If you are overwhelmed by the deluge of information about the consequences of the new tax law, you’re not alone.  We hope that the following summary is helpful.

There are two articles on our site that we will continue to update as new information comes along.  You may want to look at Should you be Rushing to Prepay and How to Prepay.  The first article is probably the more important one—it discusses whether you should prepay.  The second article explains how.

But perhaps we can save you some time with the following summary:

It is permissible to prepay your real property taxes.  Doing so lets you deduct next year’s property tax payment on this year’s taxes.  However, you cannot deduct these expenses if you are subject to the AMT, as are many higher-wage earners.  So if you are subject to the AMT, stop reading now and don’t bother rushing to prepay your property taxes.  Also bear in mind that though you might prepay your property taxes for the 2018-2019 tax year, you probably will not be able to deduct the full amount of your prepayment.  The IRS limits the time for which you can deduct; in summary, you should not expect to be able to deduct the portion related to 2019 on your 2017 return.  As to the deductibility of that portion on a future return, that will depend on then-applicable tax law.  But remember that the new tax law doubles the standard deduction—many people will find that they are better off using the standard deduction, in which case your state and local tax payments will be irrelevant in the calculation of your taxes due.

The IRS issued a guidance on December 27 warning that they can only allow deductions for prepayment of property taxes if the tax has already been assessed.  This is based on the rule that you do not owe a tax until it has been assessed, and if you are paying something that you do not owe, you cannot deduct it.  The District of Columbia has announced that real property taxes are assessed as of October 1, when the tax year begins.  Thus, real property taxes for October 2017 through September 2018 are assessed on October 1, 2017.  In Montgomery County, Maryland, property tax assessments are made each July thus property taxes for the period from July 1 2017 through June 30 2018 were assessed as of July 1 2017, but property tax  assessments for the period from July 1 through December 31 2018 will not be made until July 2018.

I received a telephone call from an accountant in Florida last night raising an important question: Is it permissible to deduct the real estate taxes that you prepay when the local jurisdiction’s tax year does not align with the calendar year?  The answer highlights that prepayment may be less attractive than you think.

In many jurisdictions—like in Montgomery County, Maryland—the fiscal year does not align with the calendar year. The tax year runs from July 1 through the following June 30. Ordinarily, property owners prepay half of the tax on September 30 and the other half on December 31. Thus, the payment that a property owner makes on or before December 31, 2017 covers taxes due for the 2018-2019 fiscal year.

The problem is that the Treasury Regulations generally restrict deductions to money spent during the current tax year for the current tax year. In other words, if you spend money in June 2017 for something that you use in June 2017, it is deductible on your 2017 tax returns. However, if you prepay an expense, the expenditure is not deductible until the year during which you use the purchased item. The IRS illustrates this point with an example: A small business owner pays $3,000 in 2017 to purchase a business insurance policy that will be effective for three years, commencing July 1, 2017. The insurance policy lasts for 36 months but only six of those months occur in this calendar year. Thus, the only part deductible in 2017 is 6/36 of the premium payment. Twelve thirty-sixths will be deductible on the taxpayer’s 2018 return, 12/36ths will be deductible on the taxpayer’s 2019 return, and the remaining 6/36ths will be deductible on the taxpayer’s 2020 return.

There is, however, a small exception to this rule. While it is correct to state the general rule as requiring that the deduction be spread out over the lifetime of the thing purchased when it is not used during the current calendar year, in fact the language of Treasury Regulations is more nuanced than that. The Regulations provide that an expense must be deducted over the lifetime of the item purchased unless the expense was made to acquire a benefit that does not extend beyond the earlier of “12 months after the first date on which the taxpayer realizes the right or benefit; or the end of the taxable year following the taxable year in which the payment is made.” Tr. Reg. 1-263(a)-4(f).

That language is a bit technical, but its meaning can be made clear by an illustration of its application. Here, we are discussing a tax payment made in December 2017 for a tax year that runs from July 1, 2018 through June 30, 2019. The rule has us compare two dates. First, there is the date that comes 12 months after the first date on which the taxpayer realizes the benefit. Here, that first date on which the taxpayer realizes the benefit is July 1, 2018; twelve months after that date would be June 30, 2019. Thus, the first date is June 30, 2019. Second, there is the end of the taxable year following the taxable year in which the payment is made. The taxable year in which the payment is made is 2017; the end of the following taxable year is 2018. Hence, the second date is December 31, 2018. And the rule provides that we must use the earlier of those dates—or December 31, 2018. In other words, the expenditure must be deducted over the lifetime of the item purchased if it was made to acquire a benefit that does extend beyond December 31, 2018.

Here, the expenditure to prepay real property taxes will cover a period that runs from July 2018 through June 2019. Thus, the expenditure acquired a benefit that goes past December 31, 2018, and so it must be deducted over time. It cannot be deducted in full on your 2017 tax return; only the portion applicable to 2018 can be deducted on the 2017 tax return.

What happens with the rest? Is the portion of the prepayment applicable to 2019 lost? As a practical matter, it probably is, even though technically it is not. The prepaid expenses for the time outside of the “12-month rule” is still deductible but it cannot be deducted until the tax year for which the payment applied. Thus, technically, the deduction is not lost: The deduction can be taken on your 2019 return. However, as a practical matter, you probably will be unable to take that deduction because of the Tax Act’s new $10,000 limit to deductible state and local taxes. In other words, you are permitted to deduct that expense in the applicable year but you cannot do so beyond the $10,000 aggregate limit for state and local income and property taxes. Many people will find that the deduction is therefore foreclosed.

And remember, if you are subject to the Alternative Minimum Tax, you will get no real benefit from prepaying your property taxes because when doing the AMT calculation, you have to add back major deductions like state income taxes and property taxes and multiply them against the AMT tax rate. While technically this does not entirely eliminate the benefit of prepayment, it makes prepayment worth less than the trouble it takes.

Do you have to pay taxes on money you receive from your employer to reimburse you for business use of your personal cell phone?

The IRS answered that on September 14, 2011.

In an audit guidance for its examiners, the IRS stated that when employers give money to employees as reimbursement for business use of a personal cell phone, that money is not taxable.

However, it is important that the payment by the employer be for “substantial noncompensatory business reasons.” The idea should not be that the employer is providing some extra money to the employees, but instead that there is a solid business reason for the employer to require employees to maintain and use their personal cell phones for business purposes.

The employer must have substantial business reasons, other than providing compensation to the employees, for requiring the employees’ use of personal cell phones in connection with the employer’s trade or business and reimbursing them for their use. The employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurred in maintaining the cell phone. Additionally, the reimbursement for business use of the employee’s personal cell phone must not be a substitute for a portion of the employee’s regular wages. Arrangements that replace a portion of an employee’s previous wages with a reimbursement for business use of the employee’s personal cell phone and arrangements that allow for the reimbursement of unusual or excessive expenses will be examined closely by IRS auditors.

The IRS gives as examples of legitimate noncompensatory business reason for requiring employees to maintain personal cell phones (and providing reimbursement to the employees for that) if the employer needs to be able to contact the employee at all times for work-related emergencies or if the employer requires that the employee be available to speak with clients at times when the employee is away from the office or at times outside the employee’s normal work schedule (i.e., clients are in different time zones).

The employee will be expected to use his or her personal cell phone for personal use as well as business use, of course. So long as the employer has a substantial noncompensatory business reason for requiring the employee to maintain that personal cell phone, reimbursement to the employee — even for the full cost of the employee’s flat-rate plan — for the use of the phone will not be considered taxable income so long as the employee’s plan is a reasonable plan for the business need. However, reimbursement for international or satellite cell phone coverage (when not needed for the employer’s business) or a pattern of reimbursements that deviates significantly from a normal course of cell phone use in the employer’s business would likely receive heightened scrutiny from an auditor.

The IRS issued a Notice in 2011 [click here to view it] that addresses the tax treatment of employer-provided cell phones for noncompensatory purposes. The Notice provides that, for beginning in 2010, the IRS will treat the employee’s use of an employer-provided cell phone for reasons related to the employer’s trade or business as a working condition fringe benefit, the value of which is excludable from the employee’s income. However, the cell phone must be issued primarily for noncompensatory business reasons. For purposes of determining whether the working condition fringe benefit provision in § 132(d) applies, the substantiation requirements that must be satisfied by the employee for an allowable deduction under § 162 are deemed to be satisfied. Additionally, any personal use of the employer-provided cell phone will be treated as a de minimis fringe benefit, excludable from the employee’s gross income under § 132(e) of the Code.

While an occasional babysitter needs nothing more than a fair wage, some food and drink for sustenance, and great patience, employing a regular babysitter, nanny, or au pair requires a bit more. You must withhold and pay payroll taxes for him or her.

If you pay a household employee wages of more than $1,800 ($1,700 for 2009, 2010, and 2011), you generally must withhold social security and Medicare taxes. Unless you prefer to pay your employee’s share of social security and Medicare taxes from your own funds, you should withhold taxes from each paycheck. (But if the person is employed by an agency, and you pay the agency instead of the worker, and the agency is properly withholding and remitting taxes, then you do not have to do this.) So presuming that you pay at least $10 per hour and that the babysitter works at least 10 hours per week, you definitely have to withhold taxes.

You also need to ensure that the employees are legally permitted to work in the US and confirm that with USCIS form I-9.

And you are likely to have state requirements as well.

Au Pairs

There are special rules that govern au pairs. Au pairs are provided a private bedroom, meals, a full weekend off each month, two weeks paid vacation, up to $500 toward attending an institution of higher education, and a cash stipend tied to the U.S. minimum wage. They are not allowed to work more than 10 hours a day and not more than 45 hours per week. They are not expected to perform general housekeeping tasks but are expected to perform child-care functions. Au pairs are required to enroll for not less than 6 semester hours of classes at a post-secondary educational institution; but may audit the classes for no credit if they wish. Au Pairs cannot be placed with a family that has an infant less than three months old unless a parent or other responsible adult is at home; in homes with children under two years of age unless the Au Pair has at least 200 hours of documented infant childcare experience; or in families with a special needs child(ren), as identified by the family, unless the au pair has identified his/her prior experience, skills, or training in the care of special needs children and the host family has reviewed and acknowledged the au pair’s prior experience, skills, or training in writing.

One of the rules governing au pairs relates to their weekly stipend. The weekly stipends for the standard Au Pair Program is directly connected to the federal minimum wage. The Au Pair stipend is based on a U.S. Department of Labor’s formula that includes credit for the room and board Host Families provide for their Au Pairs. The room and board credit currently is 40% of an au pair’s credited compensation. Since 2009, au pairs have been entitled by law to a weekly stipend of at least $195.75. (Someone earning minimum wage of $7.25 per hour, working 40 hours per week for a full year, would earn $15,080. If host families use up 40% of that, as the government deems to be the case, that leaves $9,048, or $174 per week. The formula is a little more complicated than I have just described, which is why the weekly stipend is set at $195.75.)

Thus, a properly paid au pair will earn enough to require tax withholdings within about two-and-a-half months.

Paying household employees is a trap for the unwary. Many people have folks helping around the house — babysitting, cleaning, organizing, and fixing. Often, household staff need no special attention at tax time, but if you don’t pay attention, you could make a big mistake!

If you pay a household employee wages of more than $1,800 ($1,700 for 2009, 2010, and 2011), you generally must withhold social security and Medicare taxes. Unless you prefer to pay your employee’s share of social security and Medicare taxes from your own funds, you should withhold those taxes from each paycheck. (But if the person is employed by an agency or a company that you have hired, and you pay the agency instead of the worker, and the agency is properly withholding and remitting taxes, then you do not have to do this.)

You also need to ensure that the employees are legally permitted to work in the US and confirm that with USCIS form I-9.

And you are likely to have state requirements as well.

Au Pairs are subject to special rules, because an Au Pair is authorized to stay in and work in the United States under a special government program. Au Pairs are a hybrid work/learn program, subject to special protections and compensation rules.

There are rules that govern au pairs. Au pairs are to be provided a private bedroom, meals, a full weekend off each month, two weeks paid vacation, up to $500 toward attending an institution of higher education, and a cash stipend tied to the U.S. minimum wage. They are not allowed to work more than 10 hours a day and not more than 45 hours per week. They are not expected to perform general housekeeping tasks but are expected to perform child-care functions. Au pairs are required to enroll for not less than 6 semester hours of classes at a post-secondary educational institution; but may audit the classes for no credit if they wish. Au Pairs cannot be placed with a family that has an infant less than three months old unless a parent or other responsible adult is at home; in homes with children under two years of age unless the Au Pair has at least 200 hours of documented infant childcare experience; or in families with a special needs child(ren), as identified by the family, unless the au pair has identified his/her prior experience, skills, or training in the care of special needs children and the host family has reviewed and acknowledged the au pair’s prior experience, skills, or training in writing.

One of the rules governing au pairs relates to their weekly stipend. The weekly stipends for the standard Au Pair Program is directly connected to the federal minimum wage. The Au Pair stipend is based on a U.S. Department of Labor’s formula that includes credit for the room and board Host Families provide for their Au Pairs. The room and board credit currently is 40% of an au pair’s credited compensation. Since 2009, au pairs have been entitled by law to a weekly stipend of at least $195.75. (Someone earning minimum wage of $7.25 per hour, working 40 hours per week for a full year, would earn $15,080. If host families use up 40% of that, as the government deems to be the case, that leaves $9,048, or $174 per week. The formula is a little more complicated than I have just described, which is why the weekly stipend is set at $195.75.)

Thus, a properly paid au pair will generally earn enough to require tax withholdings within about two-and-a-half months.

If you have questions about paying your domestic staff, or other tax questions, please let us know.

Avraham Greenberg, a local businessman, is married with four children. All four of his children joined the family business at a young age and helped Avraham grow and nurture it. Though Avraham has for many years ignored his lawyer’s advice concerning the importance of estate planning, he was finally motivated to act one day after learning of the death of a close friend. Avraham immediately called his lawyer and asked him to devise a simple estate plan that will enable his wife to inherit his property when he dies and for his children to inherit his property in equal shares if Avraham’s wife predeceases him.

What Avraham does not realize is that through that simple estate plan he may be violating the Torah laws of inheritance and also causing his wife and children to violate the prohibition against theft.

The Torah’s rules of inheritance, derived in part from the story of the B’nos Tzlafchad, impose particular rules of inheritance. The Torah requires a predominantly male order of inheritance, as follows:

(1) a son and the son’s male descendants inherit a person’s estate;

(2) if there are no male heirs, a daughter and her male descendants can inherit the estate (but the daughter’s female descendants are allowed to inherit if she has no male descendants);

(3) if someone has no descendants at all, then his or her father and brothers can inherit;

(4) a husband inherits his wife’s estate, but not vice versa;

(5) a male firstborn is entitled to a double portion;

(6) a widow is entitled to have her needs and living facilities provided for from her husband’s estate until she claims whatever lump sum might be due under the kesuba or until she remarries; and

(7) unmarried daughters (up to physical maturity at the age of 12) are entitled to support and maintenance from their father’s estate and to a dowry at their time of marriage, which may run as high as ten percent of the total assets left by the decedent.

When describing this inheritance scheme, the Torah uses the words “chukas mishpat”, making this scheme obligatory on all Jews. If a person acts, or fails to act, thereby causing a non-Torah heir to inherit, that person has violated the positive commandment that only males inherit. Furthermore, an heir who accepts property in this manner is considered to have accepted stolen property in violation of the prohibition against theft, “gezaila”.

Not only do Torah rules differ from how people might otherwise choose to distribute their estates, but they are also significantly different from the inheritance laws found in state law. The State of Maryland imposes an order of inheritance that is binding on all Maryland residents who lack a will. Maryland’s law operates as follows: (1) A spouse inherits approximately one-half or one-third of a person’s estate and the children (or the children’s descendants, if the children predeceased the decedent) divide the rest equally; (2) if there is no surviving spouse, then the children divide the estate equally; and (3) if there are no descendants, then the person’s parents and the parents’ descendants will inherit. Thus, because the Maryland law regarding inheritance applies to all persons who die without a Will, someone without a Will may well be violating halacha by permitting his estate to be distributed in a way that is contrary to Jewish law.

Avraham’s lawyer, a frum Jew, explains this problem to Avraham. Avraham first objects, “but what about the rule that dina d’malchusa dina (the law of the land has halachic validity)?” “Doesn’t the state law supersede any halachic requirements for validity of a will and make it effective halachically?” Avraham asks. The lawyer shows Avraham the Shukhan Arukh (Choshen Mishpat 369:11) that this principle pertains primarily to transactions between Jews and the government and/or non-Jews, and does not govern purely intra-Jewish affairs, such as family inheritance, where no public policy considerations are involved. Therefore, according to this opinion, the principle of dina d’malchusa dina cannot supersede the halachos of inheritance.

Avraham is very upset and frustrated. Although he understands the need to comply with halacha, he also feels strongly that his wife should inherit his assets from him after he dies and that his children should share equally in his estate if his wife dies before him. Fortunately, this is not an insurmountable problem.

Avraham’s lawyer explains that Avraham is facing a common problem with various halachically permissible solutions. The most common solution utilizes a special document called a “shtar zachar shalaim”. The shtar zachar shalaim, which is generally referred to as a “halachic will,” allows Avraham to create an estate plan that is consistent with his wishes and that is halachically permissible.

A halachic will supplements, but does not supplant, a conventional Last Will and Testament. After preparing the Last Will and Testament, the person then prepares the shtar zachar shalaim. The shtar, or promissory note, is a document in which the person accepts upon himself a conditional debt. He declares in the shtar that he owes to his wife and/or daughter a very large sum — in an amount that plainly exceeds the value of his estate — and that this debt is enforceable against both himself and his Torah heirs. But the duty to repay the debt has two conditions attached. First, the debt cannot be claimed until a moment before the man’s demise (to ensure that the wife and/or daughter would not be able to claim this debt while the man is still alive). Second, if the man’s sons agree to give their mother and sister a share of their father’s inheritance, then the mother and sister agree to forgo the debt and cancel it. After the father’s demise, the sons would be forced to give their mother and sister a portion of the inheritance or else pay the entire debt (which, being more than the entire inheritance, is an insurmountable obligation). Through the use of the halachic will, each person can create an estate plan that fits his or her own family’s needs and which is also acceptable under Torah law.

Jews throughout the centuries have used halachic wills to deal with civil inheritance laws that run counter to the Torah’s laws. The Rama and other gedolim have used documents like this to help families avoid the infighting that can occur when someone feels like she was disinherited. Furthermore, they were worried that an unhappy wife or daughter may improperly resort to civil courts to secure an equal share. A halachic will allows a person to avoid these three issues and allows one to rest secure in the knowledge that their children will be able to benefit from their life’s work.

This article has been reviewed by Rabbi Tzvi Teichman.

The change in Maryland’s law raises lots of questions. Maryland’s Attorney General has shared his views in a letter to the General Assembly. This document is likely to offer many insights into how the law will be interpreted in Maryland and where additional law changes might be found.

Click here to see the Attorney General’s memorandum.

Lippman, Semsker & Salb has actively served gay and lesbian clients for decades, addressing the community’s unique needs in family formation, domestic relations, estate planning, and employment issues. Combined with our skill and experience in these fields of practice, we are uniquely equipped to serve gay and lesbian families.

If you have any questions about your family’s legal rights, please let us know.

District of Columbia laws reflect a policy that favors extending parental rights to same-sex couples with children. Through recent expansions in the law, it is increasingly likely that same-sex couples with children will have the legal rights of both parents recognized under law.

The law now provides that if two women are married or are registered as domestic partners or sign a consent to parent and their child is born in the District, then DC law will recognize the child as the legal child of both parents.

Note that this law does not extend to male same-sex couples. Obviously, a man cannot bear a child, and therefore he must use a gestational surrogate to bear his child. However, DC law makes surrogacy illegal, and so the law protecting parentage does not extend to male same-sex couples.

Furthermore, because of a recent amendment to DC’s Parentage Act, beginning on March 13, 2013, DC courts will have the power to grant an adoption to any child who is born in the District of Columbia, even if the family does not reside in DC! In other words, even if you live outside of DC, so long as your child was born in DC, a DC court will have the power to grant an adoption. This is primarily of value to Virginia residents, who cannot obtain a second-parent adoption in Virginia. Therefore, if a Virginia family plans carefully so that the baby is born in DC, a DC court will be able to grant a second-parent adoption to that family. We expect that this will also be of value to West Virginia families. (Second-parent adoption is permitted in Pennsylvania and Delaware.)

Lippman, Semsker & Salb has actively served gay and lesbian clients for decades, addressing the community’s unique needs in family formation, domestic relations, estate planning, and employment issues. Combined with our skill and experience in these fields of practice, we are uniquely equipped to serve gay and lesbian families.

If you have any questions about your family’s legal rights, please let us know.

Maryland’s Marriage Equality law, permitting same-sex couples to become married in the State of Maryland, was approved by voters (52% for; 48% against) on November 6, 2012. Under the law passed by the Legislature and signed by the Governor in 2012, the law took effect on January 1, 2013.

Maryland previously recognized same-sex marriages legally formed in another state but did not allow gay couples to marry in the state. The Maryland Marriage Equality law changes the earlier language defining a marriage to state, “Only a marriage between a man and a woman is valid in this State,” to language that is not gender-specific: “Only a marriage between two individuals who are not otherwise prohibited from marrying is valid in this State.”

Under the new law, religious entities are not required to perform or promote marriages if doing so would violate the entity’s religious beliefs. This means that while gay and lesbian couples may marry in the state, they cannot compel a church to rent facilities to them for celebration of their nuptials and they may not compel a priest, rabbi, mullah, or other religious leader to perform the ceremony.

Same-sex couples who wed enjoy precisely the same rights as any other married couples.

Lippman, Semsker & Salb has actively served gay and lesbian clients for decades, addressing the community’s unique needs in estate planning, domestic relations, and employment issues. Combined with our skill and experience in the field of domestic relations law, we are uniquely equipped to serve gay and lesbian couples in the creation of relationships, separation and divorces, child custody, property division, child and spousal support, and more.

If you have any questions about your rights as a married couple in Maryland, please let us know.