Are You Subject to Income Taxes in Another Country?

A few weeks ago, I was approached by a U.S. family which splits their time between the U.S. and India. The husband and wife were technology professionals, but had jobs that required one-to-six months a year in India. Over the past few years, they had also accumulated assets in both countries and wanted me to help draft their estate plan. Still, before even thinking of planning around their assets, I needed to determine their residency for income tax purposes.

This article is therefore meant as a primer for any person splitting his or her time between the U.S. and India, and can be a quick reference guide for anyone wondering whether they will be subject to tax in India. I will focus primarily on individual residence; however, company residence will be discussed briefly as a major change in the definition of a taxable company occurred recently.

Introduction

In India, the basis for imposing income taxes is the residence of the individual, and unlike in the United States, the domicile or citizenship of the individual plays no part in determining whether the person is subject to taxation.[1] Rather, tax residency is dependent on the stay of the individual in India, irrespective of the purpose of the stay.

An individual is liable to pay taxes in India based on his/her tax residency during a fiscal year. The Indian fiscal year runs from April 1st to March 31st. There are two categories of taxable individuals: (1) residents and (2) non-residents. Residents are further classified into two sub-categories (i) resident and ordinarily resident; or (ii) resident but not ordinarily resident. Therefore, an individual can have one of three tax residency classifications: (1) Resident and Ordinarily Resident (ROR), (2) Resident but not Ordinarily Resident (RNOR); or (3) Non-Resident (NR).[2]

Section 6 of the Income Tax Act 1961 (“ITA”) deals with residence. Under the ITA, persons who meet the test of residence in India are taxed on their worldwide income whereas non-residents are taxed only on income that is sourced in India. These rules vary depending on the entity involved and different residence criteria apply to individuals, companies and unincorporated entities.[3] 

It is also worth noting that an individual’s tax residency is different than an individual’s residency for regulatory purposes under the Indian Foreign Exchange Management Act (“FEMA”) of 1999. Generally, the difference between residency for tax purposes and exchange control purposes, is that for tax purposes, the duration of the stay is the only relevant factor; while for exchange control purposes, both duration and purpose (i.e. intent) of stay matters.[4] Thus, an individual could be a resident for exchange control purposes, but not for tax purposes, and vice-versa.

Company Residence Classification

On January 4, 2017, the criteria for a company to be a tax resident and subject to taxation changed. Section 6(3) of the ITA previously stated that a company is said to be resident in India in any previous year, if— (i) it is an Indian company; or (ii) during that year, the control and management of its affairs is situated wholly in India.

Section 6(3) of the ITA now states that a company is said to be resident in India in any previous year, if— (i) it is an Indian company; or (ii) its place of effective management, in that year, is in India. According to guidance provided by the Government of India, the previously stated definition of a resident company “allowed tax avoidance opportunities for companies to artificially escape the residential status under these provisions by shifting insignificant or isolated events related with control and management outside India.”[5] Whether a company has its “effective management” in India depends on the facts and circumstances of a given case and the concept is one of “substance over form”. Id.

Residence for Individuals

Resident and Ordinarily Resident (“ROR”): Section 6(1) provides that an individual is a ROR, if the individual satisfies one of the following two conditions: (i) is in India in that year for an aggregate period of 182 days or more; or (ii) having within the four years preceding that year been in India for a period of 365 days or more, and is in India in that year for an aggregate period of 60 days or more.[6]

However, a special concession for Indian citizens and foreign citizens of Indian origin exists, and the period of 60 days referred to in (ii) above may be extended to 182 days in two cases: (i) where an Indian citizen leaves India in any year for employment outside India; and (ii) where an Indian citizen or a foreign citizen of Indian origin (Non-Resident Indian), who is outside India, comes on a visit to India. Stated more succinctly, a Non-Resident Indian (NRI) whose total stay in India in four (4) preceding years exceeds 364 days, will not lose his non-resident status in the following year(s) if his total stay in India in the subject year, from April 1 to March 31, does not exceed (i) 181 days, if he is on a “visit” to India; or (ii) 59 days, if he comes to India on “transfer of residence”.[7] Moreover, an individual is said to be an NRI if the individual, either of his parents, or any of the individual’s grandparents were born in undivided India.

An Indian resident individual is taxed on income: (i) which is received in India; (ii) which accrues or arises in or outside India; and (iii) which is deemed under the ITA to be received or to accrue or arise in India.[8] An Indian resident individual would be taxed on income at progressive tax rates of 10%, 20% or 30% depending on the relevant tax bracket (“Income Slab”) under which he/she would fall.[9]

Resident but not ordinarily resident (“RNOR”): According to Section 6(6) of the ITA, an individual is considered RNOR in India if such individual satisfies one of the following two conditions: (i) an individual who has been a non-resident in India in nine (9) out of the ten (10) previous years preceding that year; or (ii) has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine (729) days or less. However, “in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.”[10]

The RNOR is a special status afforded to Non-Residents Indians in order to provide certain benefits for returning to India and is particularly beneficial for those thinking of returning to India permanently. Generally, RNORs only need to pay taxes on his or her Indian sourced income and any income abroad will not be taxed (like NRs discussed below). Additionally, for a period of two years, no taxes would need to be paid on income from interest or dividends on foreign securities; capital gains on foreign assets; withdrawal from foreign retirement accounts; interest earned on Foreign Current Non-Resident (FCNR) bank accounts or deposits held in India; and interest on foreign currency accounts held in India. Id. RNOR is a transitional state from Non-Resident Indian to Resident and RNOR status can be used for up to three (3) years. RNOR status is likely best explained with an example.

Example:

An Indian citizen has been living abroad for 20 years, during those 20 years he did not visit India once, in the middle of year 1 his mother becomes ill and he returns to India.

If in Year-1, he spends 183 days in India, he would ordinarily qualify as a resident in Year-1, but because he was an NRI for 10 out of the last 10 years preceding Year-1, he would receive RNOR status for Year-1.

If in Year-2, he spends 365 days in India, he would ordinarily qualify as a resident in Year-2, but because he was an NRI for 9 out of the last 10 years preceding Year-2, he would receive RNOR status for Year-2.

If in Year-3, he spent 365 days in India, he would ordinarily qualify as a resident in Year-3, and because he was an NRI for 8 out of the last 10 years preceding Year-3, he would not receive RNOR status under the first test. However, because he spent less than 729 days in the 7 years preceding Year-3 (548), he would nonetheless receive RNOR status for Year-3.

Non-Resident (“NR”): In every other case, an individual would be considered a NR for Indian tax purposes. A non-resident is taxed only on income that is sourced in India, i.e., income received, accrued or arisen in India and income which is deemed under the ITA to be received, to accrue or arise in India.

Conclusion

Like the United States, the number of days an individual spends in India is extremely important and someone spending time in India needs to make sure he or she spends less than the requisite number of days or else risk being taxed on worldwide income. Unlike the United States, Indian citizens living abroad and spending less than 182 days in India for the year (and who spent less than 365 days of the prior 4 years and less than 60 in the current year) do not have to worry about being taxed on their worldwide income in India. Also unlike the U.S., Non-Residents of Indian origin who have lived outside India for several years have a grace period for their foreign income in the form of “Resident but not ordinarily resident” status, and are given the opportunity to transition into becoming a resident without being overly taxed. This can be quite an attractive prospect for anyone thinking of returning to India.

 

[1] “Wealth & Estate Planning – Indian & International Perspectives”, Nishith Desai Associates, August 2014. Available at: http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Wealth___Estate_Planning.pdf

[2] “Indian regulations for expatriates working in India – Ready for all your queries”, Deloitte Touche Tohmatsu India Private Limited, 2013. Available at: https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/thoughtpapers/in-tax-indian-regulations-for-expatriates-working-in-India-noexp.pdf

[3] Supra Note 1

[4] Supra Note 1

[5] Circular No. 06 of 2017, F. No. 142/11/2015-TPL, January 24, 2017. Available at: http://www.incometaxindia.gov.in/communications/circular/circular06_2017.pdf

[6] Section 6 of the Income Tax Act.

[7] “Guide Book for Overseas Indians on Taxation and Other Important Matters”, Overseas Indian Facilitation Centre. Available at: https://www.mea.gov.in/images/pdf/OIFCPublication2009GuidebookonTaxationforOI.pdf

[8] Section 5 of the Income Tax Act

[9] Supra Note 2

[10] Supra Note 7

Roberto Beristain Update

FOR IMMEDIATE RELEASE  

Wednesday, April 5, 2017

Contact
Adam M. Ansari, Esq., (312) 391-7788, adam@ansarishapiro.com
Tara Tidwell Cullen, NIJC, (312) 660-1337, ttidwellcullen@heartlandalliance.org


Trump Administration Displays Disregard for Families and American Due Process with Abrupt Late Night Deportation of Indiana Father


The Beristain Family is distraught this morning as the U.S. government conducted a middle-of-the-night deportation of Roberto Beristain, an Indiana father and businessman whose detention by U.S. Immigration and Customs Enforcement in February during a check-in appointment attracted broad attention by the Washington Post, Wall Street Journal, South Bend Tribune, and other national news media.

Roberto had been held at detention facilities in Indiana, Wisconsin, Illinois, Louisiana, New Mexico, and Texas. He argued that his removal order was legally improper, and had asked an immigration judge to rescind the removal order, and to stay removal. He had also filed a habeas corpus petition, likewise seeking to redress the wrongs resulting from a void order. Before either judge had a chance to rule, in a highly unusual move, ICE agents rushed him 90 miles from the detention facility to the U.S.-Mexico border at Juarez, Mexico, as the sole detainee being moved. None of his attorneys were notified, as required, of his removal and they only learned about it based on a late night, frantic call from Roberto’s wife, who indicated Roberto was in Juarez already.

“They suddenly told me it was time to go,” Roberto said. “They told me to get my stuff, they put me in the back of a van, and sped toward the border. They took me to another facility while in transport to sign paperwork. I asked to speak with my attorney, but was told there wasn’t time for that. At around 10:00 pm, I was dropped off at the Mexico-U.S. Border and walked into Mexico.”

“What is most distressing here is that Roberto had potential avenues for relief pending before the Immigration Court,” said Adam M. Ansari, managing partner, Ansari & Shapiro LLC, who has been advocating on behalf of the family since Roberto was detained on February 6, 2017. “This was an attempt to short-circuit the justice process by intentionally removing him before a judge could stop his removal. We were in communication with the government regarding those motions – what they failed to mention was that they were in the process of throwing him out of the country.” 

Jessica K. Miles of Noble & Vrapi, Roberto's counsel in New Mexico and Texas remarked, “the manner and speed with which Roberto was moved from New Mexico to Texas and then deported to Mexico despite several pending motions, coupled with misleading statements from ICE leadership about when he would be removed show a blatant disregard for his procedural rights.”

Chuck Roth, director of litigation of the National Immigrant Justice Center said, “the Trump administration treats noncitizens like Roberto like lawbreakers, even when they do everything in their power to obey the law, but the law was broken in this case by the immigration authorities. ICE’s actions have torn a father from his three U.S. citizen children, a husband from his citizen spouse, and a business owner from his American employees. And all based on a removal order which wasn’t proper in the first place. I’m not sure which is more shocking, the disregard for the harm done wantonly to families and communities, or the lengths to which the government is now willing to go to deport as many people as possible without regard to a person’s right to a fair hearing.”

“The conduct of ICE in perpetuating a continuing due process violation at all costs, is a threat to core American values and should not be overlooked or brushed aside causally,” said Rekha Sharma-Crawford of Sharma-Crawford Attorneys at Law, who drafted the Emergency Motion to Rescind that is pending in Batavia, New York.

Attorneys for Beristain, which include multiple law firms and organizations across the country, have stated they will continue to fight on behalf of Roberto, and will pursue all available legal and political remedies to bring Roberto back and correct the mistake immigration officials created nearly two decades ago. 

Adam Ansari Mentioned in the Wall Street Journal

Attorney Adam Ansari was mentioned in the Wall Street Journal regarding the case of Roberto Beristain, an immigrant from South Bend, Indiana, facing deportation after building a successful local business. 

Read the article here: https://www.wsj.com/articles/immigrant-who-helped-build-a-business-faces-deportation-1490301888

Know Your Travel Rights

Know Your Travel Rights

Guest author, Alén Takhsh, discusses travel rights in light of the 9th Circuit Court of Appeals decision regarding President Trump's Executive Order, "Protecting the Nation from Foreign Terrorist Entry into the United States."

Digital Assets – Have You Planned for Yours?

On Friday, October 21, 2016, several waves of cyberattacks disrupted the availability of several popular websites across the United States including Twitter, Spotify, Netflix, Amazon, Tumblr, Reddit, Vonage, PayPal and more. Although the attack annoyed many and made workdays severely less productive, it brought attention to the importance of planning strategies for digital assets and protecting against cybercrime, even after death.

As a caveat, estate planners typically think about the worst case scenarios, so please do not think of planners as being doomsday promoters. Rather, the goal is always to ensure a successful transition of assets to the next generation. Without proper planning, especially in a world where a majority of information is stored online, undesired situations can occur.

Perhaps your identity was stolen at one point or another in the past. Maybe it was just a credit card. Maybe someone obtained your social security number and began opening credit lines without your knowledge. Now, think of a situation where you fail to provide your family with your relevant online account information, and your identity is stolen after death. Without proper planning, it may be impossible for your family to regain your identity and fix the issues the thief has created.

You may think a power of attorney will save you, but power of attorneys are only relevant during your life and while incapacitated. And, if your entire life is stored in the cloud and you haven’t provided access in your planning documents, good luck to those tasked with administering your estate.

Fortunately, there are several steps you can easily take to secure yourself in these situations.

First, make an inventory of the hardware storing your digital assets. Most people have their digital assets spread over several devices, so making a list of all your smartphones, computers, tablets, cameras, and USB drives will help expedite an administrator’s job. I had a client who had $50,000 worth of music stored on a laptop and he was the only person with the passwords to access the library. If no planning occurred, the entirety of the music library would have likely been lost. 

Second, think about your complete online presence. Inevitably, you might forget about a few items, but be especially mindful of your online banking accounts and login information. Some of the most common online platforms and assets include:

  • Online Banking and Retirement Accounts (e.g. 401(k), IRA, pension, social security);
  • Social Media Accounts (e.g. Facebook, Twitter, Linkedin);
  • Shopping Sites (e.g. Amazon, Apple Store, eBay);
  • Transportation and Delivery Accounts (e.g. Uber, Lyft, Grubhub);
  • Email Accounts (e.g. Gmail, Outlook, Yahoo);
  • Cloud Storage Accounts (e.g. Box, Dropbox, Sharepoint);
  • Organizational Sites (e.g. health insurance, professional organizations, etc.);
  • Subscriptions (e.g. Netflix, Spotify, Hulu, xfinity).

Third, think about your work related files and the files in which you are currently working. If you are a professional and have your client files saved among your digital assets, then information should be provided to seamlessly allow your colleagues to pick-up your work and service your clients. Maybe you have been working on a project or you have a very sensitive matter you have not shared with anyone. Instead of having all of your hard work lost or your organization suffering in your absence, why not provide an inventory and instructions for the files.

Fourth, once you have created your inventory, provide for future access to your successors - listing usernames and passwords. You want to choose someone you completely trust (e.g. advisor, attorney, family member). More importantly, your estate planning documents should list the person allowed to access your digital assets. You might include all of the information on a USB drive and then keep the drive in a lockbox. In your planning documents, you can name the person allowed to access the lockbox and the person allowed to access your digital information.

The steps above are tedious. But, in today’s digital world, providing the information could end up saving your estate if your identity is compromised after you are gone. 

Chicago Property Tax Rebate Program - Applications Due by November 30, 2016

This past year, Chicago homeowners saw their property tax bills increase by an average of 13%.  Because of this, the City of Chicago developed a program to provide homeowners with some relief. Chicago's Property Tax Rebate Program is currently accepting applications.

Standard rebate amounts range between $25 and $200. The City calculates rebate amounts based upon household income and increases in the Chicago portion of a homeowners’ property tax bill.

26 neighborhood locations and City Hall accept applications. Homeowners will receive rebate checks 6 to 8 weeks after application processing. The deadline to apply is November 30, 2016.

Eligibility requirements for the Chicago Property Tax Rebate Program are as follows:

·         Chicago Resident and Homeowner;

·         Received the Homeowner’s Exemption in the most recent property tax year;

·         Household adjusted gross income of $75,000 or less in 2015;

·         City of Chicago portion of property taxes increased on most recent tax bill;

·         Homeowner is current on payment of property taxes;

·         Homeowner does not owe real estate taxes on other property located in Chicago; and

·         Homeowner does not owe other City debt (e.g., parking tickets, overdue water bills). Homeowners owing other debt may still apply; however, the City will apply rebate amounts to the outstanding debt.

Senior supplement and enhanced grant programs are also available for qualifying homeowners.

For complete information, including locations accepting applications, please visit:

Chicago Property Tax Rebate Program

or call our offices for further questions or assistance.

Were You Scammed by Wells Fargo?

The news that Wells Fargo employees opened thousands of unauthorized bank and credit card accounts for existing customer may make you wonder if you were scammed, too. About 565,000 fake credit card accounts were created without customers’ knowledge and may have negatively affected credit scores, especially if customers applied for a mortgage after the accounts were opened, Bloomberg reported.

If you bank with Wells Fargo, consumers are urged to login to their Wells Fargo online portal and find all accounts under their names. You could also review your accounts at your local bank branch, or requests a free credit report from www.annualcreditreport.com.

If you believe you were affected by this scam, please contact our office immediately.

Estate Planning with Minor and Disabled Children

There are two main questions to ask yourself when planning for a minor or disabled child:

  1. Who will take care of your child's physical needs? This is the role of a Guardian.
  2. Who will be responsible for managing your child’s inheritance until he or she is mature enough to manage it themselves? This is the role of a Trustee.

While the roles of a Guardian and a Trustee are both important, they require different skill sets. In order to pick the right person for the right job, it is important to know the duties each performs.

How to Pick a Guardian

A Guardian is responsible for caring for the physical needs of minor children, and disabled adults. They make decisions involving basic needs such as housing, clothing, medical care, and schooling. Some of the factors many parents discuss in choosing a Guardian are:

  • Values:  It is important that you name someone who shares your ideas and values for raising children. Does your potential Guardian(s) share the same moral beliefs and attitudes?
  • Age:  A Guardian must not be so young or old that he or she is unable to care for or deal with a very young child or disabled adult.
  • Financial Security: If the Guardian is not financially equipped to care for your minor or disabled child it may cause an undue burden on the rest of the Guardian’s family and lead to resentment against your child. For this reason, it is wise to consider leaving financial assistance to the Guardian to help raise your beneficiary.
  • Single or Married: You should also consider whether you would want your child raised by a single parent or by a married couple. If you name a couple, you should clearly state what you want to happen if there is a death or divorce between the couple. Generally, it is prudent to select a single person as Guardian, so that there is no conflict between Co-Guardians if one were to arise.
  • Existing Children: Does the potential Guardian(s) have children of their own. If they do, ask whether their children will welcome in your children. Also ask whether the parents will be able to handle the additional burden. Do not automatically rule out individuals whose children are already grown or who have no children. Sometimes a family with no children may better serve as a support network.

Determining a Guardian for your children can be a difficult decision. Your children’s Guardian will have the authority to make and influence all decisions for your children including where they live, the schools they attend, religious practices, and more. Making preparations and instructions in advance can ease the transition in the event of your passing.

How to Pick a Trustee

One tool for ensuring certain aspirations for your children are accomplished is the establishment of a Trust for your beneficiaries. Trusts are managed by a Trustee, not a Guardian, although the Trustee and the Guardian can be the same person. Trusts can help ensure that certain funds are provided for specified activities and events. For example, if you want an inheritance to be used for education, a future wedding, a first house, or start-up business, then your Trust instrument can help lay out instructions. A Trustee’s most important duty is to implement the Trust’s instructions concerning how the Trust property should be used to aid the beneficiaries.

To be clear – Guardians help determine how to take care of a beneficiary, while the Trustee decides how to use Trust assets to pay for the needs of the beneficiary, which often includes paying for the beneficiaries’ education, medical and living expenses.

Among other responsibilities, a Trustee must make an inventory of Trust assets; protect Trust assets and make sure assets are properly invested; prepare an accounting for beneficiaries; and, implement the Trust’s instructions as to how Trust assets are to be distributed. Importantly, the Trustee does not have to make these decisions alone. The Trust typically authorizes the Trustee to obtain necessary professional services to carry out the Trust’s instructions. Such professionals often include investment advisors, attorneys, insurance agents or certified public accountants.

The possibilities and alternatives for designing these Trusts are endless. For example, property can be kept in Trust for a beneficiary’s entire lifetime. In this situation a Trustee decides when and how much of the Trust assets will be distributed. This type of planning makes sense not only if a beneficiary is disabled, but also if the beneficiary has spendthrift tendencies or a drug or alcohol problem. The Trust can also provide protection for your child from a failed marriage or claims of creditors.

Alternatively, a parent can decide to space Trust distributions over several years or decades. This prevents children from misspending the inheritance by giving them time to mature. Or, if your child has reached maturity and is fiscally responsible, the Trust instructions can be quite flexible and allow withdrawal of Trust funds whenever he or she wants. Although the child has access to the funds, if properly drafted, the Trust will protect the inheritance from creditor claims, lawsuits, and divorcing spouses.

In the end, a majority of your decisions are going to be based on your particular preferences and objectives. If you have any questions, please contact our office.

Section 529A ABLE Accounts Opening Throughout the United States

The below article originally appeared in the Illinois State Bar Association's Trusts & Estates June 2016 Newsletter.

On December 19, 2014, THE STEPHEN BECK, JR., ACHIEVING A BETTER LIFE EXPERIENCE ACT OF 2014 (“ABLE Act”) was enacted as part of The Tax Increase Prevention Act of 2014. The ABLE Act added section 529A to the Internal Revenue Code (“Code”) after Congress recognized the increased financial burdens families raising children with disabilities incur throughout a disabled person’s lifetime. Section 529A of the Code now permits a state (or agency or instrumentality thereof) to establish and maintain a new type of tax-advantaged savings program (“ABLE Program”), similar to traditional section 529 plans, under which a separate qualified account (“ABLE Account”) may be established in order to provide secure, tax deferred funding for disability-related expenses on behalf of a designated beneficiary.

BACKGROUND

On June 22, 2015, the Treasury Department released their interim “Guidance Under Section 529A: Qualified ABLE Programs” for states enacting legislation and implementing programs prior to the release of the Treasury Department’s final regulations.  Generally, contributions to ABLE accounts are made on an after-tax basis, and must not exceed the amount of the annual per-donee gift tax exclusion under section 2503(b) in effect for that calendar year (currently $14,000). Contributions to the account may be made by any person (the account beneficiary, family and friends) and may or may not be tax deductible depending on the specifics of the state ABLE law. Total contributions cannot exceed the 2503(b) limit in any given year regardless of the number of contributors. Distributions made from an ABLE account for qualified disability expenses are not included in the designated beneficiary’s gross income and earnings from ABLE funds grow tax-deferred and are tax-free if used for qualified disability expenses.  

For purposes of public benefits, up to $100,000 in ABLE account funds will be exempted from the Social Security Income (“SSI”) resource limit. When an ABLE account exceeds $100,000, the beneficiary will be suspended from eligibility for SSI benefits and the beneficiary will no longer receive monthly income, but SSI benefits will be reactivated after the beneficiary spends down the account to under $100,000. Importantly, Medicaid eligibility will remain intact even if the ABLE account exceeds $100,000. 

Pursuant to subparagraph (e) of section 529A, an individual is an eligible individual if (A) the individual is entitled to benefits based on blindness or disability under title II or XVI of the Social Security Act, and such blindness or disability occurred before the date on which the individual attained age 26, or (B) a disability certification with respect to such individual is filed with the Secretary.  

The second certification requirement was relaxed on November 20, 2015 with Treasury Department Notice 2015-81, which indicated that designated beneficiaries can open an ABLE account by certifying, under penalties of perjury, that they meet the qualification standards, including their receipt of a signed physician’s diagnosis. A designated beneficiary must retain that diagnosis and provide it to the program or the IRS upon request. This means that eligible individuals with disabilities will not need to provide the written diagnosis when opening the ABLE account, and ABLE programs will not need to receive, retain, or evaluate detailed medical records. 

OHIO BECOMES FIRST STATE TO IMPLEMENT ITS ABLE PROGRAM

Although it is unknown when the final regulations for the administration of ABLE Accounts will be released by the Treasury Department, the absence of final regulations has not deterred many states from working towards implementation. On June 1, 2016, the State of Ohio became the first state to begin accepting ABLE Accounts.  Other states are similarly preparing for the implementation of their programs. Florida and Nebraska appear to be close to having operational programs and both state programs are expected to launch during Summer 2016. 

States have felt encouraged to begin accepting ABLE Accounts prior to final guidance primarily because the Treasury Department and the IRS have indicated that enacting states, and individuals establishing ABLE accounts therein, will not be prejudiced if a specific state’s program does not fully comport to the final regulations when issued.  The Treasury Department and the IRS have further stated that they will provide transitionary relief to states with nonconforming plans and accounts.   

Alternatively, nine states, including Alaska, Iowa, Kansas, Minnesota, Missouri, Nevada, Pennsylvania, Rhode Island, and Illinois, have agreed to work together in the creation of a unified qualified ABLE program (“Nine State Consortium Plan”) with a projected launch date of January 1, 2017. To this point, Illinois has indicated that it will not accept contributions for ABLE accounts until the Internal Revenue Service has issued its final regulations thereon. 

WHAT TO KEEP IN MIND WHEN DECIDING WHICH STATE OR PLAN TO ENROLL IN

Because section 529A was modeled after Qualified Tuition Programs created under section 529 of the Code, parents and guardians thinking of creating an ABLE Account should conduct an analysis similar to a parent or guardian’s analysis of traditional section 529 plans, paying particular attention to (1) state income tax deductions and credits, along with (2) fees and performance of historical state 529 plans.

For example, according to Ohio’s STABLE Program and the Plan Disclosure Statement found on its website, contributions to Ohio’s STABLE Plan are not deductible for state income tax purposes.  On the other hand, Missouri State Treasurer indicated that ABLE Accounts created under the previously mentioned Nine State Consortium Plan will come with advantages similar to 529 savings programs, stating “for Missourians, those advantages include a [state income] tax deduction of up to $8,000, or $16,000 if married and filing jointly.”  

Similarly, the Illinois State Treasurer, who is anchoring the Nine State Consortium Plan, indicated that “the consortium will manage a tax-advantage investment portfolio similar to those currently used to save for college, such as Illinois’ Bright Start or Bright Directions program.”  Although a state income tax deduction is not currently written into Illinois’ ABLE legislation, according to Bright Directions website, “individuals who file individual Illinois state income tax returns can deduct up to $10,000 per tax year ($20,000 if filing jointly) for their total, combined contributions to the Bright Directions College Savings Program, the Bright Start College Savings Program, and CollegeIllinois! during that tax year.”  

If states, like Illinois and Missouri, enact legislation which allows an income tax deduction for contributions, a significant long-term and short-term tax advantage will occur. In the long-term, funds contributed to an ABLE Account grow tax-deferred and are distributed tax-free at the time of distribution if used for qualified expenses. In the short-term, parents and guardians could contribute the current year's limit ($14,000 in 2016) in order to qualify for the state income tax deduction, and a day later withdraw the funds to pay for qualified disability expenses of the designated beneficiary. Hypothetically, so long as the distribution is taken to pay for qualified disability expenses, the parents will qualify for the state income tax deduction. Most states that have adopted ABLE legislation do not have a waiting period on withdrawals and distributions.

With regard to fees, if you are an Ohio resident, your STABLE account will be charged a monthly Account Maintenance Fee of $2.50. You will also be charged an annual asset-based fee of between 0.19% and 0.34%, depending on which Investment Options you select. If you are not an Ohio resident, your STABLE account will be charged a monthly Account Maintenance Fee of $5.00. You will also be charged an annual asset-based fee of between 0.45% and 0.60%, depending on which Investment Options you select.  

Although the proposed fees for the Nine State Consortium Plan have yet to be released, the Illinois State Treasurer commented that “without the consortium, individual states would lack the market share to ensure low cost and high quality investment options.”  The Treasurer further indicated, “individual states typically do not have enough potential participants to solicit a competitively priced and structured program. However, with states working together and leveraging resources, an economy of scale is created to drive down cost and attract quality investment products.”  The Treasurer went on to state, “by working together with other states, we can accomplish what would be impossible if we were to go it alone.” 

According to Connecticut ABLE Advisory Committee meeting minutes from March 29, 2016, Kerry Alexander, Director of Educational Savings at TIAA-CREF which manages 10 state 529 plans, predicted that with the implementation of the Protecting American from Tax Hikes Act (“PATH Act”) of 2015 and the home state requirement under section 529A being lifted, 12-18 states will likely launch ABLE Programs, however, only 6-8 of these programs will last.  Connecticut as a result, and similar to many other states, has erred on the side of caution and expressed its desire to study the programs as they are implemented and then direct its citizens to the strongest plan on the market. The Connecticut State Treasurer went on to comment that because final regulations have not been released, there is a fear that some state ABLE Programs will struggle to remain in compliance. Ultimately, only time will tell which ABLE Programs will be most successful.  

CONCLUSION

According to the National Disability Institute, there are 58 million individuals with disabilities in the United States and at least 10% of these individuals would qualify for the creation of an ABLE Account under the current eligibility requirements.  Accordingly, implementation of ABLE Programs across the United States will have an extremely beneficial effect on families raising a child with disabilities regardless of the state a family chooses to establish an account in. Prior to the enactment of the ABLE Act, various types of tax-advantaged savings arrangements and disability trust instruments existed, but none adequately served the goal of promoting savings while also being affordable to middle- and low-income families. With the introduction of ABLE Programs and ABLE Accounts, the Department of the Treasury and the IRS now believe that families raising a child with disabilities will be better equipped to deal with the financial burden placed on them. 

2015 Cook County Property Tax Rates Released

The office of Cook County Clerk, David Orr, announced the 2015 Cook County property tax rates this afternoon. Chicago residential property owners should see a 12.8% increase in their tax bills. The northern and southern suburbs will increase by approximately 1.7% and 2.1% respectively.

Also of note:

  • The 2015 average tax rate for Chicago is 6.867%.
  • The average Chicago property tax bill will increase from $3,220.32 in 2014 to $3,663.19 in 2015.
  • Chicago Equalized Assessed Values rose 9.3% from tax year 2014 to 2015.
  • 2015 marks the first time that the total tax billed in the City of Chicago will exceed $1 billion.

Cook County 2015 second installment property tax bills are expected to mail around July 1, 2016 with payment due on August 1, 2016.

For legal questions regarding property taxes, including appeals, please contact Jacob Shapiro (jacob@ansarishapiro.com) or Justin Strane (justin@ansarishapiro.com).

Additional information:

2015 Cook County Tax Rate Announcement

2015 Cook County Tax Rate Report

Attorney Justin Strane Published in the Illinois State Bar Association's Real Property June 2016 Newsletter

Justin's article "Commercial tenancies: Clearly define every term in a lease agreement" examined the Illinois First Appellate District's recent decision in Battaglia v. 736 N. Clark Corp., 2015, IL App (1st) 142437, as a reminder to parties involved in commercial leasing transactions to clearly define terms. Click here to read the article in its entirety. 

An Efficient Approach for Calculating 2015 Tax Prorations prior to the Release of the 2015 State Equalizer and Tax Rate

2015 was an Assessment Year for properties located in Cook County, Illinois, and this tri-annual assessment, often provides an extra level of stress for buyers and sellers during real estate purchases.  Attorneys are often tasked with determining the potential tax credits and will work towards maximizing (or minimizing) the credit for their client. 

In Illinois, tax credit issues arise because property taxes are paid in arrears. This means a buyer will be responsible for prorated proportion of last year’s taxes (i.e. if a buyer purchased a home on 9/1/15, the seller will pay the buyer for 9 months of taxes and an estimated increase in taxes).  The typical solution is a lump sum credit from the Seller to the Buyer, as tax bills are often not issued at the time of closing. As result, attorneys are forced to estimate the future year’s taxes. In in a stable neighborhood, with stable market conditions, and a predictable tax history, most brokers present an offer with a 110% proration.  A 110% proration presumes next year’s tax bill will increase by 10% from the prior year. 

However, in an assessment year, like 2015, perorations are a bit more complex, especially in Cook County, as Mayor Emmanuel has made it clear Cook County residents will see an increase in assessed taxes – the exact amount. .  
If a Buyer, and his or her broker , enter into a contract with a 2015 or 2016 tax bill credit that recites a 110% tax proration only, the Buyer will likely receive an inadequate credit to fully cover the 2015 and 2016 tax bills  

It helps to understand what makes up the calculation of your property taxes to appreciate some of the approaches Attorneys can take. There are three elements in calculating property taxes: 1) assessed value, 2) tax rate, and 3) State equalizer. The calculation is as follows,

     2015 Tax Bill = 2015 Assessed Value X 10%  X  2015 Tax Rate  X 2015 State Equalizer

If any of these factors increase, so will the taxes. The difficultly transactional attorneys face at closing, is that they only have the 2015 Assessed Value, the 2015 Tax Rate , but the 2015 State Equalizer  are not available and will not be available until the first tax bills are issued . 

I, like many other attorneys, have begun seeing properties in Cook County receive 30-40% increases in their Assessed Value  in 2015.  With Assessed Values increasing by 30-40%, a 110% proration is unlikely to cover the total 2016 Tax Bill and the Buyer will be paying for the Seller’s obligation. 

An easy solution is to take a proration of 115% or 120%. Although, if you are a Seller or Seller’s Attorney, a higher proration is something to avoid.  The thought, or at least the argument against a higher proration, is that market dictates proration and, until further information is provided by Cook County, 110% is an accurate and fair proration. Still, here is an alternative approach some Attorneys have been using as a potential solution.

   2015 Tax Estimate = 2015 Assessed Value   x  2015 Tax Rate x 10%   x  2015 State Equalizer 

The above approach takes into account a 10% increase in the Tax Rate and multiplies it by the assessed value Cook County has estimated. In Sum, it uses the most current assessed value (2015) and multiplies it by the 2014 State Equalizer since the 2015 figure has not yet been released. Still, when the 2015 State Equalizer is released, Attorneys would be better suited to use that number.

Although, this approach is more time consuming and requires greater research, it may be appropriate for the Buyer or Seller who should be concerned about taking on a tax obligation when a flat proration when negotiations fail to procure a proration in excess of 110%.