By Matthew A. Quick
Real Estate Taxes
Welcome to the seventh issue of The Estate—the quarterly note intended to give access to easy-to-understand information and news involving real estate and estate planning.
For your convenience, and in the interest of our environment, The Estate is offered in digital form via e-mail. If you would like to receive The Estate via e-mail, please send a message to the e-mail address below. Also, feel free to visit www.attorneymatthewquick.com for archived issues of The Estate and several other articles on legal topics of interest.
The articles in this issue of The Estate concern real estate taxes and individual retirement arrangements (IRAs). The next issue, due in October, will address real estate closings and transfer taxes.
Thank you for your inquiries and continued interest. In the event you have any questions or concerns regarding any legal matter, please contact me at your earliest convenience—I am always happy to help. Also, please note that all legal matters are unique, thus the information contained in The Estate may only be used for informational purposes and cannot be considered legal advice.
All of the best,
Matthew A. Quick, Esq.
1256 West Byron Street
Chicago, Illinois 60613
Please realize the importance of organ and tissue donation and choose to give the gift of life (for more information on organ and tissue donation visit www.donatelife.net).
-Real Estate Taxes-
Real estate taxes are the main source of revenue for local municipalities, which are used to provide benefits and services such as schools, community colleges, police and fire departments, health care facilities, museums, water and sewer, roads and sidewalks, parks, libraries and so forth. Real estate taxes are calculated using the value of the property, which is called an ad valorem (according to worth) tax. Once the value of a parcel is established, a tax rate is applied, thus yielding the property tax owed. Determining the value of a piece of land (also referred to as a “parcel” or “tract”) and levying the appropriate tax is a process that involves several factors.
For administrative purposes, a property identification number (referred to as a “PIN”) is initially given to each piece of land (usually a 10 to 14 digit number), allowing land and tax records to be easily identified and transferred between municipal departments. Then, to figure the value of the parcel, an assessment is performed by the county or city assessor, who is a public official that appraises the property. The property assessment may be according to one or more appraisal methods, such as market value, replacement cost or income value. In Illinois, parcels are assessed every three to four years; in Michigan, parcels are assessed upon transfer and the assessed values are increased annually by an appreciation factor (the lesser of either the rate of inflation or 5%).
While some municipalities assess the property at its full value, others determine the taxable value of a parcel based upon a percentage. The determination of the assessor as to the taxable value of a parcel of property may be appealed by the property owner, typically within a limited timeframe.
In Michigan, after the property is assessed, there are no further calculations to determine the taxable value. However, after the property is assessed in Illinois, the calculations can get tricky by including such figures as an established assessment rate and state equalization factor, which are set by the county and state (basically, a means to manipulate property taxes without changing the property’s assessed value).
When the taxable value of the property is determined, the tax rate is then applied to determine the amount of tax owed. In Michigan, the taxes are levied as a millage rate, which is equal to 1/1000th of a dollar. Thus, to figure tax on a millage rate of 4.19, simply multiply .00419 by the taxable value of the property. On the other hand, Illinois property taxes are computed on a percentage basis of the taxable value of the property. Additionally, some exemptions are available to homeowners, seniors, veterans and the like, which are dollar for dollar reductions in the amount of tax owed.
When buying or selling property, prorating property taxes is an issue. In Illinois, property taxes are paid in arrears, which means that 2009 taxes are due this year. Therefore, the seller will pay the buyer for the days the seller spent occupying the property that have not yet been paid. In Michigan, however, taxes are paid in advance, which means the buyer will pay the seller for the days the buyer will spend occupying the property that have already been paid.
Property taxes vary in each municipality, be it by tax rate or mode of assessment. Because property taxes represent a substantial expense for property owners, each property tax bill should be independently examined to ensure it is accurate. If there are any questions regarding the accuracy of a tax bill, do not hesitate to contact the assessor, treasurer or a property tax professional.
Regardless of age or proximity to retirement, one of the most important decisions to be made regarding one’s financial future is the source of retirement income. The federal government and many individual workplace organizations have retirement programs that are offered to employees, such as 401(k) (private sector retirement plan), 403(b) (non-profit sector retirement plan) and 457 (government retirement plan) plans. However, many questions have surfaced as to the reliability and security of these programs in the years to come. Also, many individuals are seeking investment options in addition to workplace plans, which has prompted an interest in individual retirement arrangements (referred to as “IRAs”). IRAs are a great way to diversify investments and secure retirement resources with beneficial tax treatment. IRAs come in many different varieties, thus allowing an IRA to easily be tailored to an individual’s investment and estate plan.
Introduced in 1974, an IRA is a specific retirement plan that can be built to one’s needs. Even though IRAs have developed significantly over the years and have taken several different forms, the traditional IRA and the Roth IRA illustrate the greatest difference that remains among the several types; that is, the method by which each is taxed.
The government has provided beneficial tax treatment for IRAs. Instead of taxing each transaction that occurs within an IRA, which is typical of a common investment, such as buying and selling stock, all transactions within an IRA have no tax impact. With a traditional IRA, a contribution is tax deductible, which means that no income tax is paid on the contribution. Instead, withdrawals are taxed as income. On the other hand, with a Roth IRA, a contribution is not tax deductible, which means income tax is paid on the contribution and withdrawals are not typically taxed.
Currently, the government allows a $5,000.00 per year maximum contribution for those under the age of 50 and a $6,000.00 per year maximum contribution for those over the age of 50. A contributor will be allowed to fund a traditional IRA over the annual contribution limit, but will not be allowed to make a tax deduction of any amount contributed over the annual limit. Alternatively, a contributor is altogether barred from funding a Roth IRA beyond the annual maximum contribution.
In addition to contribution limits, an IRA investor must also fall under an income threshold to enjoy the tax benefits of an IRA. For instance, to make a tax deductible contribution under a traditional IRA, a contributor who is married and filing jointly cannot have a modified adjusted gross income (referred to as “MAGI”) over $177,000.00. To contribute to a Roth IRA at all, a contributor who is married and filing jointly cannot have a MAGI over $177,000.00.
Conversions from a traditional IRA to a Roth IRA have gained substantial popularity this year because there is no income limitation on who can convert. Anyone with any MAGI can make a conversion. While a contributor continues to be barred from directly funding a Roth IRA with a MAGI that exceeds the income limitation, a traditional IRA may still be converted to a Roth IRA. There are several benefits of converting a traditional IRA to a Roth IRA, which include, but are not limited to, tax-free growth, tax-free withdrawals, and no minimum distribution requirements. Taxes would have to be paid on a conversion to a Roth IRA; however, so long as the conversion is done in 2010, the taxes on the conversion may be spread out over the 2011 and 2012 tax years.
Due to the income limitation, some contributors may not qualify to make a tax deductible contribution to a traditional IRA or any contribution to a Roth IRA; however, setting up a traditional IRA that is non-deductible would allow a contributor to convert to a Roth IRA in the future. If the laws remain unchanged in years to come, a contributor that is above the income limitation would be allowed to contribute to a traditional IRA that is non-deductible every year, then convert it to a Roth IRA.
An IRA can only be funded with cash or cash equivalents. Attempting to transfer any other type of asset into the IRA, such as collectibles (art, baseball cards and rare coins) and life insurance, is a prohibited transaction and disqualifies the fund from its beneficial tax treatment. Once a contribution is made to an IRA, the IRA owner can direct the institution that is holding the IRA to use the contribution to purchase most types of securities and investment products.
Although funds can be distributed from an IRA at any time, there are limited circumstances when money can be distributed or withdrawn from the account without penalties. In most situations, to avoid penalty, funds cannot be withdrawn before two circumstances exist: the contributor reaches 59 and a half years of age and a five year period has lapsed since the contribution was made. There are additional exceptions that apply to early withdrawals, such as disability, a distribution to a beneficiary after the contributor’s death and when the funds are used to buy, build or rebuild a first home.
IRAs can be included in several investment arrangements that may be used to achieve sufficient retirement resources. If you have any questions, please be sure to consult a financial professional for more information on IRA eligibility, conversions, contribution limits, when the funds must be used, and what type of IRA would best suit a particular financial profile.
Michigan Enacts E-mail and Text Message Prohibition while Driving. As of July 1st, there is a ban on sending, typing or receiving text messages or e-mails while driving (MCL 257.602b). A first offense is punishable by a $100.00 fine; a second or subsequent offense is punishable by a $200.00 fine. There are no points assessed to the driver’s record for violation of this statute.
Illinois Modifies the Process by which a Red-Light Camera Issues Tickets. Effective January 1, 2011, Public Act 96-1016 changes the use of red-light cameras that give tickets automatically as follows: (1) a law-enforcement officer must review and approve all determinations that a car committed a red-light camera violation; (2) additional fees cannot be charged to an alleged violator for exercising his or her right to an administrative hearing; (3) the motorist must be given at least 25 days after an administrative hearing to pay any penalties; (4) governments must produce a recorded image of a red-light camera violation and make the images available on the internet; and (5) a red-light violation cannot be given if the motorist moves past the stop line or cross walk and the vehicle comes to a complete stop, but does not enter the intersection.
Illinois Increases the Surviving Spouse Award in Probate. Public Act 96-968 increases the minimum surviving spouse award from $10,000.00 to $20,000.00 and increases the minimum award for a surviving minor child or an adult dependent child from $5,000.00 to $10,000.00 in estates in which the decedent passed after July 2, 2010.
I hope this issue of The Estate has been helpful. Please feel free to contact me with any questions or concerns, or to schedule a complimentary consultation. As a service to all current and prospective clients, I travel at no charge to all meetings and consultations throughout Michigan and Illinois. In addition, informational sessions regarding special needs planning and estate planning are provided free to groups of any size. Please let me know if there is any way I can help.