North Carolina Estate Planning Blog : North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

The North Carolina General Assembly recently passed legislation that preserves the deduction on NC 529 College Savings Plan contributions for all North Carolina taxpayers, regardless of income. The adjusted gross income limitations that were scheduled to return in 2012 on the state income tax deduction for the NC 529 Plan have been eliminated.

The maximum annual contribution deductible from NC taxable income remains the same at $2,500 (individual) or $5,000 (married, filing jointly).  529 Plans offer tax-free growth when used for qualified educational expenses, and are protected from creditors up to $25,000 for each plan.

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From IR-2011-70:

WASHINGTON — The Internal Revenue Service today reminds everyone who has a bank or other financial account in a foreign country, or who has signature authority over such an account, that they may be required to report the account to the U.S. Department of the Treasury by June 30 each year.

Many people in the U.S. have foreign financial accounts. While there is nothing improper about setting up or maintaining such accounts, many people may mistakenly believe their accounts are not large enough on a combined basis to trigger reporting obligations. Foreign account owners may have to report their accounts to the government, even if the accounts do not generate any taxable income.

U.S. persons are required to file a Report of Foreign Bank and Financial Accounts (FBAR), Treasury Department Form TD F 90-22.1, each year if they have a financial interest in or signature authority over financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.

For 2010, the due date for filing the FBAR is Thursday, June 30, 2011, though some financial professionals will have until June 30, 2012 to file. Unlike with federal income tax returns, requests for an extension of time to file an FBAR cannot be granted.

The FBAR is not an income tax return and should not be mailed with any income tax returns. It is due by June 30 of the year following the calendar year in which the aggregate value of the foreign accounts, on any one day, exceeds $10,000. But for 2009 and earlier years, the due date is generally Nov. 1, 2011 for individuals whose filing deadline was properly deferred under Notice 2009-62 or Notice 2010-23, and have no financial interest in a foreign financial account but with signature or other authority over that account.

FBARs are filed with the U.S. Department of the Treasury, P.O. Box 32621, Detroit, Mich. 48232-0621.

Click here for a report of a recent plea bargain by a disbarred lawyer who was charged with hiding asset in UBS accounts in Switzerland.

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A June 22, 2011article on Trusts and Estates magazine's website contains a nice summary of President Obama's budget proposal measures effecting estate planning.  However, with Republican control in Congress and the possibility of a Republican President being elected next year, there is no certainty that any of the changes will actually take effect.  Obama already agreed to the temporary increase of the estate tax exemption to $5 million and reduction of the rate to 35% through the end of 2012, and there has been recent discussion in Congress of continuing the law beyond next year.

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As an estate planning attorney and Certified Financial Planner, much of what I do is help people protect and grow their assets.  Unfortunately, there are those who seek to do the opposite - con artists who try to take others' hard earned money by committing investment fraud.  The elderly are particularly vulnerable to such scams.

The Investment Securities section of the website of the North Carolina Secretary of State contains a great deal of educational and other information for investors, including how to file a complaint.  One piece provided the Securities Division is Five Things You Need to Know to Avoid Investment Fraud:

1.     Know Yourself and Your Investing Goals

You should know your investing objectives and your level of investing knowledge. Ask yourself: What can I afford to lose? What is my risk tolerance? Do I need external guidance to help me invest?

2.     Know Who You Are Dealing With

You should know if the person offering you the investment opportunity is registered to sell  investments, what their background is, how they are paid, what kinds of products they offer, who their other clients are and what level of service you can expect.

3.     Know What You Are Investing In

For example, is the purchase a security? Ask questions, take notes, and get a second opinion from a registered adviser. Never sign a document before reading it carefully, and don't be drawn in by appearances or smooth talk. Remember most fraudulent investments are very well thought out and appear professional in their presentation.

4.     Know Who To Call For Help

The North Carolina Securities Division (1-800-688-4507) can provide verification of the registration of the securities seller, investment adviser and the security itself. Other information, such as complaint history, is also available.

5.     Know the Red Flags Which Could Signal Fraud

• Promises of high returns with little or no risk, or guarantees: All investments carry risk. Usually, the higher the expected returns, the higher the level of risk. Pressure to "invest immediately or miss the opportunity": Don't be pulled in! This tactic is used to pressure you into handing over your money without doing your homework or asking for independent advice.
• Offshore investment – tax free: Taxes can sometimes be deferred, but they can't be avoided. This tactic is used to get investors to send the money offshore where it is difficult, if not impossible, to get back.
• Great investment opportunity – "your friends can't be wrong": Yes, they can. Many investment fraud victims were introduced to the fraud by unsuspecting family, friends or co-workers.
• Psychological tactics: Sellers who play on your fear (i.e. insufficient income to keep your home or buy your medicine), greed (to live the good life or leave money to your kids?"), or insecurities (not wanting to appear foolish or incompetent) are common tools used by con artists. 
• Inside information: First you have no way of knowing that the information is true. But second, trading on inside information is illegal.

You can also talk with your CPA or attorney, who should be able to provide guidance.

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The U.S. Fourth Circuit Court of Appeals, under whose jurisdiction North Carolina falls, overruled a Tax Court decision and upheld a Treasury regulation that provides for a two-year statute of limitation on claims for innocent spouse relief (Jones v. Commissioner, docket no. 10-1985 (4th Cir. 6/13/11)). This is the third time a Tax Court ruling on this issue has been overturned by a higher court.

Married couples who sign and file a joint return are both liable for any tax and penalties due with regard to the return.  Innocent spouse relief is often sought by a spouse who claims that he or she did not have any knowledge of the other spouse's fraud against the IRS.

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From Announcement 2011-40:

WASHINGTON — The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.

The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."

While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Mileage Rate Changes

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Recently I blogged about a client who had received a threatening letter from the IRS.  She had me investigate, and it turns out it was a mistake.

I have also known the North Carolina Department of Revenue to make errors and cause undue delay.  I'm experiencing this personally right now - I filed an amended 2009 corporate return in January and have not received the refund.  I had to call DOR several times, and was told by several different people that they weren't sure of the status of the return.  When I called today, I was told that the return had not yet been accepted in the system.  The gentleman I spoke with said that he accepted the return and approved the refund, but that he had no idea when I would actually get my check.  So, I calendared another call to NCDOR in a couple of months.  Hopefully I will get my $825 and the call won't be necessary.

In another instance, I filed a client's Offer in Compromise with NCDOR and didn't hear from them for a year.  They then told me they had lost the forms and wanted to see if I could send another copy.  That was about three months ago and I'm still waiting for a response. 

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For many people, the federal home sale gain exclusion is the single most valuable tax break available. But if you're getting divorced and selling a home, you may need to plan ahead to take advantage of the tax break. We'll explain why, but first, here's a little background information.

Gain Exclusion Basics

If you're unmarried, you can potentially sell a principal residence for a profit of up to $250,000

1. You must have owned the property for at least two years during the five-year period ending on the sale date (referred to as the ownership test).

2. You must have used the property as a principal residence for at least two years during the same five-year period (referred to as the use test).

To be eligible for the $500,000 joint-filer exclusion, at least one spouse must pass the ownership test and both spouses must pass the use test.

If you excluded a gain from an earlier principal residence sale under these rules, you generally must wait at least two years before taking advantage of the tax break again. The $500,000 joint filer exclusion is only available when both spouses have not claimed an exclusion for an earlier sale within two years of the sale date in question.

Of course, home sales often occur in divorce situations and the cash from this tax break can come in handy.

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While it's certainly not uncommon for taxpayers or tax preparers to make mistakes on tax returns, the IRS can also screw up, big time.

A couple of weeks ago an 86 year old client of mine received a letter from the IRS stating that she had taken a frivolous position on her 2009 tax return (which I prepared).  The letter threatened that if she did not file an amended return within 30 days to eliminate the frivolous position, she would be fined.  The letter did not refer to the nature of the frivolous position.  Needless to say, my client was quite worried.

Having no idea what the IRS could have possibly found wrong with the return, I called, and spent many minutes on hold both before and during a conversation with an IRS agent.  Finally the agent told me that it did not appear that there was anything wrong with the return, but that she would have her supervisor call me early the next week.  Apparently, the fact that my client had had about $40,000 withheld thinking she would owe substantial tax on stock sales (she had mostly losses) triggered an alert by the IRS.

Of course, no one called.  I called back and was told that someone would call me that afternoon around 2:00.  No one called back, so after a few days, I placed my third call to the IRS.  This time, I was informed was the return was fine, and that a letter of apology had been authorized and would be mailed out within a week.

So, happy ending, but my client will end up having to pay my fees for having to deal with the IRS to straighten them out.  The thing to remember is that the IRS (NC Department of Revenue, etc.) can be wrong, and sometimes very much so.  Sic your tax lawyer on them, and you may get very good news, as my client did this morning.

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Here's a good list of tax blogs, courtesy of Susan Miller of the Acclaimed Accountant Blog.

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The federal estate tax exemption is currently set at $5 million ($10 million for married couples), with a 35% rate.  This law is set to expire on December 31, 2012, with the exemption reverting to $1 million (and a 55% rate) on January 1, 2013.

This has made planing for those with assets of between $1 million and $5 million or so challenging, but I have been telling my clients that I believed that Congress would ultimately continue the $5 million exemption.  Congress is now beginning discussions on the future of the estate tax, and early indications are that a $5 million exemption would be acceptable to both parties.  Democrats, however, would like to see the rate increased to 45%.

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If the pending appropriations bill in the North Carolina General Assembly passes and is signed into law by Governor Perdue, the filing fee for estates will increase to $120 effective July 1, 2011.  This will be the second increase in the last few years, about doubling the cost.  Yet another reason to avoid probate!

Filing fees for most other matters will increase substantially as well, and a $20 fee for filing certain types of motions will be added.

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