The North Carolina Senate had announced plans to reveal the new NC tax reform bill in early May. However, the press conference instead produced the outline of a measure that the Senate hopes to turn into a bill later in 2013. Citing pending reports of tax collections from April as part of the bill’s delay, the legislators provided the proposed tax changes that will combine to about $1 billion in tax cuts.Continue Reading...
Steve Oshin’s 2013 Annual Domestic Asset Protection Trust State Rankings were released and show the highest scoring state for DAPTs is Nevada.Continue Reading...
Parents are allowed to take a federal and state income tax deduction for each dependent child. However, North Carolina proposed Senate Bill 667 (Equalizer Voter Rights) in early April 2013 that will not allow parents to claim their child for state income tax purposes if their child has registered to vote at an address other than where the parent or legal guardian resides.Continue Reading...
Why would an individual renounce or disclaim an inheritance in North Carolina? An inheritance may not always be expected and it may not be desirable for the beneficiary. Certain assets, like real estate or personal items, may require complicated or expensive maintenance that the beneficiary does not want to manage. An inheritance may also come with a heavy tax burden. For senior citizens, an inheritance could affect their eligibility for Medicaid benefits. Instead, a beneficiary may want another family member to receive their inheritance.Continue Reading...
Family members have the best intentions when they offer money to cover college expenses, but if they neglect to use a wise gifting strategy they could affect the student’s eligibility for federal aid. With hundreds of higher education institutions, state and private universities in North Carolina, students have no shortage of options. However, the cost of college can range from several thousand to over $45,000 per year.Continue Reading...
Although Obama’s American Taxpayer Relief Act was said to make permanent changes, lawmakers had also advised that it was just the first step in a series of changes. Now Obama’s 2013 budget proposal has several amendments, of which are changes to tax laws that were recently made permanent by the American Taxpayer Relief Act.Continue Reading...
Taxpayers make preventable mistakes every year that cause delays with their tax return processing. Knowing what these mistakes are may help you avoid unnecessary delays of your refund. Courtesy of the IRS, our North Carolina tax attorneys have listed five common mistakes taxpayers make when they filing their taxes in the hours or days before April 15th:Continue Reading...
Every year many innocent people fall victim to tax scams. Taxpayers may be taken advantage of by scammers, dishonest tax preparers, or may have their identity stolen by other means. There are more opportunities for criminals to find sensitive information about people now in the Digital Age. Read below to learn about common tax scams that are expected to affect taxpayers this year and share the information with your friends and family to help spread awareness:Continue Reading...
Making withdrawals from retirement accounts before actual retirement is usually a last resort. Individuals fear penalties and taxes—expenses they were not anticipating when they took the financially responsible step to contribute to their retirement. In addition to potential penalties, withdrawing funds early means they may not be accessible when intended: Retirement.Continue Reading...
A new study reveals more employers will offer Roth 401(k)s to their employees in 2013. About a third of all employers surveyed by Aon, a human resource services provider, have plans to add a Roth contribution option. Since there are no income restrictions for Roth 401(k)s, the rising trend will catch the eye of many employees.Continue Reading...
Recently we wrote about North Carolina potentially joining several other states that are repealing state estate tax (or “death tax”). Last week, the North Carolina House Finance Committee approved repeal of the state’s death tax. If the repeal is enacted into law, soon there will no longer be any states in the Southeast that impose a death tax. (Tennessee’s death tax will expire in 2016.)Continue Reading...
Most of the country’s attention has been on federal estate tax changes made by the American Taxpayer Relief Act of 2012. Little focus centered on state estate taxes. North Carolina is among 21 states where state-level estate or inheritance taxes are imposed on assets passed on to heirs.Continue Reading...
Congress has failed to avert the fiscal cliff. We have only nine days until the estate tax exemption drops to $1 million (and the rate goes up to 55%). Not to mention the income tax increases.
To make matters worse, the IRS's online site for applying for tax identification numbers (EINs) will be unavailable from 4:00 pm. on December 27th through the rest of the year. This will hamper last minute planning efforts that require EINs, such as trusts and LLCs, and bank and brokerage accounts for same.
If you still want to take advantage of the $5.12 gift and estate tax exemption - now there's even more reason to act before it's too late.
Merry Christmas to all!
Although this is the North Carolina Estate Planning Blog, much of what I blog about applies to folks all over the country. Since I am licensed in Tennessee and have clients there, I thought it was appropriate to report on these important changes in Tennessee transfer tax.Continue Reading...
Dynasty trusts, which help families legally avoid estate taxes and preserve assets for heirs of future generations, are the target of new legislation that could significantly limit their value. A proposal in the Obama Administration’s 2012 budget is slated to limit dynasty trust terms to 90 years. (North Carolina law allows dynasty trusts to be perpetual.) The Wall Street Journal reports, “the change would apply to new trusts or additions of money to existing ones, but not those already funded.”Continue Reading...
What may become part of the “fiscal cliff” drop—and if not, it will be on the 2013 agenda—is the elimination of municipal-bond interest tax breaks. Muni-bond taxes help cover the costs of local utility services, community parks, and more. Currently, about $1 trillion dollars is invested in municipal bonds by individual investors.Continue Reading...
Estate Planning attorneys all across the country are frantically working to help their clients utilize the $5.12 million gift and estate tax exemption before it disappears at year end. Most people are making gifts to irrevocable trusts that will save taxes and provide creditor protection for generations of descendants.
We have only two weeks left, with Christmas intervening, but all is not lost. For those who want to provide a meaningful legacy this holiday season, we can still help. As my colleague Steve Oshins in Las Vegas suggested, here is the way last minute planning can be accomplished:
1. Set up a simple one-page gift trust with just the essential terms so you have a valid trust under state law.
2. Give the settlor’s best friend (or attorney/CPA) as Trust Protector the power to completely amend and restate the trust (maybe for a selected period of time like three months) in the Trust Protector’s sole and absolute discretion.
3. Get the trust fully executed and funded with the $5MM gift before year-end.
4. Reconvene in 2013 and have the Trust Protector restate the trust with regular provisions. The settlor can make recommendations, but it clearly must be done in the sole and absolute discretion of the Trust Protector to avoid IRC 2038 (estate tax inclusion).
So, if you are one of the tardy ones, don't despair. Email me early next week and let's get this done.
Greg Herman-Giddens - firstname.lastname@example.org
Last week the United States Treasury proposed new regulations for Charitable Remainder Trusts (CRTs), which affects the tax liability of distributions in 2013. CRTs are a common type of trust that allows assets to be donated to a charity while the donor receives income for the specified trust period. Trust grantors take advantage of income and estate tax deductions.Continue Reading...
Now, weeks past the election with nothing positive coming out of Congress, people of means are finally starting to realize that it makes sense to use some or all of the $5.12 million federal gift and estate tax exemption before it falls to $1million next year. Doing so can save millions of dollars for one's heirs.
This week I've already spoken to three people about such gifting, which can be leveraged with the use of limited liability companies and trusts. Married couples can even make gifts to trusts but keep the assets in the family for future use.
It's still not too late for implementing gifting plans, but the clock is ticking. Estate planning attorneys, myself included, are running out of time to help clients. As it stands, I will be working weekends though the remainder of 2012.
Ben Franklin said that nothing is certain but death and taxes. True, but tax exemptions and rates are certain to change. Act now before they change for the worse.
A recent press briefing with Press Secretary Jay Carney touched on tax issues that will affect every American in 2013. Right now, Americans are ill-prepared for the approaching drop off the “fiscal cliff.” As tax cuts are about to expire in the New Year, how will individuals be affected?Continue Reading...
When administering an estate, determining the date of death values of the decedent’s assets is essential. Filing federal and state estate tax returns and paying any taxes due can only be done when the value of all the decedent’s property is known. In addition, the date of death values establish the new cost basis for capital assets. Delays in probate may stem from valuation complications since the methods to determine date of death values is different for each asset.Continue Reading...
Estate Planning Awareness Week comes during the final quarter of the year, just before the New Year shift known as the “fiscal cliff.” What is the fiscal cliff? This buzz word encompasses the impending year-end financial perfect storm. As the calendar flips over to 2013, multiple economic changes will take place at the same time. Automatic spending cuts, expiring tax cuts, and new taxes are slated to happen simultaneously, leaving Americans hanging on a fiscal cliff.
In Rev. Proc. 2012-41, the IRS has announced various inflation-adjusted tax figures for 2013. Among them:
- The annual gift tax exclusion will be $14,000 (for gifts of a present interest to any person).
- The annual gift tax exclusion for gifts to a non-citizen spouse will be $143,000 (for gifts of a present interest).
Also, in IR 2012-77, the 2013 retirement account contribution limits were released. For 401(k) and 403(b) plans, the limit will be $17,500.
Thinking about moving to North Carolina, or from NC to another state? Want to know how all of the various taxes compare from state to state? Check out this Taxes by State page on RetirementLiving.com. You will see that while North Carolina residents face less of a tax burden than many in the Northeast and Midwest, we are more heavily taxed than citizens of most other Southern states. Keep in mind, however, that often times higher taxes reflect better public services and a higher quality of living.
The IRS charges hefty penalties for failure to timely pay taxes. Just like with the failure to file penalties, the failure to file penalty is 5% per month, with a maximum of 25%. Interest is also charged.
For those who need to pay taxes at the last minute, or simply like the convenience of paying online or by phone, the IRS offers The Electronic Federal Tax Payment System (EFTPS). In addition to income tax, gift and estate taxes can also be paid through EFTPS. This year only gifts and estates in excess of $5.12 million may incur taxes, but next year that amount is schedule to drop to $1,000,000.
The IRS has compiled a list of the top five errors on on 2012 income tax returns, both taxpayer-prepared and those prepared by paid preparers (I intentionally don't use the word professional, as many preparers have little training). However, given the immense complexity of our tax code, and human nature, even experienced CPAs and tax attorneys make mistakes. Software has certainly made tax return preparation easier, but it sometimes taxpayers and preparers may rely too heavily on tax programs and too little on independent research.
The IRS has released a draft 2012 Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return dated August 16, 2012. The changes to the return address portability of a deceased spouse's unused gift and estate tax exemption and contingent claims that may not be immediately deductible under IRC Section 2053.
The current federal estate tax exemption is $5.12 million, but it will drop to $1million in 2013 unless Congress passes a new law prior to the end of the year.
Despite all the wrangling in Congress, we are still facing income and estate tax increases in 2013, now only five months away. See if you might be able to utilize any of these planning tips from the Accounting Today article Midyear Tax Planning: Top 10 Tips in a Time of Uncertainly.
One thing the article does not address is planning by executors and trustees to minimize the impact of the coming top income tax rate of 39.6% and the additional 3.8% investment income surtax. Trusts and estates reach the highest income tax rate at $11,650 (for 2012). Executors and trustees should consult a CPA or tax attorney with expertise in fiduciary income tax matters.
The proposal provides for a continuation of the current income tax laws for one more year, preventing the scheduled expiration of the Bush tax cuts on December 31, 2012. This would be most meaningful for those individuals with income over $200,000 or couples over $250,000, as Democrats are calling for tax rates to automatically increase for these taxpayers.
The Bill also includes a one year continuation of the current $5.12 million estate tax exemption (with inflation adjustments), 35% tax rate and spousal portability of the exemption.
Two House Bills, which have already passed, provide for repeal of the new health care law and the dreaded $3.8 investment surtax that is also scheduled to hit in 2013.
However, with a Democrat controlled Senate, don't look for these Bills to become law anytime soon. Most likely, nothing will happen before the election.
See this article in Accounting Today for more on the Bill.
A self-directed IRA is an IRA held by a custodian that allows investments in a broader class of assets than allowed by most IRA custodians, such as real estate, promissory notes and private placement securities. Because they normally include such alternative assets, the risk and rewards of self-directed IRAs may be greater than those of traditional IRAs.
Self-directed IRAs are becoming increasingly common, and while there are many legitimate investments available, there is more risk of investors becoming defrauded due to the nature of the assets involved.
To help raise public awareness of how to avoid fraud, the Retirement Industry Trust Association and the North American Securities Administrators Association are offering a free webinar on July 18 at 2:00 p.m. Eastern. Click here to register.
Among the topics to be discussed are:
- What are self-directed IRA accounts and why are they useful?
- What are the warning signs of investment fraud in self-directed IRAs?
- What should investors do if they suspect fraudulent activity?
- How do securities regulators help protect investors who use self-directed IRA accounts?
Owners of self-directed IRAs should also be careful when purchasing and operating rental real estate within the IRA, as violations of a "prohibited transaction" could trigger tax penalties.
Now that the health care law has been declared constitutional, the remaining provisions will be going into effect. One little known provision is a new 3.8% investment income surtax, also called the health care surtax or the Medicare tax; it will go into effect on January 1, 2013.
This new surtax will be assessed on the lesser of a) net investment income or b) the excess of modified adjusted gross income (MAGI) over the “threshold amount.” For married taxpayers filing jointly, the threshold amount is $250,000; married filing separately, $125,000; all other individual taxpayers, $200,000. For trusts and estates, it is the beginning of the top income tax bracket ($11,650 in 2012).
Stated another way: 1) If your modified adjusted gross income (MAGI) is less than or equal to the threshold amount that applies to you, you will not pay this tax. 2) If your modified adjusted gross income (MAGI) is greater than the threshold amount that applies to you, you will pay the 3.8% tax on the lesser of a) your net investment income or b) the amount of your MAGI over the threshold amount. Here are some examples of the application of the surtax.
Note that the surtax liability is determined on income before any tax deductions are considered. That means your deductions could put you in the lowest income tax bracket, yet you could still have investment income that is subject to the surtax. Also, the capital gain rate is scheduled to increase for high-income taxpayers to 20% in 2013, so the total tax on capital gains (with the surtax) could be 23.8% in 2013 and beyond.
The good news is that there are some steps you can take this year to help you avoid or reduce the amount of surtax beginning in 2013. Also, 2012 is an exceptional year for estate planning in general. The federal estate tax exemption is $5.12 million, which allows a married couple to transfer as much as $10.24 million from their estate with no estate tax. Under current law, this exemption is scheduled to shrink to $1 million in 2013. Other Bush tax cuts, including income and capital gain taxes, are set to expire at the end of 2012. With the new 3.8% surtax becoming effective in January, 2013 is on track to have the highest tax rates we have seen in years.
Now, more than ever, you need the assistance of experienced tax professionals to advise you and help you implement the best plan for you and your family.
Note: The above content is adapted in part from information provided by the nationally recognized tax professionals at Keebler & Associates. The full text of the Health Care Act is available online, with the relevant provisions beginning at Section 1411 at page 946.
The Supreme Court's recent affirmation of the Affordable Car Act and the associated new taxes, including the 3.8% investment income surtax has many affluent taxpayers and their advisors concerned. However, individual investors aren't the only ones who will be affected by this new law, as the surtax applies to trusts and estates as well.
The surtax goes into effect on January 1, 2013 and will apply to trust and estate net investment income in excess of about $12,000 that isn't paid out to heirs or beneficiaries. Net investment income includes interest, dividends, capital gains, annuities, rents, royalties, and passive activity income, but not distributions from IRA's and other qualified retirement plans. Trusts or estates that pay out 100% of income distributions will not owe a surtax, but the heirs or beneficiaries receiving the distribution will have to report the income, which will be used in their own individual surtax determinations.
For eligible estates and electing trusts, selecting the correct year end could considerably reduce the months in which surtax is owed on the estate. It may make sense to choose a December 31, 2012 year end where possible.
It's not too early for trustees, executors and their tax advisors to start considering implication of this new tax.
Persons who have relied upon certain trusts as a means of limiting estate taxes upon their death might have cause for concern regarding an Obama administration budget proposal for 2013. While the current proposal remains very broad, and thus might be subject to change down the road, as it stands now, it would require those who set up “grantor trusts” to include trust assets in their own estates for estate tax purposes.
Current tax policy effectively keeps income tax rules and estate tax rules separate. With proper planning, a trust grantor and an irrevocable trust can be treated as the same person under income tax law, meaning that transfers between the two do not trigger an income tax. Meanwhile, trusts designated as grantor trusts can be designed to be separate from the grantor for estate tax purposes and, thus, no estate tax is paid on assets held in these trusts upon the creator’s death.
These trusts are often called “intentionally defective grantor trusts, and are used in sophisticated estate and asset protection planning. Particularly in recent years, many people have relied upon these distinctions to avoid or minimize income and estate taxes. Under the current administration’s proposed policy, this type of planning would no longer be possible.
There's no real cause for alarm yet, however, as the current state of affairs in Washington most likely prevents any action in the near future.
See this Bloomberg article.
The Supreme Court’s recent decision to uphold the Affordable Care Act will have considerable tax consequences for both high-income as well as middle-class Americans. In approving “Obamacare,” the Supreme Court characterized the health care mandate as a tax, a label that the Obama administration has been resisting in favor of the term “penalty.” By whatever name, the law will impact a large portion of Americans in the following years as it is implemented. Below is a timeline of most of the major tax provisions of the new law:
- Effective in 2011, the penalty on non-qualified distributions from HSA’s doubled to 20%.
- Starting in 2012, all W-2’s must include the value of health care benefits provided to employees.
- Beginning in January 2013, individuals with over $200,000 annual income and married couples filing jointly with over $250,000 annual income must pay an additional 0.9% Medicare payroll tax on earned income.
- Beginning in January 2013, a 3.8% Medicare surtax will be owed on the lesser of net investment income or the amount by which adjusted gross income exceeds $200,000 for individuals or $250,000 for married couples filing jointly. Such investment income includes income from capital gains, interest, dividends, annuities and royalties.
- The itemized deduction floor for medical expenses for 2013 will increase to 10% of adjusted gross income.
- Beginning in January 2014, uninsured Americans will face an additional tax penalty, starting at the greater of $95 or 1% of income in 2014 and rising to the greater of $695 or 2.5% of income by 2016. Penalties for families will be fixed at a maximum flat penalty of $2085, yet families will still owe 2.5% of household income if that amount is greater. While the IRS does not have the power to put a lien on your house under the Affordable Care Act in order to satisfy the penalty, it could possibly confiscate tax return refunds or dip into available credit.
- Beginning in 2014, individuals with low income who purchase coverage will have access to a refundable tax credit.
- Beginning in 2014, businesses that don’t provide adequate coverage will face a non-deductible fee of $2,000 per employee (not counting the first fifty employees).
- Beginning in 2018, a 40% excise tax will be imposed on the portion of health care plans that exceed $10,200 for individuals and $27,500 for families.
What remains to be seen is whether the Act will be repealed by the Republicans after the election.
The IRS has announced plans for new streamlined procedures that will allow U.S. citizens residing overseas, including dual citizens, to get current with their tax filing obligations without facing penalties or additional enforcement action. Scheduled to go into effect on September 1, 2012, the new procedures will provide help to low compliance risk taxpayers who wish to correct previous failure to file timely tax documents, including income tax returns and Reports of Foreign Bank and Financial Accounts (FBARs).
Those eligible for filing under the new procedures generally will have simple tax returns and owe $1,500 or less in tax for any of the covered years; taxpayers presenting higher compliance risk will still be subject to heightened review and possible audit. Under the new procedures, taxpayers will be required to file delinquent tax returns along with appropriate related information returns for the past three years, as well as delinquent FBARs for the past six years.
In addition to aiding overseas U.S. citizens with tax filing obligations, the IRS also plans to provide assistance regarding foreign retirement plan issues. Whereas tax treaties often allow for income deferral under U.S. tax law only if a timely election is made, the new procedures will allow for deferral in low compliance risk situations even where a timely election was not made.
Owners of individual retirement accounts might face increased scrutiny by the IRS in the near future, posing the danger of hefty penalties for account mistakes that have previously gone unnoticed. As this recent online Wall Street Journal article notes, the IRS recently has been cracking down on secret foreign accounts and high earners. Now its attention is likely to turn to IRA account holders as the agency implements more aggressive enforcement strategies in reviewing IRA accounts. The agency will report its new policy regarding taxpayer errors to the Treasury Department by October 15, but until then, account owners should take extra care to ensure that any past withdrawal and contribution errors are corrected proactively and to prevent future errors, as the penalties for such errors can amount to 50% of the amount IRA holders failed to withdraw.
Here are some rules to keep in mind when reviewing your account with your lawyer, CPA or financial planner.
- IRA owners are required to start making withdrawals from traditional IRAs by April 1 of the year after they turn 70½. Such withdrawals are calculated by dividing the total IRA balance as of December 31 of the year prior to turning 70½ by life expectancy, which can be found in IRS Publication 590.
- IRA owners who have a spouse more than a decade younger who is their sole heir must consult a separate life-expectancy table in the same publication.
- Workers whose money is in a 401(k) who don’t own more than 5% of the company do not have to make withdrawals from that account when the turn 70 ½, provided that they still work for the company sponsoring the account. However, withdrawals do have to be made if you roll your 401(k) over to an IRA, regardless whether you continue working for that employer after you turn 70½.
- Traditional IRA owners cannot contribute more than $5,000 a year, or $6,000 if age 50 or older. IRA owners also cannot contribute more than their “earned income,” which includes wages, commissions, and alimony, but does not include rental-property income, pension, or deferred compensation.
- Mistakes regarding excess contribution can be corrected before October 15 of the following year by withdrawing the excess amount plus interest.
- Inherited IRA accounts allow for tax-deferred growth and annual minimum required distributions. However, the person inheriting the account must make the required withdrawal and report it as ordinary income on his or her own tax return if the decedent account owner was over 70½ and failed to make the withdrawal for that year prior to death. Designated beneficiaries who inherit accounts from anyone other than a spouse must take withdrawals across their own life expectancies starting the year after the death of the original account holder. Beneficiaries who inherit an IRA account from a spouse can either roll the account into their own IRA or set up an inherited IRA and postpone taking required distributions until the decedent would have turned 70½.
The IRS has released the 2013 inflation-adjusted amounts for Health Savings Accounts (HSAs). The tables below show the values for 2012 and 2013.
High-deductible health plan: A health plan that meets certain requirements regarding deductibles and out-of-pocket expenses:
*Annual deductible contribution limit: For 2012 and 2013 the maximum deductible contribution to an HSA is as follows:
Source: 2013 data from IRS Revenue Procedure 2012-26
North Carolina has a new law, G.S. 105-134.6(b)(22), that grants business owners a deduction of up to $50,000 of their net business income from NC taxable income. The income must be reported on Form 1040 Schedules C, E or F, and no deduction for passive income is allowed. The North Carolina Department of Revenue just issued a Directive that answers FAQs on the new law.
Unfortunately folks like me who own small businesses that are incorporated cannot benefit from the deduction. However, those who own 100% of a business and want the protection that a separate legal entity provides can establish a limited liability company (LLC). A single member LLC is disregarded for tax purposes by the IRS, so the income is reported on the owner's Schedule C. At a tax rate of seven percent, the savings could equal $3,500 per year.
The IRS has recently announced changes to its "Fresh Start" initiative that are aimed at helping struggling taxpayers. Part of the "Fresh Start" initiative, the Offer in Compromise (OIC) program was designed to alleviate the difficulties facing some financially distressed taxpayers by providing for an agreement between a taxpayer and the IRS to settle tax liabilities for less than the full amount owed if the taxpayer meets certain conditions.
Recent revisions to the OIC program focus on the financial analysis used to determine taxpayer OIC qualification. In order to decide if a taxpayer qualifies for an OIC, the IRS analyses the taxpayer's income and assets to determine reasonable collection potential. The announced changes will decrease the number of years of future income the IRS looks at in making its determination. The IRS now will look at only one year of future income for offers paid in five or fewer months (down from four years) and two years of future income for offers paid in six to twenty-four months (down from five years).
Another major change regards the calculation of Allowable Living Standards, which aid in financial analysis to determine a taxpayer's ability to pay. The standards, which incorporate average expenditures for basic necessities for citizens in similar geographic areas, have been expanded to include additional items. Taxpayers can now use these miscellaneous allowances for credit card payments and bank fees and charges. Additional guidance has also been provided for payment of student loans and delinquent state and local taxes.
Yesterday I blogged about North Carolina's controversial Amendment One, which ended up passing by a large margin. I also have some thoughts about another matter in the headlines - the John Edwards trial. I have not been following the case closely, but I do know that central to the case is the money received in 2007 from wealthy donors Fred Baron and Bunny Mellon, Edward's knowledge of the donations, and whether they constituted campaign funds or simply gifts. Edwards former speechwriter Wendy Button testified that Edwards told her that the money was legal because the donors had paid gift taxes.
However, the matter of the gift taxes is not so simple. In 2007, the federal gift tax exemption was $2 million, meaning the Baron and Mellon could have each given someone that amount without paying any tax, provided they had not previously used up the exemption. In any event, a federal gift tax return would be required to report the gift to the donees since it exceeded $12,000 per person. But exactly who were the donees? John Edwards? He certainly benefited from the gifts, since they helped hide Hunter's pregnancy, even if he didn't receive anything himself. Rielle Hunter was certainly a donee, as she received. at least, free rent and a BMW. Andrew and Cheri Young? They apparently kept most of the money to build themselves a house.
So, if Baron and Mellon filed gift tax returns as required, whom did they list as donees? Somehow I doubt the correct names and amount were on the returns. Were the returns later amended to correct the information?
And what about subsequent gifts of the same money? Did Edwards effectively make a gift to Hunter? To the Youngs? Was there a gift from the Youngs to Hunter? Any such gifts in excess of $12,000 would also required to be reported, and the estate tax exemption of the donors would be reduced by the amount of the gifts..
Edwards and anyone else considered to be a North Carolina resident would also be required to report the gift to the North Carolina Department of Revenue, as North Carolina still had a gift tax in 2007 and 2008. In fact, North Carolina's lifetime exemption was just $100,000, and that only applied to close relatives. That means North Carolina gift tax would have been due.
Only a tax lawyer would think about such things - but, the tax laws are laws too, and they should be enforced. I would like to see how this would all unravel if the IRS and NCDOR conducted audits of those involved.
Promoters of tax avoidance scams are not only acting illegally, but they can put unknowing participants at risk of penalties and even jail time. The old saying "if it seems to good to be true, it probably is" certainly applies here, but plenty of celebrities have fallen prey to such schemes, including Wesley Snipes.
There are plenty of legitimate tax reduction techniques available, but when someone tells you he can help you avoid taxes altogether, I recommend running for the hills. You can also report the scam and its promoters to the IRS. Think of it this way - the less tax cheats out there, the more money our government gets, and theoretically, anyway, the less likely it is to raise taxes on the rest of us.
The IRS has just issued a Last Minute Reminder to Parents and Student; Don't Overlook College Tax Benefits. It provides a good overview and lots of links to other resources.
I wish there was a special benefit for parents who have more than two children in post-secondary school at once - I have four in college for at least the next two years!
While no substitute for the advice and assistance of a tax professional, The American Institute of Certified Public Accountants (AICPA) offers 10 Tips for Last Minute Tax Filers.
Remember, Failure to File and Failure to Pay penalties are 5% (each) of the amount of each due - if you wait five months, your total penalty could equal fully one-half of the tax due! And that doesn't include interest. Even if you can't get anything else done by April 17, the automatic extension could save you a lot!
North Carolina repealed its intangible, inheritance and gift taxes within the last decade or so, but still maintains an estate tax with an exemption equal to the federal amount (currently $5.12 million). These changes have made North Carolina more appealing to wealthy individuals, but our relatively high income tax still drives some folks to Florida, which has no income tax (or estate tax). A few of my clients have changed their domicile to Florida in order to save income taxes, particularly with regard to sale of a business or other event where a great deal of capital gain is realized.
Other states, such as our neighbor to the West, Tennessee, are also looking a repealing certain taxes to prevent flight of of wealthy residents to other states. See this Wall Street Journal article. Tennessee does not tax earned income, however, which might make it appealing to highly paid professionals who spend most of their income!
In a recent federal District Court case, the co-executors of a decedent's estate were held to be personally liable for the decedents unpaid income taxes under the federal priority statute because they distributed assets of the estate, the distribution rendered the estate insolvent, and it took place after they had actual knowledge of the decedent's liability for unpaid taxes. U.S. v. David A. Tyler and Louis J. Ruch, (DC PA 03/13/2012) 109 AFTR 2d ¶2012-583.
This case should serve as a reminder that serving as executor is not a job to be taken lightly, and that one must take great care to follow the law ensure that one does not become personally liable to acts or omissions as executor. In my admittedly biased opinion, lay executors should always hire counsel to assist them - and follow counsel's advice. In doing so, they will often save the estate and themselves money in the long run, not to mention increased peace of mind.
Tax season is in full swing, and I was recently out of the office for a few days, so I'm a bit late in reporting this, but the provision to do away with the ability of most IRA beneficiary's to stretch distributions over their life expectancies is now back on the table as part of the Senate Highway Bill. See Page 28 for details.
Let's hope it goes away again, for good!
The IRS has released its annual list of tax scams for taxpayers to watch out for - review this list to help educate and protect yourself. Believe it or not, the IRS wants to help!
Wealthy folks looking to transfer assets to younger generations in tax-advantaged ways should act now, as the Obama administration is seeking to limit several favorite techniques of estate planning attorneys. On the chopping block are the most commons uses of IDGTs (Intentionally Defective Grantor Trusts), GRATs (Grantor Retained Annuity Trusts), and discounts for gifts of interests in FLPs (Family Limited Partnerships) and FLLCs (Family Limited Liability Companies). Tax-free Dynasty Trusts would also be a thing of the past. This Forbes article from Deborah Jacobs provides a good overview of the proposals.
Some may argue that the passage of some or all of the proposed revenue boosting laws is unlikely, but I'm advising my clients to act now before it's too late.
The White House has issued its 2013 fiscal year revenue proposals, with estate and gift tax changes consistent with administration's earlier stance on those rules. Beginning next year, the estate tax exemption would decrease to $3.5 million and the rate would increase to 45%. Spousal portability of the estate tax exemption, however, would remain. The gift tax exemption would go back to $1 million.
Proposals to require GRATs to have 10 year minimum terms and to eliminate certain valuation discounts are also included.
With the upcoming elections and the big fight over income taxes, there is little change that these proposals will become law.
From the AICPA:
Beginning in January 1, 2011, the Internal Revenue Code provides for portability of the estate tax exemption between spouses. According to issued guidance so far from the IRS (Notice 2011-82 and IR-2011-97), to claim the benefit of portability, a timely filed Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return, is required. If the estate tax return is not timely filed, the guidance provides that the surviving spouse will not be able to claim the benefit of portability.
There is a procedure under section Treas. Reg. § 20.6081-1(c) that permits an estate, upon showing good cause, to seek a 6-month extension of time to file the estate tax return. Under this procedure, an estate is to file Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes. Form 4768 must contain a detailed explanation of why it is impossible or impractical to file a reasonably complete estate tax return by the due date and an explanation showing good cause for not requesting the automatic extension of time to file the return. Section 20.6081-1(c) provides that Form 4768 should be filed sufficiently early to permit the IRS time to consider the matter and reply before what otherwise would be the due date of the return. The instructions to Form 4768 provide that if the estate has not filed an application for an automatic extension and the time for filing such application has passed, the estate should file Form 4768 as soon as possible. It may be worth considering requesting a 6-month extension of time to file the estate tax return if you missed filing the return in time and would like to try to obtain the benefit of portability for the surviving spouse.Blogger's note: Unless Congress extends the availability of portability and use of the additional exemption gained, it will expire at the end of this year, along with the increased $5.12 million exemption (reverts to $1 million). We'll see what happens after the election!
I've been a big proponent of planning to preserve the ability to "stretch" inherited IRAs over the life expectancy of the beneficiary, which allows for tremendous tax-deferred growth. In what came as a big surprise, to me anyway, Senator Max Baucus recently proposed requiring that most inherited IRAs be paid out within five years. Now, however, it appears that Baucus is backing off his revenue raising proposal. This brings a collective sigh of relief from IRA owners, financial advisors, custodians, and tax professionals.
I just came across this article, Closing Down the Estate, on SmartMoney.com. It gives a good overview of what an executor is responsible for from a tax perspective, but is by no means exhaustive. Since Executors can be personally liable for certain tax penalties, they should make sure to engage an experienced tax attorney or CPA to ensure that everything is done timely and correctly.
S Corporation owners who are service providers often take a low salary so that they can receive most of the firm's profits as a dividend, avoiding payroll taxes. When the salary is unreasonably low, or there are no other fee generating employees of the firm, doing so is particularly questionable. In the December 2010 Watson case, a CPA, whom you think would know better, was busted by the IRS for this practice. Mr. Watson took a salary of just $24,000 in a year in which his share of the profits was over $200,000. The U.S. District Court for the Southern District of Iowa ruled for the IRS and held that the compensation was unreasonably low and the dividends were properly reclassified as salary and subjected to payroll taxes.
To be safe, make sure you set a salary comparable to what someone in a comparable position would get, and if you you have no employees who are also bringing in fees, take virtually all of your net income as a salary. This will help keep in the IRS away, and let you contribute more to your retirement account, as your earned income will be much higher.
There a few federal income tax deductions and other provisions that expire this year:
- Tax-free distributions from IRAs for charitable purposes - Taxpayers who were at least age 70½ could make tax-free charitable distributions from an IRA up to $100,000.
- Contributions of capital gain real property made for conservation purposes - The expanded deduction (50% for individuals, 100% for qualified farmers and ranchers) of the value of a qualified conservation easement donated to a qualifying charitable organization. In 2012 and later, the deduction will be limited to 30% for all taxpayers.
- Deduction for certain expenses of elementary and secondary school teachers - The above-the-line deduction of up to $250 for unreimbursed classroom expenses.
- Deduction of state and local sales taxes - Taxpayers could choose to deduct, as an itemized deduction on Schedule A, state and local general sales taxes, in lieu of deducting state and local income taxes.
- Qualified tuition and related expenses - Certain taxpayers were allowed an above-the-line deduction (up to a maximum of $4,000) for qualified tuition and related expenses for higher education.
- Individual AMT exemption amounts - Individual AMT exemption amounts for 2011 are $74,450 (married filing jointly), $37,225 (married filing separately), and $48,450 (single and head of household). In 2012 the exemption amounts will decrease to $45,000 (MFJ), $22,500 (MFS), and $33,750 (Single/HoH).
It's possible that tax legislation in 2012 could retroactively extend these benefits. A host of other tax cuts will also expire on December 31, 2012, and I'm sure that Congress will at least attempt to address the issue next year. Stay tuned for more fun and games from Washington!
The IRS is requesting comments on the tax implications of trust "decanting," which refers to transfers by a trustee of all or a portion of the principal of an irrevocable trust to another irrevocable trust. Specifically, would like to hear from practitioners regarding when and under what circumstances such transfers that result in a change in the beneficial interests in the trust are not subject to income, gift, estate, and/or generation-skipping transfer (GST) taxes. See Notice 2011-101 for details.
North Carolina and many other states have statutes that expressly allow for trust decanting. In addition, in order to add flexibility and protection for beneficiaries, irrevocable trusts such as life insurance trusts often contain provisions allowing the trustees to transfer some or all of the principal to another trust. Court approval is not required, but certain limitations are imposed to so that the rights of the beneficiaries are not substantially modified.
U.S. citizens must report and pay taxes on their world-wide income, even if living in another country. U.S. taxpayers are also required to disclose foreign bank and financial accounts (FBARs). It's important to know and follow the rules in order to avoid civil and criminal penalties.
The IRS has published a guide on income tax filing and FBARs for U.S. Citizens or Dual Citizens Residing Outside of the U.S.
According to Robert Keebler, CPA, the IRS may allow a late filed Federal Estate Tax Return, Form 706, if the only reason for filing the return is for the surviving spouse to claim the deceased spouse's unused estate tax exemption. The current exemption is $5 million, but it is scheduled to reduce to $1 million in 2013.
Form 706 is due nine months after death, with an automatic six month extension available.
On November 17, 2011, Congressman Jim McDermott (D-WA), a senior member of the House Ways and Means Committee, introduced HR 3467, the “Sensible Estate Tax Act of 2011”. Along with changes to the estate tax, the bill includes many of Obama's 2012 Fiscal Year Proposals with regard to gift and GST taxes. The bill includes the following:
Estate Tax Exclusion Amount of $1,000,000 with Top Rate of 55%:
Reduction of the estate tax exclusion amount to $1 million for decedents dying after December 31, 2011, and indexing for inflation from the year 2000 for decedents dying after 2012. The top tax rate is 55%, and the graduated amounts subject to the rate schedule would also be indexed for inflation.
Provisions designed to coordinate with the gift tax to reflect the decrease in the applicable exclusion amount.
Permanent Spousal Portability of the Estate Tax Exclusion Amount:
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Act") created portability of the estate tax exemption between spouses, but the law expires on December 31, 2012. The Bill makes portability permanent.
Also included is a technical correction in the definition of “deceased spousal unused exclusion amount (“DSUEA”)” of a surviving spouse. The reference to the basic exclusion amount of the last deceased spouse of the surviving spouse would be replaced with a reference to the applicable exclusion amount of the last deceased spouse, so that the statute would reflect the calculation of the DSUEA as described by the Joint Committee on Taxation.
Credit for State Death Taxes Restored:
The credit was phased out from 2002 to 2005. Before, many states had estate tax laws that permitted them to "pick up" the amounts allowable as a federal estate tax credit. Thus states could share in the estate tax collections without increasing the overall estate tax burden. The bill would restore the revenue sharing mechanism with the states.
Valuation Discounts and Minority Interest Discounts Limited:
Valuation discount limitations for certain transfers of nonbusiness assets (defined as an asset which is not used in the active conduct of one or more trades or businesses), including:
- For the transfer of an interest in an entity which is not actively traded, no valuation discount would be allowed with respect to “nonbusiness assets”;
- For the transfer of an interest in an entity which is not actively traded, no discount would be allowed by reason of the fact that the transferee does not have control of the entity if the transferee and the transferee’s family members have control of the entity.
- Effective with regard to transfers after the date of enactment.
Consistency in Value For Transfer and Income Tax Purposes Would be Required :
Imposition of a consistency and a reporting requirement, with penalties for inconsistent basis reporting. The basis of property acquired from a decedent pursuant to Internal Revenue Code ("IRC") Section 1014 must equal the value of that property for estate tax purposes, and the basis of property received by gift must equal the donor's basis determined under IRC Section 1015.
Effective for transfers for which returns are filed after the date of enactment.
Restrictions on Grantor Retained Annuity Trusts :
- Minimum 10 year term;
- Annuity payment cannot be reduced from one year to the next during the first 10 years of the GRAT term; and
- The remainder interest at the time of the transfer must have “a value greater than zero.’’
- The bill contains no guidance regarding the parameters of the "greater than zero" requirement.
- Effective for transfers made after the date of enactment.
Duration of Generation-Skipping Transfer Tax Exemption Limited:
Expiration of the GST exemption 90 years after the establishment of a trust. This is done by increasing to one the inclusion ratio with respect to property transferred after that date.
Applies to trusts created after enactment, and to transfers made from pre-existing trusts if the transfer is made out of principal added to the trust after the date of enactment (subject to grandfathering exceptions).
My view is the that Bill has no chance of passage in its current form, the main sticking point being the drastic reduction of the current estate tax exemption and increase of the rate.
Here are the states with an estate and or inheritance tax, ranked from approximate highest to lowest tax burden (North Carolina has the distinction of being the best of the worst):
- New Jersey - $675,000 exemption, 16% top rate (estate tax); $500 exemption/16% top rate (inheritance tax)
- Maryland -$1M/16% (estate tax); $50,000/10% (inheritance tax)
- Pennsylvania - 0/15% (inheritance tax)
- Iowa - $0/15% (inheritance tax)
- Indiana - $100/20% (inheritance tax)
- Kentucky - $500/16% (inheritance tax)
- Nebraska - $10,000/18% (inheritance tax)
- Ohio - $338,338/7% (repealed effective 1/1/2013)
- Rhode Island - $850,000/16%
- Minnesota - $1M/16.7%
- Maine - $1M/16%
- Oregon - $1M/16%
- District of Columbia - $1M/16%
- Massachusetts - $1M/16%
- Washington - $2M/19%
- Illinois - $2M/16.7%
- Connecticut -$2M/12%
- Vermont - $2.75M/16%
- North Carolina - $5M - 16%
State death taxes are deductible against the federal estate tax, which currently has a $5 million exemption and 35% rate.
This news courtesy of Financial Advisor Nat Harris (emphasis added):
House Democrats plan to introduce a bill today to extend and overhaul the estate tax beyond 2012 in the opening salvo of what is likely to be a long and politically-charged debate next year.
A favored target of Republicans, the tax on inherited wealth already promises to be one of the most controversial elements of the tax code up for renewal at the end of next year. Six Republican presidential candidates, including all of the front-runners, have said they would repeal the tax.
But the legislation by Rep. Jim McDermott (D., Wash.), a veteran member of the House Ways and Means Committee, proposes to extend the current reach of the estate tax by reducing the amount of the estate exempted from the tax to $1 million from $5 million and raising the tax rate to 55% from 35%, bringing it back to pre-Bush era levels.
"I'm not against people making money in this country, but I do think they have a responsibility to give some of it back," especially at a time of a deep federal budget deficit, McDermott said in an interview this week.
While Democrats acknowledge they will face stiff resistance from Republicans, McDermott said taxpayers need to know Congress is not ignoring the issue until the last minute. In a deal brokered with President Barack Obama last December, Congress reinstated the estate tax for this year and next, after letting it lapse for one year in 2010. While the estate tax is slated to revert back to 2001 levels after next year, Republicans in Congress have already introduced legislation to repeal it again.
"It really is a question of clarity," for both families and planners, McDermott said. "The question is how to bring fairness into it."
Under McDermott's proposal, co-sponsored by Rep. Charles Rangel (D., N.Y.), the exemption for married couples would drop to $2 million from $10 million.
Spouses could still claim the remainder of their partner's exemption if some remains unused after death, as they can now. The rate and $1 million exemption would be adjusted for inflation, beginning at the 2000 level.
The bill, slated to be introduced today, would also unify the estate and gift taxes. That means a taxpayer would only have a single exemption of $1 million for their estate and most gifts. The legislation also includes several provisions from Obama's last budget proposal to end targeted estate tax breaks.
Republicans, often led by Sen. Jon Kyl (R., Ariz.) have pushed hard in previous years to repeal the tax, whose rates and exemption levels have varied wildly over the last decade.
The IRS has begun checking land records in certain states, including North Carolina, to compare uncompensated, mainly intra-family gifts of real property to filed gift tax returns. Generally, gifts of any property over the $13,000 annual exclusion (up from $10,000 a few years ago) must be reported on a federal gift tax return for the year. See this recent Forbes article.
I encounter situations frequently where no gift tax returns where filed for gifts of real estate. Real estate lawyers who draft the deeds often do not advise clients on the tax consequences of the gift. Before ANY gift of real estate, persons should consult with tax counsel. There are also income (capital gains) tax issues to consider
If you have made any such transfers in the past, see a CPA or tax attorney immediately about filing the overdue returns. For North Carolina real property, gifts prior to 2009 must be reported on a North Carolina gift tax return as well, and any applicable tax paid.
In IR-2011-103, the IRS announced the pension and other retirement account contributions limit. Certain limits are set for below:
- The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.
- The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.
SIMPLE and SEP IRAs:
- The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.
- The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $245,000 to $250,000.
- The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.
- The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.
The IRA catch-up contribution limit for those aged 50 and over is $5,500.
The IRS announced today that the amount exemption from estate taxes will increase next year. For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount will be $5,120,000, up from $5,000,000 in 2011.
For Special Use Valuation for qualified real property, the aggregate decrease in the value of the property resulting from the election cannot exceed $1,040,000, up from $1,020,000 for 2011.
The annual exclusion for gifts will remain at $13,000.
The IRS has just issued Revenue Procedure 2011-48, which provides guidance regarding the filing and subsequent resolution of a protective claim for refund of estate tax that is based on a deduction for a claim or expense under section 2053 of the Internal Revenue Code.
Section 2053 allows deductions to be taken against the estate tax for claims and expenses such as funeral costs, administrative expenses, debts, etc. Generally the amount deducted must have actually been paid at the time of filing of the estate tax return, which is due nine months after the decedent's date of death (a six month extension is available).
For claims and expenses which have not been paid, but are anticipated to be paid after filing, the executor can file a protective claim for a refund.
The IRS has released the final instructions for the 2011 United States Estate (and Generation-Skipping Transfer Tax Return (Form 706), and Guidance on Electing Portability of Deceased Spousal Exclusion Amount (Notice 2011-82).
The federal estate tax return and any tax is due nine months after the date of death, although a six month extension for filing (not paying) is available. This year the estate tax exemption is $5 million. Estates valued under that amount are not required to file a return, but the executor of an estate of someone married at the time of his or her death may wish to do so to ensure that the surviving spouse can take advantage of whatever part of the $5 million exemption was not used by the decedent.
The proposal from the White House includes:
- Income surcharge for high income earners - basically a 5% surtax on Adjusted Gross Income in excess of $500,000.
- Repeal high-income tax cuts in 2012 as opposed to 2013.
- Grantor Retained Annuity Trusts (GRATs) - minimum 10 year term for these trusts that are used to pass wealth on to younger family members at very little if any gift tax cost.
- Materially reduce valuation discounts (minority interest and lack of marketability) for family controlled entities such as LLCs and Limited Partnerships.
- Revert to 2009 estate tax parameters for 2012, which would mean a $3.5 million exemption and a 45% rate. I assume spousal portability would go away. The current $5 million exemption is scheduled to expire on December 31, 2012. If Congress takes no action, the exemption will fall to $1 million and the rate will increase to 55%.
IR-2011-91 (emphasis added):
WASHINGTON — The Internal Revenue Service announced today that large estates of people who died in 2010 will have until early next year to file various required returns and pay any estate taxes due. In addition, the IRS is providing penalty relief to certain beneficiaries of these estates on their 2010 federal income tax returns.
This relief is designed to give large estates, normally those over $5 million, more time to comply with key tax law changes enacted late last year. Revised versions of the estate tax forms are now available on IRS.gov, and the carryover basis form will be released this fall.
The IRS is providing the following relief:
Large estates, opting out of the estate tax, now will have until Tuesday, Jan. 17, 2012, to file Form 8939. This special carryover basis form, required of estates making this choice, was previously due on Nov. 15, 2011. Because this is a change in the specified due date rather than an extension, no statement or form needs to be filed with the IRS to have this new due date apply.
2010 estates that request an extension on Form 4768 will have until March 2012 to file their estate tax returns and pay any estate tax due. Normally, a six-month filing extension is automatically granted to estates filing this form, but extensions of time to pay are granted only for good cause. As a result, most 2010 estates that timely file Form 4768 will have until Monday, March 19, 2012 to file Form 706 or Form 706-NA. For estates of those dying late in 2010 (after Dec. 16, 2010 and before Jan. 1, 2011), the due date is 15 months after the date of death. No late-filing or late-payment penalties will be due, though interest still will be charged on any estate tax paid after the original due date.
Special penalty relief is provided to many individuals, estates and trusts that already filed a 2010 federal income tax return, or obtained an extension and plan to file by the Oct. 17, 2011 extended due date. Late-payment and negligence penalty relief applies to persons inheriting property from a decedent dying in 2010, who then sells the property in 2010 but improperly reports gain or loss because they did not know whether the estate made the carryover basis election. Details are in Notice 2011-76, posted today on IRS.gov.
The Tax Relief Act of 2010 included a spousal portability provision for the $5 million estate tax exemption. If a married person dies after December 31, 2010 and does not use all of his or her exemption, the unused portion can be transferred to the surviving spouse.
For example, if husband dies and uses $1,000,000 of his exemption on bequests to his children, with the remainder of the assets passing tax-free to his wife, she can add the remaining $4 million of the husband's exemption to her exemption (making her total exemption $9 million under current law).
To take advantage of portability, however, the unused exemption must be transferred from the estate of the first spouse to die to the surviving spouse. This can be done only by filing a federal estate tax return (Form 706), even if no tax is due. If the return is not filed, any excess exemption is forfeited and cannot be used at the death of the surviving spouse.
Form 706 is due nine months after the death of the decedent, with a six month extension available. Executors should file extensions now for decedents who died in early 2011 since the final 2011 Form 706 is not yet available.
The IRS has announced that residents of the following North Carolina counties qualify for filing and payment relief due to Hurricane Irene: Beaufort, Carteret, Craven, Dare, Hyde, Pamlico and Tyrell.
The tax relief postpones certain tax filing and payment deadlines to October 31, 2011. Included are businesses that earlier received an extension until September 15, 2011 to file their 2010 returns, as well as individuals and businesses that obtained a similar extension until October 17. It also includes the estimated tax payment for the third quarter of 2011, which would normally be due September 15.
Due to Hurricane Fran, the IRS has extended the deadline for the Offshore Voluntary Disclosure Initiative for foreign accounts to September 9, 2011. U.S. taxpayers with foreign accounts totaling more than $10,000 at any time during the year must report the accounts to the IRS or face substantial penalties and criminal charges. Voluntary disclosure and payment can avoid criminal charges. Click here for more information.
For certain professionals, failing to report can end also one's career. An attorney here in North Carolina was recently disbarred for failure to report an offshore account.
The IRS has released draft instructions for the 2010 Form 706, the U.S. Estate Tax Return. Executors of estates of decedents who died in 2010 between the estate tax, with a $5 million exemption and 35% rate, or the modified carryover basis rules. The modified carryover basis law does not institute a tax, but limits a step up in basis for property acquired from a decedent to $1.3 million, with another $3 million for property passing to a spouse. Other property would have the same. basis that it had in the hands of the decedent, so that when sold, capital gains tax may be due.
On his bus tour in Illinois last week, Obama responded to a question about the future of the estate tax from a local farmer. The President stated that a compromise between the current $5 million exemption ($10 million per married couple) and the $1 million exemption that will return in 2013 had been discussed. The compromise would be a $7 million exemption per family, which I take to mean a $3.5 million exemption per person with spousal portability. No mention was made of the estate tax rate.
Personally, I don't expect widespread Republican support for such a compromise, particularly given anti-estate tax Senator Kyl's membership in the congressional super committee.
Arizona Senator Jon Kyl will join the bipartisan Congressional super committee, which has the task of cutting $1.5 trillion from the federal budget in the next decade. Kyl is a staunch opponent of the estate tax, and his appointment to the committee makes any movement toward a decrease in the current $5 million exemption or increase in the 35% rate unlikely. Democrats have called for the rate to increase to 45%.
If Congress doesn't act before December 31, 2012, the exemption will revert to $1 million, with a 55% rate.
Related article in the New York Post.
In the 2011-2012 Session, the North Carolina General Assembly passed several laws affecting estate planning, trusts and probate:
- S.L. 2011-5 and S.L. 330- The reference to the Internal Revenue Code in G.S. 105-228.90(b)(1b) is changed from May 1, 2010 to January 1, 2011. This puts NC in sync with the federal government with regard to the estate tax ($5 million exemption). For 2010 NC had no estate tax.
- S.L. 2011-339 - 1) Contains minor changes to the notice provision for trustee compensation under G.S. 32-55; 2) Clarification that certain marital trusts are exempt from the claims of creditors of the surviving spouse under G.S. 36C-5-505; 3) An addition to G.S. 36C-7-704 expressly states that a successor trustee is vested with the title to property of a former trustee; 4)Clarifies powers of a trustee to wind up administration of a trust under G.S. 36C-8-816; 5) Establishes a new category of corporate fiduciary, a "trust institution", with less restrictions than a bank. Effective October 1, 2011, and applies to all trusts created before, on or after that date.
- S.L. 2011-344 - Numerous but mostly minor changes or clarifications to right to appeal a Clerk's order, jurisdiction, probate in solemn form, venue, renunciation of right to serve as executor or administrator, revocation of letters, resignation of personal representative, collectors, small estates, summary administration, intestate succession, allowances, will requirements, caveats, will construction, and much more. The changes are effective January 1, 2012, and apply to estates of decedents dying on or after that date.
The IRS recently issued guidance on the treatment of basis for certain estates of persons who died in 2010. This will assist executors who decide to opt out of the estate tax and have the carryover basis rules apply. Form 8939, the basis allocation form required to be filed by executors opting out of the estate tax, is due November 15, 2011.
The IRS plans to release Form 8939 and instructions early this fall.
Under EGTRRA 2001, the estate tax was repealed for persons who died in 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 then reinstated the estate tax for 2010 decedents. Executors of estates of decedents who died in 2010 can now opt out of the estate tax, and instead elect the repealed carry-over basis provisions of the 2001 Act.
Notice 2011-66 provides guidance for executors of estates of decedents who died in 2010 regarding the time and manner of choosing to opt out of the estate tax have the carryover basis rules apply.
Revenue Procedure 2011-41 provides safe harbor guidance regarding property acquired from estates of decedents who died in 2010.
Good news for beneficiaries of large North Carolina estates of decedents dying in 2010. From the North Carolina Department of Revenue:
S.L. 2011-5 updated the State's conformity date to the Internal Revenue Code from May 1, 2010 to January 1, 2011. Subsequently, S.L. 2011-330 (passed on June 27, 2011) clarified that the North Carolina Estate Tax is effective and applies to the estates of decedents dying on or after January 1, 2011. For North Carolina purposes there is no estate tax for decedents dying in 2010. North Carolina law conforms to the higher exclusion amounts and gives estates that chose to pay federal estate tax for 2010 the same stepped-up basis for North Carolina purposes as for federal purposes for the property passing through the estate.
This also makes clear that North Carolina's current estate tax exemption is $5 million.
From IR-2011-80, issued on July 25, 2011:
The IRS launched a thorough review of the equitable relief provisions of the innocent spouse program earlier this year. Policy and program changes with respect to that review will become fully operational in the fall and additional guidance will be forthcoming. However, with respect to expanding the availability of equitable relief:
- The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.
- A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in suspense will be automatically afforded the new rule and should not reapply.
- The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.
The change to the two-year limit is effective immediately, and details are in Notice 2011-70.
Existing regulations, adopted in 2002, require that innocent spouse requests seeking equitable relief be filed within two years after the IRS first takes collection action against the requesting spouse. The time limit, adopted after a public hearing and public comment, was designed to encourage prompt resolution while evidence remained available. The IRS plans to issue regulations formally removing this time limit.
By law, the two-year election period for seeking innocent spouse relief under the other provisions of section 6015 of the Internal Revenue Code, continues to apply. The normal refund statute of limitations also continues to apply to tax years covered by any innocent spouse request.
Available only to someone who files a joint return, innocent spouse relief is designed to help a taxpayer who did not know and did not have reason to know that his or her spouse understated or underpaid an income tax liability. Publication 971, Innocent Spouse Relief, has more information about the program.
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.
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.Continue Reading...
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.
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.
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
Rates 1/1 through 6/30/11
Rates 7/1 through 12/31/11
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.
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
Q. If I take the exclusion of capital gain tax on the sale of my home this year, can I also take the exclusion again if I sell another home in the future? A. Yes. With the exception of the two-year waiting period, there is no limit on the number of times you can exclude the gain on the sale of a principal residence, as long as you meet the ownership and use tests.
Gain Exclusion Basics
If you're unmarried, you can potentially sell a principal residence for a profit of up to $250,000
Q. If I take the exclusion of capital gain tax on the sale of my home this year, can I also take the exclusion again if I sell another home in the future?
A. Yes. With the exception of the two-year waiting period, there is no limit on the number of times you can exclude the gain on the sale of a principal residence, as long as you meet the ownership and use tests.
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.Continue Reading...
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.
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%.
The distribution rules for inherited IRAs generally make it advantageous to have separate accounts, which can be done during your lifetime or by December 31 of the year following your death. If you plan to leave an individual retirement account (IRA) balance to several beneficiaries, consider splitting each beneficiary's share into a separate account during your life. Why is it so important to have separate accounts?
Your spouse has more alternatives available if he/she is the sole beneficiary. A surviving spouse can roll over the IRA to an IRA in his/her name or treat your IRA as his/her IRA. With the rollover IRA, the surviving spouse can name his/her own beneficiaries, thus extending the IRA's life, and can defer payouts until age 70 1/2. However, to roll over the IRA, the surviving spouse must be the sole beneficiary.
When there is more than one non-spouse beneficiary for an inherited IRA, distributions must be taken over the oldest beneficiary's life expectancy. By splitting the IRA into separate accounts, each beneficiary can take distributions based on his/her life expectancy.
An important estate planning strategy for inherited IRAs is the ability to disclaim all or a portion of the IRA. If a beneficiary disclaims an IRA within nine months of the decedent's death, the disclaimed IRA is not considered a gift and would then go to the contingent beneficiary. By splitting the IRA into separate accounts, you can better control what would happen if each beneficiary disclaims his/her share. For instance, your beneficiaries might be your two children, with your grandchildren named as contingent beneficiaries. With separate accounts, each child could decide whether to disclaim the IRA, knowing the proceeds would then go only to their children.
From an administrative standpoint, it is often easier to have only one IRA rather than several. But with separate accounts, you can ensure that your IRA is set up to work to the best advantage of your beneficiaries.Source: TrustCounsel's May 24 , 2011eNewsletter by BizActions.
On April 22, 2011, I posted an IRS Notice about a tax relief program for victims of the April 16, 2011 storms in North Carolina. As of May 9, 2011, residents who live in or own a business in the following counties are eligible:
Bertie, Bladen, Craven, Cumberland, Currituck, Greene, Halifax, Harnett, Hertford, Hoke, Johnston, Lee, Onslow, Pitt, Robeson, Sampson, Tyrell, Wake and Wilson
The majority of states no longer have an estate tax, but North Carolina is not one of them. Hungry for revenue, some states, such as Connecticut, are trying to lower the tax threshold. I'm not aware of any such movement for North Carolina. Here's a chart of the states with an estate tax, with the exemption amounts:
Tennessee, not listed above, has an inheritance tax with a $1 million exemption. Inheritance tax differs from estate tax in that the rate differs depending on the relationship of the inheritor to the deceased. Immediate family member are subject to the lowest rate. While estate taxes raise revenue, of course, the taxes are often cause for wealthy individuals to move to states like Florida, which has no estate tax (and no income tax as well).
Note: the correct name of the source is the American College of Trust and Estate Counsel (not Council).
Taking care of an elderly parent may provide more than just personal satisfaction. You could also be entitled to substantial tax deductions even if your parent doesn't live with you.
Here are five tax opportunities you might have overlooked: Claim a dependency exemption.
Here are five tax opportunities you might have overlooked:
Claim a dependency exemption.If you provide a parent with regular financial support, check and see if you can take a dependency exemption on your tax return. Each exemption
- You must provide more than half of his or her financial support for the year.
- Your parent's "gross income" must be less than $3,650 in 2010. (The good news is that the non-taxable portion of Social Security payments don't count.)
Share and share alike. Do you and your siblings chip in to help support a parent? Generally, there's no tax break for furnishing a small amount of money, but there's an exception in the tax law that allows families to share a dependency exemption.
Relatives can set up a "multiple support agreement" by filing an IRS form. In essence, your family is pooling the support payments and allowing one sibling to take the dependency exemption. The next year, the group designates another member to get the tax break.
This way, your family reaps the benefits of an exemption that no one can qualify for alone. Consult with your tax adviser for more information.
Take a medical deduction. Perhaps you pay a large amount for a parent's health care or nursing home bills. You may be able to secure a tax write-off by adding the amount to your deductible medical expenses. (Keep in mind, however that the medical deduction is limited and you can only write off qualified payments that aren't reimbursed by insurance.)
Claim a credit for home-based care.You can also get a tax break if you pay someone to care for a parent while you work. Let's say you hire a nurse's aide to watch your 85-year-old father because he's unable to stay alone. You may qualify for a medical expense deduction for the cost of the aide, as described above, but you could also be eligible for a dependent care credit. The credit is usually worth more because it's a dollar-for-dollar subtraction from the taxes you owe. A deduction only lowers the amount of income used to calculate your tax bill.
To qualify for a dependent care credit -- just like the one available to parents with children -- you must work full or part-time. The credit is also available if you're a full-time student, disabled, or actively searching for a job. The exact amount of the tax break depends on your income.
Become a head of household. There is a separate, lower tax rate for single people who pay more than half of the costs of maintaining a parent's home. You may be eligible for "head of household" tax filing status.Source: TrustCounsel's May 3, 2011 eNewsletter by BizActions.
The IRS has issued interim guidance on the treatment under Code Section 67 of investment advisory costs and other expenses subject to the 2-percent floor under Section 67(a). Notice 2011-37.
In particular, the notice provides that, for taxable years beginning before the date that final regulations under § 1.67-4 of the Regulations are published in the Federal Register, nongrantor trusts and estates will not be required to “unbundle” a fiduciary fee into portions consisting of costs that are fully deductible and costs that are subject to the 2-percent floor.
WASHINGTON –– Hiding income in offshore accounts, identity theft, return preparer fraud, and filing false or misleading tax forms top the annual list of “dirty dozen” tax scams in 2011, the Internal Revenue Service announced today.
“The Dirty Dozen represents the worst of the worst tax scams,” IRS Commissioner Doug Shulman said. “Don’t fall prey to these tax scams. They may look tempting, but these fraudulent deals end up hurting people who participate in them.”
The IRS works with the Justice Department to pursue and shut down perpetrators of these and other illegal scams. Promoters frequently end up facing heavy fines and imprisonment. Meanwhile, taxpayers who wittingly or unwittingly get involved with these schemes must repay all taxes due plus interest and penalties.
Following is the Dirty Dozen for 2011:Continue Reading...
The IRS is extending the filing deadline of Form 8939, Allocation of Increase in Basis of Property Acquired from a Decedent, which must be submitted to determine the new basis of assets in 2010 estates that opt out of the federal estate tax.
The form will no longer be due on April 18, and the IRS will issue more guidance at a future date and set the new deadline at “a reasonable period of time” after that, according to a statement issued on March 31, 2011.
The estate tax was eliminated in 2010 due to a phase-out approved in 2001, but under TRA 2010 enacted in December, the tax was reinstated at a top rate of 35% with a $5 million threshold for individuals and $10 million for married couples.
Estates have an alternative option to allocate up to $1.3 million in basis to estate assets, with an additional $3 million for assets passing to a surviving spouse. To the extent the increased basis does not bring the basis to fair market value, the heirs would then pay capital gains taxes on inherited assets they sell.
The extension will be of help to executors of estates opting to for carryover basis, because determining the cost basis of property, including stock held for decades, or a family business, may require extensive research.
Health care reform doesn’t come cheap. How do we pay for it? More and increased taxes, of course, both this year and in future years, along with certain credits for health insurance premium costs. This is an outline of the many tax law changes as a result of the new health care laws, organized by affected parties and implementation date:
· Starting in 2011
o Over-the-counter medications are no longer qualified expenses for Flexible Spending Accounts, Health Savings Accounts, or health reimbursement arrangements
o 20% penalty for nonqualified distributions from Health Savings Accounts, up from 10%
The IRS is often accused of being heartless, but it does show some compassion to taxpayers who cannot complete an IRA rollover within the deadline because of extenuating circumstances. The General Rules Factors Considered by the IRS The IRS "will issue a ruling waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the taxpayer." (IRS Revenue Procedure 2003-16) What if the deadline is missed? Any taxable amount that is not rolled over must be included as income in the year received. If the taxpayer is under age 59 1/2 at the time of the distribution, any taxable portion not rolled over may be subject to a 10 percent additional tax on early distributions. Facts of the case: The taxpayer's late husband owned an IRA. Before he turned age 70 1/2, he withdrew some of the funds. After his death, the taxpayer -- who was the sole beneficiary and under age 70 1/2 at the time -- cashed in the funds and deposited the money in an IRA in her own name. However, she did not complete the rollover within 60 days. The taxpayer told the IRS she was in mourning over the death of her husband during the time frame for the rollover. She was also involved in arranging her husband's funeral and taking care of his estate. While handling the estate proceedings, she rolled over the IRA proceeds. After reviewing the facts, the IRS accepted the widow's claim. Her failure to comply with the rule was due to the death of her husband and the aftermath. The IRS also noted that the waiver request was submitted shortly after the taxpayer discovered she had missed the deadline. (IRS PLR 200415012) These are only a few of the examples of waivers granted by the IRS. If you think you -- or a loved one -- might qualify for a hardship waiver, consult with your attorney about requesting a ruling from the IRS.
In a series of private letter rulings, the IRS has granted taxpayers relief from tax bills and penalties.
For example, one taxpayer from Maine was unable to complete a rollover transaction on time because a major snowstorm made it impossible to get to the bank. The IRS granted a hardship waiver because bad weather was beyond her control. (IRS PLR 200406054)
In another case, a 68-year-old taxpayer who was diagnosed with progressive Alzheimer's disease made a series of withdrawals from his IRA to purchase a house -- even though he had other funds available. Based on a medical evaluation requested by his daughter, it was determined that the taxpayer was incapable of understanding the tax consequences of making IRA withdrawals. The IRS waived the 60-day rollover requirement. (IRS PLR 200401025)
Reprieves have also been given to taxpayers whose financial institutions made errors. And in another case, a widow who did not meet the rollover deadline was granted a waiver because she was still in mourning.
The General RulesNormally, you can roll over funds from one IRA to another tax-free as long as you complete the rollover within 60 days. (However, tax is automatically withheld unless the funds are directly transferred from one trustee to another.) The IRS has the discretion to waive the 60-day requirement if its imposition would
Factors Considered by the IRS
The IRS "will issue a ruling waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the taxpayer." (IRS Revenue Procedure 2003-16)
What if the deadline is missed? Any taxable amount that is not rolled over must be included as income in the year received. If the taxpayer is under age 59 1/2 at the time of the distribution, any taxable portion not rolled over may be subject to a 10 percent additional tax on early distributions.
Facts of the case: The taxpayer's late husband owned an IRA. Before he turned age 70 1/2, he withdrew some of the funds. After his death, the taxpayer -- who was the sole beneficiary and under age 70 1/2 at the time -- cashed in the funds and deposited the money in an IRA in her own name. However, she did not complete the rollover within 60 days.
The taxpayer told the IRS she was in mourning over the death of her husband during the time frame for the rollover. She was also involved in arranging her husband's funeral and taking care of his estate. While handling the estate proceedings, she rolled over the IRA proceeds.
After reviewing the facts, the IRS accepted the widow's claim. Her failure to comply with the rule was due to the death of her husband and the aftermath. The IRS also noted that the waiver request was submitted shortly after the taxpayer discovered she had missed the deadline. (IRS PLR 200415012)
These are only a few of the examples of waivers granted by the IRS. If you think you -- or a loved one -- might qualify for a hardship waiver, consult with your attorney about requesting a ruling from the IRS.Source: TrustCounsel's March 22, 2011 eNewsletter by BizActions.
The rule that made higher-income folks ineligible for Roth IRA conversions expired at the end of 2009. That made 2010 a big year for conversions, because even billionaires could make the transactions. If you are among the many who took advantage last year, that's great, but there's more to the story. You still have some major decisions to make in 2011.
Here's what you need to know.
When to Report the Taxable Income from a 2010 Conversion?
You have the option of deferring the taxable income triggered by a 2010 Roth conversion and then spreading it evenly over 2011 and 2012 (50 percent in each year). Other things being equal, the deferral option is obviously a good idea.
You also have the alternative option of reporting 100 percent of the conversion income on your 2010 return instead of deferring it to 2011 and 2012.
Now that the Bush-era tax cuts have been extended through 2012, the deferral option is the best choice for most taxpayers. However, there are exceptions.
If you believe you'll pay a significantly lower tax rate on the conversion income by reporting it all in 2010, you should probably do that. For instance, say your 2010 income was depressed, but 2011 and 2012 are looking good. In this scenario, reporting all the conversion income on your 2010 return and paying a lower conversion tax bill might make it worthwhile to pay the bill sooner rather than later.
You make the choice to report 100 percent of the conversion income in 2010 by including a certain form with your 2010 Form 1040. This is how you also make the deferral choice -- by filing an IRS form with your tax return. Your tax adviser will take care of the details.
Deciding Whether to Reverse an Ill-Fated 2010 Conversion
You have until the October 17, 2011 extended deadline for filing your 2010 Form 1040 to reverse an ill-fated 2010 Roth conversion by "recharacterizing" the converted account back to traditional IRA status. Note that the October 17, 2011 deadline applies whether you actually extend your 2010 Form 1040 or not.
Why would you want to reverse a conversion? Consider the following example.
Example: In 2010, you converted three traditional IRAs into three Roth accounts. We'll call them Roth IRA-1, Roth IRA-2, and Roth IRA-3. In 2011, the value of Roth IRA-3 takes a big dive due to horrible performance by the investments chosen for that account. If you take no action, you'll owe income tax on Roth IRA-3 value that no longer exists. This is not good! But you have until October 17, 2011 to reverse the Roth IRA-3 conversion by recharacterizing that account back to traditional IRA status. After the reversal, it's as if the Roth IRA-3 conversion never happened, so the related conversion tax bill simply goes away.
Example: In 2010, you converted three traditional IRAs into three Roth accounts. We'll call them Roth IRA-1, Roth IRA-2, and Roth IRA-3.
In 2011, the value of Roth IRA-3 takes a big dive due to horrible performance by the investments chosen for that account. If you take no action, you'll owe income tax on Roth IRA-3 value that no longer exists. This is not good!
But you have until October 17, 2011 to reverse the Roth IRA-3 conversion by recharacterizing that account back to traditional IRA status. After the reversal, it's as if the Roth IRA-3 conversion never happened, so the related conversion tax bill simply goes away.
Deciding Whether to Extend Your 2010 Return
If you did a Roth conversion last year, there may be two good reasons to consider extending your 2010 Form 1040 to October 17, 2011.
Reason No. 1: Extending gives you more time to decide if you should choose the deferral option (which would result in splitting the taxable income from your 2010 conversion evenly between 2011 and 2012) or choose the alternative option of reporting 100 percent of the conversion income on your 2010 return. As we explained earlier, the deferral option is probably the right choice in most cases, but it depends on how your 2010 tax rate compares to your expected rates for 2011 and 2012. By October, you'll have a better handle on those years than you do right now. So extending is a no-brainer. Do it by filing Form 4868 on or before April 18, 2011.
Reason No. 2: Filing an extension makes it simpler to handle the reversal of a 2010 conversion, if a reversal becomes advisable. If you extend your 2010 Form 1040, you report a reversal by simply showing no income from the now-reversed conversion on your return. That would be easy. But if you decide on a reversal after shipping off your return, you'll have to file an amended return (using Form 1040X) to delete the conversion income. That is still possible but not as easy.
The Bottom Line
The book is still open on your 2010 Roth conversion deal, because you must make important decisions in 2011. First and foremost, you may want to extend your 2010 return to give yourself extra time to make those decisions. Even if you've never extended before, doing it this time around might be a good idea. Consult with your tax adviser if you have questions about your situation.
Source: TrustCounsel's March 22, 2011 eNewsletter (BizActions).
WASHINGTON — The Internal Revenue Service today released the 2011 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.
Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 84-page document, The Truth About Frivolous Tax Arguments.
The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. It will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.
Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.
The 2011 version of the IRS document includes numerous recently decided cases that continue to demonstrate that frivolous positions have no legitimacy.
Frivolous arguments include contentions that taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment; that the only “employees” subject to federal income tax are employees of the federal government; and that only foreign-source income is taxable.
In addition, the document highlights cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes, and the imposition of criminal and civil penalties on taxpayers who claimed they were not citizens of the United States for federal income tax purposes.
Here's a recent marketwatch.com article on State Estate and Inheritance Taxes, and the various exemption amounts for each state. A majority of states, including Florida, have no state estate or inheritance taxes, and a couple of others effectively have the same $5 million exemption as the federal estate tax.
As reported in the article, North Carolina falls into that category, although due to an outdated reference to the Internal Revenue Code in the North Carolina statutes, some practitioners are of the opinion that North Carolina's current exemption is only $1 million. It is expected that the matter will be resolved by a technical corrections bill later this year. Assuming that North Carolina's estate tax exemption is $5 million, it is certainly not one of the worst places to die, but because the North Carolina tax is merely a deduction, and not a credit, against the federal estate tax, it is also not one of the best.
There are also many states, particularly in the Northeast and Midwest, that have much lower exemptions. New Jersey is ranked as the worst place to die from a death tax perspective.
Thanks to Keebler and Associates, LLP, CPAs for portions of this summary:
Limit the tax rate that certain individuals will get a benefit for their itemized deductions - For investors filing joint returns and having income over $250,000 itemized deductions would only reduce the investor’s tax liability by a maximum of 28%. For those investors who purchase securities on margin this limitation could be very costly. Short-term capital gains and interest income would be taxed at a rate of 35% yet the interest expense would only receive a 28% benefit. If an investor earned $100,000 of interest income and incurred $100,000 of margin interest expense, while the investor would have broken even on a pre-tax basis, he would be liable for $7,000 in tax.
Require a minimum 10 year term for grantor retained annuity trusts (“GRATs”) – Currently, investors are able to contribute property to a trust and retain an annuity interest in the trust. Any excess may be left to anyone the investor desires. The present value of the annuity is subtracted from the contributed amount, and any excess is treated as a gift to the beneficiaries of the trust. The Treasury publishes a discount rate to be used to determine the present value of the annuity. Many investors retain an annuity whose present value equals the fair market value of the property contributed to the trust. In such case, no gift tax is due, and if the trust can earn a rate of return higher than the discount rate, such excess is passed on to the beneficiaries free of gift or estate tax. However, if the grantor dies during the term of the trust, the assets in the trust are included in the grantor’s estate. In order to mitigate that possibility, many of these trusts are set up as two to three year vehicles. The proposal would be to set a minimum term of 10 years for any GRATs established after the date of enactment of the law.
Require ordinary treatment of income from activities for dealers of equity options and commodities – Under current law dealers of equity options, commodities and commodities derivatives treat their income from their dealer activities in Sec. 1256 contracts as 60% long-term and 40% short-term capital gains/losses. Dealers in other types of securities treat all of their income from dealer activities as ordinary income. The proposal would require such dealers to treat all of their income from such securities as ordinary.
Tax carried interests in certain partnerships as ordinary income – Under current law, the character of income flows from a partnership to its partners. Some partners receive their partnership interests in exchange for services rendered to the partnership. Such interests typically give the partner the right to receive a share of future income from the partnership. At the time the interest is received, the partner would not be entitled to any proceeds if the partnership were liquidated, so there is no taxable income at the time the interest is received. In the future, the partners’ character of the income received from the partnership interest retains the same character that the partnership received. In many cases such income may be either qualified dividends or long term-capital gains, which are taxed at a maximum rate of 15%. The proposal would treat the income on a partnership interest that was not acquired for cash or property as ordinary income, if the partnership is an investment partnership. Gains upon the disposition of such an interest would also be treated as ordinary income. A partnership would be an investment partnership if the majority of its assets are investment type assets, such as securities, real estate, commodities, interests in partnerships, cash or cash equivalents.
Modify rules on valuation discounts – Based on judicial decisions and statutes enacted in many states, valuation discounts are allowed in determining the fair market value of property subject to gift and estate tax even though current tax law states that interests transferred intra-family should not be discounted for “applicable restrictions”. The proposal would grant the Treasury the authority to write regulations that would define a category of “disregarded restrictions” that would be ignored in valuing property for estate and gift tax purposes.
Require accrual of income from the forward sale of stock by a corporation – Under IRC Section 1032 a corporation does not recognize income or loss from purchases and sales in its own stock. This rule applies when a corporation enters into a contract to issue shares in the future for a sum certain. However, if the corporation issued shares currently and received payment for those shares in the future, a portion of the payment would be treated as taxable interest income. The proposal would impute interest income on the transaction in which the shares are issued in the future. While there are real differences between the two transactions in that there are new shareholders at the time the shares are issued, the Administration believes that the two are economically equivalent and should receive the same tax treatment.
Limit Generation-Skipping Transfer Tax Exemption to 90 Years - GST tax exemption (currently up to $5 million) allocated to trusts would last for only 90 years, after which it would expire. This would mean that distributions from the trust after that time would be subject to the 35% GST tax.
Since many states have eliminated or lengthened the rule against perpetuities that limited the time trusts could be in existence, this provision would have a substantial effect on trust creation and administration, severely limiting the use of dynasty trusts.
Make Permanent Portability of Estate Tax Exemption Between Spouses - For 2011 and 2012, a surviving spouse make make use of the predeceased spouse's unused $5 million estate tax exemption. The proposal would make this permanent.
Click here for the Green Book that contains explanations for the proposals.
Just As the Name Implies
Second-to-die life insurance doesn't pay off until the death of the second policyholder. Why is it needed? Let's say you own several million dollars worth of assets. By law, you can leave the entire amount to your surviving spouse with no estate tax consequences. But those assets then become part of your spouse's estate and could be taxed after death at rates of up to 35 percent in 2011 and 2012.
Unfavorable Rule for Corporate-Owned Life Insurance
For corporate owned life insurance (COLI) issued after the August 17, 2006, enactment of the Pension Protection Act, an unfavorable provision generally requires businesses to include death benefit proceeds (in excess of premiums paid) in taxable income.
But second-to-die insurance can also be used by the co-owners or partners of a business operation. In this scenario, the insurance proceeds are paid upon the second owner's death.
One IRS ruling gives a little more flexibility to policyholders of second-to-die insurance, which is also called "survivorship insurance" in some circles. Specifically, the ruling may allow you to transfer ownership of your policy and get the proceeds out of your taxable estate.
Generally, life insurance proceeds paid directly to you because of the death of the policyholder are not taxable. However, your taxable estate will include proceeds from a life insurance policy on your life if the money is paid to the estate (or if it's received by someone else for the benefit of the estate). Also, the proceeds are included in your taxable estate if you possess any "incidents of ownership" in the policy, such as the right to change the beneficiaries or borrow against the policy.
If you want life insurance proceeds to avoid federal estate tax, you may want to transfer ownership of your life insurance policy to another person or entity. (See lower right-hand box if the entity is a corporation.)
You can transfer the ownership rights in an existing policy, but the proceeds are still taxable under federal law if you die within three years of the transfer -- and possibly under state law too.
In the IRS private letter ruling, a couple transferred a second-to-die life insurance policy to an irrevocable trust and named their daughter, who is executor of their estate, as the trustee. They also granted their daughter discretion to use the proceeds to pay estate tax, inheritance tax and other taxes due because of death, but she is under no compulsion to do so.
Result: The IRS said that the life insurance proceeds will not be included in the estate of the second spouse to die, even though the funds could be used to pay estate tax. (IRS PLR 200147039)
Check with your estate-planning attorney to learn whether second-to-die insurance is right for you or whether transferring ownership of a policy is a smart move. Keep in mind that transferring ownership may also have gift tax consequences.
Today the IRS announced a new special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The initiative is available through Aug. 31, 2011.
While it is legal to hold assets offshore, the assets must be disclosed to the IRS, and U.S. citizens must pay tax on all earnings worldwide.
See IR-2011-14 for details of the Initiative.
Since the enactment of TRA 2010 in December of last year, tax practitioners have been concerned that gifts made during 2011 and 2012 may, partially because of the way in which the current Federal Estate and Generation-Skipping Transfer Tax Return (Form 706) is worded, be subject to an estate tax for decedents dying in years after 2012 if the federal estate tax exemption is reduced at that time. This is generally referred to as the "claw back" scenario.
The February 2, 2011 AALU Bulletin article on this subject indicates that taxpayers should not hesitate to take advantage of the $5 million gift and generation-skipping transfer tax exemptions available this year and next and should not be concerned that such gifts will be subject to a claw back in later years:
"What is reasonably clear is that Congress did not intend that gifts made during 2011 and 2012 would be subject to an additional estate tax in 2013 and thereafter. Furthermore, it is likely that some type of administrative or legislative relief will be forthcoming assuming that an unintended “glitch” does exist. This relief may be as simple as revising the Form 706."
From the North Carolina Department of Revenue:
Taxpayers across the nation will have until April 18, 2011, to file 2010 federal returns, extensions, and payments that ordinarily would be due April 15, 2011. The extra time is provided because April 15 falls on Emancipation day, a legal holiday in the District of Columbia.
For individual income tax purposes, North Carolina will follow the April 18 extended filing date and consider any returns and payments that would have been due on April 15 as filed on time if they are filed and paid by April 18. The extended deadline applies to the following State forms and payments:
- 2010 State individual income tax returns, whether filed electronically or on paper
- First quarter 2011 individual estimated income tax payments
- Estates and Trusts
- Applications for extension for any of the above tax forms
The extended deadline does not apply to corporations that file franchise and corporate income tax returns due on April 15, 2011, or to first quarter 2011 corporate estimated income tax payments.
Last week I was interviewed regarding income and estate taxes in 2010 and 2011 offering tips and insights based on what I see in my practice. Click here for the text and the podcast.
"Nothing is certain but death and taxes," Benjamin Franklin famously said. In the last decade, another occurrence has been certain: The federal estate tax keeps changing. The tax cut legislation passed recently establishes new estate and gift tax rules for this year, next year and last year. Here is a summary of the rules, along with some estate planning considerations for high-net-worth individuals.
The new tax cut extension package, which was signed into law on December 17, 2010, establishes a new (but temporary) estate and gift tax regime for 2011 and 2012. It also clarifies the situation for the estates of individuals who died in 2010 (see right-hand box).
Here is a brief summary of the relevant estate and gift tax provisions in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
Note: North Carolina law provides that North Carolina estate tax is due only if federal estate tax is due, so the NC exemption is essentially $5 million as well.Continue Reading...
IRS Launches the IRS2Go App for iPhone, Android; To Check Refunds, Get Tax Information
Video: IRS2Go: English
WASHINGTON — The Internal Revenue Service today unveiled IRS2Go, its first smartphone application that lets taxpayers check on their status of their tax refund and obtain helpful tax information.
"This new smart phone app reflects our commitment to modernizing the agency and engaging taxpayers where they want when they want it," said IRS Commissioner Doug Shulman. "As technology evolves and younger taxpayers get their information in new ways, we will keep innovating to make it easy for all taxpayers to access helpful information."
The IRS2Go phone app gives people a convenient way of checking on their federal refund. It also gives people a quick way of obtaining easy-to-understand tax tips.
Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app.
"This phone app is a first step for us," Shulman said. "We will look for additional ways to expand and refine our use of smartphones and other new technologies to help meet the needs of taxpayers."
The mobile app, among a handful in the federal government, offers a number of safe and secure ways to help taxpayers. Features of the first release of the IRS2Go app include:
Get Your Refund Status
Taxpayers can check the status of their federal refund through the new phone app with a few basic pieces of information. First, taxpayers enter a Social Security number, which is masked and encrypted for security purposes. Next, taxpayers pick the filing status they used on their tax return. Finally, taxpayers enter the amount of the refund they expect from their 2010 tax return.
For people who e-file, the refund function of the phone app will work within about 72 hours after taxpayers receive an e-mail acknowledgement saying the IRS received their tax return.
For people filing paper tax returns, longer processing times mean they will need to wait three to four weeks before they can check their refund status.
About 70 percent of the 142 million individual tax returns were filed electronically last year.
Get Tax Updates
Phone app users enter their e-mail address to automatically get daily tax tips. Tax Tips are simple, straightforward tips and reminders to help with tax planning and preparation. Tax Tips are issued daily during the tax filing season and periodically during the rest of the year. The plain English updates cover topics such as free tax help, child tax credits, the Earned Income Tax Credit, education credits and other topics.
Follow the IRS
Taxpayers can sign up to follow the IRS Twitter news feed, @IRSnews. IRSnews provides the latest federal tax news and information for taxpayers. The IRSnews tweets provide easy-to-use information, including tax law changes and important IRS programs.
IRS2Go is the latest IRS effort to provide information to taxpayers beyond traditional channels. The IRS also uses tools such as YouTube and Twitter to share the latest information on tax changes, initiatives, products and services through social media channels. For more information on IRS2Go and other new media products, visit www.IRS.gov.
Related Item: IRS Goes Mobile With IRS2Go
There's good news if you've reached age 70 1/2, and you have an IRA and philanthropic inclinations. Through 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 resurrected the opportunity to make cash donations to IRS-approved charities directly out of your IRA.
Such qualified charitable distributions are federal-income-tax-free, but you get no itemized charitable deduction on Form 1040. But that's okay. The tax-free treatment of qualified charitable distributions equates to an immediate 100 percent deduction, since the otherwise-taxable IRA dollars are sent directly to charity.
Who Benefits Most
The qualified charitable distribution opportunity is beneficial for taxpayers who:
1. Have reached age 70 1/2.
2. Make charitable donations, but don't itemize deductions. (Under the normal rules, only itemizers get tax-saving benefits from charitable gifts).
3. Make large charitable donations, but their deductions would be delayed by the 50 percent-of-AGI limitation.
4. Want to avoid being taxed on required minimum distributions that they are forced to take from IRAs.
5. Are looking for a quick and easy estate-tax-reduction strategy.
A qualified charitable distribution is a payment of an otherwise taxable amount out of a traditional or Roth IRA directly to an IRS-approved public charity. No more than $100,000 can be donated during any one year. However, if both you and your spouse have IRAs set up in your respective names, each of you is entitled to a separate $100,000 limitation.
As things currently stand, the ability to take advantage of this strategy is scheduled to expire at the end of 2011, but Congress may extend it again.
Income Tax Advantages
Qualified charitable distributions are not included in your adjusted gross income (AGI). This lowers the odds that you'll be affected by unfavorable AGI-based provisions -- such as the rule that can cause more of your Social Security benefits to be taxed and the rules that can reduce or eliminate deductions for medical expenses and passive losses from rental real estate.
In addition, you don't have to worry about the 50 percent-of-AGI limitation that can delay itemized deductions for garden-variety charitable donations of cash.
Finally, a qualified charitable distribution from a traditional IRA counts as a payout for purposes of the IRA required minimum distribution rules. Therefore, you can arrange to donate all or part of your 2011 required minimum distribution amount (up to the $100,000 limit) that you would otherwise be forced to receive and pay income taxes on. In effect, you can replace taxable required minimum distributions with tax-free qualified charitable distributions that go to your favorite charities.Continue Reading...
Do you think you have to pay income tax on large ($500k++) Roth IRA conversions at the top marginal tax rates? Think again. I have recommend the following strategy to several of my clients. In most cases, you can stay with your current investment manager.
By utilizing the Jagen™ investment strategy, you may be able to lock in a 24.5*% rate on big IRA conversions.
A lot of advisors don’t like the idea of clients paying taxes early. They adhere to the mindset of “never pay a tax if you don’t absolutely have to.” Some advisors also still believe that clients might be in lower tax brackets later in life and don’t want to recommend taxable transactions at today’s top federal rate of 35%. But what if clients didn’t have to pay at top rates today? A Roth conversion at a 25% or less tax rate now will almost guarantee long-term tax savings for high net worth clients with large IRAs. How many clients with large IRAs will be in a retirement tax bracket less than 25%?
Jagen™ funds are eligible IRA investments and offer access to very high level institutional money management platforms. In addition, the Jagen™ fund design provides for a variance between the net asset value (NAV) and fair market value (FMV) of each investor’s interest in the funds.
For example, an investor might have an IRA holding Jagen™ fund units valued at $1 million NAV. This same account may only have a $700,000 FMV based on a qualified appraisal of those fund units. The reason for this valuation adjustment involves various features of Jagen™ funds which must be taken into account when determining FMV. Each fund is privately owned by a limited number of investors and fund units are not traded on open exchanges. Investors must commit to holding their fund units for specified terms. Thus FMV will typically be less than NAV during the holding period.
This week I'm attending the University of Miami School of Law Heckerling Institute on Estate Planning. Most of the speakers so far are of the opinion of that the current federal estate tax exemption will not be decreased in 2013 when TRA 2010 expires.
From today's IRS Newswire:
For most taxpayers, the 2011 tax filing season starts on schedule. However, tax law changes enacted by Congress and signed by President Obama in December mean some people need to wait until mid- to late February to file their tax returns in order to give the IRS time to reprogram its processing systems.
Some taxpayers – including those who itemize deductions on Form 1040 Schedule A – will need to wait to file. This includes taxpayers impacted by any of three tax provisions that expired at the end of 2009 and were renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act Of 2010 enacted Dec. 17. Those who need to wait to file include:
- Taxpayers Claiming Itemized Deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes (add link to Schedule A). In addition, itemized deductions include the state and local general sales tax deduction that was also extended and which primarily benefits people living in areas without state and local income taxes. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
- Taxpayers Claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students – covering up to $4,000 of tuition and fees paid to a post-secondary institution – is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit extended last month and the Lifetime Learning Credit.
- Taxpayers Claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.
On December 17, 2010 the President signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act), extending the Bush-era tax cuts. This new law creates a once-in-a-lifetime planning opportunity that ends at midnight, December 31, 2010.
The new law also presents additional planning opportunities that are less immediate, but no less important.
Generally, transfers (greater than $13,000 per year) to generations younger than children are subject to what is known as the generation-skipping transfer tax, an onerous tax that equals the maximum gift or estate tax rate. The purpose of this tax, enacted in the late 1980s, is to prevent wealthy individuals from transferring assets to younger generations for the purpose of avoiding application of the estate tax at every generation.
A Unique Opportunity
The 2010 Tax Relief Act creates a unique opportunity to make gifts through December 31, 2010 that are not subject to the generation-skipping transfer tax. This is because, under the new law, the tax rate is zero for any generation-skipping transfer made in 2010. Beginning January 1, 2011, the tax rate for these transfers will be 35%. In two short years the rate goes back to 55%.
Take Advantage of the Lowest Tax Rates in Decades
I urge you to consider taking advantage of this rare gift from Congress and consider making transfers to generations younger than children, even if you do not yet have grandchildren. An estate planning attorney can help you structure these gifts so that they meet your goals and objectives, regardless of amount.
This afternoon, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. This legislation, negotiated by the White House and select members of the House and Senate, provides for a short-term extension of tax cuts made in 2001. It also addresses the Alternative Minimum Tax (AMT) and Estate, Gift and Generation-skipping Transfer taxes.
Two-year extension of all current tax rates through 2012
- Rates remain 10, 25, 28, 33, and 35 percent
- 2-year extension of reduced 0 or 15 percent rate for capital gains & dividends
- 2-year continued repeal of Personal Exemption Phase-out (PEP) & itemized deduction limitation (Pease)
Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010, 2011, 2012
- Reunification of estate and gift taxes
- 35% top rate and $5 million exemption for estate, gift and GST
- Alternatively, taxpayer may choose modified carryover basis for 2010
- Unused exemption may be transferred to spouse
- Exemption amount indexed for inflation in 2012
AMT Patch for 2010 and 2011
- Increases the exemption amounts for 2010 to $47,450 ($72,450 married filing jointly) and for 2011 to $48,450 ($74,450 married filing jointly). It also allows the nonrefundable personal credits against the AMT.
Extension of “tax extenders” for 2010 and 2011, including:
- Tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes
- Above-the-line deduction for qualified tuition and related expenses
- Expanded Coverdell Accounts and definition of education expenses
- American Opportunity Tax Credit for tuition expenses of up to $2,500
- Deduction of state and local general sales taxes
- 30-percent credit for energy-efficiency improvements to the home (IRC section 25C)
- Exclusion of qualified small business capital gains (IRC§1202)
Temporary Employee Payroll Tax Cut
- Provides a payroll tax holiday during 2011 of two percentage points. Employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800.
Source: Financial Planning Association
Last night the House passed HR 4853 by a vote of 277-148 approving the Tax Relief Act of 2010 as passed by the Senate Wednesday. The bill now goes to the President for signature.
The new website, which has been developed over the past year, is launching just days after President Obama called for fundamental reform of the income tax system, touching off a new national conversation about the tax code.
“The AICPA developed 360Taxes.org to give taxpayers a place to go for free, plain-English answers to their most commontax questions,” said AICPA President and CEO Barry Melancon. “The renowned tax expertise of CPAs literally is now at taxpayers’ fingertips.”
Jordan Amin, chair of the AICPA’s Financial Literacy Commission, said that 360Taxes.org will be one of the most important websites for taxpayers not just at tax filing time but also at each of their life stages. “You have to think about taxes when you’re buying, renovating or selling a home; getting married or divorced; starting a family; saving for retirement or an education; buying life insurance; and starting or selling a business,” Amin said. “CPAs have always helped taxpayers plan for these financial decisions and now their expertise is backing360Taxes.org.”
Features of 360Taxes.org include:
· Ask a CPA, which offers taxpayers a way to ask tax-related questions and read answers to questions from other taxpayers.
· Frequently Asked Questions about timely tax topics.
· Tax tips and in-depth articles on topics such as estate taxes and how to offset education costs using tax credits and deductions.
· Calculators that help determine the tax benefits of contributing to certain types of retirement plans and the cost of monthly mortgage payments.
· Links to consumer-focused tax blogs written by CPAs.
· Resources for choosing a CPA to help with tax and other financial services.
360Taxes.org is an extension of the AICPA’s successful 360 Degrees of Financial Literacy program (http://www.360financialliteracy.org/), a public service, non-commercial effort of the nation’s Certified Public Accountants to help Americans understand their personal finances through every stage of life.
Source: AICPA December 15, 2010 Press Release
The Senate has passed (by vote of 81-19) the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act), and the House is expected to take up the measure tomorrow.
The Act includes bringing back the $100,000 IRA spousal rollover for 2010 and 2011.
The Senate Finance Committee has produced a summary of the Reid Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which extends the Bush tax cuts for two years. Here's what the proposal says regarding estate, gift and generation-skipping transfer taxes:
Temporary estate, gift and generation skipping transfer tax relief. The EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.
Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.
Reunification. Prior to the EGTRRA, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.
Note: under the portability heading, the reference to the current $7 million exemption per couple is erroneous, as there is no estate tax this year. The estate tax exemption was $3.5 million per person in 2009.
The House has decided not to vote on the tax cut agreement Obama reached with Republican leaders earlier this week. Particularly objectionable was the proposed $5 million estate tax exemption. From CNN.com:
"According to several Democratic members and aides, much of the discussion focused on the addition of the estate tax provision to the package. The estate tax is scheduled to be reinstated at a higher rate of 55% next year, with the exemption up to $1 million.
A bill that passed in the House a year ago set the threshold for the exemption at $3.5 million and the tax rate at 45%, while the provision in the tax deal exempts estates up to $5 million and sets a lower rate."
From today's press release from the American Institute of Certified Public Accountants:
The American Institute of Certified Public Accountants has asked the Internal Revenue Service to issue guidance about how to apply carryover basis rules for the assets of taxpayers who died in 2010 in order to settle their estates. Basis is generally the original purchase price of an asset, such as stocks or property.
“The carryover basis regime is new and unfamiliar, and the April 18, 2011, due date for filing the information returns allocating the basis adjustments to particular assets is rapidly approaching,” the AICPA said.
The traditional “step-up basis” method, under which heirs were permitted to use the fair market value of the assets at the time of the decedent’s death, was repealed for 2010 by the Economic Growth and Tax Relief Reconciliation Act of 2001 and replaced with carryover basis. Under carryover basis, heirs use the decedent’s original cost of the assets as their basis when calculating taxes due, but the executor is allowed to increase the basis of the assets up to $1.3 million. An additional $3 million increase is permitted if the assets are passed to the surviving spouse.
Among the specific questions for which the AICPA requested guidance are who will make the basis allocation if the estate does not have an executor, what happens to the decedent’s suspended passive losses, will the basis allocation form be a stand-alone form or a form attached to the decedent’s final Form 1040, how do the rules apply to community property, and how are net operating loss carryovers and capital loss carryovers measured?
[Emphasis added] Click here for a copy of the AICPA letter.
The agreement includes a two year extension on the Bush income tax cuts, and with regard to the estate tax (from the Washington Post):
"The deal also would revive the estate tax, but it would exempt inheritances of up to $5 million for individuals and $10 million for couples. Democrats on Capitol Hill are strongly opposed to setting the cap at that high a level and to the 35 percent rate discussed by Obama and Republicans that would apply to the taxable portion of estates."
Stay posted for updates on the future of the death tax. I think the only certainty right now is that there will be no permanent repeal.
Senator Max Baucus, Chair of the Senate Finance Committee on Finance, introduced the "Middle Class Tax Cut Act of 2010" which would make the Bush income tax cuts permanent for those making under $250,000 per year.
The legislative text and summary of the Middle Class Tax Cut Act of 2010, released yesterday by Senate Finance Committee Chairman Max Baucus (D-Mont.), is now available at the Finance Committee’s website at http://finance.senate.gov/legislation/. A summary of some of the estate tax provisions is set out below.Permanent estate, gift and generation skipping transfer tax relief. EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal reinstates the 2009 law for the estate, gift, and generation skipping transfer taxes permanently, setting the exemption at $3.5 million per person and $7 million per couple and a top tax rate of 45 percent. The exemption amount is indexed beginning in 2011. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before the date of introduction. The proposal is effective upon date of introduction for gift and generation skipping transfer taxes.
Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning.
Deferral of estate tax for farmland. The proposal allows taxpayers to defer the payment of estate taxes on farmland of a family farm until the farmland is sold or transferred outside the family or ceases to be used for farming. The proposal also increases the valuation adjustment for donations of a conservation easement.
Increase of special use revaluation amount. The proposal increases the amount of the revaluation to the exemption amount, allowing up to a $3.5 million adjustment.
Minimum 10-year term for grantor retained annuity trusts (GRATs). The proposal requires that GRATs be set up for a minimum 10-year term. The proposal applies to transfers for which returns are filed after the date of enactment.
Basis for estate and income taxes. The proposal clarifies that the basis of property in the hands of the heir is the same as its value for estate and gift tax purposes. The proposal also requires the executor or donor to report the value to the IRS and heir. The proposal applies to transfers for which returns are filed after the date of enactment.
Thanks to Robert Keebler, CPA for this summary.
For the past ten years, the federal estate tax rules have been changing and they will shift again on January 1, 2011. As of that date, the federal estate tax will return with a $1 million exemption and rate of 37-55%. Thus, virtually everyone with assets in excess of $1 million should have their estate plan reviewed.
Bypass Trust Arrangements Can Save Estate Taxes
Married couples concerned about estate taxes can set up a bypass trust arrangement in their wills or living trust documents. (Bypass trusts are also commonly called credit shelter trusts).
The main purpose of a bypass trust is to allow both spouses to take advantage of their respective federal estate tax exemptions. Typically, assets with value equal to the current exemption amount are automatically put into the bypass trust when the first spouse dies. The trust is created at that time and is irrevocable.
The beneficiaries of the trust are designated by the first spouse to die, and the assets used to fund the trust come out of that person's estate when death occurs. Typically, the trust beneficiaries are that person's children and/or grandchildren.
Since the first spouse to die designates the beneficiaries of the bypass trust, the assets used to fund the trust are included in that person's estate for federal estate tax purposes. However, no federal estate tax is due because that person's estate tax exemption provides sufficient shelter.
The surviving spouse can be given money from the bypass trust to meet his or her reasonable financial needs. When the surviving spouse passes away, the remaining assets in the bypass trust go the beneficiaries of the trust (such as the children and/or grandchildren).
A Potential Problem
Even with properly drafted bypass trust provisions, asset ownership and beneficiary designations must be coordinated with the intent of the estate plan so that assets are available to be sheltered in the bypass trust at the death of the first spouse to die. This asset allocation is a crucial part of any estate plan.
The Bottom Line
Throughout your life, your estate plan will have to be altered at times due to tax changes and other events. Some situations are inherently unpredictable--like winning the lottery or losing a bundle in the stock market. However, it's a fact that the federal estate tax laws are in flux and proper planning is needed. Anyone with assets over $1 million who has not had their plan created or updated after January 1, 2010 with the return of the estate tax (with a $1 million exemption) factored in should schedule an appointment for a review to see what, if any, changes are advisable. This is particularly important for married couples.
P.S. Remember that the proceeds of life insurance policies are taxable for federal estate tax purposes.
The results of the recent midterm elections may not bring about speedy estate tax repeal or reform. To see why, check out this Forbes.com article Results of Midterm Elections Do Not Bring Certainty to the Federal Estate Tax.
Today I was alerted to the existence of a draft of the IRS from that will be required to be filed for estates of decedents dying in 2010 with estates in excess of $1.3 million. IRS Form 8939 - Allocation of Increase in Basis for Property Received from a Decedent. The due date is April 15, 2011.
This form is necessitated by the Modified Carryover Basis rules that replaced the estate tax for 2010. Each decedent's estate gets $1.3 million worth of basis to allocate to appreciated assets, with an additional $3 million for assets going to a surviving spouse. IRC Section 1022. The allocated basis will effectively eliminate capital gains tax liability for assets sold soon after death.
On October 30, 2010, there was a brief piece in the Durham Herald-Sun reporting that U.S. Representative Cynthia Lummis (R-WY) said that some of her constituents are so worried about the reinstatement of the federal estate tax that they plan to discontinue dialysis and other life-extending medical treatments so they can die before the end of the year.
Lummis, the sole Wyoming representative to the U.S. House, declined to name the residents who made the comments.
I personally find it hard to believe that someone would chose to die just to save taxes. But, it what Lummis says is true, that would make a great political commercial for Republicans - elderly farmers and ranchers saying that since Democrats are getting in the way of estate tax reform, they are going to pull their own plugs to save taxes for their children.
In Revenue Procedure 2010-40, the IRS provides 2011 figures for many items in the tax code. Of particular note to my readers:
- The Annual Exclusion from the Gift Tax remains at $13,000. IRC Section 2503
- The Annual Exclusion for gifts to a non-citizen spouse is $136,000.
Congress left Washington with a big pile of unfinished tax issues still on the table. Under tax laws enacted in the past decade, many popular tax provisions expired at the end of last year, or they expire at the end of 2010.
What could happen to all these tax breaks?
- In some cases, Democrats and Republicans have stated they intend to extend them -- but they just haven't gotten around to it or they can't agree on the exact amounts. But there is a good chance that preferential tax treatment will be retained or extended.
- In other cases, there is not bipartisan agreement, so the tax breaks may not be extended.
- With still other tax breaks, it's anybody's guess what is going to happen.
Politicians are not expected back in D.C. until after the November 2 mid-term election. In the meantime, here's a chart with some of the important unresolved tax issues. Consult with your tax adviser for information about how to go forward in your situation.This entry is from today's TrustCounsel eNewsletter by BizActions. Continue Reading...
The American Institute of Certified Public Accountants has recommended to Congress that the due dates for tax returns filed by Partnerships, S Corporations, C Corporations, Trusts and Estates, and Pension Plans be changed.
For the initial due date, the returns that would be affected are:
Form 1120S (S Corp) - March 15 to March 31.
Form 1120 (C Corp) - March 15 to April 15
Form 1065 (Partnership and most LLCs) April 15 to March 15
This would allow the more efficient flow of information from certain returns, such as Form 1065, to other returns that are due on a later date.
The due dates for extended returns would also change. See the AICPA letter linked to above for details.
Brian Dooley, CPA in his International Tax Counselor's Blog, recently authored a helpful post on the use of IRS Form 56, Notice Concerning Fiduciary Relationship, for helping aging parents and others manage any issues that arise with the IRS. Form 56 is traditionally used for fiduciaries such as executors and trustees, but it can also be used to name children who will be helping their parents in the future.
Since children are not automatically fiduciaries for their parents, the person named as the fiduciary in Form 56 must be named as an agent in a durable power of attorney, and that document must be sent in along with Form 56.
The IRS Power of Attorney, Form 2848, may also be used, and does allow an immediate family member to serve as the agent with no formal fiduciary relationship. It may not be as useful for future tax years, however.
Of course, both forms must be signed while the tax payer is still competent.
The federal estate tax is a big issue in many congressional races, with proponents of repeal arguing that it severely impacts family businesses and farms. See this article in the online version of the Wall Street Journal.
What is rarely discussed is that with proper planning, including the use of life insurance, the heavy financial burden of the estate tax can be avoided or drastically reduced. Attorneys fees and life insurance premiums are a lot cheaper than a 55% estate tax. Many family business owners and farmers simply refuse to plan ahead.
Here's the latest from theHill.com. Bottom line - nobody knows what's going to happen when Congress is back in session.
AICPA, U.S. PIRG Coalition Urges Congress to Ban Tax Strategy Patents Before Adjourning
Inappropriate Patents Attempt Monopoly on U.S. Tax Code
WASHINGTON (Sept. 29, 2010) – Tax strategy patents threaten American taxpayers and Congress should ban them before it adjourns for the year, a coalition of 18 national consumer and taxpayer organizations said in a letter to lawmakers.Continue Reading...
The Tax Hike Prevention Act of 2010 was introduced in the Senate on September 13 as Senate Bill 3773 "to permanently extend the 2001 and 2003 tax relief provisions and to provide permanent AMT relief and estate tax relief, and for other purposes."
Highlights of the proposed Estate Tax Relief Provisions include:
1. To be effective beginning January 1, 2010 with respect to decedents dying on or after that date; and beginning on January 1, 2011 with respect to gifts made and generation-skipping transfers on and after that date.
2. Reunification of the Gift Tax and Estate Tax Unified Credit Equivalent Amount to $5 million and the amount is indexed for inflation.
3. Top Marginal Rate of Gift, Estate and Generation-Skipping Transfer Tax of 35%.
4. "Portability" of decedent's unused Unified Credit by election of the executor of the decedent's estate to pass the unused portion to the surviving spouse.
5. Special election available for decedents dying in 2010 to apply existing 2010 law rather than the Tax Hike Prevention Act of 2010.
Thanks to attorney David Cahoone of Sarasota, Florida for this update.
This update is from Tax Analysts by way of Robert Keebler, CPA:
Obama administration officials are considering a proposal to allow taxpayers to elect to apply 2009 rules to their 2010 estate tax bills, a Treasury Department official said in an interview that aired September 12.
Treasury Assistant Secretary for Tax Policy Michael Mundaca said in a C-SPAN interview that the Obama administration would like to make permanent the 2009 iteration of the now-expired estate tax. The estate tax was allowed to lapse for 2010, and Congress has not agreed on a fix. Allowing taxpayers to retroactively apply the 2009 rates to their 2010 taxes is one possibility being considered, Mundaca said.
The option could prove appealing to taxpayers who have inherited estates worth less than the $3.5 million estate tax exemption for 2009 but more than $1.3 million. The current law repeals the estate tax entirely but allows a basis step-up for only $1.3 million of the estate's assets, not for the entirety of the estate as under the 2009 law. Thus, heirs of decedents dying in 2010 may exempt only $1.3 million of capital gains when they dispose of the property and must calculate capital gains tax using the decedent's basis in the property.
Most people know that the proceeds of a life insurance policy are generally free of income taxes. What many don't realize, however, is that the same proceeds are included in one's estate for estate tax purposes.
The federal estate tax will be back next year with a rate of 55% for amounts over $1 million. This will mean that many folks who do not think of themselves as wealthy will have a significant estate tax problem in the event of their death.
However, this is an easy problem to fix. By creating an Irrevocable Life Insurance Trust (ILIT) and transferring the ownership of the policy to the trust, estate tax at the death of the insured (and the beneficiaries) can be avoided. For a transferred policy, the insured must survive by three years for the proceeds to escape taxation, but a newly issued policy in the name of the trust is immediately exempt.
I see a lot of clients who are reluctant to set up an ILIT because of the cost (usually $1,000 to $2,500 or so). Not chicken feed, but not much compared to the hundred of thousands of dollars the ILIT will save. People don't think twice about spending $500 a year to insure a $20,000 car, but can't justify a one-time expense of a couple of thousand dollars to save a couple of hundred thousand for the benefit of their family. Not logical.
That's why I call the failure to create an ILIT estate planning's costliest mistake. An ILIT is quickly and easily implemented by an experienced estate planning attorney, will not limit or complicate the ownership of your assets, and is a veritable bargain in comparison the benefit it will provide.
Given the new basis reporting requirement for the estate of decedents dying in 2010, these new FAQ from the IRS are welcome and contain very important details, including (emphasis added):
Are there any filing requirements for a decedent who died in 2010?
Yes. Current legislation requires the executor of an estate to file the following tax returns:
- The final income tax return (Form 1040) for the decedent;
- Fiduciary income tax returns (Form 1041) for the estate during administration; and
- A return allocating the allowable basis adjustment to property acquired from a decedent, if the fair market value of the property exceeds $1.3 million or if the decedent acquired property by gift, except in certain cases.
- No later than 30 days after the filing of the return allocating the allowable basis adjustment, a written statement to each recipient of property that contains the information on the return.
For more information, you should consult your tax adviser.
What is the due date for the tax return allocating the allowable basis adjustment?
The form allocating the allowable basis adjustment must be submitted by the executor with the decedent’s final income tax return. For decedents dying in 2010, the due date is Friday, April 15, 2011.
What if the assets acquired from the decedent have a fair market value of less than $1.3 million? Does the executor need to file a return allocating the basis adjustment?
Maybe. The return allocating the basis adjustment is required only if the property acquired from the decedent is in excess of $1.3 million or if the decedent acquired property by gift, except in the case of certain gifts from decedent’s spouse, during the 3-year period ending on the date of the decedent’s death and the donor was otherwise required to file a return to report the gift.
For more information, you should consult your tax adviser.
What is the form number for the return used to allocate the allowable basis adjustment and where can I obtain it?
A form to allocate the allowable basis adjustment due by the executor is currently under construction, and a number has not yet been assigned.
When the return form is completed, it will be posted at the IRS Web site.
This year, of course, there is no federal estate tax. However, many Wills and Trusts drafted in the past contain formula clauses based on the existence of the federal estate and/or generation-skipping transfer tax. These convoluted clauses were generally designed to maximize tax savings.
In 2010 there is no federal estate tax. So what happens if a persons with such a Will or Trust dies this year? How is the formula to be interpreted? Well, recent changes to North Carolina law (N.C.G.S. Sections 31-46.1 and 36C-1-113) help provide certainty in the interpretation of the formula clauses. NC law now provides that the clauses are to be given effect as if the federal estate and generation-skipping transfer taxes law as of December 31, 2009 were in effect.
Executors or trustees, or an affected beneficiary, if they believe the testator would not have intended such a result, may bring a proceeding for a court determination.
Successful estate planning generally involves passing on your assets to your heirs at a low tax cost. To help achieve that goal, there are a few things to keep in mind about retirement accounts.Continue Reading...
Three of four prominent IRA experts have either already utilized a Roth conversion or plan to do so, and the fourth says he plans to if the market gets even worse.
Click here to see what Ed Slott, Robert Keebler, Seymour Goldberg and Natalie Choate have to say about their personal Roth conversion decisions.
While I have attended programs by Slott, Keebler and Choate, I certainly don't have the same status in the tax world as do they (nor their wealth, I would venture to guess). But for what it's worth, at age 49 I am leaning against doing a Roth conversion for two primary reasons: 1) Even with the coming tax increases, I believe my tax rate during retirement will be lower that it is presently, and 2) I don't want to spend my cash reserves paying the taxes that will be due as a result of the conversion.
While there is still debate over whether Congress will increase the scheduled $1 million exemption and decrease the 55% rate when the estate tax returns in 2011, as the days and weeks pass it seems much less likely that the estate tax will be implemented retroactively for 2010. See this article in Investment News, which also discusses upcoming changes in the the income tax.
No, not little green men, but non-citizens. This list, complete with links to the IRS website, is courtesy of Brian Dooley, CPA, MBT:
The U.S. tax liability of aliens is determined primarily by the provisions of the U.S. Internal Revenue Code. However, the United States has entered into certain agreements known as tax treaties with several foreign countries which oftentimes override or modify the provisions of the Internal Revenue Code.
2. Resident Aliens
A resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether from sources within or outside the United States.
3. Nonresident Aliens
A nonresident alien usually is subject to U.S. income tax only on U.S. source income. Under limited circumstances, certain foreign source income is subject to U.S. tax.
4. Dual-Status Aliens
You are a dual status alien when you have been both a resident alien and a nonresident alien in the same tax year.
5. Source of Income
A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income.
6. Income Types
In general, all income of a nonresident alien is Fixed, Determinable, Annual, Periodical (FDAP) income. However, certain kinds of FDAP income are considered to be effectively connected with a U.S. trade or business. These two types of income are taxed in different ways.
7. Tax Withholding on Foreign Persons
Payments of income to foreign persons are subject to special withholding rules. In particular, foreign athletes and entertainers are subject to substantial withholding on their U.S. source gross income. This withholding can be reduced by entering into a Central Withholding Agreement with the Internal Revenue Service.
8. Taxpayer Identification Numbers (TIN)
Anyone (including aliens) who files a U.S. federal tax return must have a Taxpayer Identification Number (TIN). In addition, aliens who request tax treaty exemptions or other exemptions from withholding must also have a TIN.
Note: Resident Aliens are also subject to U.S. Gift and Estate Tax laws, as are non-resident aliens with regard to U.S. real property.
Roth IRAs are a great tax saving vehicle. The reason: Investments held in a Roth IRA are allowed to build up federal-income-tax-free. Later on, you can take federal-income-tax-free withdrawals. Obviously, a zero tax rate is the best rate going.
In addition to being great tax saving tools for retirement, Roth IRAs also provide tremendous estate planning advantages - especially if you can get a large portion of your wealth into an account.
Unfortunately, getting lots of money into a Roth IRA is not so easy. It can take many years of annual contributions. However, there's also one very quick way - by converting an existing traditional IRA or SEP account into a Roth IRA. There are no limitations on the size or number of converted accounts. Naturally, under tax law, there is a price for allowing you to jump start your Roth IRA savings program with a conversion. Even so, it may be worth the price.
Roth Conversion Basics
A Roth conversion is treated as a taxable distribution from your traditional IRA. In other words, you're deemed to receive a taxable cash payout from your traditional IRA with the money going into the new Roth account. So the conversion triggers a current income tax bill. In most cases, however, this negative factor is outweighed by the following positive factors.
* You don't have to pay the 10 percent premature withdrawal penalty tax on the deemed distribution that results from the Roth conversion transaction. This is true even if you're under age 59 1/2 when the conversion takes place.
* Your conversion tax bill is significantly lower, thanks to the individual income tax rate cuts made in the 2003 tax law. Some people believe the tax rates we have today could be the lowest rates we'll see for the rest of our lives. No one knows, of course, but now could be a good time for a Roth conversion.
* The value of the traditional IRA (or IRAs) you want to convert may still be down because of poor investment performance in recent years. However, a lower account balance means a lower conversion tax bill, which is a good thing.
(See below for an important future change regarding an income limit for Roth conversions.)
Under prior law, an individual with modified adjusted gross income (MAGI) above $100,000 could not convert a traditional IRA into a Roth IRA. But the income limitation was eliminated beginning in 2010. For Roth conversions that occur in 2010 only, half of the taxable income triggered by the conversion generally can be reported in 2011 and the other half in 2012. For conversions in 2011 and beyond, all the income must be reported in the conversion year -- as under prior law.
There are only two requirements for tax-free withdrawals. You must:
1. Have a Roth account that's been open for more than five years.
2. Be age 59 1/2 or older.
With only a couple of days until Congress takes its summer recess, it's likely that that nothing will happen with estate tax reform until September at the earliest. Even though this article from Investment News states that "reversion to 55% rate and $1 million exemption [is] not seen as likely," many tax professionals feel differently.
Persons whose estates would be affected by the estate tax at a $1 million exemption should not wait to plan, given the 55% rate that will apply. The potential cost to one's heirs is simply too great.
My former colleague and attorney Julie Garber recently sent the following email to over 50 attorneys, trust officers and accountants located throughout the U.S.:
"Hi, I am conducting a straw poll on the estate tax for my blog. The question is what do you think Congress is going to do with the estate tax in 2010 and here are the choices for answers:
A. Nothing, tax will come back on Jan. 1, 2011 with $1 million exemption, 55% tax rate
B. Reinstate tax at 2009 levels ($3.5 million exemption, 45% rate) and make it retroactive to Jan. 1, 2010
C. Reinstate tax at 2009 levels ($3.5 million exemption, 45% rate) and not make it retroactive to Jan. 1, 2010
D. Reinstate tax at 2009 levels ($3.5 million exemption, 45% rate) and give heirs of decedents who die in 2010 but prior to enactment of the new law the choice between using the modified carryover basis and the new law
E. Something else - please describe"
The results of the poll:
- 68% chose A
- 11% chose B
- 7% chose C
- 7% chose D
- 7% chose E
Yesterday I listened in on a conference call about planning to avoid the 3.8% Medicare Surtax that will come into effect in 2013. The speaker, CPA Robert Keebler, a nationally known tax expert, stated that it is likely that Congress will offer estates of those who die in 2010 the choice between the estate tax system, with a step-up in basis for appreciated property, and the modified carryover basis system currently in effect. The latter system will be most advantageous for virtually all estates except those under $1 million. Click "Continue Reading" for a brief explanation of the modified carryover basis rule.
Keebler and Jonathan Mintz, an Executive Director of WealthCounsel, LLC both agree that Congress will not provide for an increase of the estate tax exemption over the $1 million that is scheduled for next year.
Watch out for your heirs, who might not want you to live to 2011 due to the heavy estate tax burden estates over $1 million will face next year. See this article from the Wall Street Journal.
You or someone you love may be ready for a retirement community living arrangement, which typically includes lifetime residential accommodations, meals, and some degree of medical services. These facilities can be quite expensive. The good news: Unexpected tax write-offs may help offset the cost.
The tax-saving idea is that you may be able to deduct part of the retirement community's one-time entrance fee and ongoing monthly fees as medical expenses on your Form 1040, regardless of your current health status. Since the fees we are talking about here can be quite large (see right-hand box), meaningful deductions may be possible despite the limitation on medical write-offs. (You can only deduct medical expenses to the extent they exceed 7.5 percent of your adjusted gross income.)
Court Decision Shows the Way
For recent proof that substantial deductions are possible, we can point to a 2004 Tax Court decision. Source: Delbert L. Baker v. Commissioner (122 TC 143 (2004). In 1989, Delbert Baker and his wife bought into a resort-style retirement community. It provided four living arrangement categories:
- Independent living with minimal medical services,
- Assisted living with more medical help,
- Special care (for victims of Alzheimer's and dementia), and
- Skilled nursing with maximum medical services.
The Bakers paid a one-time entrance fee of about $130,000 plus monthly fees of over $2,000 in exchange for lifetime residential and medical care privileges for both spouses. (This was back in 1989. Today's prices would be much higher in many areas.)
Friday's Wall Street Journal had an article on the latest estate tax proposal, from independent Senator Bernie Sanders and Democratic Senators Tom Harkin of Iowa, Sheldon Whitehouse of Rhode Island and Sherrod Brown of Ohio.
The proposal would retroactively reinstate a $3.5 million exemption with a tax rate of 45%. Estates valued between $10 million and $50 million would pay a 50% rate, estates valued above $50 million would pay 55%, and estates in excess of $500 million would be hit with an additional 10% surtax. The proposal includes a 10-year minimum on grantor retained annuity trusts (GRATs), which would greatly reduce the usefulness of these trusts as estate tax reduction strategies .
Don't look for the proposal to become law anytime soon, however. Many estate tax measures have stalled in this Congress and I don't think things will change in the near future.
On June 15, 2010, the House of Representatives passed The Small Business Jobs Tax Relief Act of 2010 (the "Act") which, if passed by the Senate and signed by the President, will significantly limit the utility of Grantor Retained Annuity Trusts (GRATs).
The Act would impose the following new limitations on GRATs:
(1) A required minimum 10-year term;
(2) The annual annuity payment cannot decrease relative to any prior year during the first 10 years of the term; and
(3) The remainder interest must have a value greater than zero determined as of the time of the transfer.
The new legislation would apply to all transfers to GRATs made after the date of the enactment of the Act.
Impact of New Legislation
When creating a GRAT, a short annuity payment period is considered advantageous because the grantor's death during the annuity payment period will cause all of the GRAT property to be included in the grantor's estate for tax purposes. In addition, potential significant appreciation within the shorter term will not be cancelled out by virtue of a longer term normalization or reduction in values. The required minimum 10-year term increases the mortality risk and could make GRATs less desirable for those who anticipate significant short term appreciation. Furthermore, by mandating that the annual annuity payments cannot decrease during the first 10 years of the GRAT term, the Act removes the possibility of front-loading the annual annuity payments as a means of converting a 10-year GRAT into a shorter term GRAT.
By requiring a remainder interest with a value greater than zero, the Act would require that the grantor pay gift tax, or at least use some portion of the grantor's $1,000,000 gift tax exemption, when establishing the GRAT. Since the GRAT may or may not actually realize an investment return sufficiently in excess of the §7520 Rate (i.e., the hurdle rate to beat to actually have an effective transfer of property via the GRAT) so as to pass property to the GRAT remainder beneficiaries, this can result in a waste of the grantor's gift tax exemption or the payment of gift tax without any benefit.
Please click here for a more detailed explanation of how GRATs work.
What action do you need to take?
Although it is impossible to say whether the Act will actually become law, the current confluence of (i) low asset values, (ii) a §7520 Rate near its all time low, and (iii) the real possibility that GRATs might not remain as viable an estate tax planning technique for much longer, suggests that now is the time to establish a GRAT.
Source: Moses & Singer, LLP June 2010 Client Alert
According to a recent article on WSJ.com, the additional 3.8% tax that starts in 2013 will also apply to undistributed income in estates and trusts, starting at about the $12,000 mark (making the top rate 44.4%). This will make planning for distributions to beneficiaries that much more important, as most beneficiaries will be in lower tax brackets.
Here's an article about Houston's Dan Duncan's death this year and his $9 billion estate, which will completely escape estate taxes (although his heirs may be liable for capital gains taxes upon the sale of some of his assets). Had an estate tax been in place this year, the IRS would have received about $4 billion from Duncan's estate. Not much in terms of the federal budget, but think how far that amount would go in cleaning up the gulf oil mess.
On June 2, 2010, Senator Charles Grassley (R-IA) offered reporters his view on the uncertain future of the estate tax. Grassley is the ranking Republican on the Senate Finance Committee.
From today's GiftLaw eNewsletter: In December of 2009, the House passed the Permanent Estate Tax Relief for Families, Farmers and Small Businesses Act of 2009. This makes permanent the 2009 estate exemption of $3.5 million and top estate tax rate of 45%. If the House and Senate are not able to take action on estate taxes by the end of 2010 then on January 1, 2011 the estate tax returns with a 55% top rate and an exemption of $1 million (plus indexed increases). If this were to happen, Sen. Grassley stated that there will be a "tremendous upheaval at the grassroots of America."
Sen. Grassley noted that Sen. Jon Kyle (R-AZ) and Sen. Blanche Lincoln (D-AR) have proposed that the Senate Finance Committee pass an estate tax bill with a $5 million per person exemption and a 35% top estate tax rate. However, Grassley expressed the opinion that "the Finance Committee would like to take up consideration of legislation, but we aren't assured by the majority leader that the bill passed out of committee will be taken up on the floor."
Under the Senate rules, even if the Finance Committee were to pass the Kyle-Lincoln estate tax compromise, Majority Leader Harry Reid (D-NV) is not obligated to schedule a floor vote and could simply stall the legislation.
In my view, Grassley's statement about the upheaval is ludicrous. The folks who constitute America's "grassroots" are not millionaires. Even with a $1 million exemption, proper planing can reduce or eliminate estate taxes for those with far more than $1,000,000. Stop whining and start focusing on something that will really help our country. That's my 2 cents on this Saturday afternoon.