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:
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:
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 :
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):
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 recently issued guidance that U.S. taxpayers living in the United Kingdom can get a credit against their U.S. income tax taxes for the GBP30,000 non-domicile charge. Rev. Rul. 2011-19. See also this article in the STEP Journal.
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:
Qualified Plans:
SIMPLE and SEP IRAs:
Traditional IRAs:
Roth IRAs:
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.
IR-2011-104, which also lists income tax benefit increases - exemptions, standard deductions, tax brackets, etc. See also Revenue Procedure RP-2011-52.
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 IRS has now issued the U.S. Estate and Generation-Skipping Transfer Tax Return (Form 706) and draft instructions for decedents dying in 2011.
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:
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:
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 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.
From IR-2011-70:
WASHINGTON — The Internal Revenue Service today reminds everyone who has a bank or other financial account in a foreign country, or who has signature authority over such an account, that they may be required to report the account to the U.S. Department of the Treasury by June 30 each year.
Many people in the U.S. have foreign financial accounts. While there is nothing improper about setting up or maintaining such accounts, many people may mistakenly believe their accounts are not large enough on a combined basis to trigger reporting obligations. Foreign account owners may have to report their accounts to the government, even if the accounts do not generate any taxable income.
U.S. persons are required to file a Report of Foreign Bank and Financial Accounts (FBAR), Treasury Department Form TD F 90-22.1, each year if they have a financial interest in or signature authority over financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.
For 2010, the due date for filing the FBAR is Thursday, June 30, 2011, though some financial professionals will have until June 30, 2012 to file. Unlike with federal income tax returns, requests for an extension of time to file an FBAR cannot be granted.
The FBAR is not an income tax return and should not be mailed with any income tax returns. It is due by June 30 of the year following the calendar year in which the aggregate value of the foreign accounts, on any one day, exceeds $10,000. But for 2009 and earlier years, the due date is generally Nov. 1, 2011 for individuals whose filing deadline was properly deferred under Notice 2009-62 or Notice 2010-23, and have no financial interest in a foreign financial account but with signature or other authority over that account.
FBARs are filed with the U.S. Department of the Treasury, P.O. Box 32621, Detroit, Mich. 48232-0621.
Click here for a report of a recent plea bargain by a disbarred lawyer who was charged with hiding asset in UBS accounts in Switzerland.
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
|
Purpose |
Rates 1/1 through 6/30/11 |
Rates 7/1 through 12/31/11 |
|
Business |
51 |
55.5 |
|
Medical/Moving |
19 |
23.5 |
|
Charitable |
14 |
14 |
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.
without owing any federal tax to the U.S. Treasury. If you're married and file jointly for the year of sale, you can potentially exclude up to $500,000 of gain. To qualify, you generally must pass both of the following 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.
Here's a good list of tax blogs, courtesy of Susan Miller of the Acclaimed Accountant Blog.
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.
Separating accounts is especially important when one of the beneficiaries is not an individual or qualifying trust, such as a charitable organization. If you die before required distributions must begin at age 70 1/2, then the entire balance must be paid out in five years. If you die after required distributions begin, then the balance can be paid out over your remaining life expectancy. When the account is split, the individual beneficiary can take distributions over 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.
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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.
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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.
Video: Dirty Dozen: English | Spanish | ASL
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:
Individuals:
· 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%
Continue Reading...
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.
go against equity or good conscience. If you inherit an IRA from your spouse, you can choose to roll over the funds into your own IRA, as long as you meet the 60-day deadline.
When considering whether or not to waive the 60-day requirement, the IRS considers all the relevant facts and circumstances, including:
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 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.
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:
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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.
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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. |
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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.
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Tax Basics |
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:
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.
Not satisfied with a $5 million estate tax exemption (until January 1, 2014 anyway) and spousal portability of the exemption, on January 5th Republicans introduced five bills to repeal the estate tax.
For details, see Hani Sarji's Estate of Confusion blog posts of January 12 and January 13, 2011.
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
From IR-2011-8
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.
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Who Benefits Most The qualified charitable distribution opportunity is beneficial for taxpayers who:
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. |
The Basics
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:
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.
Background
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.
HIGHLIGHTS
Two-year extension of all current tax rates through 2012
Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010, 2011, 2012
AMT Patch for 2010 and 2011
Extension of “tax extenders” for 2010 and 2011, including:
Temporary Employee Payroll Tax Cut
Source: Financial Planning Association
Continue Reading...
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.
There may be a vote on the bill today, but it is unlikely to garner much Republican support and will probably fail. Republicans want to extent the Bush cuts for all taxpayers.
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:
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?
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:
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:
1.Tax Treaties
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:
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.
Continue Reading...
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:
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.)
Continue Reading...
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
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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).
New Limitations
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.
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While I think it's great that the IRS is having these open houses to try to help taxpayers, keep in mind that the IRS's primary goal is to collect every tax dollar it can. The IRS is not your friend. If you owe more than $10,000, you are probably best served by hiring a tax attorney, CPA or enrolled agent to assist you.
With the federal estate tax returning next year at a rate of 55%, with only a $1 million exemption, planning to reduce estate tax should be on the forefront of the minds of those fortunate enough to have assets in excess of that amount.
One technique that was shared with me recently by Chad Virgil, CFP, works as follows (example scenario):
Note: the numbers used in this illustration are from March, 2010, with a MetLife annuity and Hartford life insurance policy.
Senate Finance Committee Chair Max Baucus (D-MT) and House Ways and Means Committee Chair Sander Levin (D-MI) announced that they have reached an agreement on continuing the IRA Charitable Rollover and many other tax saving extensions.
Both the House and Senate previously passed bills to extend these provisions, but since there were different tax offsets in the House and Senate bills, prolonged discussions were necessary to come up with mutually acceptable tax increases.
The House plans to vote on the bill the week of May 24. As for the Senate, Baucus has indicated that he believes that he will get the 60 votes necessary to pass the bill.
Source: GiftLaw eNewsletter (May 24, 2010)
Currently the maximum federal tax rate for qualified dividends and long-term capital gains is 15%. This is great for people like Warren Buffett, who live off of investment income. However, these low tax rates for wealthier investors will soon be a thing of the past.
Unless legislation is passed to continue the current rates for qualified dividends, next year all dividends will be taxed at ordinary income rates. The top rate for ordinary income, currently 35%, goes up to 39.6% in 2011. Then, in 2013, the 3.8% investment income surcharge kicks in, making the total maximum rate 43.4%.
The long-term capital gains rate will increase to 20% next year, and the surcharge beginning in 2013 will mean the top rate will be 23.8%.
These hefty tax increases will trigger a greater interest in tax deferral strategies such as cash value life insurance and tax-deferred annuities, and may motivate more intra-family income shifting strategies such as limited liability companies.
TheHill.com reported today that, according to Senate Minority Whip Jon Kyl (R-Ariz.), a deal in the works between Senate Democrats and Republicans on the estate tax has fallen apart.
Senator Kyl said: "We no longer have an agreement because the Democratic side has decided that unless a matter has a guaranteed majority of Democratic votes going in, they're not going to allow it on the floor, at least not voluntarily," he said. "So we have to find a way to get a reasonable permanent estate tax reform to the floor where members can vote on it."
Kyl did not share the details of the proposal, but the article states “sources have told The Hill that lawmakers were looking to give taxpayers the option of prepaying their estate tax. The levy would be set at 35 percent for those worth more than $3.5 million. However, the exemption would ultimately increase over time to $5 million and wouldn't be indexed for inflation. Prepayment trusts would pay a lower rate.”
So, one day closer to the return of the $1 million exemption and 55% rate on January 1, 2011.
Thanks to a client for bringing this article to my attention: How To Protect Your Family From Estate Tax Uncertainty. It contains good advice, which I have highlighted in bold in the following text from the article:
Make sure your estate plan accounts for a year with no estate tax, as well as a minimal $1 million exemption next year. Typically, a couple's wills are designed to use each spouse's estate tax exemption, without leaving a surviving spouse short of funds. When the first spouse dies, the exemption amount goes into a "bypass" trust for the children and the rest goes outright to the surviving spouse. The survivor has access to trust income and, if needed, principal, but the amount in the trust bypasses his or her estate.
With no estate tax such formula-driven plans don't work as intended, with too little, too much or even nothing left to certain heirs. So far ten states have passed laws saying that an estate's executor can fund the trust as if the 2009 estate law is in place; Florida has decided to require heirs to go to court to sort it out.
If you have a bypass trust, consult a lawyer now. You may be able to do a cheap fix with a codicil that clarifies how your assets should be allocated if there is no estate tax when you die. Or, if your plan is old and you live in a state with an estate tax, consider a will rewrite that might help your family minimize the combined federal and state tax bite. (Nineteen states and the District of Columbia have their own estate taxes, and these laws are also constantly in flux.)
Note: North Carolina does not have an estate tax this year, but it should return next year along with the federal tax.
More from theHill.com on the estate tax in Kyl: Deal on the estate tax in the offing:
"Sources close to the matter told The Hill last week that lawmakers are looking to give taxpayers the option of prepaying their estate tax. The levy would be set at 35 percent for those worth more than $3.5 million, however the exemption would ultimately increase over time to $5 million and would not be indexed for inflation. Prepayment trusts would pay a lower rate.
It is unclear how the gift tax would be addressed. Kyl recently told The Hill that he would like the rate to mirror the estate tax.
The senator said the proposal will be fully compliant with pay-as-you-go rules, which stipulates that anything more expensive than the House-passed estate tax bill must be offset.
The lower chamber recently passed legislation creating a 45 percent tax on estates worth more than $3.5 million. Kyl could need approximately $80 billion in offsets if he goes with the aforementioned plan. "
This is the first I have heard about prepaying the estate tax. Sounds like a desperate money-grab from Congress that will not be attractive to most wealthy folks. Just like with the Roth IRA conversions, prepaying tax is a hard pill to swallow as well as a gamble. I wonder if there will be any refund provisions in case the value of one's estate is significantly less at death.
Lest you start to feel complacent about estate tax reform, I should report that just this morning Professor Jeff Pennell of Emory Law School stated in a presentation in Atlanta that he did not believe that any estate tax fix would pass this year. He feels that nothing in Congress has changed since December 2009 and there are would just not be enough votes for it.
These are interesting times for estate tax nerds like me!
On May 4, Senate Finance Chairman Max Baucus (D-Mont.) stated that members of Congress will discuss the estate tax along with a small business tax bill this week. An aide reported that Committee and floor action on the small business bill might happen before the end of May.
Republicans in particular are trying to increase the estate tax exemption that will be in effect next year from $1 million to at least $3.5 million.
From Baucus sees action on small business bill, estate tax soon on theHill.com:
Baucus said talks on the estate tax and the small business bill are happening simultaneously.
"On substance we are getting very close," Baucus said about progress on the small business bill.
Senate staffers expect the legislation to cost between $10 billion and $15 billion over 10 years. The bill's marquee provision will likely zero out capital gains for one year for small businesses registered as C corporations. A similar measure was in the House-passed small business bill.
Finance could markup its small business bill as early as next week, but that timeline could slip if negotiations on the estate tax falter. Still, a floor vote on the bill before the Memorial Day recess is likely.
Staffers said there would likely have to be an agreement on both the estate and small business bill for both measures to advance. That agreement would likely have to include Senate Majority Leader Harry Reid (D-Nev.) abiding by whatever Finance committee members agreed to.
On the estate tax, Finance members Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) are leading the negotiations, staffers said.
The tax is currently repealed, but barring congressional action it returns next year to pre-2001 levels by socking estates worth more than $1 million with a tax that tops out at 55 percent.
The senators seek to create a less onerous tax. Kyl recently told The Hill the starting point for discussions on the tax was the 2009 law. He also said estates will likely have a choice in complying with the current repeal or the new bill once the legislation is enacted.
From TrustCounsel's today's eNewsletter:
There's no one legal structure that works best for all businesses. The most favorable choice depends on a number of factors, including the number of owners, your tax situation and whether or not you have employees. A limited liability company (LLC) may be a good choice because it provides flexibility, low maintenance, favorable tax treatment and most importantly, limited liability protection to keep your personal assets safe.
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Dodging a Double Tax Hit An LLC can help avoid double taxation if you sell the company or some of its assets. Let's say your company buys a warehouse and later makes a profit selling it.As a C corporation: You're liable for a combined federal and state tax bite of as much as 40 percent. Now you can take the gain left over after paying corporate level taxes as salary or a dividend distribution. If you take the money as a dividend, your company loses a deduction and you pay personal taxes on the cash. Add your personal tax bill to the corporation tax bill to find out how much was paid in combined taxes. If you take the money as salary, your company keeps its deduction, but now payroll taxes kick in. As an LLC: You are taxed only on your personal return and at low capital gains rates. |
Discuss the specific benefits of various business structures with your attorney, keeping in mind that the laws regulating LLCs vary from state to state. Here is a list of general LLC issues to consider:
Continue Reading...
The new chair of the House Ways and Means Committee, Rep. Sander Levin (D-Mich.) was quoted in an April 19 article on DailyFinance.com:
Levin indicated he wants to change the current estate tax law. In 2010, the estate tax expired, but under current law in 2011 it will revert to 2000 levels, when estates worth more than $1 million were liable for the federal tax. In 2009, estates below $3.5 million were not liable for estate tax.
"I find this uncertainty unacceptable and unfair," Levin said. Many wills are written to leave as much to the children as possible below the threshold at which estate taxes must be paid, with the rest going to the surviving spouse. "Today that means that the children may well be left with nothing," he said.
The article doesn't contain any further information about what Levin has in mind, but I assume that he is thinking about bringing the estate tax back with a $3.5 million exemption, retroactive to January 1, 2010. However, as previous blog entries discuss, the IRS undoubtedly faces litigation if the estate tax is retroactively reinstated.
Also, Levin's comment about the way "[m]any wills are written" is not particularly accurate. Most wills (and living trusts) that contain estate tax savings provisions contain a family/credit shelter/bypass trust that receives the amount exempt from estate taxes. This allows the surviving spouse to utilize the funds for support for the remainder of his or her life. At the survivor's death the trust is paid to the children. Furthermore, in most marriages, the surviving spouse will leave the assets to the kids at his or her death, so they won't exactly be left with nothing. What he describes is primarily a problem in second marriages.
What I take from Levin's statements is that the estate tax issue will not be resolved in the near future, anyway.
From our eNewsletter:
It Depends On the Statute of Limitations |
Forbes.com has been publishing a series on finance and taxes - here's one about an estate tax worst case scenario: Estate Tax Could Come Back with a Sharp Bite. Author Deborah Jacobs discusses the possibility that we could have a $1 million exemption, combined with the elimination of tax reducing strategies such as Grantor Retained Annuity Trusts (GRATs) and Family Limited Partnerships (FLPs).
There has been talk in Washington about possibly reinstating the estate tax retroactively to January 1, 2010? If that's done, however, many have speculated that litigation challenging the constitutionality of doing so will follow. But from whom?
Here's a possible candidate, according to Scott Martin of the The Trust Advisor Blog : "Houston gas pipeline mogul Dan Duncan was the 74th richest person in the world when he died on March 28. If he'd passed away three months earlier or ten months later, his $9 billion estate could have generated up to $4 billion for the IRS. But because there's no federal estate tax this year, the government gets nothing." Martin also states that "the sheer amount of money on the table makes a retroactive tax more unlikely. Big estates mean big lawyers ready to fight to see those billions of dollars go to the deceased's heirs, and the headaches could go on for years."
With accompanying pictures, this article on Forbes.com gives us 10 things NOT to do with regard to our tax returns.
A recent AALU report, Update on Estate Tax Reform: Developments and Dynamics, lists three factors that affect the ongoing environment for federal estate tax legislation:
1) a packed congressional schedule; 2) a focus on deficit reduction; and 3) the upcoming mid-term elections.
The report states that we may have a better idea of what's to come once Congress returns to session, but that the Senate may be hesitant to pass a reconciliation bill (which could include estate tax provisions) because of the recent health care reconciliation bill. If it is not included in a reconciliation bill (which requires only 51 votes), 60 votes would be necessary to pass estate tax legislation:
“The difficulty in finding 60 votes may lead to either (1) reversion in 2010 to a $1 million exemption and 55% rate or (2) a short-term extension of tax cuts, including the estate tax on a two- year basis at $3.5 million exemption and 45% rate, possibly during a lame duck session (when Congress returns after November elections).”
I'm telling my clients that (1) is a good possibility, given that that is what will happen if Congress takes no action. All those with estates over $ 1 million should run, not walk, to their estate planning attorney! A $2 million North Carolina estate could face over $600,000 in taxes.
Support is growing in Congress for allowing estates of decedents dying in 2010 to choose between the $3.5 million estate tax exemption (per 2009 law) and the current modified carryover basis law. Ever a good source of tax news, thehill.com has a brief article on this topic.
For a description of the modified carryover basis law, click "Continue Reading."
Continue Reading...Don't be an April Fool, read these tax tips from the IRS (2010-62):
1. E-file your return Don’t miss out on the benefits of e-file. Your tax return will get processed quickly if you use e-file. If there is an error on your return, it will typically be identified and can be corrected right away. E-file is available 24 hours a day, seven days a week, from the convenience of your own home. If you file electronically and choose to have your tax refund deposited directly into your bank account, you will have your money in as few as 10 days. Two out of three taxpayers, 95 million, already get the benefits of e-file.
2. Review tax ID numbers Remember to carefully check all identification numbers on your return. Incorrect or illegible Social Security Numbers can delay or reduce a tax refund.
3. Double-check your figures Whether you are filing electronically or by paper, review all the amounts you transferred over from your Forms W-2 or 1099.
4. Review your math Taxpayers filing paper returns should also double-check that they have correctly figured the refund or balance due and have used the right figure from the tax table.
5. Sign and date your return Both spouses must sign a joint return, even if only one had income. Anyone paid to prepare a return must also sign it.
6. Choose Direct Deposit To receive your refund quicker, select Direct Deposit and the IRS will deposit your refund directly into your bank account.
7. How to make a payment People sending a payment should make the check out to "United States Treasury" and should enclose it with, but not attach it to, the tax return or the Form 1040-V, Payment Voucher, if used. Write your name, address, SSN, telephone number, tax year and form number on the check or money order. If you file electronically, you can file and pay in a single step by authorizing an electronic funds withdrawal. Whether you file a paper return or file electronically, you can pay by phone or online using a credit or debit card. Visit IRS.gov for more information on payment options.
8. File an extension Taxpayers who will not be able to file a return by the April 15 deadline should request an extension of time to file. Remember, the extension of time to file is not an extension of time to pay.
9. Visit the IRS Web site anytime of the day or night IRS.gov has forms, publications and helpful information on a variety of tax subjects.
10. Review your return…one more time Before you seal the envelope or hit send, go over all the information on your return again. Errors may delay the processing of your return, so it’s best for you to make sure everything on your return is correct.
Many North Carolinians have winter homes in Florida, and even more Floridians have summer homes in the North Carolina mountains. For those who live part-time in each state, there may come a time when they want to think about changing domicile from one state to another. Others may simply be trying to choose between Florida and North Carolina to which to retire or otherwise move. When it comes to offering protection for one's assets and less taxation, Florida wins hands down over North Carolina. However Florida has high property taxes and homeowners' insurance rates, and there are many quality of life issues to consider.
For a comparison chart of North Carolina and Florida on Creditor Protection and Taxes, click "Continue Reading."
Continue Reading...
The White House has launched an Tax Savings Tool on its website to assist middle-class taxpayers in getting the most out of the various Recovery Act tax credits.
The tax wizard asks for input about one's filing status, salary range, recent home purchases, college expenses, and other questions relating to various tax credits provided by the Recovery Act.
Vice President Biden stated that “The big guys know all the credits and deductions to claim during tax season, but we want middle-class families to know just how much is out there for them this year thanks to the Recovery Act and how to take advantage of it. From help with college expenses to credits for cost-saving, energy-efficiency home improvements, these Recovery Act tax credits not only provide some needed relief for working Americans, but also help them invest in their families’ futures.”
Thanks to Brian Dooley, CPA, for this news.My article, Tax Consequences of Equitable Distribution, which discusses the income tax issues involved in the division of property due to divorce, was just published in Core Compass, an online newsletter for real estate investors and their advisors.
The Reconciliation Bill (H.R. 4872), which passed the House and has gone to the Senate contains a 3.8% surtax on investment income for single taxpayers with modified adjusted gross income (MAGI) over $200,000, and married taxpayers with MAGI over $250,000. The tax, which will begin in 2013, is levied on interest, dividends, rents, royalties and capital gains, beginning in 2013, but not retirement benefits.
The Health Care Reconciliation bill includes a new 3.8% Medicare tax on investment income, which includes IRA distributions, interest income (including tax exempt), dividends, capital gains, rental income and oil royalties.
Under H.R. 3590, there is also a 1% increase in the employee Medicare tax on all earnings. Taxpayers with income under $100,000 will benefit from partial exemptions.
Congress has promised the two new taxes are temporary (10 years or so)- but don't hold your breath.
From IR-2010-32:
WASHINGTON — The Internal Revenue Service today issued its 2010 “dirty dozen” list of tax scams, including schemes involving return preparer fraud, hiding income offshore and phishing.
“Taxpayers should be wary of anyone peddling scams that seem too good to be true,” IRS Commissioner Doug Shulman said. “The IRS fights fraud by pursuing taxpayers who hide income abroad and by ensuring taxpayers get competent, ethical service from qualified professionals at home in the U.S.”
Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers. Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties. The IRS pursues and shuts down promoters of these and numerous other scams.
The IRS urges taxpayers to avoid these common schemes:
Continue Reading...Here's the latest on the fight over the future of the estate tax tax, from Bloomberg.com. In general, Republicans and business lobbyists are pushing for a $5 million exemption and a 35% rate, while the Obama administration is counting on a $3.5 million exemption and a 45% rate. If nothing is done, 2011 will bring a $1 million exemption and a 55% rate.
The IRS has announced that about 39,100 North Carolinians have unclaimed tax refunds, averaging $539 per person. The total due North Carolina residents is $32,919,000.
However, to collect the money, a return for 2006 must be filed with the IRS no later than Thursday, April 15, 2010.
Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes property of the U.S. Treasury.
For 2006 returns, the window closes on April 15, 2010. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund.
The IRS reminds taxpayers seeking a 2006 refund that their checks will be held if they have not filed tax returns for 2007 or 2008. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to satisfy unpaid child support or past due federal debts such as student loans.
By failing to file a return, people stand to lose more than refunds of taxes withheld or paid during 2006. For example, most telephone customers, including most cell-phone users, qualify for the one-time telephone excise tax refund. Available only on the 2006 return, this special payment applies to long-distance excise taxes paid on phone service billed from March 2003 through July 2006. The government offers a standard refund amount of $30 to $60, or taxpayers can base their refund request on the actual amount of tax paid. For details, see the Telephone Excise Tax Refund page on IRS.gov.
In addition, many low-and-moderate income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families whose incomes are below certain thresholds, which in 2006 were $38,348 for those with two or more children, $34,001 for people with one child and $14,120 for those with no children. For more information, visit the EITC Home Page.
Current and prior year tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling toll-free 1-800-TAX-FORM (1-800-829-3676). Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for 2006, 2007 or 2008 should request copies from their employer, bank or other payer. If these efforts are unsuccessful, taxpayers can get a free transcript showing information from these year-end documents by calling 1-800-829-1040, or by filing Form 4506-T, Request for Transcript of Tax Return, with the IRS.
Yes, I know this is the North Carolina Estate Planning Blog, but in these troubled economic times, with most states, including NC, desperate for cash, this could be a sign of things to come here and elsewhere.
Washington currently has a $2 million estate tax exemption, with rates ranging from 10% to 19%. A bill was introduced in the state legislature on February 13 to double the rates (20% to 28%).
North Carolina's estate tax is tied to the federal estate tax, so there is no tax this year. It will return next year, however, when the federal estate tax is back, with a scheduled $1 million exemption and 55% rate. North Carolina's top rate is 16%.
There is no estate tax in North Carolina this year, but residents (and owners of real estate) in 19 other states do have a state estate tax, even in the absence of the federal estate tax. Take a look at this article on Forbes.com, Where Not to Die In 2010.
The North Carolina estate tax will return next year when the federal estate tax is reinstated.
The Tax Policy Center of the Urban Institute and the Brookings Institution contains fascinating (to a tax geek) and detailed information about taxes. Particularly informative is the information on the Obama Administration's 2010 income tax increase proposal.
Here's a table showing the proposed increases for 2011 and the estimated increased revenue over a 10 year period:
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Proposed Tax Increase |
10 Year Tax Revenue |
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Income Tax Rates 33% and 35% |
$364 Billion |
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To 36% and 39.6% |
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Itemized Deductions Capped at 28% |
$291 Billion |
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Personal Exemption Phase-out and 3% |
$208 Billion |
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Floor on Itemized Deductions |
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Capital Gains Tax Rate 15% to 20% |
$105 Billion |
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Total |
$968 Billion |
The tax rate increases are bad enough, but I really hate not being able to take advantage of all of my itemized deductions! The IRS giveth, and then the IRS taketh away.
Nothing has been decided yet, but here's the scoop from TheHill.com as of February 9, 2010. At a minimum, the 2009 $3.5 million exemption and 45% rate would continue, effective January 1, 2010.
On February 2, 2010, in Ododonnabhain v. Commissioner of Internal Revenue, the U.S. Tax Court held that a transgender woman's expenses for hormone therapy and sex reassignment surgery were medically necessary and therefore deductible for federal income tax purposes. The court found that "gender identity disorder" is a disease, and ruled that gender transition-related healthcare is non-cosmetic, medically necessary healthcare. However, expenses for breast augmentation were found to be cosmetic as the surgery did not treat the disease or improve bodily function, and therefore were non-deductible.
Based on what appeared to be a giant "loophole" in the gift tax law applying to gifts made in 2010, taxpayers could arguably make gifts to a wholly-owned grantor trust free from gift tax. Last week at the Heckerling Estate Planning Institute, commentators said this was too good to be true, and opined that the IRS would soon close the loophole. No sooner said than done:
Yesterday the IRS published Notice 2010-19, which applies to taxpayers making gifts in trust during 2010. Under section 2511(c), a transfer of property to a non-wholly-owned grantor trust is a transfer by gift of the entire interest in the property. To determine whether a transfer to a wholly-owned grantor trust constitutes a gift, the gift tax provisions in effect prior to 2010 apply.
In North Carolina it is not uncommon for persons to handle administration of a decedent's estate without hiring a lawyer or an accountant. Because of the complexity of the law and the likelihood that certain requirements or opportunities will be overlooked, I certainly don't recommend going it alone. This post is not intended to be a do-it-yourself guide, but simply an overview of the basic process. Complying with income tax requirements is the most complex part of the majority of estates.
A deceased individual's tax year ends as of the date of death. Thus, all of the items of income and deduction prior to that date are reported on Form 1040. The tax year for the estate begins on the date of death, and generally ends on the last day of the month 11 months later. A separate tax id number for the estate is necessary and must be obtained from the IRS. The tax id number is provided to all financial institutions in which the decedent owned an account for income reporting purposes, and is used for the estate checking account.
Continue Reading...
WASHINGTON — People who give to charities providing earthquake relief in Haiti can claim these donations on the tax return they are completing this season, according to the Internal Revenue Service.
Taxpayers who itemize deductions on their 2009 return qualify for this special tax relief provision, enacted Jan. 22. Only cash contributions made to these charities after Jan. 11, 2010, and before March 1, 2010, are eligible. This includes contributions made by text message, check, credit card or debit card. [Emphasis added.]
Continue Reading...For years, there has only been North Carolina estate tax due if federal estate tax was due. Now, however, that the federal estate tax is gone (for now, anyway), what's the status of the NC estate tax?
N.C.G.S. Section 105-32.2 provides, in pertinent part, as follows:
"The amount of the estate tax imposed by this section is the amount of the state death tax credit that, as of December 31, 2001, would have been allowed under section 2011 of the Code against the federal taxable estate. The tax may not exceed the amount of federal estate tax due under the Code." [Emphasis added.]
Regardless of how the first sentence above is interpreted, since zero federal estate tax is due for individuals dying in 2010, the second sentence clearly mandates a zero NC estate tax as well.
This posting is courtesy of attorney Marc Soss of Florida:
The aging demographics of the United States coupled with the Pension and Recovery Act of 2006 (the "PPA”) and Deficit Reduction Act of 2007 (“DRA”) have provided an excellent planning opportunity to create tax efficient vehicles to solve a clients’ long-term care planning needs. Beginning on January 1, 2010, a tax-free planning option will become available for individuals who desire to provide for long-term medical care by utilizing an existing annuity or life insurance contract purchased after 1996. While not a new concept (it dates back to 1997), the 2010 tax-free planning opportunity may be beneficial to an individual with a larger than needed life insurance policy death benefit, unaffordable monthly or annual premiums, an under-performing or matured deferred annuity contract, or the desire to incorporate long-term medical care into his or her estate plan.
Continue Reading...
From The New York Times to my bully pulpit:
This article helps explain why revising old estate plans is more important than ever, given this bizarre (tax-wise) year of 2010.
And for heaven's sake, if you don't have an estate plan, what are you waiting for? Today is the first day of the rest of your life, but tomorrow may be the last day of the life you had. Be a grownup and get a plan!
This is from Steve Akers' recent presentation, Estate Planning in Light of One-Year 'Repeal' of Estate and GST Tax in 2010:
"the Administration proposes to dramatically change the rules regarding valuation discounts (emphasis added). If there is an estate and gift tax reform package adopted next year, it could include that provision. If there is no legislation, there are indications that the IRS will issue regulations under §2704 that would place significant restrictions on valuation discounts on entities that are valued on the basis of their liquidation value (such as family limited partnerships holding marketable securities or other assets other than operating businesses.) Therefore, to have a chance to take advantage of the lower 35% rates in 2010 and to avoid the coming restrictions on valuation discounts, clients should consider make desired gifts and sales as early in the year as possible (Emphasis added).
Since the estate tax is sure to return, I am advising clients for whom a family limited liability company makes sense to form it now, and if possible use their $1 million lifetime gift tax exemption now to take advantage of discounting before it is legislated away.
I just put this Estate Planning Alert on my firm's website homepage, but thought it would also be appropriate for this blog:
As of January 1, 2010, there is no more federal estate tax. The estate tax has been replaced with a complex modified carryover basis regime. In 2011, the estate tax is scheduled to return, with a $1,000,000 exemption and 55% rate (plus an additional 16% for North Carolina residents). Due to these changing laws, it is imperative that everyone with an estate of $1 million or more do proper planning to ensure that income and estate taxes will be minimized. Be aware that the face value of life insurance is included in calculating one's estate, so even many young couples have estates in excess of $1 million. Do not let your family pay tax unnecessarily. Consult an estate planning specialist today.
From its inception, the 2001 tax act was scheduled to repeal the federal estate tax and generation skipping transfer tax (GSTT) for one year beginning January 1, 2010. This should come as no surprise. What is surprising, however, is the fact that the 2001 tax act has now played out and repeal, at least temporarily - and unless reinstated retroactively - is upon us. This post is from today's Advisor's Forum Wealth Counselor and explores how we got here (which may be instructive as to what will happen in the future) as well as some of the planning implications of no federal estate tax or GSTT for at least some part of 2010.
Continue Reading...It's 2010! As of January 1st, the federal estate tax is no more and it may mean that you should revise your estate plan and related documents. Anyone with total assets over $1 million (including face value of life insurance, retirement, home equity, etc.) should make make sure there estate plan is up to date. Click "Continue Reading" to find out what the change involves, what happens next year, and what steps you might want to take now to ensure your wishes are carried out.
Continue Reading...We only have a few hours left before the much reviled "death" tax disappears, to be replaced by a complicated and confusing carryover basis regime. So, if your estate is over $3.5 million, the tax impact may be less if you die tomorrow rather than today. Don't count on certain tax savings, however, as Congress could very well reinstate the estate tax retroactively to January 1, 2010. And if you wait until 2011 to die, your estate could be taxed even more, as the estate tax will return then, with a $1 million exemption and a 55% rate.
My advice - don't die, but see your estate attorney right away! Failure to plan for all these changing laws could end up being very costly.
Starting tomorrow, North Carolina residents will pay sales taxes on certain digital downloads from the internet, and standard gasoline tax on ethanol. The Triangle Business Journal has a brief article.
Some financial advisors are warning against a Rush to Roth. The key to is to approach the idea cautiously and do a comprehensive analysis. Whether a Roth conversion makes sense is a highly individual decision, to be made in consultation with your advisors.
I did a Roth conversion the last time the IRS allowed us to pay the taxes over a couple of years, which was about 10 years ago. This time around, however, I'm not so keen on the idea.
I have not completed an analysis of my own situation at this point, but I will probably decide against a conversion of my traditional IRA, as most of the additional income would likely be taxed at combined federal and state rates of over 40%. Even with virtually certain future income tax rate increases, I expect that my taxable income will be lower in retirement. That's particularly true if I head to sunny Florida, where there's no state income tax! Plus, I'm not keen on giving Uncle Sam and the NC Department of Revenue $40,000 + of my savings - I may need it down the road (or even next year, as my son heads off to college)!
Here's a recent article on the estate tax from the WSJ.com. Not exactly objective reporting, more like an opinion piece against the "death" tax.
The articles states that "the best strategic outcome now is to let the death tax expire in January as scheduled under current law, and return to this debate next year when the tax rate is zero. Then let liberal Democrats explain to voters on the eve of elections that they must restore one of the most despised of all taxes."
This is not exactly accurate in that while "restoration" of the estate tax for 2010 would require congressional action, without any action the exemption will be reduced to $1 million and the rate will increase to 55% in 2011. So if next year the Democrats propose imposing the current $3.5 million exemption and 45% rate on 2010 and future years, they will actually be proposing significant tax relief. That would get my vote.
Here are yesterday's and today's articles from the Wall Street Journal. While there is a brief discussion of the 2010 "Carryover" Basis rule that will apply instead of the estate tax, there is no mention of the fact that each estate will have $1.3 million in basis to apply to assets, with an extra $3 million for spouses. Even with these generous exemptions, it will be a record-keeping nightmare.
From IR-2009-114
Watch Video: Year-End Tax Tips: English | Spanish | ASL
Watch Video: Record Keeping: English | ASL
WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.
Some of these changes include the following:
Special Charitable Contributions for Certain IRA Owners
This provision, currently scheduled to expire at the end of 2009, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, created in 2006, is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.
Rules for Clothing and Household Items
To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.
Continue Reading...Other than perhaps a one year extension of current law, we are unlikely to see any movement on the estate tax in 2009. CCH Tax Newsletter.
Today the IRS issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Effective January 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
The U.S. House of Representatives is scheduled to vote on the estate tax today, but even if legislation passes, Senate approval is necessary. Lots of politics involved for a tax that affects so few people. See what the Washington Post has to say.
Have you ever heard a friend, neighbor, or colleague state that they had found a way to get around paying income taxes, or that certain taxes weren't really legal? Don't believe them - many people, including several wealthy actors, have gotten into trouble with the IRS that way.
The IRS has a comprehensive analysis of frivolous tax arguments on its website.
This legislation would continue the current $3.5 million exemption and 45% rate, but does not include the spousal "portability." While the bill may very well pass in the House, Senate action is uncertain. More...
This from Howard Hinds of the Curbstone Group in Boston:
Master Limited Partnerships (MLPs) are excellent tools for estate planning:
1. MLP distributions (around 8% yield right now) are considered return of capital, meaning that distributions reduce your basis in the MLP, while allocated net income increases your basis.
2. Tax Shield: Because MLPs own large hard assets (like pipelines) with high depreciation (non-cash) expenses, allocated income to an investor is usually less than 20% of cash distributions in a given year for the first several years of ownership. This creates a tax deferral, which is recaptured when you sell the MLP.
3. When you sell an MLP: (a) the gains from your purchase price to selling price are taxed at capital gains rates, and (b) the difference between your purchase price and your basis (which has been reduced over time) is taxed at ordinary income rates.
4. But, if you die while holding an MLP, the tax deferrals you have accumulated over time are washed away along with the capital gains taxes, and whoever receives those MLPs after you die has a new stepped up basis, so those tax deferrals are not passed along. This can be a very big deal for someone who has owned Kinder Morgan Energy Partners since 1995 and they have $0 basis and the share price is $55 per share
So in addition to being great income vehicles for someone with large estate, MLPs can be great tax shields as well.
On November 17, 2009, Senators Tom Carper (D-DE) and George V. Voinovich (R-OH) reintroduced bipartisan legislation that would freeze the estate tax at its current 2009 level (a $3.5 million exemption and 45% rate) and allow a surviving spouse to elect to use the exemption of the his or her predeceased spouse. The bill was referred to the Senate Finance Committee.
And don't even think about estate tax repeal. From Brian Dooley CPA, MBT's newsletter:
Update: The AMT patch is gone as seventy-three tax breaks will get a twelve month life.
House Ways and Means Committee Chairman Charles Rangel, D-N.Y. is introducing legislation next week that would keep a variety of tax breaks from expiring before the end of the year. However, without the AMT patch, there is a ten percent tax increase for those living in California and New York and a five percent in other states (the math of the AMT depends upon your state tax rate).
Instead of sending the bill through his committee, Rangel plans to dispatch the bill directly to the floor of the House, so there is no debate There are about 73 tax provisions scheduled to expire by Dec. 31, including the credit for research and experimentation expenses, deductions for tuition and state and local taxes, film and TV production expensing rules, a deduction for contributions of food inventory, tax breaks for certain expenses by school teachers, and a host of other goodies. Why only a twelve month extension? It makes the lobbyists pay up each year.
The Estate Tax is not going away. One more year at $3.5 million exemption. In 2011, the exemption plunge to $1million. Let's face it, we need the money. As they say, dead men don't vote.
Another article from CQ Politics about the Democrats' plan for the estate tax in 2010.
Many people are aware that they can give any number of other people up to $13,000 per year under the federal gift tax annual exclusion (IRC Section 2503(b)). Staying under this number means that no gift tax return has to be filed and that there will be no reduction in the amount that can be passed free of estate taxes at the donor's death.
However, writing gift checks to children, grandchildren or others at the end of the year can cause the donee lose the benefit of the annual exclusion unless:
Bottom line: make sure your donee deposits the check no later than the last business day of the year.
Example: Bob gives his $13,000 gift check to his granddaughter Lucy on Christmas Day, 2009. Lucy deposits the check in her bank on December 31, 2009. The check is paid by the drawee bank on January 7, 2010. This would be completed gift for Bob in 2009.
Planning for tax-qualified plans, which includes IRAs, 401(k)s and qualified retirement plans, requires a careful examination of the potential taxes that impact these assets. Unlike most other assets that receive a “basis step up” to current fair market value upon the owner’s death, IRAs, 401(k)s and other qualified retirement plans do not step-up to the date-of-death value. Therefore, beneficiaries who receive these assets do so subject to income tax. If your estate is subject to estate tax, the value of these assets may be further reduced by the estate tax. And if you name grandchildren or younger generations as beneficiaries, these assets may additionally be reduced by the generation-skipping transfer tax. All tolled, these assets may be reduced by 70% or more.
There are several strategies available to help reduce the impact of these taxes:
Continue Reading...
Coming as no surprise to me, anyway, an article on the website CQ Polictics, House LIkely to Delay Estate Tax Consideration, states that the House will likely postpone any movement on estate tax legislation until after Thanksgiving. I'm still of the opinion that a one year "patch" continuing the current $3.5 million exemption and 45% rate is the most likely outcome.
This courtesy of Professor Chris Hoyt of the University of Missouri (Kansas City) School of Law:
The Tax Court rejected an argument made by the IRS that a donor should
not be able to claim a charitable income tax deduction for a
contribution to a private foundation because the donor effectively
controlled the private foundation. The case is Foxworthy, Inc. v. Comm,
T.C. Memo. 2009-203 (Sept. 9, 2009). This appears to be the first time
that the IRS has raised this argument in court, and it was soundly
rejected by the Tax Court.
The conclusion is helpful to also resolve questions about claiming
charitable income tax deductions for contributions to donor advised
funds and donor directed funds.
The cases that I have found where the courts disallowed a charitable
income tax deduction because of excessive donor control tend to occur
when the donor retains excessive control over the contributed property
(e.g., failure to deliver the property; retained possession of the
property; etc.). By comparison, the ability of a donor to advise or even
direct the specific charitable organizations that should receive grants
from a donor advised fund (Sec. 4966(d)), a donor directed fund (e.g.,
Sec. 170(b)(1)(e)(iii)), or a charitable remainder trust (Rev. Rul.
76-371, 1976-2 C.B. 305) has never before been an issue to prevent an
individual from claiming a charitable income tax deduction under Section
170. This new Tax Court decision buttresses that result.
Click "Continue Reading" for the excerpt of the Tax Court's opinion of the charitable deduction issue. It was just one of issues that the Tax Court addressed in its lengthy opinion.
From the GiftLaw eNewsletter article New Decade Predictions:
"The clear intention of Congress is to start addressing the deficit in 2011 by increasing taxes on upper-income taxpayers. The top brackets are proposed to be returned to 36% and 39.6% in 2011. In addition, the phase-outs known as "PEP" and "Pease" of personal exemptions and a 3% floor on itemized deductions will be restored. Capital gains taxes are likely to be returned to 20%.
The estate tax will also be retained, with a probable top rate of 45%. While the estate exemption is scheduled to return to $1,000,000 in 2011, it is likely to be held at $3.5 million, but could be lowered to the $2 million value that existed from 2006-2008."
Increasing tax rates and a possible lower estate tax exemption should fuel a renewed interest in charitable planning giving, including charitable remainder trusts.
One common oversight I see when reviewing new clients’ financial status is failure to consider the estate tax impact of large life insurance policies. Most people know that life insurance proceeds are received free from income tax. What most don’t know, however, is that the proceeds are part of the insured’s estate for estate tax purposes if:
Life insurance proceeds of any amount can be paid to a U.S. citizen spouse free from tax. But – those same proceeds, or the value of items purchased with the proceeds, will be included in the taxable estate of the surviving spouse.
This may not be a problem for most of us at the current $3.5 million estate tax exemption. However, barring a change in the law, in less than 14 months the exemption will revert to $1 million, and the rate will increase from 45% to 55%. North Carolina adds another 16%.
With a $1 million exemption even a $250,000 policy could be subject to estate tax when combined with the value of real estate, retirement accounts, and all the other assets of a decedent. Why take the chance of losing over half the proceeds to Uncle Sam? The solution is to create an irrevocable life insurance trust (ILIT) to own the policy. The proceeds will then escape taxation at the death of the insured, his or her spouse, and can be structured to avoid taxes at the death of the children or other beneficiaries are well. In addition, the proceeds are protected from creditors and mismanagement by the beneficiaries.
If an existing policy is transferred to an ILIT, the proceeds will still be included in the insured’s estate for estate tax purposes if he or she dies within three years of the transfer, so it's best not to delay planning for existing policies.
ILITs must be structured properly to take into account various estate, gift and income tax issues, as well as state law. Make sure you have an estate planning specialist prepare your ILIT and work with your life insurance agent. ILITs are not inexpensive to create, but your beneficiaries could easily save several hundred thousand dollars or more.
This article on Trusts & Estates journal's website discusses a very real possibility - a return in 2011 to the estate tax laws of 2001. Briefly, that would mean a $1 million exemption and a 55% rate.
To help small business owners steer their way through all of the retirement plan options available, the IRS has come up with the IRS Retirement Plans Navigator. The site contains a comparison of the various plans and other helpful information and links.
On October 15, 2009, Rep. Schrader (D. Oregon) introduced "The Small Business and Family Farm Estate Tax Relief Act of 2009" ( H.R. 3841), which would "repeal carryover basis for decedents dying in 2009, and "increase the estate tax exemption to $5,000,000" and "reduce the maximum estate and gift tax rate to 45 percent" for decedents dying after December 31, 2009.
Trouble is, carryover basis is to apply to decedents dying in 2010, not 2009. Seems this bill needs to be amended to correct the description of what it would do.
Check out this aptly titled article on webcpa.com - The dangers of postponing estate planning until Congress clarifies the law. Don't let the expenditure of a few hours or a couple of thousand dollars keep you from putting a plan into place that could avoid unintended financial problems for your family and/or save them hundreds of thousands of dollars in taxes. Estate plans are not meant to be a "once and done" solution. Regular updates are necessary, just like tuneups for a car. Without regular maintenance, your car will eventually breakdown and be useless. The same could be said for an estate plan.
This article from WSJ online on the effect on changing estate tax exemptions on what's left for the surviving spouse describes just one reason why.
Here's a link to an article from Evan Cooper at Investment News about a recent webinar on the federal estate tax that the magazine hosted - geared for financial advisors but worthy reading for all those interested in what will happen with the estate tax. There were no definite conclusions by the panel, but most experts agree that estate taxes are likely to go up, rather than down.
One listener, J.B. Stroll, commented: "Having listened to the presentation, I thought a major take-away was that Congressman Rangel had intimated to a speaker that the proposal would be for a "patch" with the existing 2009 rules for one more year. There wasn't time for congress to deal with revamping of the estate taxes." (Emphasis added). This is consistent to what I have heard.
As an estate planning attorney, here's one recommendation from the article I certainly endorse: "When your clients have anything remotely related to estate planning to consider, find a competent estate-planning attorney with whom to work. This stuff is so complicated already — and likely to become even more complex — that your clients will thank you a million times over for helping them get their estate plans in order. A lifetime of hard work can disappear as a result of one tiny mistake, so be ultracareful."
In addition to providing ease of management and significant asset protection, FLPs and (FLLCs) are still a excellent planning tool for obtaining gift and estate tax discounts (for minority interests and lack of marketability) - provided that the implementation and valuation are done correctly. See this BVWire article on Keller v. U.S., 2009 WL 2601611 (S.D. Tex.) (Aug. 20, 2009).
However, anyone considering a FLP or FLLC for the transfer tax advantages should not delay - the Obama administration has recommended legislation prohibiting such discounts in most cases.
From IR 2009-85:
WASHINGTON ― The Internal Revenue Service today provided guidance for retirement plan administrators, plan participants and retirees regarding recent legislation affecting required minimum distributions. The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for 2009 from certain retirement plans.
Generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employer’s plan beginning with the year the account owner reaches age 70½. The 2008 law waives required minimum distributions for 2009 for IRAs and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 required minimum distributions to be rolled over into an IRA or another retirement plan.
Notice 2009-82 provides relief for people who have already received a 2009 required minimum distribution this year. Individuals generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.
Continue Reading...
Jonathan Weisman of the Wall Street Journal reports that the Estate Tax Faces Its Own Life-and-Death Struggle. When and what will happen with regard to the federal estate tax is still very much up in the air.
Here's what's happened this decade:
Fellow Blawger Gideon Alper, who writes the Gay Couples Law Blog, has an interesting take on what will, or will not, happen with the federal estate tax over the next year or so: Estate Tax Repeal in 2010 Not a Big Deal Because Congress Can Pass a Retroactive Tax Amendment.
Regardless of what happens with the estate tax, the bottom line for those whose estates are $1 million or more, or are likely to be in the near future, is to be prepared, to the extent possible, by implementing a comprehensive, yet flexible, estate plan. And then - review it as the tax legislation does change.
From IR-2009-84:
WASHINGTON ─ The Internal Revenue Service today announced a one-time extension of the deadline for special voluntary disclosures by taxpayers with unreported income from hidden offshore accounts. These taxpayers now have until Oct. 15, 2009.
Under special provisions issued in March, taxpayers with these hidden accounts originally had until Sept. 23, 2009 to come forward. Those taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties, where applicable, and possible criminal prosecution.
IRS officials decided to extend this deadline after receiving repeated requests from tax practitioners and attorneys around the country following an influx of taxpayer requests. By extending the deadline for a short period of time, the IRS is providing relief for those taxpayers who had intended to come forward prior to the deadline, but faced logistical and administrative challenges in meeting it. The extension will allow tax preparers and attorneys the necessary time to interview and advise their backlog of taxpayers with these hidden accounts, and prepare the necessary paperwork to qualify for the special penalty provisions.
The IRS also announced that there will be no further extensions.
A New York tax lawyer, of all people, was denied medical expense deductions for $100,000 or so in expenses for his prostitute and pornography habit. See the TaxProf's posting on the U.S. Tax Court case of Halby v. Commissioner, T.C. Memo 209-204.
Much more scintillating than than the tax problems of Obama's cabinet members and Charles Rangel!
Hurry up and wait is basically the message of this article from TheHill.com
TheHill.com is self-described as the publication “for and about Congress, breaking stories from Capitol Hill, K Street and the White House. The Hill stands alone in delivering solid, nonpartisan reporting on the inner workings of Congress and the nexus of politics and business.”
For those seeking some certainty in the tax laws to be able to do more effective planning, the situation on the Hill may seem more like the "Hell."
I, for one, am advising my clients not to count on a $3.5 million or more exemption in the future as a given. This goes for current planning and post-mortem planning, such as funding credit-shelter trusts by disclaimer after the death of the first spouse to die. Not that my clients always take my advice...I just make sure my file is documented so if the kids end up with large estate tax bill, I won't be the one to blame.
From the Wall Street Journal: Higher Taxes Are Coming: Are You Prepared?
Here in North Carolina, we've already been hit with higher taxes. Can't wait for the federal increases. :-(
The White House Office of Management and Budget announced last week in its Mid-Sesion Review that the cumulative budget deficits for the upcoming 10 years are projected to be $9.1 trillion. The smallest single-year deficit during that time will be $739 billion (the largest actual shortfall was last year's $455 billion deficit). The “good” news is that the 2009 deficit looks like it will be smaller than initially forecasted, down from $1.84 trillion to $1.58 trillion. The bad news that we will see higher taxes in future years.
Unlike in the income tax and asset protection arena, single member limited liability companies (LLCs) are not disregarded for gift tax purposes. Pierre v. Commissioner, 133 T.C. No. 2 (Aug. 24, 2009). See Paul Caron's recent TaxProf Blog entry for a brief summary.
More news on the possible future of the federal estate tax from WSJ.com.
North Carolina Governor Beverly Perdue signed the Budget bill (SB 202) into law. The bill includes increased income and sales tax rates. See this post from Enrolled Agent Brian Strahle.
Based on inside sources in the U.S. Senate, here's a prediction about what will happen with the estate tax. Since health care reform has consumed Congress and the Obama administration (except for drinking beer with professors and policemen), there will likely be no action on the estate tax until late December. At that time, with a cash-hungry government facing a year with no estate tax whatsoever, Congress will institute a one-year patch extending the current $3.5 million exemption through 2010. Then, in 2011, the exemption will drop to $1 million (with no action from Congress necessary). This, in addition to the coming increases in income taxes, will help pay for health care reform and all the other hemorrhaging of taxpayers' money. Bad for taxpayers, but a boon for tax planning professionals. We'll see...
Video: Watch Out for Tax Scams: English | Spanish | ASL
WASHINGTON — The Internal Revenue Service reminds consumers to avoid identity theft scams that use the IRS name, logo or Web site in an attempt to convince taxpayers that the scam is a genuine communication from the IRS. Scammers may use other federal agency names, such as the U.S. Department of the Treasury.
In an identity theft scam, a fraudster, often posing as a trusted government, financial or business institution or official, tries to trick a victim into revealing personal and financial information, such as credit card numbers and passwords, bank account numbers and passwords, Social Security numbers and more. Generally, identity thieves use someone’s personal data to steal his or her financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns.
The scams may take place through e-mail, fax or phone. When they take place via e-mail, they are called “phishing” scams.
The IRS does not discuss tax account matters with taxpayers by e-mail.
The IRS urges consumers to avoid falling for the following recent schemes:
Continue Reading...
This is from the latest edition of the GiftLaw eNewsletter:
Note from Greg: Family Limited Partnerships (FLPs) were previously the preferred entity for obtaining discounts on transfers of wealth to younger family members. FLPs have largely been replaced by Family Limited Liability Companies (FLLCs). The writer of the article below often refers to FLPs even though the case involved FLLCs.
Indirect Gifts through FLP Trigger $1 Million Gift Tax
In David E. Heckerman et ux.v.United States; No. 2:08-cv-00211 (27 Jul 2009), the District Court determined that gifts of cash to an FLP together with gifts of FLP interests were indirect gifts valued at fair market value.
On November 28, 2001, David and Susan Heckerman created trusts for each of their two children, then ages five and two. They also created the Heckerman Family LLC and two solely-owned LLCs, Heckerman Investments LLC and Heckerman Real Estate LLC. Heckerman Investments LLC was designed to receive liquid securities and Heckerman Real Estate LLC was designed to hold realty.
On December 28, 2001, David and Susan Heckerman transferred a $2.05 million beach house in Malibu, California to Family LLC, with an immediate quitclaim deed to Real Estate LLC. On January 11, 2002, they transferred $2.85 million in mutual funds to Investments LLC and signed gift documents "effective on January 11, 2002" to transfer the majority of Family LLC units to the children's trusts.
Appraiser Mark Wellington of Private Valuations, Inc. completed an appraisal of the value of Family LLC units gifted to the children's trusts. He determined that the transfers would be subject to a 58% discount for lack of marketability. Therefore, both David and Susan had transferred a gift value of $1,022,000. Using their four annual exclusions (two parents times two children) and two $1 million gift exemptions, there was no gift tax payable.
The IRS audited the return, claimed that the securities transfer was an indirect gift and assessed gift tax of $511,497.56 for each donor. The Heckermans paid the gift tax and filed for a refund.
The IRS contended that under Reg. 25.2511-1(a), "whether the gift is direct or indirect," there is a transfer. Because the transfer to the FLP was completed on the same date as the gift of the units and there was no clear evidence that the transfer of the FLP units was after the funding of the FLP, the IRS claimed that this was an indirect gift. The IRS also claimed a step transaction.
The court supported both positions by the IRS. First, the gifts of FLP interests were apparently not signed until after January 11, 2002, but were "effective as of January 11, 2002." Therefore, the transfer process created an indirect gift on the theory that the children's trusts owned the FLP units when the cash was transferred.
In addition, following the rationale of Senda v. Commissioner, 433 F.3d 1044 (8th Cir. 2006), there was a "step transaction" that also created the indirect gift. Because the transfer of $2.85 million in cash to Investments LLC and the gifts of the LLC units were an "integrated transaction," the step transaction doctrine applied.
Editor's Note: It is significant that the IRS did not object to the FLP discounts for the transfer of the real estate on December 28, 2001 and gift of FLP units two weeks later on Jan. 11, 2002. With even a period of two weeks between the funding and the FLP unit gifts, the transfer was effective in producing a substantial FLP discount.
Democrats in the North Carolina House and Senate reached a compromise on tax increases yesterday. Briefly, the proposal would:
The income and sales tax increases are supposedly temporary, for a two year period. There are no additional sales taxes for certain services as contained in the earlier Senate proposal.
The only good thing I can say about this proposal is that at least the increased income taxes can be deducted for federal tax purposes (for those that itemize deductions). Additional sales taxes would not necessarily be deductible for those who deduct income taxes rather than sales taxes.
The U.S. Senate Finance Committee is considering instituting a 1.45% Medicare tax on investment income, including interest, dividends, capital gain, and partnerships and rentals. Currently long term capital gains and qualified dividends are taxed at a maximum of 15%, while the other types of income are taxed at ordinary income rates.
See this story on Bloomberg.com for details this proposal for paying for health care reform.
I personally would not object too much to this tax if it only applied to investment income over a certain amount, say $25,000 annually. With unavoidable multiple state and federal income tax increases on the horizon, I think we'll see an increased interest in retirement savings, life insurance and annuities as a way to defer taxes.
Loans among family members, especially from parents to children, are very common. However, most people are not aware of the tax laws regarding such loans. With certain exceptions, if you make an interest free to loan to a family member (or friend, for that matter), the IRS will impute the interest income to you, meaning that you are required to pay tax on a certain amount of interest, even though you never received it. Here are the basics:
Yesterday North Carolina Governor Beverly Perdue revealed her proposed tax plan, which is designed to raise $1.6 billion in taxes. Here are some of the highlights:
Income Taxes
Sales Taxes
Tax Credits
Senate Bill 202, among other things, contains many tax increases for us in the Tar Heel state, to wit:
You may wish to contact the following Legislators to let them know how you feel about this proposed law:
Representative Paul Luebke (Chair of the House Finance Committee)
(919) 733-7663
Senator David Hoyle (Chair of the Senate Finance Committee)
(919) 733-5734
If you don't support the bill, there's a petition to sign. Make some noise, people!
The U.S. Tax Court decision in Estate of Erma V. Jorgensen, T.C. Memo 2009-66, provides another example of the wrong way to create and administer a family limited partnership from an estate tax planning perspective. See this article by attorney Kay Ford Bailey of Austin, Texas for a brief analysis.
Despite criticism from members of both parties, the North Carolina House of Representatives' Finance Committee approved a proposed tax package yesterday. The proposal includes the following:
These and other increases would bring in an estimated additional $784 million in revenue for the next fiscal year.
Depressing to contemplate, indeed, but at least a 9 cent per six pack increase in the beer tax was defeated! At 53 cents per gallon, North Carolina still has one of the highest beer taxes in the nation. And that doesn't count the sales tax!
Here's the text of IRS Tax Tip 2009-72, but don't forget, you can always contact a tax lawyer, CPA or enrolled agent for assistance and representation before the IRS:
It’s a moment many taxpayers dread. A letter arrives from the IRS — and it’s not a refund check. Don’t panic; many of these letters can be dealt with simply and painlessly.
Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of a change to their account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.
If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
• Agree? If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
• Disagree? If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help us respond to your inquiry.
Be sure to keep copies of any correspondence with your records.
For more information about IRS notices and bills, see Publication 594, What You Should Know about the IRS Collection Process. Information about penalties and interest charges is available in Publication 17, Your Federal Income Tax. Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Links:
On April 22, 2009 Representative Jim McDermott of Washington has introduced H.R. 2023, which has been submitted to the Ways and Means Committee for study. The Sensible Estate Tax Act of 2009 would (1) allow an estate tax exclusion of $2 million adjusted for inflation in calendar years after 2010; (2) revise the estate tax rates for larger estates (45% up to $5 million, 50% from $5-10 million, and 55% above $10 million; inflation adjusted); (3) restore the estate tax credit for state estate, inheritance, legacy, or succession taxes; (4) restore the unified credit against the gift tax; and (5) allow a surviving spouse an increase in the unified estate tax credit by the amount of any unused credit of a deceased spouse.
I agree that this legislation is sensible from a fiscal standpoint, enabling the IRS to collect more revenue (than a $3.5 million or higher exemption would allow), while providing a healthy $4 million that married couples can pass on to children or others with no special planning. It will also help many states such as Florida that only can collect estate tax on a state level to the extent that the federal government provides a credit, rather than a deduction.
As for spousal portability, as I have said before, while on its face it appears to obviate the need for credit-shelter or bypass trusts, that's not necessarily the case. Even with portable exemptions, credit-shelter trusts will be important from an asset preservation standpoint, avoiding the possibility of taxation should the surviving spouse's estate exceed $4 million, and protection against future reductions in the estate tax exemption.
There's also the question of how the exemption amount available to the surviving spouse would be established. If a couple thinks there's a chance that the survivor's estate will exceed $4 million, would an estate return need to be filed at the first death, even it it's under $2 million? How else would any transfers to others than the spouse be documented?
In the recent case of Estate of Valeria M. Miller v. Commissioner; T.C. Memo. 2009-119; No. 5207-07 (27 May 2009), the U.S. Tax Court allowed a 35% discount for gifts of family limited partnership interests. No discount was permitted for the FLP interest owned by the decedent at her death.
This case shows that a properly planned and executed family limited partnership or limited liability company is still a very effective way to pass on wealth to younger generations. However, Obama's tax proposals would do away with such discounts in most cases.
Click here for a summary and the full text of the case, thanks to NC State's GiftLaw eNewsletter.
A while back I blogged about the advisability of trustees of irrevocable life insurance trusts (ILITs) reviewing the policy owned by the trust to help ensure the policy is still a sound investment and won't lapse. Here's an article from the Wall Street Journal website covering a related topic, Keep Tabs on Insurance that Covers Estate Taxes. The article doesn't discuss the use of ILITs to avoid estate taxes on the life insurance proceeds and further protect the funds for the beneficiaries, but in my opinion an ILIT should always be used for life insurance in a taxable estate (over $3.5 million in 2009). ILITs are the best (estate) tax shelters around! Even for relatively "small" $1,000,000 policy, a $2,500 trust could easily save over $500,000 in estate taxes.
As reported in the Giftlaw eNewsletter, the potential tax increases to pay for healthcare reform may include the following:
1. Employer Health Care Exclusion-- The exclusion could be capped or phased-out for higher-income employees. For higher-income persons, part of their medical premium will be taxable, even though paid by the employer.
2. Income Tax Deduction -- The 7.5% floor for medical expenses could be raised to a substantially higher level and reduce the value of the deduction.
3. HSAs and FSAs -- The health savings account (HSA) or flexible spending arrangement (FSA) could have reduced contribution limits. FSA fund distributions could be limited to qualified itemized medical deductions.
4. Medicare -- All state and local employees may be required to participate.
5. Alcohol Tax - An increased and uniform national tax may apply to alcohol.
6. Soft Drink Tax -- A new tax may be levied on sugar-enhanced beverages.
7. Top Brackets Increase -- The current top 35% and 33% brackets may rise to 39.6 % and 36%.
8. Itemized Deduction Limits -- Higher income individuals may have a 3% floor on deductions and would also lose their personal exemptions.
9. Capital Gains Tax Increase -- The 15% capital gains tax rate may be increased to 20%.
10. Estate Tax -- Retained with $3.5 million exemption and 45% rate.
11. Estate Tax Discounts -- Valuation discounts reduced or eliminated.
12. Grantor Retained Annuity Trusts -- GRATs limited to ten years or longer.
The United States Tax Court, in Benz v. Commissioner, 132 TC No 15, recently ruled that a taxpayer taking a series of equal periodic payments as an exception to the 10% early distribution penalty for IRA withdrawals could also take advantage the early distribution penalty exception for payment of higher education expenses without the education payment being considered a modification of the series of equal payments.
Those taxpayers who treated a similar situation in the last three years as a modification of their series of equal periodic payments and ended up paying the 10% penalty should consider filing amended returns.
President Obama's Green Book contains proposals for modifying the GRAT rules, eliminating valuation discounts for transfers of interest in many family limited partnerships and limited liability companies, and increasing income tax rates and limiting deductions for high income taxpayers.
Here's a nice outline prepared by Bob Keebler, CPA of Virchow Krause & Company, LLP in Wisconsin.
Continue Reading...Taxes are going up, and so is the number of revenue agents at the IRS! This is from the latest GiftLaw eNewsletter:
In the 2010 budget proposed by President Barack Obama, there is an increase of $400 million dollars for the IRS. The IRS plans to increase its enforcement budget to $5.5 billion out of the total $12.12 billion IRS budget.
IRS Commissioner Douglas Shulman has been emphasizing the importance of greater enforcement as a method of closing the "tax gap." Increased IRS funds will enable the hiring of 4,500 new revenue agents. IRS Deputy Commissioner Linda Stiff noted that these new agents are the "largest hiring initiative" in recent years.
Treasury Secretary Tim Geithner indicated, "This budget will also expand job-creating investments in local communities, strengthen our nation's security through financial intelligence, launch new initiatives to enforce the tax code and provide the recourses to address global economic challenges." The new IRS accountants, economists, statisticians and revenue agents are part of an ongoing program by President Barack Obama and Secretary Geithner to close the tax gap.
Editor's Note:
With the record budget deficits, Washington faces three financial options. The first is to increase taxes, the second to reduce spending and the third to increase tax law enforcement. Because the taxpayers of the United States are among the most honest in the entire world and pay 85% to 88% of the total taxes due, it will be difficult to close the budget gap merely through greater enforcement. However, the current administration is clearly going to make an effort to increase tax revenues with 4,500 new IRS agents.
Here's a great article from Santa Barbara attorney Mark Cornwall - Beware the Pros at Cons. Occasionally clients ask me about such arrangements, and, of course, and I inform them that's it's a bunch of baloney. Remember - if it sounds to good to be true, it most likely is!
There has been much recent discussion about "death" tax reform, and several bills have been introduced in Congress to that effect (as I have blogged about over the last few months), but so far the law as provided in the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRA) is still in effect.
EGTRA put into place the following estate tax "phase-out" schedule, which repeals the estate tax for a grand total of one year, and brings bring a $1 million exemption and 55% rate in 2011:
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From IRS Commissioner Doug Shulman:
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The North Carolina Senate Finance Committee is reviewing a plan to cut income and sales taxes while instituting new sales taxes on certain services.
For income taxes, the top rate would drop from 7.75% to 7.5%, while the lowest rate would decrease from 6% to 5.25%. The calculation of income taxes would also be made easier, using the federal adjusted gross income without having to make further changes to determine the NC taxable income. Credits would be allowed for charitable contributions and home mortgages, and the child tax credit would increase $25 to $125.
Corporate income tax rates, currently 6.9%, would be reduced over a two year period to 4.5%, but limited liability companies would be required to pay franchise taxes. The could be bad news for for LLC owners, would are currently required to $200 annually to the state for the privilege of operating the company.
And, to the benefit of professionals and other business owners, state and local privilege licenses would be eliminated.
Finally, the state sales tax would be lowered from 6.75% to 6.00%. Many counties, however, have local rates than are higher. Sales taxes would be instituted on heretofore untaxed services/items such as building repairs, extended warranties, and downloaded music and software.
The debate over extending the $3.5 million estate tax exemption versus increasing the exemption to $5 million is discussed in this NY Times article. Don't our legislators have better things to do than argue over reducing taxes for such a minute percentage of the U.S. population?
Those with estates over $3.5 million simply need to avail themselves of the services of a qualified estate planning attorney to implement measures to reduce or eliminate estate taxes.
From the IRS Newswire 2009-041:
WASHINGTON — The Internal Revenue Service today issued its 2009 “dirty dozen” list of tax scams, including schemes involving phishing, hiding income offshore and false claims for refunds.
“Taxpayers should be wary of scams to avoid paying taxes that seem too good to be true, especially during these challenging economic times,” IRS Commissioner Doug Shulman said. “There is no secret trick that can eliminate a person’s tax obligations. People should be wary of anyone peddling any of these scams.”
Tax schemes are illegal and can lead to problems for both scam artists and taxpayers who risk significant penalties, interest and possible criminal prosecution.
The IRS urges taxpayers to avoid these common schemes:
Continue Reading...From the IRS Newswire issue IR-2009-040:
WASHINGTON — The Internal Revenue Service offers last minute reminders to taxpayers who have not yet filed a tax return, paid what they owe or requested an extension of time to file as the April 15 tax filing and payment deadline approaches.
Continue Reading...U.S. Senate goes two ways on estate taxes.
The U.S. Senate went two different ways on the estate tax, which has been a contentious issue for years — a tax congressional Republicans have villified as the “death tax”.
Senators voted 51-48 to include a provision in the fiscal 2010 budget that called for exempting estates at $5 million for individuals and limiting the tax to 35 percent — though the measure is non-binding and could be stripped out when the legislation is melded with a separate budget that passed the House of Representatives.
The amendment provoked a moment of drama in an otherwise long day of voting in the Senate where Democratic leaders scrambled to find the votes to kill the amendment, which scores some political points to those who have rallied against the estate tax for years.
The amendment was backed by several Democrats, including a couple senators facing tough re-election bids next year, Senators Blanche Lincoln of Arkansas and Patty Murray of Washington.
The New York Times was so incensed by the amendment it wrote the following in its lead editorial on Thursday:
“The proverbial millionaires next door — the plumbers, contra ctors and accountants who amass substantial wealth through hard work and modest living — are not the intended beneficiaries of the proposed cut. The Obama budget already takes care of them, because it retains today’s law, which imposes the estate tax only on couples with property worth more than $7 million, or individuals with property worth more than $3.5 million. That means 99.8 percent of estates will never — ever — pay a penny of estate tax.”
Senate Minority Leader Mitch McConnell argued that “No one should have to be taxed on their assets twice, and no one should have to visit the taxman and the undertaker on the same day. But if we can’t repeal this tax, then we should at least lower it at a time when Americans are already burdened by shrinking retirement savings.”
President had proposed in his budget plan keeping the estate tax exemption at its current level of $3.5 million and tax the rest at 45 percent.
But minutes later the Senate adopted a second amendment that would require a 60-vote threshold to change the estate tax rate and exemption beyond the current levels unless commensurate tax relief was offered those who earn less than $100,000 annually.
Since Republicans now have only 42 seats in the Senate, and 10 Democrats supported the earlier amendment, reaching 60 votes likely would be tough.
In any event, since the amendments are part of the non-binding budget resolution, the votes are really just symbolic.
The Final Four is set for this weekend, and my beloved Tar Heels have a good shot at winning the title. In North Carolina and across the country, countless Americans have entered into NCAA office pools, and the winners will be determined Monday night. Winners take heed, however - make sure you know the applicable tax rules.
Under the Internal Revenue Code (and thus in NC also), gambling winnings must be reported as taxable income. You cannot claim an overall tax loss for gambling activities, but you can generally claim losses as an itemized deduction -- up to the amount of your winnings. (Professional gamblers report winnings on Schedule C.) Losses in excess of winnings are not deductible.
It's important to keep accurate records. Keep a diary or ledger of all your gambling activities that shows the type of gambling activity, the location, and the amounts won and lost. You can support the amounts with receipts, tickets, statements or other records that substantiate your claims.
Gambling income includes, but is not limited to winnings from lotteries, raffles, horse races, and casinos. It also covers cash winnings and the fair market value of such prizes as cars and trips.
P.S. Don't forget that in North Carolina, as in many states, most gambling activities, inlcuding office sports betting pools, are illegal. That does not mean that any winnings should not be reported, however. It's more likely that you will get penalized by the IRS for not reporting gambling winnings than you will be charged with a gambling criminal offense.
Click "Continue Reading" to view the statements of Senator Max Baucus (D-MT) (chairman of the Senate Finance Committee) made on the floor of the Senate last week. He opposed an amendment proposed by Senator John Thune (R-SD) to President Obama’s budget. Obama proposes limiting deductibility for charitable gifts for high income taxpayers to a 28%. Senator Thune’s amendment would have eliminated this deductibility cap. The amendment failed - 48 for and 49 against.
Continue Reading...From the GiftLaw eNewsletter:
Senate Finance Committee Chair Max Baucus (D-MT) introduced the Taxpayer Certainty and Relief Act of 2009 on March 26, 2009. The tax bill includes a $2.3 trillion middle class tax cut package and also creates a freeze on estate tax rates and major estate planning modifications.
Sen. Baucus indicated, "By guaranteeing a little extra cash in the pocket of working moms and dads and by making sure that the AMT and the estate tax can move with the economy, we avoid sweeping tax increases for millions of American families."
The bill would make permanent many of the provisions enacted for tax relief during the past decade. Several of the provisions are intended to reduce income taxes for low and middle income taxpayers. The bill would not change the scheduled increase in the top two tax brackets in 2011 to 36% and 39.6%.
The middle class reductions:
1. For taxpayers in the 10%, 15%, 25% and 28% brackets, the rates are continued.
2. The alternative minimum tax exemption is indexed for inflation.
3. The zero percent long-term capital gain rate for taxpayers in the 10% and 15% bracket is continued.
4. The child tax credit is refundable for incomes below $3,000.
5. The marriage penalty relief for taxpayers in the 15% bracket is continued.
6. The adoption and exclusion caps of $10,000 per eligible child are continued.
Sen. Baucus proposes significant changes in estate taxes. Rather than repealing the estate tax in 2010, the exemption is frozen at $3.5 million per person ($7 million per couple), with the estate tax rate set at 45%. The exemption would be increased for inflation in $10,000 increments starting in 2011.
Farmers and ranchers would benefit from an increase in the special use valuation from $750,000 to $3.5 million. This would permit transfer of very valuable farms and ranches from parents to children who are actually operating the farm or ranch.
A change that will require modifications to most large estate plans is the proposal to pass "marital deduction portability." If a surviving spouse passes away with an estate larger than the applicable exemption, he or she will be able to use the "aggregate deceased spousal unused exclusion amount."
In order to use a portion of the first decedent spouse's exclusion, his or her executor must make an election on that estate tax return. If the "Spousal Unused Exclusion" election is made, the surviving spouse may then use the remaining unused exemption.
If this bill becomes law, the full estate could be transferred to surviving spouse and he or she will have an estate exemption of $7 million.
Note: If this bill becomes law, the first tendency of many couples with taxable estates will be to revise their wills or trusts to do away with the credit-shelter (bypass) trusts. However, there will still be compelling reasons to have such trusts. With a credit-shelter trust, growth in the value of the assets is also protected from estate taxes, while that is not necessarily true if a couple relies on exemption portability. In addition, the credit shelter (or marital) trust provides valuable protection from mismanagement, creditors, and future spouses.
Here's a nice, easy to read Summary of the American Recovery and Reinvestment Act of 2009, which includes comparisons to prior law.
First-Time Homebuyers Have Several Options to Maximize New Tax Credit
WASHINGTON — As part of the Treasury Department’s consumer outreach effort and with the April 15 individual tax filing deadline approaching, the Internal Revenue Service today began a concerted effort to educate taxpayers about additional options at their disposal to claim the new $8,000 first-time homebuyer credit for 2009 home purchases. For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they’ve already filed their tax return.
The Treasury Department encourages taxpayers to explore these options to maximize their credit and get their money back as fast as possible.
“The new credit can get money in the pockets of first-time homebuyers quickly,” said IRS Commissioner Doug Shulman. “For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they’ve already filed their tax return.”
First-time homebuyers represent a significant portion of existing single-family home sales. The expansion in the first-time homebuyer credit will make it easier for first-time homebuyers to enter the housing market this year.
Under the American Recovery and Reinvestment Act of 2009, qualifying taxpayers who purchase a home before Dec. 1 receive up to $8,000, or $4,000 for married individuals filing separately. People can claim the credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year.
Continue Reading...
The following is from my e-newsletter that went out this morning:
The American Recovery and Reinvestment Act of 2009, which was signed into law on February 17th, includes a multitude of federal income tax changes. This article summarizes some of the personal tax changes: 
One-Year AMT Patch Has Two Parts
Probably an increase in 2010 and a substantial drop thereafter.
From Professor Chris Hoyt of the University of Missouri (Kansas City) School of Law:
President Obama has released his controversial budget. The proposal
that affects charitable organizations the most is that the tax benefit
that upper-income taxpayers would receive from their charitable gifts
would be limited to 28%, beginning in 2011. The same 28% limit would
also apply to tax savings from the home mortgage interest deduction.
Also the highest marginal tax rate would increase from 35% in 2010 to
the Clinton-era rates of as high as 39.6% in 2011.
So, if in 2011 a rich person gets an extra $100 of income and donates it
to charity, the extra $100 would be subject to a nearly 40% federal tax
rate but the charitable gift would only produce a $28 tax saving. The
rich person must spend nearly $12 in taxes to make the gift.
Five observations:
(1) Expect wealthy donors to prepay in 2010 contributions that they
would normally make in 2011 and 2012. The nation's charities
experienced this when Ronald Reagan lowered the highest tax rates from
50% to 28% as part of the 1986 Tax Reform Act. Gifts surged in 1986 but
fell in 1987. So, if the proposal is enacted, expect major gifts to
decrease in 2011 since some donors prepaid their gifts in 2010.
(2) There could be a boon in grantor charitable lead trusts in 2010
since a donor can get a charitable income tax deduction in the year that
the charitable lead trust is funded rather than in the year that the
lead trust makes its charitable gifts. Visualize it: the donor gets a
2010 charitable tax deduction and saves 35% yet the charity receives
gifts in later years when the donor would have only had a 28% deduction.
The donor and the charitable lead trust will likely increase investment
in tax-exempt municipal bonds in future years to avoid the higher 39.6%
marginal tax rate.
(3) If enacted, then 2010 will be a boon year to establish a private
foundation or a donor advised fund. A rich person can get tax savings
at a 35% rate in 2010 and then have grants flow out in later years when
the charitable gifts would have only produced a 28% rate tax savings.
(4) "Charitable IRA Rollover" will become especially attractive in 2011
and later years, if it is in fact extended. Rich people will really
want to keep taxable IRA distributions out of their income. They won't
mind the fact that they are losing a charitable income tax deduction in
2011. It would have only saved 28%. Charitable IRA rollover could
effectively save them the 12% on each gift.
(5) None of this might happen. The President proposed a budget, but it
is Congress that actually makes the budget and changes the tax laws. It
will be interesting to see how proposal works its way through Congress.
The complaints and the lobbying have already started.
From today's IRS Newswire:
WASHINGTON — The Internal Revenue Service announced today that taxpayers who qualify for the first-time homebuyer credit and purchase a home this year before Dec. 1 have a special option available for claiming the tax credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year.
Qualifying taxpayers who buy a home this year before Dec. 1 can get up to $8,000, or $4,000 for married filing separately.
Continue Reading...
From the IRS:
If you took an early distribution from your retirement plan, here are some things you need to know:
1. Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.
2. Early distributions are usually subject to an additional 10 percent tax.
3. Early distributions must also be reported to the IRS.
4. Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.
5. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
6. If you made nondeductible contributions to an IRA and later take early distributions from that same IRA, the portion of the distribution attributable to those contributions is not taxed.
7. If you received an early distribution from a Roth IRA the distribution attributable to contributions is not taxed.
8. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
9. There are several exceptions to the additional 10 percent early distribution, such as when the distributions are used for purchase of a first home, certain medical and educational expenses or if you become disabled. Other exceptions can be found in IRS Publication 590, Individual Retirement Arrangements (IRAs).
10. More information about early distributions from retirement plans and the additional 10 percent tax can be found in IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
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Links:
On February 17, 2009, President Obama signed into law the $787 billion American Recovery and Reinvestment Act of 2009 (the 2009 "Stimulus Act").
The Act includes several provisions designed to offer a degree of financial assistance to individuals in the short and intermediate term, including a one-time $250 Economic Recovery Payment to individuals receiving Social Security benefits, Railroad Retirement benefits, Veteran's benefits, or Supplemental Security Income (SSI) benefits. In addition, up to $2,400 of unemployment compensation benefits received in 2009 will be excluded from gross income for federal income tax purposes. And, for individuals who lose their jobs on or after September 1, 2008, and before January 1, 2010, the Act offers assistance in the form of subsidized COBRA premiums--those who qualify will have to pay only 35% of the COBRA premiums needed to continue their health coverage, for up to 9 months.
The Act also features new and modified tax credits and deductions, including:
In addition, the Act increases the refundable portion of the child tax credit, and makes changes to the earned income tax credit that benefit families with three or more qualifying children, and married couples filing joint returns. Also, 2008 provisions relating to the alternative minimum tax (AMT), bonus first-year depreciation, and IRC Section 179 expensing were all extended through 2009.
Source: Townsend Asset Management Corp.
While only about .05% of estates will be subject to federal estate tax with the current $3.5 million exemption, this article, which originally ran in Trusts and Estates magazine, says to expect an audit in virtually all taxable estates.
This report on msnbc.msn.com discusses GuideStar's statement that 500,000 non-profit organizations could lose their tax-exempt status in May 2010. Non-profits with annual receipts of no more than $25,000 need file only a short informational return with the IRS - Form 990. Failure to do so for three consecutive years will cause revocation of non-profit status.
Click "Continue Reading" for the Senate Appropriations Conference Summary Report.
Continue Reading...Click "Continue Reading" to view a chart that provides a side-by-side comparison of the tax provisions in the House and Senate versions of “The American Recovery and Reinvestment Act of 2009.” The House version is H.R. 1, as passed on January 28, 2009, with a 244 to 188 vote margin. The Senate version, S. 350, is the Senate Finance Committee version, with amendments.
Continue Reading...
The U.S. Tax Court issued an opinion on January 29, 2009 in the Estate of Marjorie deGreeff Litchfield v. Commissioner (T.C. Memo. 2009-21). The case involved the determination of appropriate (estate tax) discounts for built-in capital gains tax liabilities, and lack of control and lack of marketability for minority interests in two closely held family corporations, including one that had recently converted to a subchapter S corporation. The court allowed a discount of 91% for the built-in capital gains tax for the C corporation, and 52% for the S corporation. The minority interest (lack of control) discount was determined to be 14.8% for the C corporation and 11.9% for the S corporation. The lack of marketability discounts were established at 25% and 20%, respectively, for the two entities. The FMV Valuation Alert offers a nice summary.
This case involved farmland and marketable securities. Discounts for transfers of entities owning marketable securities and cash will be history if HR 436, the Certain Estate Tax Relief Act of 2009, passes.
Facing negative publicity over unpaid taxes, Tom Daschle withdrew his name from consideration as Secretary of Health and Human Services. Nancy Killefer, Obama's pick for Chief Performance Officer, also withdrew her nomination, citing her unpaid payroll taxes for a household employee.
Too bad Timothy Geithner (Secretary of the Treasury) didn't do the same. Now we have a tax cheat in charge of the IRS. As an honest taxpayer and tax lawyer, I am personally and professionally outraged!
The estate tax exemption is up (to $3.5 million) and portfolios are down. However, for those whose estates are still above $3,500,000, now is the perfect time to transfer wealth to younger generations. Interest rates are low, and the tax laws may never be more favorable. See Tough Times Are Good Times to Trim Estates on the WSJ website.
First it was Timothy Geithner for Secretary of the Treasury, and now it turns out Tom Daschle, nominated for Secretary of the Department of Health and Human, also failed to report income and pay taxes. Then there's Charles Rangel. What's up with these people? Mistake, error, omission - I call it tax fraud.
Call me idealistic, but I don't believe we should have tax cheaters running our country, especially the IRS and the Ways and Means Committee!
Don't worry if you don't get your Forms 1099-B by tomorrow - the deadline this year is not until February 17. From the IRS:
WASHINGTON ― Many investors will receive their year-end tax statements later than in past years, but these forms are likely to be more accurate, according to the Internal Revenue Service.
A new law, enacted last fall, changed the deadline from Jan. 31 to Feb. 15, when brokers, including brokerage firms, mutual fund companies and barter exchanges, must furnish year-end Forms 1099-B to their customers. Where a broker furnishes these forms by mail, this means that the forms must be mailed, not received by that date.
Because Feb. 15 falls on Sunday in 2009, and Monday, Feb. 16 is a federal holiday, the deadline is Feb. 17 this year. In addition, the IRS said earlier this month that for calendar-year 2008 reporting, the Feb. 17 deadline also applies to other tax information that brokers report to their customers, including such items as interest and dividends, on a combined year-end statement.
This change is designed to make it easier for brokers to provide investors with accurate year-end statements on stock sales and other transactions. Inaccurate year-end statements that have to be corrected later often force investors to file amended individual returns.
In its 2006 annual report, the Information Returns Program Advisory Committee (IRPAC) recommended changing this deadline from Jan. 31 to Feb. 15. The report noted that, “Form 1099 reporting has become very complex over recent years. As a result, many broker dealers are currently experiencing 20% amended Forms 1099. There is insufficient time to make the necessary changes in January, verify the data, print the forms and mail them by Jan. 31.” IRPAC is a federal advisory committee that advises the IRS on issues related to information returns, such as Forms 1099.
The long-standing Jan. 31 deadline for providing other year-end forms remains unchanged. However, because Jan. 31 falls on Saturday, employers, banks and other businesses have until Monday, Feb. 2 to mail or otherwise make available various 2008 year-end tax statements. This includes forms in the W-2, 1098 and 1099 series.
Taxpayers can make the tax-filing process faster and easier and often avoid follow-up correspondence with the IRS by carefully reviewing all year-end statements. Make sure all social security numbers are correct, check income and withholding amounts and contact the issuer promptly, if any mistakes are found.
There's a couple of good recent articles on forbes.com - Dems Dedicated to Death Tax and Why You Need a Will. For this year, anyway, the $3.5 million exemption means that many of us don't need planning for estate tax purposes, but we need planning nonetheless.
1. H.R.96 : To amend the Internal Revenue Code of 1986 to increase the maximum reduction in estate tax value for farmland and other special use property, to restore and increase the estate tax deduction for family-owned business interests, and for other purposes.
Sponsor: Rep Conaway, K. Michael [TX-11] (introduced 1/6/2009) Cosponsors (None) Latest Major Action: 1/6/2009 Referred to House committee. Status: Referred to the House Committee on Ways and Means.
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2. H.R.173 : To amend the Internal Revenue Code of 1986 to exempt certain farmland from the estate tax.
Sponsor: Rep Salazar, John T. [CO-3] (introduced 1/6/2009) Cosponsors (7)
Latest Major Action: 1/6/2009 Referred to House committee. Status: Referred to the House Committee on Ways and Means.
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3. H.R.436 : To amend the Internal Revenue Code of 1986 to repeal the new carryover basis rules in order to prevent tax increases and the imposition of compliance burdens on many more estates than would benefit from repeal, to retain the estate tax with a $3,500,000 exemption, and for other purposes.
Sponsor: Rep Pomeroy, Earl [ND] (introduced 1/9/2009) Cosponsors (None)
Latest Major Action: 1/9/2009 Referred to House committee. Status: Referred to the House Committee on Ways and Means.
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4. H.R.533 : To make full estate tax repeal, small business expensing, and SECA tax deduction for health insurance permanent.
Sponsor: Rep Neugebauer, Randy [TX-19] (introduced 1/14/2009) Cosponsors (None) Latest Major Action: 1/14/2009 Referred to House committee. Status: Referred to the House Committee on Ways and Means.
A bill entitled the Certain Estate Tax Relief Act of 2009 was recently introduced in the U.S. House of Representatives. The bill retains the current $3.5 million federal estate tax exemption, freezes the estate tax rate at 45%, and repeals the carryover basis rules which would otherwise be in place next year. The effective date would be January 1, 2010.
The bill also contains a provision disallowing valuation discounts for transfers for interests in entities (such as LLCs and corporations) containing "nonbusiness assets." This is aimed at preventing the use of family limited partnerships and limited liability companies (which are not true operating businesses - holding marketable securities, for example) for discounted transfers to younger family members. This would eliminate a common and highly effective method for gift and estate tax reduction, but LLCs would continue to be an excellent tool for asset protection. The effective date of this portion of the Act would be the date of enactment.
Click "Continue Reading" for the text of the bill.
Continue Reading...Here are some of the current entries:
An additional tip will be added each business day until April 15, 2009
In addition to the text tips, some audio files will also be available.
Choosing a tax preparer is a particularly important topic. I recently assisted a client whose previous tax preparer included fraudulent deductions on the client's returns (without his consent or knowledge), and made a mistake that cost the client almost $15,000. Luckily I discovered the mistake in time and we were able to get a refund.
Unfortunately, CPAs and tax attorneys can also make major mistakes on tax returns. If you are having gift, estate, or fiduciary income tax returns prepared, make sure that you use a preparer who is properly trained and experienced in preparing such returns. Given the potential penalties involved, it is not worth using the lowest cost provider.
Conrad Teitell, one of the nation's most foremost charitable gift planning attorneys, has, on behalf of the American Council on Gift Annuities and the National Council on Planned Giving, written Congress urging changes to IRA distribution laws:
Click "Further Reading" for the full text of the letter and the proposed bill. The same letter was sent to House leaders.
BTW, Teitell is a former professor of mine, and a very entertaining speaker. I'll never forget how he incorporated a rubber chicken into a talk on income and estate rules relating to charitable giving!
Continue Reading...Today's Wall Street Journal has an article on the latest buzz on what the Democrats would like to do with the federal estate tax. This summary is courtesy of Stephen Bigge, CPA:
In a Private Letter Ruling issued late in 2007, the IRS approved a clever technique to leverage a gift to your favorite charity using your IRA and life insurance. Developed by Douglas Delaney, a CPA and attorney in South Carolina, the "CHIRA®" works something like this:
Here's an example for the CHIRA® website:
A 74 year old donor decides to loan $1 million from her IRA to her favorite charity. The charity uses $30,000 each year to purchase a $1 million life policy on her life. The death benefit is used to fully repay the loan. Today, the charity will have $970,000 to allocate to their charitable purposes as well as a prudent interest and premium reserve. Whether it is cash to sustain their budget for a few years, or to put shovels in the ground two years early, the CHIRA® plan provides immediate capital without income tax to the donor.
The IRS concluded that (1) this is not a prohibited transaction within the meaning of Section 4975 of the Internal Revenue Code which would terminate the IRA under Section 408(a)(3), and (2) is not a prohibited investment in life insurance by an IRA under Section 408(a)(3) of the Code. What this means is that this technique results in no taxable income to the donor.
However, this a complex, multi-step technique, and everything must be done correctly in order to achieve the intended consequences. If you decide that a CHIRA® makes sense for you, make sure that you consult with tax counsel to ensure that you will face no adverse tax consequences.
Click "Continue Reading" for the full text of PLR 200741016.
Continue Reading...Tired of all the taxes here in the good ole USA and thinking of moving to a tropical isle with little or no taxation? Besides the emotional and security issues, there tax penalties for leaving the U.S. In addition to providing tax relief to military personnel and veterans, the Heroes Earnings Assistance and Relief Act (HEART Act) of 2008 also contains a couple of provisions regarding expatriate taxation. Those who renounce their U.S. citizens in an attempt to save on taxes face the following:
Tonight at midnight, of course, will be the start of 2009. With the change in the calendar year comes several significant tax changes, most of which I have blogged about prior to today:
While these changes all favor the taxpayer, keep in mind that unless the law is changed sometime in 2009 or 2010 (when there will be no estate tax), in 2011 the federal estate tax exemption will be only $1 million. Prudent planning for couples with estates over $1 million should include trust provisions to shelter assets from estate tax. Single individuals should consider other planning methods to reduce or eliminate estate taxes. And remember - life insurance proceeds are included in one's taxable estate!
This morning President Bush signed H.R. 7327, the “Worker, Retiree and Employer Recovery Act of 2008” (WRERA). The law suspends Required Minimum Distribution (from IRAs and qualified plans) requirements for 2009 and requires employers to offer non-spousal rollovers from qualified plans to inherited IRAs beginning January 1, 2010.
What is an LLC?
In 1977 Wyoming was the first state to enact laws permitting the creation of a Limited Liability Company. An LLC combines the best features of a corporation with the best features of a partnership. Among other things, an LLC has the limited liability of a corporation and the ease of management and flow-through income tax treatment of a partnership.
In 2000, Wyoming again led the nation by enacting its Close LLC statute. This type of LLC is designed specifically for a small closely held family business. Family assets (such as stocks, bonds, farms, ranches, rental property, CDs and family businesses) can be managed under the protective umbrella of a Wyoming Close LLC.
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From IR 2008-142:
WASHINGTON — The IRS has placed its comprehensive tax guide for individuals on IRS.gov, updating it for tax year 2008. The updated on-line version of IRS Publication 17, “Your Federal Income Tax,” contains more than 900 interactive links.
Publication 17 has been updated with important changes for 2008, including information on the new recovery rebate credit, new first-time-homebuyer credit, and an additional standard deduction for real estate taxes. It has been published annually by the IRS for more than 65 years and has been available on the IRS Web site since 1996.
As in prior years, the publication provides information on how to file an individual tax return, what to include as income, how to calculate capital gains and losses, how IRAs and other expenses can affect how much income to report, whether to take the standard deduction or itemize, and how to figure taxes and credits.
Publication 17 is available on line, however, those who do not have access to the Internet can call 1-800-829-3676 to request a free copy from the IRS. Printed copies will be available in January 2009.
This update is courtesy of Barry C. Picker, CPA:
It looks as if Congress has passed, and sent to Pres. Bush, H.R. 7327; Worker, Retiree, and Employer Recovery Act of 2008, which among other things, suspends the excise tax on the failure to take a minimum distribution. In other words, it suspends the requirement to take a minimum distribution.
However, this provision is effective for 2009 RMDs; unfortunately for most retirees, the problem is that they have to take their 2008 minimum distribution that was computed on a higher asset value, and must take it now from a possibly depleted account. So retirees who have not taken their 2008 minimum distribution will have to sell potential loss assets to meet the 2008 distribution requirement. They could alternatively take a distribution in kind, but if asset values have decreased, they will have to take more shares in order to meet the distribution amount.
The Act states that it does not change the required beginning date for someone whose RBD would be in 2009, nor does it suspend (I think, someone can check me on this) the distribution requirement for someone whose RBD is 2008. So if someone dies, the after death determination of death before or after RBD is not changed. However, if someone is currently a beneficiary under the five year rule, 2009 does not exist, so if the fifth year is 2009, it’s now 2010. If the fifth year would be 2012 it’s now 2013.
This is from IR-2008-138, issued today by the IRS:
WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.
One provision offers older owners of individual retirement arrangements (IRAs) a different way to give to charity. There are also rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. Some of these changes include the following.
Special Charitable Contributions for Certain IRA Owners
An IRA owner, age 70 ½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This option, created in 2006 and recently extended through 2009, is available to eligible IRA owners, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.
Rules for Clothing and Household Items
To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to be in good used condition or better if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.
Continue Reading...Self-employed persons or small business owners such as home builders with big tax losses for the year should consider converting their traditional IRAs to Roth IRAs this year to "soak up" some or all of the loss. This planning could be even more beneficial given that the securities or mutual funds in the original IRA are likely to be depressed in value, which means less income will be realized.
Make sure you speak to your tax advisor soon if you think a rollover may be of benefit to you in 2008. This plan will not work if you have long term capital losses (e.g. from stock sales) rather than ordinary losses (for example, from a S Corporation or LLC), as only $3,000 in capital loss can be used to offset ordinary income.
As a beer aficionado, I was surprised to learn today that NC has the fourth-highest tax on beer in the nation, at 53 cents a gallon. And, of course, we also have to pay sales tax when we as consumers buy the beer.
The highest tax is Georgia, at $1.01 per gallon. The states with the highest tax are all in the South, with the exception of heavily Mormon Utah. Wyoming, at 2 cents a gallon, is the lowest. Beer Tax Map of the U.S. One thing about Wyoming, though, is that you have to buy beer in a liquor store or bar - it's not sold in convenience, drug or grocery stores. I know that from personal experience after a long day's motorcycle ride this past August.
I guess I shouldn't be surprised about NC's high beer tax ranking, given our high gas tax. Wonder if our DWI rates would go up if those two taxes were reduced?
The IRS is increasing its efforts to track down American taxpayers who have undeclared foreign bank accounts (including US citizens living abroad). The Department of Justice indicted a UBS AG senior executive on November 12, alleging tax fraud. The indictment expressly alleges that a number of the approximately 20,000 American taxpayers who allegedly profited from the alleged tax fraud scheme are co-conspirators.
If you have any foreign bank accounts, you need to make sure that you are in compliance. See the newly designed IRS Form TDF 90-22.1 (to be used after Dec 31, 2008). Disclosure of foreign bank accounts with an aggregate value of more than US $10,000 is mandatory. Civil and criminal penalties, including in certain circumstances a fine of up to $500,000 and imprisonment of up to five years, are provided for failure to file a report, supply information, or for filing a false or fraudulent report.
The Internal Revenue Service has issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:
Contrary to what many of my clients assume, legal fees for general estate planning are not deductible for income tax purposes. Estate planning fees are only deductible to the extent that they represent income, gift, or estate tax planning or advice. Wong, Tax Court Memo 1989-683.
For a relatively sophisticated plan involving credit-shelter and marital trusts, the deductible portion of the fee may be about 50% at most. The deduction is a miscellaneous itemized deduction, meaning it is subject to the two percent (of adjusted gross income) floor. IRC Section 67.
The effect of the 2% floor is that most people who pay for tax planning, who are generally high-income, do not get the benefit of the deduction.
Legal fees for business-related legal advice and services are deductible by the business. However, It is not proper to for a self-employed person to pay for their personal estate planning out of his or her business in order to get a deduction.
In any event, make sure you talk to your estate attorney and CPA to ensure that any deduction you take is lawful.
A recent article on Obama's tax plan: How Obama's Tax Plan Could Affect You
Our top rate is now 7.75%, just slightly under Idaho's top rate of 7.8%. Even New York has a lower top rate. Before our top rate of 8.25% expired, we were tied for 9th place with Hawaii.
The top 10 States (including Washington D.C.):
As for our lowest rate of 6% - we are the highest in the United States! That's right - number one. No State has a higher lowest income tax rate than North Carolina.
Here's a recent comprehensive report from the Urban-Brookings Tax Policy Center entitled Back from the Grave: Revenue and Distributional Effects of Reforming the Federal Estate Tax. An outline of the presidential candidates' and other recent proposals for reform is contained in Table 11 on page 20.
I just received an email with the following text (albiet in my spam filter).
After the last annual calculations of your fiscal activity
we have determined that you are eligible to receive
a tax refund under section 501(c) (3) of the
Internal Revenue Code. Tax refund value is $120.50.
Please submit the tax refund request and allow us 6-9 days
in order to IWP the data received.
If u don't receive your refund within 9 business
days from the original IRS mailing date shown,
you can start a refund trace online.
If you distribute funds to other organization, your records must show wether
they are exempt under section 497 (c) (15). In cases where the recipient org.
is not exempt under section 497 (c) (15), you must have evidence the funds will
be used for section 497 (c) (15) purposes.
If you distribute fund to individuals, you should keep case histories showing
the recipient's name and address; the purpose of the award; the maner of
section; and the realtionship of the recipient to any of your officers, directors,
trustees, members, or major contributors.
To access the form for your tax refund, please click here
This notification has been sent by the Internal Revenue Service,
a bureau of the Department of the Treasury.
Of course, the email is fraudulent (not to mention nonsense), and anyone foolish enough to follow the link and enter in the requested financial information will most likely find their identity and their money stolen. Beware!
IR-2008-118, Oct. 16, 2008
WASHINGTON — The Internal Revenue Service today announced cost‑of‑living adjustments applicable to dollar limitations for pension plans and other items for tax year 2009.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. It also requires that the Commissioner annually adjust these limits for cost‑of‑living increases.
Many of the pension plan limitations will change for 2009 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, for others, the limitation will remain unchanged. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $15,500 to $16,500. This limitation affects elective deferrals to Section 401(k) plans and to the federal government’s Thrift Savings Plan, among other plans.
Effective Jan. 1, 2009, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $185,000 to $195,000. For participants who separated from service before Jan. 1, 2009, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2008, by 1.0530.
The limitation for defined contribution plans under Section 415(c)(1)(A) is increased from $46,000 to $49,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). These dollar amounts and the adjusted amounts are as follows:
The IRS has announced many annual inflation adjustments for 2009, including an increase in the annual gift exclusion.
The annual gift tax exclusion for present interest gifts will be $13,000.
The annual exclusion for present interest gifts to a non-citizen spouse will be $133,000.
As I previously reported, North Carolina will no longer have a gift tax starting in 2009.
Click "Continue Reading" for the full text of Revenue Procedure 2008-66.
Once you cease working for an employer, you have the option of rolling over to an Individual Retirement Account (IRA) any retirement plan (such as a 401(k)) established for you while employed.
In most cases, it is beneficial to do such a rollover because of the advantages offered by an IRA. However, in certain cases it might make sense to leave the funds in the original account. Read on:
Advantages of IRAs:
Advantages of Employer Plans:
1) If you are not selling options or using margin trading, you should revoke your margin agreements. This reduces your risk by ensuring that your securities are not lent.
From Bob Keebler, CPA
The Emergency Economic Stabilization Act of 2008 (H.R. 1424) passed the House yesterday, and was quickly signed by President Bush. The law includes an extension of the IRA Charitable Rollover, which allows individuals age 70 and older to transfer up to $100,000 per year to public charities, tax-free. It is in effect for 2008 and 2009.
Effective January 1, 2009, the $250,000 capital gain exclusion ($500,000 for married couples) for sales of former vacation homes that become one's personal residence will be limited. This posting by Charles Rubin provides a good explanation to the changes to IRC Section 121.
The North Carolina Department of Revenue has published a list of recent changes to NC tax laws.
I previously reported on relatively minor change to the estate tax and the repeal of the gift tax. Another change that might be of interest to readers in the reduction in the top income tax rate from 8.25% to 8% for 2007 and 7.75% for 2008 and beyond.
Rep. Charles Rangel, chair of the Ways and Means Committee in the U.S. House of Representatives, owes the IRS $5,000 in back taxes for failing to report years worth income from a rental property. Ironically, his position means that he is one of Washington's most powerful influences on changes to the tax code.
Rangel himself admits that there is no excuse for his failure to report the income, but does not believe that he should step down. I beg to differ. I believe that he should resign immediately. A tax cheater in charge of changes to the tax laws? Makes no sense to me.
This is a complicated but potentially very worthwhile strategies to pursue in estate in which the decedent owned valuable depreciable real estate (e.g. office buildings, shopping centers, or multiple rental homes). Thanks to Bob Keebler, CPA for the following memo:
A unique opportunity many lawyers, CPAs and trustees miss during the estate administration process is to recommend cost segregation studies. Such studies may be applied on both a going forward basis and for the open income tax years prior to an individual’s death. A cost segregation study simply allows the owner of real property to reclassify segments of what would otherwise have been treated as 27.5 and 39 year life depreciable property as 5, 7, or 15 year property.
Continue Reading...The following is from the latest GiftLaw eNewsletter's Washington Hotline:
Presidential Candidate Barack Obama's Proposals
Middle Class Tax Cuts - The general goal of the Obama plan is to cut taxes for the middle class and raise taxes for higher-income persons. For individuals age 65 and over with incomes under $50,000, he proposes no income taxes.
Tax Rates - The personal tax rates for persons with $250,000 or more of income would be restored to the 1995 level of 39.6%. The corporate tax rate would remain at 35%.
Estate Tax Rate - The estate tax rate of 45% would be continued with the 2009 exemption of $3.5 million per person.
Capital Gains Tax - The probable capital gains tax rate will be 20% (various rates have been discussed).
Net Tax Cut - The overall plan is a net tax cut. The increased taxes on higher income persons will be offset by tax credits for lower income workers, increased college tax credits and increased childcare tax credits.
Sen. Obama stated, "I will cut taxes - cut taxes - for 95% of all working families. Because in an economy like this, the last thing we should do is raise taxes on the middle-class."
Presidential Candidate John McCain's Proposals
Tax Cuts - Sen. McCain proposes to continue the tax cuts of 2001 and 2003. The top rate will remain 35% for higher-income persons.
Increase Dependent Deduction - The dependent deduction would increase from the current $3,500 per child level to $7,000 by 2016.
Corporate Rate - The top tax rate on corporations would be reduced to 25%, with a broadening of the corporate tax base.
Alternative Minimum Tax - The AMT patch would be continued and indexed to exclude most Americans from AMT.
Estate Tax - The estate tax exemption would be increased to $5 million per person with a top estate tax rate of 15%.
McCain advisor Carly Fiorini has indicated, "John McCain has a consistent record of cutting taxes. As President, he will fight efforts to increase the current tax rates, and will require a 3/5 majority vote in Congress to raise future taxes."
The IRS recently published a report on lifetime wealth transfers in 2005 as disclosed to the IRS on federal gift tax returns. The statistics are interesting to review - for tax and estate planning nerds, anyway. The report also contains a history of the federal gift tax. In 1924 the annual exclusion was only $500!
I'm back from vacation, furiously trying to catch up on things (as if!), but thought I would quickly add this tidbit from the NC Department of Revenue. It only applies to returns of NC residents who owned real estate in one or more other states, and generally results in a reduced amount of tax.
The change became effective July 16, 2008, but amended returns can be filed for any returns for which the time to claim a refund had not expired as of December 31, 2007.
Continue Reading...On May 21, the U.S. House passed the Renewable Energy and Jobs Creation Act of 2008 (H.R. 6049). The act includes a one year extension of the Charitable IRA rollover and similar tax provisions and updated tax incentives for renewable energy. The state and local sales tax deduction, and tuition deduction extensions are also included.
The Senate and the White House support the continuation of the charitable rollover, but Bush will most likely veto the act in its current form since it includes $54 billion in tax increases and no extension of AMT relief.
The House Ways and Means Committee passed H.R. 6049, the Energy and Tax Extenders Act of 2008, on May 15, 2008. The bill includes a one-year extension of the $100,000 IRA Rollover for taxpayers age 70 and over, as well as many other tax extenders and renewable energy provisions.
Included in the bill are one-year extensions on the deduction for state and local sales tax, a deduction for educational expenses, the teacher's expense deduction, a provision allowing non-itemizers to deduct a portion of property taxes, and an expanded child tax credit for low-income taxpayers.
Charitable-related extensions include the enhanced deductions for gifts of apparently wholesome food, gifts of books to schools, gifts of computers for educational purposes and favorable Subchapter S basis rules for gifts of appreciated property.
Charles Rangel (D-NY), Chairman of the Committee, commented that "This bill would provide critical tax relief to help working families cope with the rising cost of living. Furthermore, this bill would extend vital tax incentives for American businesses to help them invest in new technologies and remain competitive internationally." He also stated that the bill's energy provisions will "reduce our dependency on foreign oil."
Let's hope that's true! Look for passage of the bill by the House and Senate sometime next month.
This post is excerpted from an article in the May 19, 2008 Giftlaw eNewsletter.
When doing estate planning, one needs to consider to whom to leave one's property, which is usually not much of a problem. Next, one must decide who will be in charge of the administration the Will - the executor . This choice is sometimes more difficult, but even without suitable family or friends, a professional or corporate fiduciary can be named. Once these decisions are made, the very simplest of wills can be created.
However, a simple will does not address three very important estate planning considerations dealing with protecting assets and family members:
As you can see, it pays to look beyond the basics when developing an estate plan.
As a proponent of Family Limited Liability Companies (LLCs) for asset management, creditor protection, and ease of gifting, I was pleased to read about the U.S. Tax Court's decision in Mirowski v. Commissioner, T.C. Memo 2008-74. March 26, 2008.
Mrs. Mirowski, widow of the inventor of the heart defibrillator implant, created a trust for each of her three daughters in 1992, which were funded with portions of her interests in the patent licenses. Then, in 2001, she formed a single member LLC, transferring substantial assets to it. Shortly thereafter, Mrs. Mirowski gifted a 16% interest in the LLC to each of the trusts. A mere four days later, she died unexpectedly.
The IRS argued under Section 2036(a) of the Internal Revenue Code that Mrs. Mirowski retained the right to income or enjoyment of the gifted property, so that it was included in her taxable estate. The estate maintained that the Section 2038 "bona fide sale" exception applied, so that the transferred assets were not subject to estate tax.
The Tax Court agreed, holding that the LLC's activities do not have to be equivalent to those of a "business" for the bona fide sale exception to be applicable. The Court stated that Mrs. Mirowski had "legitimate and significant non-tax reasons" for establishing and funding the LLC, including 1) joint management of family assets, 2) combining family assets to maximize investment opportunities, and 3) enabling equal transfers to her daughters.
Some key points for Family LLCs to hold up for gift and estate tax purposes:
The bottom line is that Family LLCs remain a viable and attractive option for transfers of family wealth, while also providing asset protection and management advantages. Just make sure you use an attorney experienced in forming Family LLCs to assist you, and carefully follow all of his or her instructions.
Excerpts from a recent IRS Memo:
WASHINGTON — Taxpayers who have filed their federal income tax returns and are expecting their refunds can use the Internal Revenue Service’s online tool, “Where’s My Refund?,” to check on the status of their refunds.
“Where’s My Refund?” is fast, easy, safe and convenient.
To get to personalized refund information, taxpayers should be ready to enter their:
Taxpayers can check on the status of their refund seven days after e-filing a return. For a paper return, check four to six weeks after mailing the return.
“Where’s My Refund?” also includes links to customized information based on a taxpayer’s specific situation. For example if “Where’s My Refund?” shows that the IRS was unable to deliver a refund, a taxpayer can change his or her address online. Taxpayers can avoid undelivered refund checks by having their refunds directly deposited into a personal checking or savings account.
If 28 days have passed after the IRS says it mailed a refund check, “Where’s My Refund?” enables taxpayers to initiate a trace.
Taxpayers without internet access can check the status of their refunds by calling the IRS TeleTax System at 800-829-4477 or the IRS Refund Hotline at 800-829-1954. The TeleTax refund information is updated each weekend. If you do not get a date for your refund, please wait until the next week before calling back.
Some scam artists are sending phony emails, including those relating to “Where’s My Refund?”, to trick individuals into revealing personal financial information that can be used to access their financial accounts. People who want to access the genuine IRS Web site and the “Where’s My Refund?” feature should go directly to the IRS Web site by typing the address, www.irs.gov, into the address` line of their Internet window. The only genuine IRS Web site is IRS.gov.
On April 17, Senators Max Baucus (D-MT) and Charles Grassley (R-IA) introduced a bill for 2008 and 2009 which would extend certain tax laws until December 31, 2009. The bill includes an increase in the AMT exemption for 2008 to $46,200 for individuals and $69,950 for couples, energy credits and tax extenders. The most notable extension is the Charitable IRA Rollover - IRA owners over age 70½ would be able transfer tax-free up to $100,000 directly to qualified charities, as was allowed last year.
I only had one client inform me that he did the full $100,000 charitable rollover in 2007, but I am certainly in favor of contuining this benefit. Taking the $100,000 as income and then taking a deduction for the same amount, if possible, is generally not as favorable from a tax standpoint.
In an unexpected announcement (Notice 2008-30), the IRS has stated that it will allow non-spouse beneficiaries of qualified plans (such as a 401(k), 403(b) or employer pension plan) to convert those funds directly to a Roth IRA.
However, at least for the time being, beneficiaries of an IRA do not have this option. Another issue is that the employer's plan must allow rollovers to a Roth, since they are not required to do so.
In most cases I recommend that employer plans such as 401(k)s be rolled over to IRAs when eligible, since IRAs generally offer better investment options and more liberal distribution rules. In North Carolina IRAs are protected from creditors, at least for the original account owner, but this may not be true in all states. Also, some states (not NC) offer Medicaid eligibility protection for qualified plans but not for IRAs.
The $100,000 income limitation for Roth conversions will disappear in 2010, and the tax due for the conversion can be paid in 2011 and 2012 (by including 50% of the income for the conversion in taxable income for each year).
Yesterday a public hearing on possible gift and estate tax reform was scheduled before the Senate Finance Committee. Click "Continue Reading" for the full text of the report by the staff of the Joint Committee on Taxation. I could not get the proper formatting to reproduce, so it's a bit difficult to read.
Of primary concern are potential limitations on Dynasty Trusts, discounts for Gifts of Interests in Family Limited Partnerships (and LLCs), and use of Crummy Withdrawal Powers in trusts (which allow use of the $12,000 annual gift tax exclusion for transfers to trusts).
Items for Immediate Consideration:
By the way, the report references the "$11,000" annual gift tax exclusion, which is an error. The exclusion was increased to $12,000 last year.
The Revenue Laws Study Committee of the North Carolina General Assembly is taking a look at reforming the North Carolina Gift Tax. I previously blogged about House Bill 235, describing the proposed changes. In general the NC Gift Tax would be made similar to the federal gift tax, with a $1 million lifetime exemption. The bill stalled last year, but is under study once again.
According to the IRS Commissioner:
As reported in the TaxProf Blog, Citizens for Tax Justice has released a state-by-state ranking of the number of estates owing federal estate tax in 2006. North Carolina ranked 13th, with 523 estates paying estate tax that year. Not exactly a large number! The estate tax exemption in 2006 was $2 million, as it is this year, so only estates valued over that amount owed tax. Assets passing to a surviving spouse or charity are tax-free regardless of the amount.
With proper planning, married couples can pass on up to $4 million to their heirs without tax.
Stimulus Payment Schedule for Tax Returns
Received and Processed by April 15
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Direct Deposit Payments |
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If the last two digits of your Social Security number are: |
Your economic stimulus payment deposit should be sent to your bank account by: |
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00 – 20 |
May 2 |
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21 – 75 |
May 9 |
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76 – 99 |
May 16 |
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Paper Check |
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If the last two digits of your Social Security number are: |
Your check should be in the mail by: |
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00 – 09 |
May 16 |
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10 – 18 |
May 23 |
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19 – 25 |
May 30 |
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26 – 38 |
June 6 |
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39 – 51 |
June 13 |
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52 – 63 |
June 20 |
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64 – 75 |
June 27 |
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76 – 87 |
July 4 |
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88 – 99 |
July 11 |
An online calculator is also available to determine eligibility and calculate the amount of the payment for those who are not eligible for the entire $300 or $600 payments. IRS Announcement IR 2008-44.
From this article in the New York Times yesterday:
Beginning next year, the federal estate tax exemption will increase to $3.5 million. This means that the tax would apply to only about 0.3 percent of people who die each year. Not exactly the average American.
However, as part of the 2009 budget resolution, Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee, has proposed to keep the tax at those levels, with annual adjustments for inflation. The proposal is expected to pass.
Under current law, the estate tax will be eliminated in 2010 for that year only. In 2011 the exemption would drop down to $1 million. Republican senators,, however, feel that Baucus’s proposal is not sufficient. After it passes, Senator Jon Kyl, Republican of Arizona, is expected to propose further cutting the estate taxes.
The government would have to borrow to make up for the $200 billion tax loss, worsening the deficit and adding about $100 billion in interest to the nation’s tab.
The Kyl proposal needs a simple majority to pass. So if every Republican votes yes, just one Democrat would have to join them for the proposal to pass.
I personally feel that a $3.5 million exemption is quite generous, particularly given that married couples who do proper estate planning can pass double that amount to their heirs. If persons with estates over the exemption amount don't want to pay taxes, a good estate planning attorney can certainly help!
Tax scammers are creative - calling on telephone as well as sending emails. Heres a liink to a recent list of scammers' ploys from the IRS.
The elderly are particularly vulnerable, so if you have an aging relative, make sure you alert them.
For those folks who are not legally required to file federal income tax returns but want to get their tax rebates this Spring (who wouldn't?), the IRS offers free online filing.
This from Professor Chistopher Hoyt at the UMKC Law School, with good news for S Corporation owners:
The IRS released a revenue ruling that confirmed many of our hopes regarding charitable gifts of appreciated property by a Subchapter S corporation. Normally a shareholder's income tax deduction for an S corporation's business losses is limited to the shareholder's basis in the corporation's stock. The IRS confirmed that charitable gifts can qualify for better tax treatment. The IRS concluded that if an S corporation made a charitable contribution in 2006 or 2007 of appreciated property (such as real estate), the shareholder was entitled to claim a charitable income tax deduction that exceeded the shareholder's basis in the stock. This favorable tax treatment was a temporary measure contained in legislation that expired in 2007, but it is one of the "extender" laws (like "Charitable IRA rollover") and there is a good chance that it will be extended into 2008.
Rev. Rul. 2008-16; 2008-11 IRB 1
The U.S. Supreme Court, in Michael J. Knight, Trustee of William L. Rudkin Testamentary Trust v. Commissioner, 552 U.S. ___, 128 S. Ct. 782 (2008), ruled that costs paid to an investment advisor by a nongrantor trust or estate generally are subject to the 2% floor for miscellaneous itemized deductions under Internal Revenue Code Section 67(a).
Later this year, the Treasury Department will issue final regulations under Reg. 1.67-4 in keeping with the Supreme Court's decision in Knight. The final regulations on bundled fees that include a portion for investment management will most likely include safe harbors or methods to calculate the portion fully deductible.
Since the final regulations will not be published prior to due dates for the 2007 returns, bundled trustee and executor's fees will be fully deductible for 2007 and prior years (tax years beginning before January 1, 2008) IRS Notice 2008-32; 2008-11 IRB 1.
Notice 2008-32 does, for 2007 and prior year returns, require allocation of "readily identifiable" expenses that are subject to the 2% floor of Sec. 67.
This works to the disadvantage of trusts in which a "custodial' or "administrative" trustee is used, with relatively low trustee fees, with separate (and generally higher) fees paid to the investment advisor, who handles the investment management. But, beginning this year, the playing field has been leveled to some degree.
Click "Continue Reading" the text of Notice 2008-32.
The IRS has announced that it will soon propose new regulations governing 529 College Savings Plans, which will (I) contain an anti-abuse rule (to prevent using 529 Plans to skirt gift tax rules); (II) determine the estate, gift and GST tax results of contributions, transfers and withdrawals; and (III) create rules for making the 5 year election, address certain income tax issues, and create new record keeping requirements.
Here's the example the IRS gives as an abuse - quite a clever technique!:
Grandparents want to gift $1 million to a child without using any of their $1 million lifetime exclusion. So, the grandparents establish 529 Plan accounts for each of their 10 grandchildren, placing $120,000 in each (the $12,000 annual exclusion, times 2 for 2 grandparents, times 5 to use the 5 year averaging rule) times the number of grandchildren, and naming the child as the account owner. After the 5 years, the child designates a new beneficiary for each account, naming himself. Since Section 529 provides that no gift occurs if the new beneficiary is in the same family and at the same or a higher generational level, the grandparents have succeeded in giving the child $1.2 million without using any of their applicable exclusion.
The child would have to pay income tax and a penalty on any growth when withdrawals are used for non-educational expenses, but overall it would save the family a lot of tax.
Click "Continue Reading" for a concise summary of, and some commentary on, the Stimulus Bill signed into law last week by President Bush, courtesy of the GiftLaw eNewsletter.
Continue Reading...Family Limited Partnerships, or more commonly now, Family Limited Liability Companies, are great vehicles for management and protection of family businesses, real estate, and investments. They also can be used to facilitate gifting, since interests in the entity given to junior family members typically qualify for minority interest and lack of marketability discounts. These discounts can provide powerful leveraging.
However, to stand up to IRS scrutiny, it is important the FLP or FLLC be properly formed and administered. Click "Continue Reading" for a checklist to help determine if your family entity meets the necessary criteria.
Continue Reading...
The IRS recently published a notice naming four new frivolous income tax claims:
Needless to say, do not take any of these positions on your return!
This week I'm in Orlando at the University of Miami School of Law's Heckerling Estate Planning Institute. Yesterday there was a discussion of what may be coming down the pike as to the federal estate tax (death tax):
Date of New Legislation: It's unlikely there will be any action until after the November 2008 election. There are 35 seats open in the Senate, 23 of which are currently occupied by Republicans. The democrats will probably end up with the majority. In any event, we will probably see no movement until 2009.
Chance of Outright Repeal: No way, even if the Republicans are in charge.
Exemption Amount: The current amount exempt from federal estate taxes is $2 million, and it is scheduled to rise to $3.5 million in 2009. With a Democrat in the White house and a Democrat controlled Senate, the exemption would probably stay at $3.5 million for a number of years. If the Republicans are in control, the exemption will most likely be increased to $5 million. Any increases in the exemption as part of the 2009 legislation over $3.5 million per person would not be available in that year, but would instead be phased in over several years. The phase-in could be similar to what was proposed in HR 5970 in July 2006.
Rate: We will probably see the top rate decrease from the current 45% to 35%, although very large estates may face a higher rate.
"Portability" of Exemption Between Spouses: Very likely that the new legislation would provide that the surviving spouse could utilize both exemptions, in a manner similar to that proposed in HR 5970 and HR 5638.
I previously blogged that employers would be required to allow post-death non-spousal rollovers of their retirement plans to IRAs starting in 2008. However, that did not come to pass:
This information is courtesy of attorney Phil Kavesh in California:
The IRS had previously announced that it would accept as part of the Technical Correction Bill to the Pension Protection Act of 2006 a provision that would require all corporate retirement plans to offer non-spouse beneficiaries a trustee to trustee lump sum rollover to an Inherited IRA, thereby allowing non-spouse beneficiaries to take advantage of RMD stretchout and avoid the one-year and five-year rules under most corporate retirement plans.
The Technical Corrections Bill recently passed did NOT include this provision and the IRS has decided not to move from its previous position that permitted each corporate retirement plan to decide whether or not to offer this rollover. This development means that those with corporate retirement plans who have reached normal retirement age and can take an in-service distribution or have retired and left their money in the plan should consider rolling it out to an IRA now, so that non-spouse beneficiaries may take full advantage of RMD stretchout. You may want to check the individual plan first, to see if it has been amended to allow the non-spouse rollover, as I anticipate that many plans will start to make this change over time. If the plan has already made the change, a current rollover would not be necessary.
For creditor, divorce and other protections for an inherited IRA, while still allowing the stretch, a standalone IRA/Retirement Plan Trust makes sense for most persons with retirement account values in excess of $200,000. See my posting on IRA Trusts.
Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:
This represents a 2 cent increase for business miles, and 1 cent decrease for medical/moving. Doesn't make sense to me to have a decrease, given gas prices!
I often prepare Living Trusts for clients, who like the idea of avoiding the cost, time, and hassle of probate. However, probate can only be avoided completely if there are no probate assets. One type of asset that is often overlooked is vehicles. If someone dies with only a $15,000 vehicle in his or her name, probate will often be required in order to transfer title.
In the past clients have told me that when they have tried to transfer their cars to a living trust, the Division of Motor Vehicles requires them to pay the 3% highway use tax upon transfer in addition to the new title fee.
However, under North Carolina law, there should be maximum of only $40 due. Thus, assuming you can get the folks at the local DMV office to agree, the cost of transferring a vehicle to a trust should be fairly reasonable, and certainly less than the cost of probate.
N.C. General Statutes Section 105-187.6 provides, in pertinent part (emphasis added):
(b) Partial Exemptions. – A maximum tax of forty dollars ($40.00) applies when a certificate of title is issued as the result of a transfer of a motor vehicle:
(2) To a partnership, limited liability company, corporation, trust, or other person where no gain or loss arises on the transfer of the motor vehicle under section 351 or section 721 of the Code, or because the transfer is treated under the Code as being to an entity that is not a separate entity from its owner or whose separate existence is otherwise disregarded, or to a partnership, limited liability company, or corporation by merger, conversion, or consolidation in accordance with applicable law.
I previously blogged about the 2007 income tax deduction available to North Carolina residents to contribute to a North Carolina 529 College Savings Plan account. A deduction of up to $2,500 is available for single taxpayers and up to $5,000 for married couples filing jointly. Initially the deductions were subject to income limitations, but no longer.
In addition, rollovers from 529 plans in other states are considered contributions, so those taxpayers (like me) who set up accounts in another state years ago when the NC Plan was lousy, can now do a rollover to the NC Plan and take a deduction, even without making any new contributions. Rollovers are allowed only once every 12 months.
A veto would also kill the extension of the $100,000 IRA Charitable Rollover, which is scheduled to expire at the end of this year. Tax expert Professor Christopher Hoyt of the University of Missouri (Kansas City) Law School is betting there will be no veto. The following was released by Tax Analysts:
The White House November 8 threatened to veto the House's alternative
minimum tax patch and extenders package.
According to a statement of administration policy, the Bush
administration opposes the Temporary Tax Relief Act of 2007 (H.R. 3996)
because it couples an AMT patch with what it called "a tax increase on
other taxpayers."
The measure would provide a one-year patch of the AMT at a cost of
roughly $ 50 billion in 2008 and extend for one year several popular tax
breaks, including the research credit and the deduction for teachers'
classroom expenses, at a total cost of roughly $ 21 billion over 10
years, according to a Joint Committee on Taxation revenue estimate. Two
of the bill's largest offsets include provisions that would tax
nonqualified deferred compensation paid by offshore hedge funds to
investment managers and tax as ordinary income the carried interest
income of private equity partners performing investment management
services. A third large offset would implement an eight-year delay in
allowing worldwide allocation of interest expense.
The administration highlighted its opposition to tax provisions that it
warned would "undermine the competitiveness of U.S. businesses in the
global economy." The administration cautioned that lawmakers should
remove those tax provisions before passing the final bill.
The White House also said it disapproved of a provision in the bill that
would eliminate the IRS private debt collection program.
The House is expected to take up the bill November 9, but House Speaker
Nancy Pelosi, D-Calif., indicated November 8 that due to scheduling of
other bills, a vote on the package could slip into the following week,
since its timing was "not absolutely certain."
The IRS will be offering a number of workshops for small to medium sized 501(c)(3) organizations on tax compliance issues. The cost is a bargan - only $45!
The closest one to North Carolina will be in Columbia, South Carolina on December 4,5 and 6. Click here for details.
Beginning in 2008, retirement plans (such as 401(ks) must allow non-spouse beneficiaries to roll over to an IRA. The following is from Ed Slott, CPA:
The Pension Protection Act of 2006 included a provision that would permit non-spouse plan beneficiaries to do direct transfers from the plan to a properly titled inherited IRA and take stretch distributions over their lifetimes instead of being subject to the harsh payout rules of most company plans. This provision became effective in 2007.
The purpose of the provision was to allow non-spouse plan beneficiaries the same ability to stretch post-death distributions over their lifetime as if they inherited from an IRA. That was the plan. But in January 2007, IRS issued Notice 2007-7 which stated that the provision was not mandatory for plans. This created confusion and controversy and took the wind out of sails of this provision. This was contrary to what Congress intended. Congress realized this and has proposed a technical correction to the law stating that the plans MUST allow the non-spouse direct rollover to an inherited IRA.
In light of the pending Congressional technical correction, IRS reversed its position and now says that the non-spouse rollover provision will be mandatory beginning in 2008.
Maximum deferral limits for 401(k) and 457 plans remain at $15,500. The limit for defined contribution plan increases to $46,000, while the SIMPLE limit is $10,500. See IRS News Release IR-2007-171 for full details.
The IRS has issued a news release warning small businesses about certain trust arrangements being sold as welfare benefit plans. These arrangements are considered abusive from a tax standpoint in that they provide extra benefits to the business owner or key employees.
Small business owners should not adopt such plans unless the plan has been cleared with their tax adviser.
Estate planners love acronyms, and one of the most common when referring to a particular type of trust is QTIP, which stands for Qualified Terminable Interest Property. A QTIP trust provides a way for someone to leave property in a trust for a spouse free of tax by way of the unlimited marital deduction, but yet control where the assets go at the death of the spouse. The QTIP assets are included in the estate of the surviving spouse for estate tax purposes even though he or she has little or no control over them.
As you can imagine, QTIP Trusts are especially favored in second marriages where there are children from the first marriage. This article on bankrate.com discusses estate planning in second marriages, including QTIP Trusts. However, the article fails to mention the use of Credit-Shelter (or Bypass) Trusts, which can also provide support for the surviving spouse but are used in larger estates because the assets are sheltered from estate taxes at the death of the second spouse to die. Also, the article seems to say that the estate tax exemption is $1 million, which is erroneous. The federal lifetime gift tax exemption is $1 million, but the estate tax exemption is $2 million.
On September 7, the U.S. House of Representatives passed H.R. 1908, The Patent Reform Act of 2007. Section 10 of that bill prohibits patenting tax strategies. While the bill prevents future patents on tax strategies it is neutral on the validity of patents that have already been issued.
Some tax strategies have already been patented, including one dealing with funding a Grantor Retained Annuity Trust (GRAT) with stock options. The owner of that patent actually sued someone who used the technique without obtaining permission. Several other patents involving charitable gifting strategies have been submitted to the Patent Office - assuming the bill becomes law, those should be stopped.
This bill is good for both for taxpayers and tax professionals, preventing undue restrictions on the ability to adopt tax-saving techniques.
Click here to access the text of the bill. The ban on tax patents appears on pages 55 through 57.
The IRS recently announced that the total number of estate tax returns filed fell by 58 percent to about 45,000 in 2005 from about 108,000 in 2001. The total amount of assets represented by these returns also fell, although by a lesser percentage. The total gross estate (assets) on these returns fell by 14 percent to $185 billion in 2005 from $216 billion in 2001. Net estate taxes reported on these returns declined by even less, only 8 percent. Click here for the IRS Estate Tax Facts.
With the estate tax exemption now at $2 million, I am doing fewer estate tax returns as part of my estate administration practice. Since, strangely enough, I enjoy preparing tax returns, that's disappointing. Death may be certain, and taxes may be certain, but death taxes are becoming a relative rarity.
I previously blogged about former U.S. Attorney, state judge and North Carolina Republican Chairman Samuel T. Currin and attorney Rick Graves being indicated for tax fraud. Mr. Graves was acquitted by unanimous jury verdict, but Mr. Currin plead guilty to the tax fraud charges as well as securities fraud. Earlier this week he was sentenced to 70 months in federal prison.
Mr. Currin conspired to launder almost $1.5 million through his law firm's trust account, and failed to disclose an offshore debit card account. He also manipulated stock prices of several companies by disseminating false information, and then profited from the increased stock prices that resulted.
Chapel Hill's own John McCormick was also recently arrested in Arizona. The former attorney, who was disbarred after his disappearance, is accused of stealing more than $1 million of his clients' money.
Finally, former Durham D.A. Mike Nifong reported to the Durham jail to serve his one day sentence for contempt of court.
We lawyers have a hard enough time with our public image even in the absence of newsworthy cases like these. Please rest assured that the vast majority of attorneys are law abiding, honest, and loyal to our clients. I personally place the utmost importance on the trust of my clients, and do everything I can to maintain that trust at the highest level. Beyond the obvious specialization in trust law, that is the reason I named my firm TrustCounsel, P.A.
The North Carolina Long-Term Care Insurance Premium Tax Credit has been reenacted effective for the 2007 tax year through 2012. A credit of 15% of the premium costs, up to a maximum of $350, is allowable for each policy. The credit is restricted those under the following AGI limits:
Married filing jointly - $100,000
Head of Household - $80,000
Single - $60,000
Married filing separately - $50,000
Also, those that take a deduction as part of health care expenses on their Federal income tax return cannot take the NC LTC tax credit.
Click "Continue Reading" for the text of the statute.
Having just ridden a motorcycle through the endless farms of Iowa on my way to and from Sturgis, South Dakota, this news item caught my attention. Last month a bill was introduced to defer federal estate taxes on family farms as long as the land is used for farming or conservation purposes. See this article on the Save the Family Farm and Ranch Act of 2007.
While proper estate planning, including the use of life insurance trusts and family limited liability companies, could avoid much of the impact of estate taxes on family farms, I think this bill is a good move to help protect our nation's farmers and their contributions to our food supply.
A recent U.S. Tax Court case held executors liable for the penalty for the late filing estate tax return despite their attempt to blame their lawyer for the untimely return. Decedent, a U.S. citizen domiciled in Germany, died on September 10, 1999. She had two wills - U.S. and German. Two individuals, Roisen and Helman, were nominated as executors. They hired an attorney, who sought an extension of time for filing the estate tax return. The return was eventually filed on September 19, 2001, although the last date is could be timely filed was December 10, 2000. The IRS imposed a $233,359 penalty for late filing the return. The surviving executor argued the penalty should not be imposed because the return was late filed as a result of reasonable cause, not willful neglect. He argued that his attorney failed to advise him the return was due. The court found that the executor’s expectation that an attorney will file a return does not relieve the executor from his statutory duty to timely file the return. An executor might be excused if he reasonably relied on incorrect advice, such as no return was required, but here there was no evidence the executors even knew the filing deadline had passed, much less any evidence that they received errant advice.
Estate of Zlotowski v. Commissioner, T.C. Memo 2007-203 (July 24, 2007)
Lesson learned: You can't always blame the lawyer! Executors need to keep themselves informed about estate matters, including tax and other deadlines.
On June 25 the U.S. Supreme Court agreed to hear a case on whether the investment expenses of trusts are fully deductible or subject to a 2% floor. The Circuit Courts are in disagreement on this issue. The case is Michael J. Knight, Trustee of the William L. Rudkin Testamentary Trust v. Comm'r of Internal Revenue.
North Carolina is in the Fourth Circuit, which has held that the fees are subject to the 2% floor. If the Supreme Court rules the other way, it will be a big benefit for beneficiaries of North Carolina trusts.
Do you have a dispute or other matter pending with the IRS and are tired of dealing with them over the phone? There are a number of IRS offices in North Carolina
Effective January 1, 2008, the "kiddie tax," which applies the parent's tax rate to children's unearned income over $1,700 (for 2007) will apply to dependent children under age 19 and dependent full-time college students under 24. Prior to 2006, the tax only applied to children under 14, but it was raised to 18 in 2006. See this article on Kiplinger.com for details and planning tips.
Gifting property can be an effective way to spend down assets for future Medicaid eligibility and to reduce estate tax liability. Many people are not aware, however, that unless an exclusion or exemption applies, one must file federal and state tax returns on all gifts of property. Failing to file returns and paying gift tax when required can result in hefty penalties and interest.
Continue Reading...Last week the North Carolina Senate produced its version of the state budget, which included:
• Reducing the state sales tax and the top income tax rate each by 1/4 percentage point, eliminating the last of a 2001 increase in both taxes. This would bring the highest income tax rate down to 8%. The top rate only applies to those with income over $120,000 per year. The House version of the budget did not reduce either.
- While the sales tax cut would benefit everyone, a quarter percent would not provide significant relief for anyone. A low-income person spending $10,000 annually on items subject to sales tax would only save $25 over the course of the year! Likewise, the cut in the income tax will not produce appreciable savings for high income earners. For someone with taxable income of $220,000 per year, there would be a savings of just $250. A taxpayer with income of $150,000 would pay only $75 less. Not that I'm complaining....
• No state version of the federal Earned Income Tax Credit and no funds to help counties pay their share of rising Medicaid costs. The House version did both.
North Carolina is not known for its attractive estate planning and asset protection laws, but NC residents can avail themselves of certain out-of-state planning strategies that can provide significant estate tax savings and creditor protection. One state that has some of the most favorable laws is Nevada.
As a write this, I'm sitting in a hotel room in Las Vegas, having just finished up a meeting with nationally known estate planning and asset protection attorney Steve Oshins, whose office is located here. Mr. Oshins, who is published frequently in Trust & Estates magazine and Estate Planning magazine, has developed several innovative trusts and trust-related strategies, such as the Megatrust, the Inheritors Trust and the Opportunity Shifting Trust.
I have joined Mr. Oshins' Advanced Planning Legal Network to be able to bring these same types of techniques to my clients.
Click "Continue Reading" for a brief description of the advantages of using Nevada laws for estate planning.
Continue Reading...I recently attended a two day seminar by nationally recognized IRA expert Ed Slott, CPA. If the protection of a trust for IRA beneficiaries is desired, Slott says that the best way is to have the IRA paid to a Standalone IRA Trust. He cautions that IRAs should not be mixed with non-IRA assets.
Slott also recommends that for married couples, spouses with large IRA balances should use the distributions to pay for life insurance to be held in trust for the other spouse, and then make the children (or a trust for their benefit) beneficiaries of the IRA. This leverages funds that are subject to income and possibly estate tax into completely tax-free monies, and provides optimum "stretching" of the IRA, allowing maximum growth. I think this strategy should be used for any couple with large IRA(s) and a total estate exceeding $2 million.
Robert Keebler, CPA, MST reports on Private Letter Ruling 200708084:
Designated Beneficiaries of See-Through-Trusts and the Life Expectancy used to
Determine the Payout Period of the IRA Distributions
In PLR 200708084, the IRS ruled that a trust is a qualified “see-through trust” and the
decedent’s son and daughter are the only individuals who have to be considered
“designated beneficiaries” because the trust pays outright to them. The lesson to take
from this PLR is that when there are beneficiaries who receive their trust benefit outright,
you do not have to look beyond those beneficiaries for potential contingent beneficiaries
in determining the oldest trust beneficiary.
In an October 2006 posting, I reported that North Carolina attorney Rick Graves was indicated for tax fraud. I am pleased to report that last week he was found "not guilty" by unanimous jury verdict, and acquitted of both charges of federal tax fraud.
To view Mr. Graves' Press Release, click "Continue Reading."
Continue Reading...In 2007, qualified North Carolina taxpayers may deduct contributions to North Carolina's 529 College Savings Plan up to $2,500 for individuals and $5,000 for married couples filing jointly. Earnings used for qualified college expenses are income tax free.
To qualify for the deduction, for taxpayers must have adjusted gross income below $60,000 (single), $100,000 (joint), $80,000 (head of household), or $50,000 (married filing separate). You should consult your financial, tax, or other advisor to learn more about how this may apply to your specific circumstances.
For more details, visit the NC College Savings Plan website.
Yesterday the U.S. Senate approved an amendment to the Budget Resolution that would extend the 2009 estate tax rate (45%) and exemption ($3.5 million) through 2012. Under current law the estate tax would be "repealed" in 2010, but would return in 2011 with an exemption of only $1 million.
Click "Continue Reading" to view a report from Marshall Jones of West Palm Beach.
Continue Reading...Earlier this week the IRS published Notice 2007-30, which contains a list of 40 frivolous positions taxpayers should avoid taking on their income tax returns.
In 2006, the penalty for frivolous tax returns was increased from $500 to $5,000. The new penalty amount applies when a person submits a tax return, any portion of which is based on a position the IRS identifies as frivolous.
Four revenue rulings issued along with with the notice address particular frivolous claims frequently made to the IRS. The revenue rulings deal with:
The rulings emphasize the adverse consequences to taxpayers who fail to file returns or fail to pay taxes based on any of these frivolous arguments.
The courts have not only rejected these arguments numerous times, but also have imposed thousands of dollars in fines on taxpayers or their representatives for pursuing frivolous cases.
"Our rulings on frivolous arguments emphasize that the IRS and the courts reject these arguments about the validity of the income tax and ‘too good to be true’ schemes to eliminate tax liability," said IRS Chief Counsel Donald L. Korb.
The IRS continues to investigate promoters of frivolous arguments and to refer cases to the Department of Justice for criminal prosecution. In addition to tax and interest, the $5,000 penalty, taxpayers who file based on a frivolous position may be subject to civil penalties of 20 or 75 percent of the underpaid tax. Persons who bring frivolous tax cases in court may face an additional penalty of up to $25,000.
Related Items:
All taxpayers, whether one uses a professional tax preparer or not, would be well-served to review Notice 2007-30.
An article in the February 24-25 issue of The Wall Street Journal describes how 529 College Savings plans can be used to reduce estate taxes. Earnings on the funds invested in such plans are tax-free if used for qualified college educational expenses. North Carolina residents also get a small tax deduction for contributions to North Carolina sponsored plans (Click "Continue Reading" for more information).
The plans allow the owner to maintain control over how the funds are used, and even change the beneficiary to another relative or the owner himself. If the funds are not used for educational expenses, taxes are due on the gains, along with a 10% penalty.
Gift tax rules allow using up to five years of the $12,000 annual gift tax exclusion at once, so that one person can put $60,000 into a plan in one year. For wealthy grandparents with multiple granchildren, this can add up to substantial estate tax savings. The current estate tax exemption is $2 million, so persons with estates over this amount may want to consider this technique. Before establishing the accounts, however, be sure to check with a qualified tax and investment advisor. There are fees associated with 529 Plans, and investment performance in many types of plans have been lackluster of the last several years.
Check out www.savingforcollege.com for a plethora of information on 529 Plans.
Continue Reading...On February 15, 2007, bill H235 was introduced in the North Carolina General Assembly to reform the North Carolina gift tax so that it would be based on the federal gift tax. Under the proposed legislation, NC gift tax would only be due if federal gift tax is due. The change would be effective January 1, 2007. Click "Continue Reading" to see the text of the bill.
Under current law, North Carolina allows the same $12,000 annual exclusions as the federal system, but rather than a $1 million lifetime exemption, there is only a $100,000 lifetime exemption, which applies only to ancestors and descendants.
The NC gift tax catches many residents (and even professional advisors) unaware, and many gifts are never reported, mainly because of ignorance of law, so the reform is probably a good idea. I'm not sure how much tax revenue would be lost.
Continue Reading...
Jeffrey Pennell, a professor at Emory Law School, was one of the featured speakers today at the Mid-South Forum ( meeting of estate planning attorneys) in Atlanta. In January I reported on his comments on the future of the estate tax at the Heckerling Estate Planning Institute in Orlando.
Professor Pennell believes that Congress will not act until late in 2009, and then will extend the $3.5 million estate tax exemption and reduce the rate to about 35%. He pointed out that for the country's extremely wealthy families - the ones that can influence Congress - the rate is much more important than a difference of a million dollars or two in the exemption amount.
In North Carolina, anyone can call himself or herself an accountant (as opposed to a Certified Public Accountant). No special training or education is required. If your taxes are very simple, you may be okay going to an non-certified accountant or tax preparation firm such as H&R Block.
However, if your return is at all complex, or you are looking for tax advice and planning assistance, your bet bet is to hire a CPA, Enrolled Agent, or Tax Attorney. Also, keep in mind that only these three professionals will be able to represent you in the event of an audit.
CPAs must pass an exam and have meet certain edcuational and experience requirements. Enrolled Agents have passed an exam administered by the IRS. Tax attorneys often have a masters degree in tax (LL.M..) in addition to a law degree. Some tax attorneys do not prepare returns, but those that do can often offer a different perspective from CPAs, who may tend to be more conservative.
This article on the Fox News website provides some additional information.
An article by Robert Frank in yesterday's Wall Street Journal describes the recent dramatic drop in taxable estate tax returns. The rising estate tax exemption (currently $2 million), decreases in the tax rate, effective tax planning, increasing charitable giving by the super-wealthy and the advent of young dot.com millionaires all seem to be contributing to the reduction in returns and revenues.
In 2005 only 18,431 taxable estate tax returns were filed, one-third less than the year before, despite the fact that the number of millionaire households in the U.S. has increased more than twofold between 1995 and 2004.
An article in yesterday's Wall Street Journal discusses the problem of financial services firms providing late or amended Forms 1099. These forms, which show the amounts of interest, dividends and capital gains attributable to each investment account, are necessary for preparation of one's income tax returns. Both Wachovia and Morgan Stanley have obtained extensions from the IRS to file their 1099s, which will now be issued sometime in February. In recent years, the amount of amended 1099s issued after the January 31 deadline has also increased.
The problem is that if you file too early, you may later receive a late or amended 1099, which would generally necessitate filing an amended return.
If you use a CPA or tax service you may not have much control over when your return is prepared, but if you can do so, it probably makes sense to wait until March to file your returns, especially if you are a Wachovia or Morgan Stanley client.
The Tax Relief and Health Care Act of 2006 was passed into law this week, extending the State and Local Sales Tax Deduction, the Higher Education Tuition and Fees Deduction, and the Educator Expense Adjustment. See this IRS news release for details, or see below for how to deal with the extended tax breaks on the 2006 Form 1040.
Continue Reading...| For some last things to think about before getting set to get your estate plan in order for 2007, check out this recent article by Kay Bell published on Bankrate.com: | |||
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Have you been too busy to make your list, much less check it twice? No problem. We've got it right here.
Nah, we're not talking about that reminder sheet for your holiday shopping. This is your all-important year-end tax to-do list.
By checking off these 13 items by Dec. 31, you'll find your tax filing chore next year much easier. Even better, these year-end moves might net you enough tax savings so that you can easily pay for most of the gifts on that other list.
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The following news is from Stephanie Heilborn of the Milbank, Tweed law firm in New York City:
Russ Sullivan, Democratic Staff Director of the Senate Finance Committee, spoke at the joint meeting of the Estate & Gift Tax Committee and Trusts, Estates & Surrogate's Courts Committee of the NYC Bar Association last night. He provided some good insight into the current thinking on estate & gift tax reform.
Congress expects to address the estate tax in the second half of 2007. The bottom line is that for any bill to pass both houses, it cannot reduce the revenues raised by estate/gift tax by more than 50% (apparently the reason last year's proposal didn't pass is that it cost just a little too much (it reduced revenues by 60%) for some key Democratic senators to support it). Any new estate tax law is highly likely to contain the following provisions:
Step-up in basis (the feedback regarding carryover basis has been loudly and uniformly negative)
Estate tax exemption between $3.5 million and $5 million
Estate tax rate will correspond to the capital gains rate--possibly 15% rate for the first $5-10 million and a higher rate, which "will start with a 3", for the balance over that
Exemptions will be transferable between spouses
No state tax deduction (Apparently the state governors have been terrible lobbiers--not a single one has complained about the loss of state estate tax revenues.)
There will be "offsets" in exchange for the reduction in tax rates. These are likely to include restrictions on discounts available for family limited partnerships, especially those funded with mostly marketable securities. He told us, "Take a good look at some of the proposals from during the Clinton administration."
Unclear whether the estate and gift tax will be reunified--there has been disagreement within the Senate Finance Committee staffs
If we get to 2010 and no estate tax bill has been passed, they will extend the 2009 provisions for a while--even the more progressive Democrats agree that we can't go back to the pre-2001 law.
Finally, they do expect to issue technical corrections to the Pension Protection Act of 2006 sometime next year.
This is good news for most, but any new limitations on discounts available for family limited partnerships and limited liability companies could restrict planning for some wealthier taxpayers.
From a recent IRS e-newsletter:
Continue Reading...WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law changes made last summer by the Pension Protection Act.
The new law offers older owners of individual retirement accounts a new way to give to charity. It also includes rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. Some of these changes include the following.
From the N.C. State GiftLaw eNewsletter this week:
In January of 2007, Rep. Charles Rangel (D-NY) will assume the leadership of the House Ways and Means Committee. Chairman Rangel has indicated that alternative minimum tax (AMT) reform will be a high priority. Large numbers of taxpayers from his district in New York City have substantial incomes and now are subject to AMT.
During the past five years, Congress has repeatedly passed an "AMT Patch." As more taxpayers have been subject to AMT, Congress has slowly and steadily increased the AMT exemption. However, with increasing numbers of taxpayers with higher incomes and reductions in top tax rates in 2001 and 2003, millions of American taxpayers are now facing alternative minimum tax.
Bills have previously been introduced in both the House and the Senate to repeal the AMT. If the revenues forgone by AMT repeal are calculated, the cost could potentially amount to a trillion dollars. Therefore, the major question on AMT repeal is whether or not to use offsets to create a "revenue-neutral" bill. "Revenue-neutral" is Washington language for a bill that will include some tax increases. Given the magnitude of the funds involved, the offsets may include higher rates for upper-income taxpayers.
Sen. Charles Grassley, who will be the ranking Republican on the Senate Finance Committee in January, issued a press release that warned about raising rates to pay for AMT repeal. He noted, "I hope the new Democratic leaders won't fall into traps on AMT repeal, such as counting on the revenue that AMT raises for more Government spending. It's ridiculous to rely on revenue that was never supposed to be collected in the first place. Another trap is raising taxes to pay for AMT repeal. It's unfair to raise taxes to repeal something with serious unintended consequences like the AMT."
Sometimes known as the "awfully mean tax," the AMT involves a complex set of rules designed to ensure that high-income taxpayers pay their "fair" share of taxes. Personally, I don't like seeing my itemized deductions being reduced because of AMT limitations. Even if I end up paying the same amount of tax due to tax increases, I support AMT repeal as small step in simplifying the tax code.
From an article by Kay Bell on Bankrate.com:
It took federal lawmakers almost two years of debate, half a dozen stabs at earlier legislation and an end-of-session deadline to finally agree on a law designed to shore up company pension plans.
But buried in the 900-plus pages of the Pension Protection Act of 2006 are several tax provisions that will benefit individuals who do their own golden years' saving.
The law also contains welcome news for folks looking for ways to cover the high cost of college. The philanthropic, however, face some new, good and not-so-good donation guidelines.
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For a state-by-state comparison of income and sales taxes, check out this article on Bankrate.com
When someone who lives in a state with a income tax is about to sell a multi-million dollar piece of appreciated property located in an income tax free state (such as Florida), sometimes it makes sense to consider relocating, at least for a year or so, to that state. But, the move would have to be a true change of domicile, involving a new drivers license, vehicle registration, voter registration, etc.
Owning real estate in a self-directed IRA can seem like a great way to save for retirement. However, I have found that most clients want to structure the ownership and/or management of the real estate in such a way that they will run afoul of the prohibited transactions rules. Once they learn of the restrictions involved, they are not so keen on the idea. Real estate or business ownership in an IRA can work, but knowledgeable tax counsel should be consulted. Many attorneys and CPAs are not familiar with the laws regulating self-directed IRAs.
Check out this article by Lynn O'Shaughnessy: Sweat Equity in IRA Real Estate can be no-no
In 2007, for the first time, inflation adjustments will increase the income limits that apply to the retirement savings contributions credit, contributions to a Roth IRA and deductible contributions to a traditional IRA where the taxpayer or the taxpayer's spouse is covered by a retirement plan at work.
Revenue Procedure 2006-53, containing a complete list of inflation adjustments, is on the IRS Web site and will appear in Internal Revenue Bulletin 2006-48, dated Nov. 27, 2006.
From EstatePlanningLawFirms.com on November 6, 2006:
Washington D.C. – Congressman Ted Poe (TX-02) announced that the House of Representatives passed H.R. 5638, the Permanent Estate Tax Relief Act of 2006. This bill will make certain provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) permanent. Without the passage of H.R. 5638, the estate tax repeal and all other provisions of EGTRRA would sunset on December 31, 2010. This would cause taxes placed on estates to revert back to their previous rates which were significantly higher. The current lower tax rate allows citizens who die to leave more to their beneficiaries, and less to the government. This is important to family owned businesses of all sizes, many were forced to sell their business because they couldn’t pay the taxes when the owner died.
“The old saying goes that the only two certainties in life are death and taxes. Under an estate or death tax, small farmers and family minded individuals who saved their whole lives to leave something to their children have to pay taxes, die, and then pay taxes again. It is unconscionable that the government punishes people by taxing them in life and in death. I urge the Senate to pass this bill quickly so that President Bush can sign it in to law,” Poe said.
Important Provisions of H.R. 5638:
1-Reunifies the estate, gift and generation-skipping transfer taxes - giving individuals greater flexibility to make estate planning decisions during life.2-Increases the exemption amount to $5 million per person effective January 1, 2010.
3-Reduces the rate of tax on estates up to $25 million to the capital gains tax rate (15 percent).
4-Reduces the rate of tax on estates of $25 million or more to twice the capital gains rate (currently 30 percent).
5-Simplifies estate tax planning by allowing married couples to take full advantage of the $5 million exemption by carrying over any unused exemption to the surviving spouse.
Due to #5, advance estate tax planning would not be as important, and would obviate the need for credit-shelter (bypass) trusts in many cases. Effectively, only couples with a net worth in excess of of $10 million would need to worry about estate taxes.
Since the Senate appears to be Democrat-controlled now, the chances of this bill passing is somewhat less now that than before the election. Prior estate tax relief has passed in the House, only to fail in the Senate.
From the IRS Newswire:
IR-2006-168, Nov. 1, 2006
WASHINGTON - The Internal Revenue Service today issued the 2007 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning Jan. 1, 2007, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:
48.5 cents per mile for business miles driven;
20 cents per mile driven for medical or moving purposes; and
14 cents per mile driven in service to a charitable organization.The new rate for business miles compares to a rate of 44.5 cents per mile for 2006. The new rate for medical and moving purposes compares to 18 cents in 2006. The primary reasons for the higher rates were higher prices for vehicles and fuel during the year ending in October.
The standard mileage rates for business, medical and moving purposes are based on an annual study of the fixed and variable costs of operating an automobile. Runzheimer International, an independent contractor, conducted the study for the IRS.
The mileage rate for charitable miles is set by statute.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, for any vehicle used for hire or for more than four vehicles used simultaneously. Revenue Procedure 2006-49 contains additional information on these standard mileage rates.
When the Estate Tax is repealed (albiet for one year) in 2010, some heirs will face capital gains tax instead, with complicated and burdensome record keeping necessary. Check out this article at Bankrate.com, from which the chart below was taken...
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From EstatePlanningLawFirms.com:
WASHINGTON - United States Senator Mary Landrieu, D-La., announced that she is introducing a bill to bring relief and reform to the federal estate tax system. Under Sen. Landrieu's proposal, 99.99 percent of Louisiana residents would no longer be subject to any federal estate tax whatsoever and there would be a rate cut for those who would still have a tax liability.
"This is a plan that has a chance to pass Congress," said Sen. Landrieu, who added that she hopes the plan will serve as the blueprint for future Congressional debate and compromise on the issue.
"Unlike the current law, my plan is clear, simple and fair," she said. "It gives most opponents of the estate tax what they want: a significant tax cut. It gives most reformers what they want: a stable and predictable system that enables long-term estate planning. It gives most small business people and farmers what they want: a chance to keep what they have built up in their families over a lifetime of hard work. And it does all of this in a way that is fiscally responsible."
"How can people do wise and informed estate planning under the current system, which is unstable, uncertain and unfair?" Sen. Landrieu asked. "We need certainty. We need reform. And we need relief. I think my proposal lays a clear, balanced path to each."
Under Sen. Landrieu's Estate Tax Relief and Reform Act of 2006, the federal estate tax exemption level would be set at $5 million per person and $10 million per couple. The current exemption is $2 million per person but falls to $1 million in 2011.
"By dramatically raising the exemption, we will effectively get most people of Louisiana out of the tax altogether and forever," Sen. Landrieu said. "This is especially beneficial for many small business owners and family farmers."
The current estate tax only applies to about two percent of estates nationwide, so the "relief" only helps a very small percentage of the population. With the Democrats likely to regain control of Congress, I don't think Senator Landrieu can count on her proposal passing. It's ironic that she feels the citizens of her state should be freed from the burden of the estate tax after she requested $250 billion in Hurricane Katrina relief last year.
Attorney Bill Graham of Salisbury is rallying folks against North Carolina's high gas tax rates. Check out the story on the News and Observer website. North Carolina has one of the highest gas taxes in the country, but there are valid arguments for keeping the tax as it is. It is a "fair" tax in that the persons who use the roads the most pay the most taxes.
Newsday reported today that actor Wesley Snipes has been indicted for federal income tax fraud for claiming $12 million in refunds for 1997 and 1997. Today is also the 75th anniversary of the date that mobster Al Capone was sentenced to 11 years in prison for income tax evasion. He served 8 years.
While I don't see a lot of outright fraud by clients coming into my office, I have had many clients who have neglected to file their tax returns, sometimes for many years. One even had the returns prepared by a CPA, with envelopes ready for mailing, and never bothered to sign the returns, write a check and stick them in the mail. Penalties for failure for file returns and failure to timely pay taxes are 5% and .5% respectively of the tax due per month for up to 5 months, so the penalties can easily 25% of the tax! The interest adds up quickly also.
So, not only is it important not to cheat on your taxes, but also to make sure you file and pay on time!
Two NC attorneys face jail for helping clients dodge taxes. While they can be useful in asset protection under the right circumstances, Offshore Trusts cannot legally avoid taxes for U.S. citizens!
Posted by Juan Antunez in his Florida Probate Litigation Blog:
Offshore trust scheme leads to former U.S. Attorney pleading guilty to tax fraud
In Florida it is almost inevitable that attorneys -- and especially trusts and estates attorneys -- will end up counseling clients who have existing relationships with off-shore trust companies or are considering some sort of arrangement involving an off-shore trust. Like any industry, there are good and bad actors doing business out there. Perhaps unfairly, my inclination is to approach the entire industry with more than my usual degree of skepticism (which says a lot!).
Recent events underscore why Florida attorneys would be wise to counsel caution when evaluating tax savings ideas proposed to clients by off-shore trust operators. In April of 2006 the heads of a Bahamian corporation operating under the name "Sterling Trust" were jailed in North Carolina after a sting operation mounted by undercover agents of the IRS in connection with an alleged tax fraud conspiracy. The trust angle was described in Executives With Bahamas Ties Jailed as follows:
The indictment, signed by Assistant U.S. Attorney Matthew Martens, says Graves, the Woltzes and Currin "would and did concoct foreign ‘dual trust’ arrangements so that wealthy United States citizens could evade federal income tax."
According to the indictment, the IRS undercover agents solicited advice from Graves on evading U.S. taxes on the fictitious sale of "gaming rights" for $10 million. Graves allegedly recommended a scheme known as a "dual trust structure" by which Sterling Trust would set up two trusts that would facilitate the evasion of the taxes.
Attorneys can get personally stung by this type of fraud when they step over the line from simply acting as counselors to affirmatively facilitating their cleints' involvement in this type of scheme. As reported in Former U.S. Attorney to Plead Guilty in Tax Fraud Scheme, a distinguished former U.S. Attorney is facing up to 43 years! in prison because of his involvement . . . in addition to the personal catastrophe this must be for his family. Here are a few excerpts from the linked-to article:
A former U.S. Attorney, state judge and state Republican chairman has agreed to plead guilty to charges related to a tax fraud conspiracy, federal prosecutors in Raleigh, N.C., said Wednesday.
Samuel T. Currin will plead guilty to conspiring to launder $1.45 million through his law firm's client trust account and to lying on his taxes by failing to report an offshore debit card account, prosecutors said. Three others also have been charged.
He could be sentenced to as many as 43 years in prison.
Tax attorney Ricky Graves; Howell Way Woltz, president of Sterling Trust in the Bahamas; and his wife, Vernice Woltz, a director of Sterling Trust, are also charged.
Lesson learned: Caveat Emptor!
I recently had a client come in who had made a gift of over $120,000 to her brother several years ago, using funds that had originally come from their mother. She used the mother's accountant in Florida to prepare her gift tax return. The accountant, apparently unaware that North Carolina had a gift tax, failed to prepare an NC gift tax return or advise her about the tax.
The North Carolina Department of Revenue, by checking the federal gift tax returns filed by NC residents, became aware of the federal return and contacted my client. She now faces penalties and interest in addition to the tax due.
North Carolina allows the same $12,000 annual exclusions as the federal system, but rather than a $1 million lifetime exemption, there is only a $100,000 lifetime exemption, which applies only to ancestors and descendants.
I have seen other clients incur unexpected tax liability when their advisers were ignorant of NC gift tax laws. If you are considering make any large gifts, make sure you seek qualified tax counsel so that you don't have any unpleasant surprises down the road. The taxman will cometh!
Enter keywords:
1. Have reached age 70 1/2.
