The Health Care Reconciliation bill sent to the Senate today includes a new 4% medicare tax on investment income, which includes IRA distributions, interest income (including tax exempt), dividends, capital gains, rental income and oil royalties.  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.

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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...

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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.

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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.

From IR-2010-24.

 

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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%. 

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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.

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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:

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.

 

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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.

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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.

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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.

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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.

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IR 2010-012:

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.]

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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. 

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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. 

 

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The Dow Jones Newswire quotes Rep. Charles Rangel, Chair of the House Ways and Means Committee, as saying that he does not favor retroactive estate tax legislation (to January 1, 2010). The same article quotes Rangel's Senate counterpart, Sen. Max Baucus, Chairman of the Senate Finance Committee, as saying he wants retroactivity.  What's an estate planner to do?  I'm advising my clients to plan for both sets of laws - estate tax and the modified carryover basis rules.

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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! 

 

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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.

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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.

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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...

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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...

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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.

 

 

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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.

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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)!

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Just a few days left until the estate tax expires (although for one year only), and retroactive action in 2010 is likely.  True death tax haters can track the countdown here.

 

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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.

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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...

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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.

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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:

• 50 cents per mile for business miles driven
• 16.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

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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.

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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.

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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...

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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.

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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.

Senate Bill 2784

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 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.

 

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Another article from CQ Politics about the Democrats' plan for the estate tax in 2010.

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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:

• The check was paid by the drawee bank when first presented for payment;
• The donor was alive when the check was paid by the drawee bank;
• The donor intended to make a gift and delivery of the check was unconditional; and
• The check was deposited, cashed or presented in the year for which completed gift treatment is sought and within a reasonable time after issuance.

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.

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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:

• Structure accounts to provide the longest term payout possible (stretch).
• Name a Retirement Trust as Beneficiary
• Take the money out during lifetime and pay the income tax, then gift the remaining cash either outright or through an irrevocable life insurance trust.  Or consider a Roth conversion.
• Take the money out during lifetime and buy an immediate annuity to provide a guaranteed annual income, to pay the income tax, and to pay for insurance owned by a wealth replacement trust.
• Name a Charitable Remainder Trust as beneficiary with a lifetime payout to your surviving spouse. The remaining assets would pass to charity at the death of your spouse.
• Give the accounts to charity at death.

 

 

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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.

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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.

Continue Reading...

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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.

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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:

• The proceeds are payable to the insured estate, or
• The insured has any “incidents of ownership” of the policy, such as the right to change the beneficiary or access the cash value.

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.

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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.

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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.

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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.

 

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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.

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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.

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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."

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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.

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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.

 

 

 

 

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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:

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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.

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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.

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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!

 

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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.

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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. :-(

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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.

 

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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.

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More news on the possible future of the federal estate tax from WSJ.com.

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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. 

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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...

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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:

IR-2009-71

 

 

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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.
 

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Democrats in the North Carolina House and Senate reached a compromise on tax increases yesterday.  Briefly, the proposal would:

• Increase income taxes by 2%
• Increase sales tax by 1% (to 7.75% in most counties)
• Increase cigarette taxes by 10 cents per pack
• Increase beer, wine and liquor taxes

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.

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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.

 

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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:

• Loans of $10,000 or less.  No interest income will be imputed provided that the borrower does not use the money for income-producing investments.
• Loans of $100,000 or less.  No imputed interest income provided that the borrower has less than $1,000 of total net investment income each year.
• Other loans.  Make sure you charge (at least) the Applicable Federal Rate in place in the month during which the loan is made.  These rates, set by the government, change monthly and depend on the length of the loan [(1) up to 3 years, (2) 3 to 9 years, and (3) over 9 years)].
• Promissory Note.  Make sure you properly document the loan, with interest rate, payment terms and length of loan.  Otherwise the IRS may treat it as a gift, which would require a filing a gift tax return and possible payment of gift tax.  It also can help avoid family disputes in the event of the death of one of the parties to the loan.
• Deed of Trust/Mortgage.  To secure the payment of the loan by the borrower's personal residence, the borrower can sign a deed of trust, which is then filed in the county Register of Deeds.  The borrower can then deduct the interest payments for income tax purposes.
• See a Lawyer.  To ensure that you don't run afoul of tax laws and otherwise protect yourself, consult with a tax lawyer, and have him or her prepare the necessary documents.

 

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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

• Reduce individual income tax rates, except for a two-year "emergency surcharge" on single taxpayers with income over $500,000 and married taxpayers with income in excess of $1 million.
• Reduce the corporate income tax from 6.9% to 5.9% beginning in 2011.
• Increase the gross premium tax paid by insurance companies to 2.25%.
• Stop the corporate income tax transfer to the public school capital fund.
• Apply the franchise tax to limited liability companies.
• Repeal privilege license taxes.

Sales Taxes

• Increase state sales tax from 6.75% to 7.75% through September 2011.  Then rate would then decrease to 6.5%.
• Tax warranties, installations, repairs and some personal services.
• Tax recreation and entertainment, such as movies, concerts and amusement parks.
• Tax more online sales, courier services, and storage fees.
• Tax luxury services such as chartered jets and cosmetic surgery.
• Increase cigarette tax by 50 cents a pack, to 85 cents.
• Increase taxes on alcoholic beverages.

Tax Credits

• Small business tax reduction
• Expanded college savings credit
• Create homebuyer's credit

Compare this plan to the Senate and House proposals. 

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Senate Bill 202, among other things, contains many tax increases for us in the Tar Heel state, to wit:

• Increase top income tax brackets to 8.25% and 8.5% (currently 7.75%)
• Raise the State sales tax from 6.75% to 7%
• Apply sales tax to repairs, warranties, installation, movies, athletic events, amusement events/activities, courier and delivery services, and internet sales.
• Require Limited Liability Companies to pay a franchise tax.
• Increase the liquor tax by 1.5%.

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!

 

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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.

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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:

• Increase top income tax brackets to 8.25% and 8.5% (currently 7.75%)
• Raise the State sales tax from 6.75% to 7%
• Apply sales tax to repairs, warranties, installation, movies, athletic events, amusement events/activities, courier and delivery services, and internet sales.
• Require Limited Liability Companies to pay a franchise tax.
• Increase the liquor tax by 1.5%.

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!

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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:

• Publication 594, Understanding the Collection Process (PDF 129K)
• Publication 17, Your Federal Income Tax (PDF 2,072K)
• Tax Topic 651, Notices — What to Do

 

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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?

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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.

 

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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.

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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.

 

 

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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.

 
 

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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...

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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.

 

 

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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!

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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:

March 26, 2009 My goal has always been clear — to get those taxpayers hiding assets offshore back into the system. We recently provided guidance to our examination personnel who are addressing voluntary disclosure requests involving unreported offshore income. We believe the guidance represents a firm but fair resolution of these cases and will provide consistent treatment for taxpayers. The goal is to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure practice while they still can. In the guidance to our people, we draw a clear line between those individual taxpayers with offshore accounts who voluntarily come forward to get right with the government and those who continue to fail to meet their tax obligations. People who come in voluntarily will get a fair settlement. We set up a penalty framework that makes sense for them — they need to pay back-taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They will also pay a penalty of 20 percent of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. Just to be clear, this is 20 percent of the highest asset value of an account anytime in the past six years. This gives taxpayers — and tax practitioners — certainty and consistency in how their case will be handled. We have instructed our agents to resolve these taxpayers’ cases in a uniform, consistent manner. Those who truly come in voluntarily will pay back taxes, interest and a significant penalty, but can avoid criminal prosecution.  [Emphasis added] At the same time, we have also provided guidance to our agents who have cases of unreported offshore income when the taxpayer did not come in through our voluntary disclosure practice. In these cases, we are instructing our agents to fully develop these cases, pursuing both civil and criminal avenues, and consider all available penalties including the maximum penalty for the willful failure to file the FBAR report and the fraud penalty. We believe this is a firm, but fair resolution of these cases. It will make sure that those who hid money offshore pay a significant price, but also allow them to avoid criminal prosecution if they come in voluntarily. As we continue to step up our international enforcement efforts, this is a chance for people to come clean on their own. Our guidance to the field is for the next six months only, after which we will re-evaluate our options. For taxpayers who continue to hide their head in the sand, the situation will only become more dire. They should come forward now under our voluntary disclosure practice and get right with the government.

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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.

 

 

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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.

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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:

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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.

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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.

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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.

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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.

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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.

 

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Here's a nice, easy to read Summary of the American Recovery and Reinvestment Act of 2009, which includes comparisons to prior law.

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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.

 

 

 

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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

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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.

 

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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.

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Available here on the IRS website.  Hopefully most us will see a little more money in our paychecks soon.

Click here for the text of the full announcement.

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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).
.

Links:

• Publication 575, Pensions and Annuities (PDF 227K)
• Publication 590, Individual Retirement Arrangements (IRAs) (PDF 449K)  
• Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax Favored Accounts   (PDF 72K)
• Form 5329 Instructions (PDF 40K)

 

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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:

• A new "Making Work Pay Tax Credit" for 2009 and 2010 equal to 6.2% of earned income, up to $400 ($800 in the case of a married couple filing jointly); withholding schedules will be adjusted to increase current take-home pay to reflect the credit. The credit is phased out for individuals with modified adjusted gross income exceeding $75,000 ($150,000 for married couples filing jointly).
• A revised Hope education tax credit for 2009 and 2010, renamed as the American Opportunity Tax Credit. With an increased annual limit per student of $2,500, the credit is now available for the first four years of post-secondary education, and up to 40% of the credit is refundable. The credit is phased out for individuals with modified adjusted gross income exceeding $80,000 ($160,000 for married couples filing jointly).
• A revised first-time homebuyer tax credit, extended to include qualifying home purchases through November of 2009. The maximum credit is increased to $8,000, and the rules requiring that the credit be repaid are waived for qualifying homes purchased after December 31, 2008, and before December 1, 2009, as long as the home continues to serve as the individual's principal residence for 36 months. The credit continues to be phased out for individuals with modified adjusted gross income exceeding $75,000 ($150,000 for married couples filing jointly).
• A new standard deduction for state sales and excise tax related to the purchase of a qualified motor vehicle after February 17, 2009 and before January 1, 2010. Individuals who itemize deductions will claim the deduction as part of state and local taxes paid, reported on Schedule A of IRS Form 1040. The deduction is capped at the tax attributable to a maximum purchase price of $49,500, and is phased out for individuals with modified adjusted gross income exceeding $125,000 ($250,000 for married couples filing jointly).

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.

 

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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.

 

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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.

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Click "Continue Reading" for the Senate Appropriations Conference Summary Report.

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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.

 

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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.

 

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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!

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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.

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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!

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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.

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Where Not To Die

01.19.09, 06:00 PM EST

Sixteen states and the District of Columbia (shaded in red) impose their own estate taxes. The dollar amount exempted from tax (in black) and the top tax rate (in yellow) vary by state. Eight states (shaded in orange) levy an inheritance tax, meaning the tax rate (in black) depends on who gets the money. New Jersey and Maryland levy both types of tax.

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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. 

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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.

 

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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.

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Here are some of the current entries:

• Choosing a tax preparer
• Where you can get free tax help
• How e-file can make filing easier and getting you your refund faster
• How to file for an extension or to amend your return
• What tax records to keep
• First-Time Homebuyer Credit

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.

 

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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:

• Removing the $100,000 cap on IRA charitable rollovers
• Allow similar transfers to charitable gift annuities and charitable remainder trusts
• Make the law permanent

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!

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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:

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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:

1.  The donor rolls over funds from a regular IRA to a self-directed IRA. The donor and the charity apply for the life insurance.
2. An loan (with market rate interest due) is made to the selected charity from the donor's new IRA. The loan is secured by a new life insurance policy purchased by the charity on the life of the donor.  The charity signs a promissory note payable to the IRA.
3. The charity assigns to the IRA the portion of the death benefit equal to the outstanding loan from the IRA.

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.

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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:

• A tax on the net unrealized gain of worldwide assets, due at the time the individual leaves the U.S.  The gain is based on the fair market value on the day before the expiration date, and assumes the assets were sold on that date.  The first $600,000 on gain is exempt.  Recognition of the gain can be deferred until actual sale only if proper security is furnished to the IRS.
• There is a 45% gift/estate tax due on transfers made by an expatriate during his or her lifetime or at death to a U.S. beneficiary.  The beneficiary is liable for payment of the tax.

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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:

• Federal Estate Tax Exemption increases to $3.5 million
• Federal Gift Tax Annual Exclusion increases to $13,000
• Federal Gift Tax Annual Exclusion for Non-Citizen Spouses increases to $133,000
• North Carolina Gift Tax repealed
• Rollover availability from Employer Retirement Plans to Non-Spouse IRAs mandated (beginning January 1, 2010)
• Required Minimum Distributions from retirement accounts suspended

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!

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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.

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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.

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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.

 

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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.

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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.

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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?

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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.

 

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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:

• 55 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

Revenue Procedure 2008-72

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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 invovling 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.

 

 

 

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A recent article on Obama's tax plan:  How Obama's Tax Plan Could Affect You

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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.):

1. CA - 10.3%
2. RI - 9.9%
3. VT - 9.5%
4. OR - 9.0%
5. IA - 8.98%
6. NJ - 8.97%
7. ME - 8.5%
8. DC - 8.5%
9. HI - 8.25%
10.  ID - 7.8%

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.

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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.

 

 

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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!

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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 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.
• The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $230,000 to $245,000.
• The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $150,000 to $160,000.
• The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5‑year distribution period is increased from $935,000 to $985,000, while the dollar amount used to determine the lengthening of the 5‑year distribution period is increased from $185,000 to $195,000.
• The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $105,000 to $110,000.
• The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over is increased from $5,000 to $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
• The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost‑of‑living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $345,000 to $360,000.
• The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) is increased from $500 to $550.
• The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $10,500 to $11,500.
• The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $15,500 to $16,500.
• The compensation amounts under Section 1.61‑21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes is increased from $90,000 to $95,000.  The compensation amount under Section 1.61‑21(f)(5)(iii) is increased from $185,000 to $195,000.
• The limitation on wages under Section 45A regarding individuals eligible for the Indian employment credit is $40,000 for tax years beginning in 2008 and will increase to $45,000 for tax years beginning in 2009. The termination date of section 45A was recently extended from Dec. 31, 2007, to Dec. 31, 2009, by Section 314 of Division C of the Emergency Economic Stabilization Act of 2008, P.L. 110-343.

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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.

 

Continue Reading...

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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:

• Early retirement choices - Unlike in a 401(k), penalty-free withdrawals may be had from an IRA before age 59 1/2 under the "substantially equal periodic payments" rule.  This rule allows an account owner to make withdrawals of a specific amount over the longer of a period of five years or until attaining age 59 1/2.
• More favorable beneficiary options - Some employer sponsored plans require non-spouse beneficiaries to take withdrawals from the plan over a five year period, lessening the opportunity for tax-deferred growth and triggering more income tax.  With IRAs, non-spouse beneficiaries may "stretch" withdrawals over their lifetimes, creating tremendous growth potential for younger beneficiaries.
• Penalty-free withdrawals - With IRAs, these are allowed for higher-education expenses and first-time home buying.  Not so with employer plans.
• Greater investment choices - Some employer plans have limited investment options, and only one account is permitted.  IRAs offer much more freedom in choosing investments, and different accounts with different investment strategies (and/or beneficiaries) may be set up.
• Fee payment options - IRA administrative fees may be deducted from the account, or may be paid from non-retirement funds.  The latter type of payments, which are not allowed in employer plans, are deductible as a miscellaneous itemized deduction.

Advantages of Employer Plans:

• Reduction of capital gains in company stock - company stock moved out of a 401(k) into a non-retirement account is taxed based on the value of the stock when purchased, rather than the date of transfer.  If the stock is first moved to an IRA, this tax break is not available.
• Penalty-free withdrawals at age 55 - employees who cease employment at 55 (or anytime before 59 1/2) can take penalty-free withdrawals starting immediately.  Except for the substantially equal periodic payments rule, IRA account owners must wait until 59 1/2.
• Avoidance of North Carolina income taxes - Certain retired government workers can claim an exemption from state income for their retirement plan payments.  If the account was rolled over into an IRA, the exemption would not be available.

 

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 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

 

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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.

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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.

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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.

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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.

 

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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.

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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."

 

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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!

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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...

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If you regularly give to your church, make sure you get an acknowledgment letter that complies with IRS regulations - otherwise you are not entitled to deduct the gifts.  Furthermore, tax preparers should not include deductions for gifts unless the taxpayer can produce the proper receipts.

Here's Professor Christopher Hoyt's report a recent decision from the Tax Court on this issue:

By way of background, a gift over $250 is not deductible unless the
charity delivers a letter to the donor that states (a) the amount of the
donation plus (b) a statement that there were no goods or services
provided to the donor.  (If there were any goods or services, then the
statement must describe the goods or services and set forth a good faith
estimate of the value of those goods or services.)  Sec. 170(f)(8)(C);
Reg. Sec. 1.170A-13(f)(3)

Here the donors made tithes to their church but the church failed to
give the statement with the magic language.  Despite the cancelled
checks and the Tax Court's acknowledgment that the tithes were
charitable gifts, the charitable tax deduction was disallowed.   The
church finally sent a letter with the magic statement that there were no
goods or services after the donors were audited, but since the letter
was received after the return was filed so it was not "contemporaneous"

The court case stresses the need for all charities to competently send
to their donors a contemporaneous written acknowledgment for all gifts
of $250 or more.





Continue Reading...

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This news is courtesy of Roger Brooks and the Association for Advanced Life Underwriting.

The introduction of two estate tax bills - one in the Senate (S. 3284) and the other in the House (H.R. 6499) - enhances the likelihood of ultimate (more probable in 2009 than 2008) estate tax reform.

Senate Bill - $3.5 Million Exemption. Senator Carper (D-DE) introduced S. 3284 with two co-sponsors, Senator Voinovich (R-OH) and Senator Leahy (D-VT). The bill would permanently fix the lifetime estate tax exemption at $3.5 million (indexed for inflation) and the estate tax marginal rate at 45% (essentially freezing the exemption and rate levels slated by the current Revenue Code to be in place in 2009). Significantly, this initiative represents the first time, within our memory, Senators from both parties have co-sponsored such estate tax reform legislation.

House Bill - $2 Million Exemption. Representative McDermott (D-WA), a member of the Ways and Means Committee, has, without co-sponsors, introduced H.R. 6499 which sets the lifetime exemption at $2 million (indexed for inflation) and adopts other major reform approaches, such as gift and estate tax reunification.  Rep. McDermott’s bill would repeal portions of the Economic Growth and Tax Relief Reconciliation Act of 2001 related to the estate tax. Its major thrust would be the adoption of the $2million lifetime exemption, indexed for inflation. The bill would be applicable for all “estates of decedents dying and gifts made after December 31, 2008” and would reunify the gift and estate tax exemption/exclusion amounts. Instead of the applicable exclusion amount for the gift tax being $1 million, it would equal $2 million in 2009 and would be indexed for inflation going forward.

The exclusion amount for the estate tax would also be increased by any unused exclusion from a deceased spouse. This provision (not previously introduced in the current Congressional session, but often described as implementing spousal exemption portability) would allow the surviving spouse to increase his or her exclusion amount by the unused comparable amount of a deceased spouse, if the executor makes an election at the time of the deceased spouse’s death. Furthermore, the exclusion amount could be increased by the unused amount of more than one deceased spouse if the surviving spouse had been married more than once, but the total for each such deceased spouse would be capped at the basic exclusion amount of $2 million, indexed for inflation.

The rate for the estate tax would be 45% for all estates between $1.5 and $5 million, 50% for estates between $5 and $10 million, and 55% for estates over $10 million. Furthermore, the bill would reinstitute the credit for State death taxes and would repeal the deduction for such taxes. The credit was taken away in 2001 and the deduction was put in its place. This bill would restore the credit as it was prior to the 2001 amendment.

Continue Reading...

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If you set up a Charitable Remainder Trust (CRT) in the past but now wish you could get a lump sum back from the trust, it may be possible to sell your interest in the trust.  In a 2001 Private Letter Ruling (200127023), the IRS ruled that the sale of an income interest in a trust is a sale of a capital asset.

Thus, a CRT income beneficiary who has had that interest in the CRT for a year or longer can, in many cases, sell their interest and pay taxes at the current 15% long-term capital gain rate.  (State taxes would be additional).

Given that the capital gains rates are at historically low levels, this can be a way to turn a long term income interest into a lump sum that can be enjoyed currently, while avoiding potential future increases in tax rates.

There are companies that will purchase interests in trusts, including CRTs.

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In what comes as a surprise to me, based on the last news as reported in my postings in the last week or so, yesterday Governor Easley signed HB2436, which includes (page 201) a complete repeal of the North Carolina Gift Tax (Article 6 of Chapter 105 of General Statutes), effective January 1, 2009.

This will certainly make estate tax planning and Medicaid planning easier (and less expensive, in some cases) for North Carolinians.  I personally will miss the NC gift tax, since I enjoyed advising people about its peculiarities as compared to the federal gift tax.  After all, it it weren't for taxes, my job would be much less interesting!

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Democrat and Republican Senate leaders continue to clash over the tax extenders bill, which contains an extension of the $100,00 IRA charitable rollover and other income tax benefits.  Stay tuned...

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These are the facts from a recent Private Letter Ruling from the IRS:

The Decedent had a "pour-over" will requiring that his probate estate be added to his living trust. The trust provided that upon Decedent's death distributions are to be made to certain beneficiaries with the remainder going to four charitable organizations. The Decedent had an IRA at the time of his death but there was no designated beneficiary as the named beneficiary was deceased. Therefore, the Decedent's estate became the beneficiary by default. The Trustee of the living trust and the personal representative of the estate proposed to satisfy the residuary bequest to the charities by assigning the IRA to the four named charities.

IRC Section 691(a)(1) provides that income in respect of a decedent (IRD) assets owned at death are included in the gross income of the estate or the person, who, by reason of the owner's death, acquire the right to receive the asset. A traditional IRA is an IRD asset (Rev. Rul. 92-47, 1992-1 C.B. 198). Under Sec. 691(a)(2), if a right to an item of IRD is transferred by an estate who received the asset by reason of the owner's death, the asset is included in the gross income of the estate.

However, the term "transfer" under Sec. 691(a)(2) does not include the transmission of an IRD asset at death if the transmission occurs pursuant to the right of the person receiving the asset by reason of a decedent's death by bequest, devise or inheritance. The IRS held that the transfer of the IRA in satisfaction of the Decedent's residuary bequest from his trust is not a transfer within the meaning of Sec. 691 and is thus not includable in the gross taxable income of decedent's estate.

The IRD will be considered income to the four charities, but since they are tax exempt organizations, no tax will be due.

To see the full text of PLR - 200826028, click "Continue Reading."
Continue Reading...

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Yesterday the North Carolina General Assembly reached an agreement on the budget, but it did not include a repeal of the gift tax in 2009.  Instead, the repeal was put off until 2010.  However, given the state of the economy and continuing budget woes, I for one won't count on repeal until it actually takes place.

Most North Carolina residents and even many attorneys aren't even aware of the NC gift tax.  In my practice I have learned of many, many gifts that have been made over the years and not reported as required.

If the General Assembly ultimately decides to keep the gift tax, I believe they should provide funds to the Department of Revenue to hire me as a consultant!  I have a few ideas that would result in a marked increase in tax collected.

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My last entry was about SB1756, which includes a complete repeal of the North Carolina gift tax.  However, Governor Easley and others have been strongly urging the General Assembly to delete the repeal provisions.

If you would like to see the gift tax repealed, please email or call the office of your legislators and ask them to support repeal of the gift tax, effective 1/1/09. Go to www.ncleg.net and look under House Finance committee for names and email addresses of finance committee chairs.

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Today the IRS issued temporary and proposed regulations that reduce the extension of time to file tax returns for certain businesses that generate Schedules K-1 and other similar statements to five months. (The current period is six months.)

This change will be effective for extension requests for tax returns due on or after January 1, 2009, and applies to entities that file the following returns and forms that have a tax year ending on or after September 30, 2008:

• Form 1065, U.S. Return of Partnership Income
• Form 1041, U.S. Income Tax Return for Estates & Trusts
• Form 8804, Annual Return for Partnership Withholding Tax (Section 1446)

The final and temporary regulations finalize the simplified procedures for obtaining an automatic extension of time to file returns, doing away with the requirements for a signature and an explanation of the need for an extension of time to file. They also complete the elimination of Form 2688, Application for Additional Extension of Time to File U.S. Individual Income Tax Return, granting individual taxpayers an automatic six-month extension with their filing of Form 4868, Application for Automatic Extension of Time to File a U.S. Individual Income Tax Return.

Thanks to Bob Keebler, CPA for this news.

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Budget negotiators for the North Carolina House and Senate agreed on tax breaks in the 2008-09 spending plan, which include, most notably for me and many of my clients, a repeal of the state gift tax.  North Carolina is one of only four states with a gift tax.  The others are Tennessee, Connecticut and Louisiana.

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As a result of the ever-rising gas prices, the IRS has increased the optional standard mileage rates for July 1 through December 31, 2008.  For business, the rate is now 58.5 cents per mile, and 27 cents per mile for medical and moving.  The charitable rate remains unchanged at 14 cents a mile.  See Announcement 2008-63.

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The Renewable Energy and Job Creation Act of 2008, the latest version of legislation featuring several tax extenders, alternative minimum tax relief and energy provisions failed to pass the Senate.  Championed by Senate Finance Committee Chair Max Baucus, the bill faced stiff opposition from Republicans who objected to the tax offsets, most notably taxing offshore deferred compensation of hedge fund managers and delaying a business tax interest deduction until 2019.

Baucus has already crafted a revised bill, the Energy Independence and Tax Relief Act of  2008, which should be submitted to the Senate next week.  Democrats oppose any tax extenders without tax offsets.

See my earlier postings under the heading Pending Legislation for a more detailed description of the tax extenders, which include the IRA charitable rollover.

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With all of the universities in this area, this recent change in the law dealing with deferred compensation (IRC Section 409A) may be of interest to many local readers.  The new law may affect faculty who have a 10 month teaching contract but elect to be paid over a 12 month period.  See this AAUP Tax Alert for details.

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For you true tax geeks out there, you can find all kinds of interesting statistics in this report published by the IRS.  In 2006, North Carolina ranked 11th in the country in number of estate tax returns filed (1089), and 12th in terms of estate size.  California, Florida and New York were the top states.

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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.

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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.

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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:

1. Estate Taxes - currently estate taxes are an issue for estates over $2 million.  What many people don't realize is that virtually everything they own is taxable.  The most common misconception is that life insurance is tax free.  This is generally true for income tax purposes, but not for estate tax purposes.  The combination of life insurance face value, retirement plans and equity in real estate put many couples over the exemption amount.  Without proper planning property roughly 50% of the property over $2 million will go to the government (45% federal tax plus NC estate tax).   Also, in 2011 the estate tax exemption will be reduced to $1 million.
2. Probate Avoidance - Even the most sophisticated Will does not avoid probate for property passing under the terms of the Will.  The probate process, governing by the court, can be lengthy and expensive.  Living Trusts can keep matters out of the court and save time, money and hassle.   As a rule of thumb, I recommend Living Trusts for those who have probate assets of $200,000 or more.  An example of a probate asset would be a brokerage account in one's sole name.
3. Asset Protection - Leaving an inheritance to someone outright makes things simple, but once that person receives the assets, there is no protection for the inheritance.  The assets could be lost to bad judgment, creditors, or divorcing spouses.  I urge my clients to consider leaving assets in trust, even to their spouses.  The protection offered can be invaluable in case the unexpected happens.  The trusts can be designed to be very flexible, and the beneficiary can even be a trustee.

As you can see, it pays to look beyond the basics when developing an estate plan.

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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:

• Strictly follow the terms of the Operating Agreement
• State the reasons for the LLC in the Operating Agreement
• Have the Agreement reviewed by separate counsel for all initial members
• Leave enough assets outside the LLC to live on and pay taxes
• Don't mingle LLC assets with personal assets
• File the proper tax returns each year
• File the necessary documents with the Secretary of State each year
• Don't put your personal residence in a Family LLC
• Make sure the senior generation does not have the power to allocate profits and losses
• Require annual distributions
• Have the junior family members (or their trusts) make initial contributions to the LLC to provide for the pooling of assets
• Don't wait until the senior family member is near death

 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. 

 

 

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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:

• Social Security Number (or Taxpayer Identification Number),
• Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)),
• Exact refund amount shown on their tax returns.

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.

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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.

 

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For better or worse, this has been my busiest tax season ever.  That's the reason I haven't blogged in a while.  I do a lot of returns for decedents, estates and trusts, as well as gift tax returns, most of which are due April 15.  It's now after 7:00 p.m., and I'm getting ready to head out to the post office with the last two extensions.

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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).

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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: 

1. Dynasty Trusts (page 33) - take action now to create or fully fund Dynasty Trusts.
2. Family Limited Partnerships (page 37) - those considering creating a Family Limited Partnership or  Limited Liability Company should do so now.  Those with existing entities should not delay making contemplated gifts of ownership interests. 
3. Crummy Powers (page 46) - fund Crummy trusts early in 2008 - review the three options.

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.

Continue Reading...

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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.

 

 

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According to the IRS Commissioner:

1. File Early.
2. File Electronically.
3. Use Direct Deposit.

IR 2008-51

 

 

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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.

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Stimulus Payment Schedule for Tax Returns
Received and Processed by April 15

Direct Deposit Payments
If the last two digits of your Social Security number are:	Your economic stimulus payment deposit should be sent to your bank account by:
00 – 20	May 2
21 – 75	May 9
76 – 99	May 16
Paper Check
If the last two digits of your Social Security number are:	Your check should be in the mail by:
00 – 09	May 16
10 – 18	May 23
19 – 25	May 30
26 – 38	June 6
39 – 51	June 13
52 – 63	June 20
64 – 75	June 27
76 – 87	July 4
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.

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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!

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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.

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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.

Information about eligibility requirements.

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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

 

 

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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.

Continue Reading...

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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.

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If you are of of the many Americans eligible for a tax rebate this year, and are expecting a check in May, don't procrastinate.  In order to receive a rebate, you must have already have filed your 2007 return.  So forget the extensions and get your returns done by April 15!

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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...

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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...

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The IRS issued a warning today about new telephone and email scams.  Click "Continue Reading" to view the official notice.  In my inbox the phony IRS emails are almost as common as the emails from people in Nigeria or London or Hong Kong who want to share their found millions with me. Continue Reading...

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The IRS recently published a notice naming four new frivolous income tax claims:

• Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending.
• Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS.
• A nonexistent “Mariner’s Tax Deduction” (or the like) related to invalid deductions for meals.
• Certain instances of misuse or excessive use of the section 6421 fuels credit.

Needless to say, do not take any of these positions on your return!

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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. 

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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.

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This in information is courtesy of the NC State Giftlaw Newsletter.  Of broadest interest in probably the increase in the AMT exemption and the delay it will cause for early filers who expect refunds. Continue Reading...

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This article discusses in brief the history of the federal estate tax and its effect on the U.S. budget. Also examined are the ways in which the economic behavior of the population affected by the estate tax has changed over time due to market, technological, and political stimuli.

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Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

• 50.5 cents per mile for business miles driven;
• 19 cents per mile driven for medical or moving purposes; and
• 14 cents per mile driven in service of charitable organizations.

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!

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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.

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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.

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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."

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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.

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The following is from the North Carolina State University GiftLaw newsletter:

House Ways and Means Chairman Charles Rangel (D-NY) introduced this week the Tax Reduction and Reform Act of 2007 (TRRA 2007). The primary goal of TRRA 2007 is repeal of the AMT. As incomes have grown and the AMT exemptions have failed to keep pace, millions of American taxpayers are now facing a higher tax payment under AMT than under the regular income tax system. If AMT is left unchanged, millions of future taxpayers would transition from the regular income tax to the alternative minimum tax.

Because AMT was never intended to apply to middle income taxpayers, Chairman Rangel has proposed its repeal. However, under the "Paygo" rules of the Democratic Party, he must find an offset or tax increase to replace the estimated revenue loss under AMT of $831 billion over ten years. Therefore, Chairman Rangel proposes to replace the AMT with a new tax on higher-income persons. The new proposed tax is 4% on adjusted gross income over $200,000 and 4.6% on adjusted gross income over $500,000 ($250,000 for single taxpayers).

TRRA 2007 also includes a number of tax extenders and various other tax increases. Chairman Rangel recognizes that a comprehensive tax bill cannot pass this late in the legislative session and plans to hold hearings on major tax reform in early 2008.

TRRA 2007 would also extend the $100,000 IRA charitable rollover for year 2008. The unfavorable news is that the proposed surtax is on adjusted gross income and not taxable income. If a surtax were to pass on adjusted gross income, that would be a significant negative incentive for higher-income donors to make large cash gifts because they would lose part of their charitable deduction. Surtaxes previously have applied to taxable income. A surtax on taxable income is actually a charitable tax incentive, since a cash or appreciated property gift from a higher income person reduces both the income tax and the surtax.

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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. 

Click here for the posting on the IRS website.

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Here's an update from the North Carolina Department of Revenue.  There are no significant changes to the estate and gift tax rules, but clarification was made about penalties for those taxpayers who fail to report any changes in the federal estate and gift tax returns to the NC Department of Revenue.

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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.

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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.

 

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Considering a second home? Read the Vacation Home Survival Guide on forbes.com.  A couple things to keep in mind that aren't mentioned are that second home in other states can trigger probate in that state, even possibly additional estate or inheritance taxes.  Owning the home in a limited liability company (LLC) or living trust can help avoid probate, and an LLC can help protect your other assets if you rent out the home and are ever sued by a tenant.

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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.

 

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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.

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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.

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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.

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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.

Continue Reading...

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I have gotten several email messages that supposedly originate from the IRS, promising refunds if you provide your bank account information.  Check out this announcement from the IRS about a new email scam.

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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.

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Whoever said the IRS isn't on your side?  Click here

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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.

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While non-citizens who reside in the U.S. are subject to U.S. income tax on their worldwide income, and U.S. estate tax for worldwide assets, they do not receive the same treatment as citizens when it comes to U.S. gift and estate taxes.  Thus, when one or both spouses in a married couple are not U.S. citizens, special planning may be required to avoid adverse tax consequences for transfers during lifetime or at death. Continue Reading...

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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.

 

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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

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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.

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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...

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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.

 

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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...

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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.

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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.

Continue Reading...

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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...

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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.

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Today the IRS published a Notice entitled IRS Urges Taxpayers to Avoid Common Mistakes, which includes common problems and how they can be avoided.

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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...

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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:

• False arguments that wages do not constitute taxable income.
• Filing returns and paying taxes are voluntary.
• The IRS must furnish taxpayers with a summary record of assessment made on a Form 23C,   “Assessment Certificate-Summary Record of Assessments”, before overdue taxes may be collected.
• Income is not taxable when the taxpayer declares that he is not a United States citizen because he is a citizen of an individual State or claims he is not a person as defined by the Internal Revenue Code.

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:

• Revenue Rule 2007-19
• Revenue Rule 2007-20
• Revenue Rule 2007-21
• Revenue Rule 2007-22
• IR-2007-37, Fraudulent Telephone Tax Refunds, Abusive Roth IRAs Top Off 2007 “Dirty Dozen” Tax Scams

All taxpayers, whether one uses a professional tax preparer or not, would be well-served to review Notice 2007-30.

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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.

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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.

 

 

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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.

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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.

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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.

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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.

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Professor Christopher Hoyt of the University of Missouri School of Law has proved a useful summary of IRS Notice 2007-7, 2007-5 IRB 1, which provides guidance about Charitable IRA Rollovers.  This law, which became effective in 2006, allows anyone over age 70 1/2 to have up to $100,000 distributed directly to a qualifying charity and be excluded from income. Continue Reading...

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This  week I'm attending the 41st Annual Heckerling Institute on Estate Planning in Orlando.  The Institute, sponsored by the University of Miami School of Law, is the nation's leading conference on estate planning.  The first speaker (and my former professor), Jeff Pennell of Emory Law School, stated that he thinks that estate tax repeal is now a dead issue.  We'll see what some of the other commentators have to say as the week goes on.

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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.

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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:

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.

Year-end tax prep Tax planning can work to your advantage. You can lower your liability by paying certain expenses before Dec. 31 and by deferring income until after that date when possible.

13 ways to cut your tax bill 1. Get in the giving mood 2. Evaluate your portfolio 3. Let your home help you out 4. Embrace energy efficiency 5. Go for better gas mileage 6. Flex your spending account muscle 7. Maximize medical deductions 8. Make early miscellaneous payments 9. Shift incoming income 10. Tend to your retirement 11. Examine education payment options 12. Check your withholding 13. Expired tax breaks extended Click on each numbered link to read more

 

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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.

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From a recent IRS e-newsletter:

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.

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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.

 

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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.

The new pension law primarily makes changes to retirement plans, on both corporate and individual levels. But several provisions also provide tax breaks for, and call more tax examiner attention to, other areas that affect individual taxpayers. Click on the title of provisions 1 through 10 for the article text.

The 10 new tax provisions 1. Automatic enrollments 2. Investment advice 3. Refunds to retirement 4. Easier rollovers to Roths 5. Permanent IRA contribution levels 6. Saving the Saver's Credit 7. Tax-free 529 distributions 8. Proving donated goods' value 9. More record keeping 10. Giving away IRA money

 

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