Articles Posted in Tax Planning

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clockLate in the year, and at the last minute, on December 16, 2014, Congress has extended the ability of those over 70 1/2 to make direct charitable donations from their IRA’s of up to $100,000, as long as they haven’t already taken out the required minimum distribution for 2014 and do this charitable rollover by December 31.  The way to do this is to tell your plan custodian to distribute up to $100,000 to a public charity of your choice from your IRA. (For a couple, this is 100K from each IRA.)

Although there’s no charitable deduction for a charitable rollover, there’s still a potentially big tax benefit for those who make them: the money that’s designated to charity does not count as taxable income to the donor, and that can help keep the donor’s taxable income below threshold limits for Medicare means testing, and other tax thresholds.

The current extension is for 2014, only, and is one of many temporary laws that were supposed to last only two years, but have been extended annually since the end of 2013.

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giveAs 2014 draws to a close, many of our clients are thinking about making annual gifts to charities. The IRS has just posted a handy article with six tips to keep in mind to make sure that you can claim an income tax deduction for the gift. Here’s a summary:

1. Qualified charities. Make sure that you are making a donation to a qualified charity. The IRS offers a tool to make sure that your intended recipient is qualified. Donations to churches, synagogues, temples, mosques, and government agencies are also deductible, even if they’re not listed.

2. Monetary donations. If you want to give a charity money, in cash, or by check, electronic funds transfer, or credit card, you must have a bank record (like a cancelled check) or a written statement from the charity to deduct the gift.

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black-29972_150The IRS has extended the deadline for filing an estate tax return for decedents dying in 2011, 2012, and 2013 to December 31, 2014. The purpose of the extension is to provide time for surviving spouses to elect portability on the return, which would allow them to use their deceased spouse’s unused exemption from the federal estate tax. Electing portability means, in effect, that a married couple can combine their available exemptions, potentially saving a family a significant amount of money when the second spouse dies.

For example, if a person died in 2011, and had an estate worth $2 million, and that $2 million was allocated to a Credit Trust (as many of our client’s estate plans would do), their surviving spouse could file an estate tax return, elect portability, and gain an additional $3 million in exemption to be used at the spouse’s death. (In 2011, the available exemption was $5 million, and the decedent used up $2 million by funding the Credit Trust.)

In the above example, an estate tax return would not need to be filed for any other reason (because $2 million wasn’t a taxable estate in 2011), and many families may have missed the opportunity to file a return within nine months of the death (which is the usual deadline) because the decedent didn’t have a taxable estate, so no return was required.  The IRS, however, has extended the deadline for such returns until the end of this year to allow surviving spouses to take another look at the benefits of requesting this additional exemption.

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shutterstock_156185702Who knew?! I honestly had no idea that there was such a thing as National Estate Planning Awareness Week, but, in fact there is, and it’s the third week in October, established by House Resolution 1499 in 2008.

When I worked in the US Senate, I was particularly thrilled by National Ice Cream Day (the third Sunday in July) and when I worked in the California State Legislature there was one day when bikers from all over California rode around the capital to protest helmet laws (I’m not sure if that was an official day or not). But this, while not nearly as thrilling as either of those days, is still a good excuse to remind folks about the importance of having a plan in place and keeping it current.

The American Bar Association cites statistics that estimate 55% of Americans don’t have an estate plan. I’ve seen other estimates that over 120 million Americans don’t have an estate plan in place. Either way, that’s a lot of people.

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united-states-151582_150California is a big state, and it’s easy to get near-sighted. Because California has no state-specific gift or estate taxes, it’s easy to focus almost exclusively on the federal estate and gift tax exemptions when planning for the taxes due after there’s been a death.

But nineteen states and the District of Columbia levy their own state estate taxes or inheritance taxes, with widely varying exemptions and tax rates, and these taxes can come due, even to California residents–either because they own property located in another state, or because they inherit assets from a resident of a state with an inheritance tax.

If you, for example, own property in a state with an estate tax, like Minnesota, you might find an estate tax bill due as a result.  Estate taxes fall on the estate of the person who died; Minnesota currently exempts property worth up to $1.2 million, then levies a maximum estate tax rate of 16%. So, if your luxury duck blind is valued at more than $1.2 million,  your estate may owe tax on the transfer of that blind at your death.

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black-29972_150.pngToday, the federal estate tax exemption is $5.34 million, and this number is indexed to inflation, so will rise over time. I was recently at the Stanford University and the Silicon Valley Community Foundation’s annual Conference on Charitable Giving, and heard that the White House’s Office of Management and Budget has estimated that this means that only .15% of estates will be subject to the estate tax in the future.

In less wonky terms, this means that less than 1 out of every 100 American households will ever have to file an estate tax return. It also means that more than 99% of Americans don’t need a charitable deduction at death, since they’ll have no estate taxes to reduce by that deduction.

As a result of the high exemption level, the focus of estate planning, for many families, has shifted from planning as a way to reduce the estate tax that may be due at death to other priorities. It is still important, of course, to use planning as a way to manage assets for minors, to distribute your assets at death and to avoid probate. 

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Thumbnail image for gift.jpgAs we approach the winter solstice and the dreaded holiday decorations begin to appear at every single store in the neighborhood, I thought I’d remind our readers that there’s still time to make an annual gift for 2013. The annual gift tax exemption amount is currently $14,000.

That means that each person can give up to $14,000 per person to as many people as they’d like without using any of their lifetime exemption from the gift tax (currently $5.25 million per person).  Couples can give up to $28,000. Annual gifts, when used for an extended period of time, are a wonderful tax-free way of transferring wealth between generations. As long as no single gift exceeds the annual exemption, none of these annual gifts need to be reported on a gift tax return. However, if one gift exceeds that amount, all of your gifts for that year must be reported.

The only rule for annual gifts is that they must be completed in a given calendar year. If you give a gift by check this year, for example, it must be cashed by December 31, 2013. If you want to give a gift, but keep the gift in trust until a minor child grows up, you must use a trust that allows the beneficiary a meaningful opportunity to withdraw the annual gift within a specified period of time (this is called a Crummey Trust).

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kiddie tax piggie bank.jpgIt’s that time of year! We are all thinking about taxes, but here’s a tax you may not have given much thought to: the Kiddie Tax. This is a tax that was imposed as a way to prevent high tax bracket parents from shifting income to their lower bracket children by placing investments in the child’s name, not the parent’s name (a practice that was once relatively common)–I know, I once came home from college, answered the phone, and my mother’s accountant actually said, by way of introduction, “you don’t know me, but I certainly know you!”

The kiddie tax currently falls on investment income (interest, dividends, capital gains and other unearned income, such as from a trust) earned by children that is over $2000 annually for children aged nineteen or younger (or 24 if the child is a full-time student). Once a child’s income reaches that threshold amount, it will be taxed at their parent’s highest tax rate. If your child is actually working and getting paid, that income will still be taxed at the child’s lower tax rate.

This is relevant to estate planning if you have established an annual gift trust for your children, since income from that trust falls within the definition of ‘unearned income.’ To minimze income taxes on such a trust, the Trustee could invest in assets that appreciate over time, but don’t generate much (if any) taxable income until they are sold (when your children will be older and taxed at their own tax rates).

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gift.jpgAs of 2013, the annual gift tax exclusion amount is $14,000. That means that you can give up to $14,000 per year to any one person without having to report that gift on a gift tax return by April of the year following the gift. But that gift has to be completed–if you write someone a check, they have to cash it. If they don’t have use of the money in 2013, that’s not going to qualify as an “annual gift.”

But what if you want to give an annual gift to your five year old? You don’t really want to give her the money now…..ideally, you’d like to make those annual gifts to her but keep the money in trust until she grows up, when she can spend it, you hope, responsibly. Can you do that? If you give her a gift in 2013, that she can’t spend until 2034, is that really an “annual” gift in 2013?

Yes! As a matter of fact, you can create a trust that can hold those annual gifts for years, provided that trust has what’s called “Crummey Powers” (named after the attorney who came up with the idea.) A Crummey Trust provides for something called a ‘withdrawal power.’ If your Trustee sends your daughter’s guardian (that’s you) a notice, letting you know that $14,000 has been deposited into her trust, and that she has thirty days to withdraw the money (or whatever your trust says, provided that it’s a reasonable amount of time to withdraw the money), but if she does not withdraw the money (which she won’t, of course) it will stay in trust until 2034, that WILL qualify as an “annual” gift.

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questionmark.jpgUntil now, estate planners have primarily focused on reducing the potential estate tax bill for their clients. This was a sensible approach, since the estate tax rate has traditionally been quite high and the exemption from federal estate tax has been relatively low.

All this began to change in 2001, and now, with the 2012 Taxpayer Relief Act, the landscape is completely different: the estate tax rate is capped at 40%, and the exclusion is set at $5 million, and indexed for inflation ($5.25 million in 2013). Also, married couples will be able to use the unused exclusion of the first spouse to die, as long as the survivor files an estate tax return requesting it, which is called portability.

What this means for most families (who don’t have $5 million, let alone $10 million), is that reducing estate tax may not be the most important financial estate planning goal any more. Instead, families may want to focus instead on minimizing their exposure to capital gains taxes. Capital gains taxes are levied upon the difference between what someone buys an asset for (called ‘basis’) and what they sell that asset for–the lower the basis, the higher the gain, and the higher the tax. In 2013, the maximum tax rate for long-term capital gains (for assets held longer than one year) is 23.8% for high income families.