Estate Tax
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December 16, 2024 The following letter was prepared and distributed to clients and friends of Dowell Group, LLP. The letter discusses individual and business tax planning ideas that may be appropriate in certain situations. This does not represent tax advice, as every situation must be considered on its own merits. Dear Clients and Friends, As we near the end of another year, it can be worthwhile to take a few moments to consider if there are any additional actions that should be taken to improve your tax positions. Our goal is to alert you to tax planning ideas that might prove helpful in these last days of 2024. We have tried to organize this communication in a “checklist” format, separated between issues affecting individuals and businesses, so that you can more quickly identify concerns relevant to your situation. We have also included some comments on other matters of interest that are not directly relate to income taxes, but may be worth considering. We hope the following proves to be helpful to you. Tax planning remains very much a case-by-case analysis. Because we are limited with what we can cover in this format, we also encourage you to visit our website at www.dowellcpa.com, where we regularly post articles that relate to businesses, individuals, trusts, and estates. In a world that continues to go through so many changes, we are here to serve you. If you have a question or concern, please contact us. We also want to take the time to thank you. In this busy world, we know that we do not often slow down enough to say thanks. We know that we would not be here as a thriving firm without you. Most importantly, whatever your faith or beliefs, we wish you peace, good health, and good relationships this holiday season and in the years ahead. Sincerely, Dowell Group, LLP Individuals - Year-End Tax Planning □ Higher-income individuals must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of MAGI over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, the approach taken to minimize or eliminate the 3.8% surtax will depend on the taxpayer's estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to reduce MAGI other than NII, and some individuals will need to consider ways to minimize both NII and other types of MAGI. An important exception is that NII does not include distributions from IRAs or most other retirement plans. □ The 0.9% additional Medicare tax also may require higher-income earners to take year-end action. It applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds, above. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer. □ Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $94,050 for a married couple for 2024). If the 0% rate applies to long-term capital gains you took earlier this year for example, you are a joint filer who made a profit of $5,000 on the sale of stock held for more than one year and your other taxable income for 2024 is $89,050 or less then try not to sell assets yielding a capital loss before year-end, because the first $5,000 of those losses won't yield a benefit this year. (It will offset $5,000 of capital gain that is already tax-free.) □ Postpone income until next year and accelerate deductions into this year if doing so will enable you to claim larger deductions, credits, and other tax breaks for this year that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into this year. For example, that may be the case for a person who will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or who expects to be in a higher tax bracket next year. □ If you believe a Roth IRA is better for you than a traditional IRA, consider converting traditional-IRA money invested in any beaten-down stocks (or mutual funds) into a Roth IRA this year if eligible to do so. Keep in mind that the conversion will increase your income this year, possibly reducing tax breaks subject to phaseout at higher AGI levels. This may be desirable, however, for those potentially subject to higher tax rates under pending legislation. □ It may be advantageous to try to arrange with your employer to defer, until early next year, a bonus that may be coming your way. This might cut as well as defer your tax. Again, considerations may be different for the highest income individuals. □ Many taxpayers won't want to itemize because of the high standard deduction amounts that apply for 2024 ($29,200 for joint filers, $14,600 for singles and for marrieds filing separately, $21,900 for heads of household), and because many itemized deductions have been reduced or abolished. Like last year, no more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible; and personal casualty and theft losses are deductible only if they're attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses but only to the extent they exceed 7.5% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won't save taxes if they don't cumulatively exceed the standard deduction for your filing status. □ Some taxpayers may be able to work around these deduction restrictions by applying a bunching strategy to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, a taxpayer who will be able to itemize deductions this year but not next year will benefit by making two years' worth of charitable contributions this year, instead of spreading out donations over 2024 and 2025. For 2022-2025, the deduction for charitable contributions of individuals is limited to 60% of the contribution base (generally, AGI). □ If you expect to owe state and local income taxes when you file your return next year and you will be itemizing this year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into this year. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not good to the extent it causes your state and local taxes paid this year to exceed $10,000. □ If you were 73 or older this year you must take a required minimum distribution (RMD) from any IRA or 401(k) plan (or other employer-sponsored retirement plan) of which you are a beneficiary. Those who turn 73 this year have until April 1 of next year to take their first RMD but may want to take it by the end of this year to avoid having to double up on RMDs next year. □ If you are age 70½ or older by the end of this year, have traditional IRAs, and especially if you are unable to itemize your deductions, consider making charitable donations via qualified charitable distributions from your IRAs by the end of the year. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction. For 2024, distributions of up to $105,000 per taxpayer are tax-free (increasing as a result of inflation adjustment to $108,000 in 2025). (Previously, those who reached reach age 70½ during a year weren't permitted to make contributions to a traditional IRA for that year or any later year. While that restriction no longer applies, the qualified charitable distribution amount must be reduced by contributions to an IRA that were deducted for any year in which the contributor was age 70½ or older, unless a previous qualified charitable distribution exclusion was reduced by that post-age 70½ contribution.) The IRA qualified charitable distribution also allows distributions to charities (up to $53,000) through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. □ If you are younger than age 70½ at the end of the year, you anticipate that you will not itemize your deductions in later years when you are 70½ or older, and you don't now have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs this year. If these circumstances apply to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs this year. Then, in the year you reach age 70½, make your charitable donations by way of qualified charitable distributions from your IRA. Doing this will allow you, in effect, to convert nondeductible charitable contributions that you make in the year you turn 70½ and later years, into currently deductible IRA contributions and reductions of gross income from later year distributions from the IRAs. □ Take an eligible rollover distribution from a qualified retirement plan before the end of the year if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes you owe this year. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in this year's income, but the withheld tax will be applied pro rata over the full tax year to reduce previous underpayments of estimated tax. □ Consider increasing the amount you set aside for next year in your employer's FSA if you set aside too little for this year and anticipate similar medical costs next year. □ If you become eligible by December to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for the current year. □ Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $18,000 made in 2024 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. □ If you were in a federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred, or on the return for the prior year, generating a quicker refund. □ If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in the current year to maximize your casualty loss deduction this year. Individuals – Other Considerations at Year-End □ Review your portfolio – The end of the year is a perfect time to analyze your holdings and determine if the risk tolerances and asset allocations are still appropriate for your investment objectives. Consider your age, health, and family issues. □ Review beneficiary designations – Review the beneficiaries named on retirement accounts or insurance policies; consider if assets are titled correctly; determine if a family member should be added as a signer on an account. □ Wills and Trusts - If you have not set up wills and trusts, then contact your attorney; call us if you need a reference. If it has been many years since you had your wills and trusts drafted, set up a meeting with your attorney or CPA to review the documents, including the named beneficiaries, guardians, and executors. □ Estate planning – The amount of an individual’s estate that is exempt from estate taxes in 2024 is $13.61 million (double that amount for a married couple). States, like Illinois, may have lower thresholds for the amounts that are subject to state inheritance taxes. Planning is required to make sure that your estate is optimally situated for estate tax purposes. □ Grantor (“Living”) trusts – If you have substantial assets, you should consider creating a grantor (also known as living or revocable) trust. If you have a grantor trust, be sure that all assets are held in that trust; brokerage accounts should be titled in the name of the trust. □ Power of Attorney - As part of the review of wills and trusts, also consider powers-of-attorney and health care powers-of-attorney you have in force (or should have in force) for all of your family members. □ Insurance - Review the various types of insurance coverages you have in place and re-examine your needs. This includes homeowner’s, auto, life, health, disability, umbrella liability, and long-term care. □ Family meeting – While there may be a few more family gatherings this year compare to last year, many will still be “zooming” their loved ones at the holidays. Whether your family is zooming or in-person, consider having a family meeting to give an overview of your investments and objectives, charitable giving strategies and desires, the location of key documents, and names of your key advisors (CPAs, attorneys, bankers, insurance agents, investment advisors, etc.). □ Safe deposit box - Make a special point to visit your safe deposit box and inventory (and organize) the contents. Make sure your executor, spouse, or other key person knows where the key is kept. □ Cyber Security – Many of us have been subject to some level of privacy violations. Consider if you should purchase personal identify theft protection. One good practice is to check once a year with the three major credit bureaus, where you can pull a credit report for free. □ Passwords – The passwords to your critical accounts (bank, investments, insurance) should be someplace where they are accessible in the event of your illness or death. Your password list should include other accounts as well that are password protected (like phones, internet, email, etc.). Businesses - Year-End Tax Planning □ Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2024, if taxable income exceeds $383,900 for a married couple filing jointly, (about half that for others), the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income up to $100,000 above the threshold, and to other filers with taxable income up to $50,000 above their threshold. (For 2025, the amount rises to $394,600.) □ Taxpayers may be able to salvage some or all of this deduction, by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout) for the current year. Depending on their business model, taxpayers also may be able increase the deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting us. □ More small businesses are able to use the cash (as opposed to accrual) method of accounting than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test, which is satisfied for 2024 if, during a three-year testing period which precedes the current year, average annual gross receipts don't exceed $30 million. Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments. (For 2025, the amount rises to $31 million.) □ Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2024, the expensing limit is $1,220,000, and the investment ceiling limit is $3,050,000. For 2025, the amounts rise to $1,250,000 and $3,130,000, respectively. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for interior improvements to a building (but not for its enlargement), elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. □ The generous dollar ceilings mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. So expensing eligible items acquired and placed in service in the last days of the current year, rather than at the beginning of next year, can result in a full expensing deduction on this year's return. □ Businesses also can claim a 60% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service in 2024, and for qualified improvement property, described above as related to the expensing deduction. The 60% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. Now is the time to take advantage of bonus depreciation as it is being phased out. It will be 40% in 2025, and 20% in 2026. Bonus depreciation will not be available after 2026. □ Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs aren't required to be capitalized under the UNICAP rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS, e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing qualifying items before the end of the year. □ A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for the current year (and substantial net income next year) may find it worthwhile to accelerate just enough of next year's income (or to defer just enough of its current-year deductions) to create a small amount of net income in the current year. This allows the corporation to base next year's estimated tax installments on the relatively small amount of income shown on its current-year return, rather than having to pay estimated taxes based on 100% of its much larger taxable income for next year. □ Year-end bonuses can be timed for maximum tax effect by both cash - and accrual-basis employers. Cash basis employers deduct bonuses in the year paid, so they can time the payment for maximum tax effect. Accrual-basis employers deduct bonuses in the accrual year, when all events related to them are established with reasonable certainty. However, the bonus must be paid within two months after the end of the employer's tax year for the deduction to be allowed in the earlier accrual year. Accrual employers looking to defer deductions to a higher-taxed future year should consider changing their bonus plans before year end to set the payment date later than the 2.5-month window or change the bonus plan s terms to make the bonus amount not determinable at year end. □ To reduce current-year taxable income, consider deferring a debt-cancellation event until next year. □ Sometimes the disposition of a passive activity can be timed to make best use of its freed-up suspended losses. Where reduction of current-year income is desired, consider disposing of a passive activity before year-end to take the suspended losses against current income. Businesses – Other Considerations □ Corporate records – Update annual resolutions and officer elections. □ Good standing – Verify that the annual franchise tax return has been filed with the State of incorporation or organization. □ Insurance – Consult with your advisors, executive team, and insurance agent to determine if your business, property, and key officers, are adequately insured. □ Buy-sell agreement – If your business has multiple shareholders, consider adopting an agreement to orderly transfer those shares in the event of a sale, retirement, or death. □ Budget – Every business should have a budget or a forecast in place. Assemble your trusted team, pull the data together, study the most recent results, consider objectives for the coming year, and create the budget or forecast. □ Benefits – Many businesses would benefit by checking their benefit package annually, to be sure that it is competitive with the marketplace. This includes retirement accounts offered, insurance options, as well as “soft” benefits like remote work and flex-time. □ Compensation – Consider if the level of pay of your current employees is competitive. In today’s competitive environment, it is often much easier to retain a key employee than recruit one. □ Cyber Security – It seems that a day rarely goes by without a story about a business being hacked. Cyber security should rank at the top of everyone’s list. Discuss weaknesses in your server, systems, or procedures with internal staff and with experts in the field. There are some good 3rd parties that can be engaged to test your systems and people. □ Other Security – Consider other ways your business could be exposed to risk. For instance, is your building secured with proper alarms, cameras, etc. □ Entity type – Even though making a change is not likely, sit down with your attorney and CPA to discuss entity type; maybe your business would benefit by considering a different structure. Limited liability companies have grown in popularity, but there is also a place for S corporations, and C corporations may still offer some advantages. □ Ownership structure – There may be a number of reasons to consider the ownership of a business, including the need to reward and retain key employees, to gain income tax or estate tax advantages. □ Acquisitions – Expanding in the marketplace may offer strategic advantages to a business, whether to open up new markets, access new customers, or gain skill sets. Identifying key targets may be something to consider in the new year, if it fits with the goals of ownership.
Life insurance is a significant asset in many estates. Whether it is included for estate tax purposes or not is the issue.
Planning to give to charity? Consider the impact of making those gifts from your IRA at death.
Read this if you gift appreciated property to a charity. Don't take the requirements of a written receipt lightly.
A quick high-level summary of possible changes under President-elect Biden.
by Gregory S. Dowell December 2, 2019 It comes as a surprise to some people to learn that they may have to file a gift tax return to report the funds they gave to their daughter to buy a house. Because we tax the recipient of income from an income tax perspective, it further comes as a surprise to some people when they find out that it is the giver of the gift (usually called the “donor”) who must report and pay any gift tax that is due, rather than the recipient (often referred to as the “donee”). While this is just a brief overview, hopefully this article will shed some light on when gift tax returns must be filed. To avoid allowing the transfer of wealth to be completely untaxed from generation to generation, US laws require that gift tax (and estate tax) must be paid under certain conditions. Generally, a citizen or resident of the United States must file a gift tax return if gifts were made that totaled more than $15,000 in any one year to someone. While gifts under $15,000 to a recipient are not subject to gift tax return reporting, a donor must total up all of the gifts to any one recipient made during the year to see if the $15,000 threshold has been reached. An exception to this rule is for most gifts to a spouse (although different rules apply if the spouse is not a US citizen and if total gifts exceed $155,000 in 2019). Gift tax returns are also filed individually, even in the case of married couples, although married couples can file gift tax returns that allow the splitting of gifts between them. Some other important notes on filing gift tax returns: Certain gifts, called future interests, are not subject to the $15,000 annual exclusion and you must file Form 709 even if the gift was under $15,000. If a gift is of community property, it is considered made one-half by each spouse. For example, a gift of $100,000 of community property is considered a gift of $50,000 made by each spouse, and each spouse must file a gift tax return. Likewise, each spouse must file a gift tax return if they have made a gift of property held by them as joint tenants or tenants by the entirety. Only individuals are required to file gift tax returns. If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST taxes. The donor is responsible for paying the gift tax. However, if the donor does not pay the tax, the person receiving the gift may have to pay the tax. If a donor dies before filing a return, the donor’s executor must file the return. Most gifts to charities do not trigger the need to file a gift tax return, regardless of the amount that is donated. This is true as long as the entire interest in the property was transferred to a qualifying charities. If only a partial interest was transferred to a charity, a gift tax return must be filed. If a gift tax return is required to be filed, it is filed annually on form 709 with the Internal Revenue Service. It is due to be filed on April 15th of the year following the year of the gift. An extension of time to file the gift tax return is automatically received if the individual extends her individual income tax return. If the individual income tax return is not extended, then a 6-month extension can be obtained to file the gift tax return by filing form 8892. Just like the individual income tax return rules, extending the time to file the gift tax returns does not extend the time for paying any gift tax that might be due, and penalties and interest will be assessed for the gift taxes not paid by the original due date of the return. In the case of death of the taxpayer, the due date for filing the return is either the due date for filing the donor’s estate tax return on form 706, or the April 15th (or extended) date for filing the decedent-donor’s gift tax return. Generally, the federal gift tax applies to any transfer by gift of real or personal property (whether tangible or intangible) that was made directly or indirectly, in trust, or by any other means. The gift tax applies not only to the free transfer of any kind of property, but also to sales or exchanges, not made in the ordinary course of business, where value of the money (or property) received is less than the value of what is sold or exchanged. The gift tax is in addition to any other tax, such as federal income tax, paid or due on the transfer. The exercise or release of a general power of appointment may be a gift by the individual possessing the power. General powers of appointment are those in which the holders of the power can appoint the property under the power to themselves, their creditors, their estates, or the creditors of their estates. To qualify as a power of appointment, it must be created by someone other than the holder of the power. The gift tax may also apply to forgiving a debt, to making an interest-free or below-market interest rate loan, to transferring the benefits of an insurance policy, to certain property settlements in divorce cases, and to giving up some amount of annuity in exchange for the creation of a survivor annuity. The gift tax applies to any digital asset, such as an electronic record, content, or data stored or existing in a binary format, in which the donor transfers a right to use or possess, including virtual currency or other digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value; domain names; images; multimedia; and textual content files. Bonds that are exempt from federal income taxes are not exempt from federal gift taxes. There are four types of transfers to third parties that are not considered gifts, do not trigger the gift tax rules, and should not be reported on the form 709: Transfers to political organizations, Transfers to certain exempt organizations, Payments that qualify for the educational exclusion Payments that qualify for the medical exclusion. To expand on the above, the following is taken directly from the instructions to form 709, as printed by the IRS: Political organizations. The gift tax does not apply to a transfer to a political organization (defined in section 527(e)(1)) for the use of the organization. Certain exempt organizations. The gift tax does not apply to a transfer to any civic league or other organization described in section 501(c)(4); any labor, agricultural, or horticultural organization described in section 501(c)(5); or any business league or other organization described in section 501(c)(6) for the use of such organization, provided that such organization is exempt from tax under section 501(a). Educational exclusion. The gift tax does not apply to an amount you paid on behalf of an individual to a qualifying domestic or foreign educational organization as tuition for the education or training of the individual. A qualifying educational organization is one that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on. See section 170(b)(1)(A)(ii) and its regulations. The payment must be made directly to the qualifying educational organization and it must be for tuition. No educational exclusion is allowed for amounts paid for books, supplies, room and board, or other similar expenses that are not direct tuition costs. To the extent that the payment to the educational organization was for something other than tuition, it is a gift to the individual for whose benefit it was made, and may be offset by the annual exclusion if it is otherwise available. Contributions to a qualified tuition program (QTP) on behalf of a designated beneficiary do not qualify for the educational exclusion. See Line B. Qualified Tuition Programs (529 Plans or Programs) in the instructions for Schedule A, later. Medical exclusion. The gift tax does not apply to an amount you paid on behalf of an individual to a person or institution that provided medical care for the individual. The payment must be to the care provider. The medical care must meet the requirements of section 213(d) (definition of medical care for income tax deduction purposes). Medical care includes expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, or for transportation primarily for and essential to medical care. Medical care also includes amounts paid for medical insurance on behalf of any individual. The medical exclusion does not apply to amounts paid for medical care that are reimbursed by the donee’s insurance. If payment for a medical expense is reimbursed by the donee’s insurance company, your payment for that expense, to the extent of the reimbursed amount, is not eligible for the medical exclusion and you are considered to have made a gift to the donee of the reimbursed amount. To the extent that the payment was for something other than medical care, it is a gift to the individual on whose behalf the payment was made and may be offset by the annual exclusion if it is otherwise available. The medical and educational exclusions are allowed without regard to the relationship between you and the donee. For examples illustrating these exclusions, see Regulations section 25.2503-6(c). While the above will not cover all cases and eventualities, hopefully it serves to answer some general questions about gift taxes.
by Gregory S. Dowell June 27, 2019 In a win for taxpayers against overly-aggressive efforts by states to tax any and all income, the US Supreme Court unanimously ruled that a state cannot tax a trust when the trust’s only connection to that state is because of the residency of a beneficiary. In this case (North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust), North Carolina attempted to tax a trust and relied on its statute that allows a trust to be taxed solely because it has a North Carolina beneficiary. Earlier in the litigation process, the North Carolina Supreme Court ruled that the statute was unconstitutional. Ultimately, the US Supreme Court ruled that because the trust lacked minimum contacts with the State of NC, taxing the trust in NC would be a violation of the Due Process Clause of the 14th Amendment. I n the case, the trust had no connection with NC, other than the fact that a beneficiary of the trust was a resident. NC assessed more than $1.3 million of taxes on income earned by the trust for tax years 2005 through 2008. During that same period, the beneficiary had no right to receive any distributions from the trust and, in fact, did not receive any distributions. The trustee has absolute determination as to whether any amounts were to be paid to the beneficiaries. The trustee paid the assessment under protest, and then filed suit in state court. The US Supreme Court, in agreeing with North Carolina courts that the assessment of tax violated due process, noted that the beneficiary “received no income from the trust in the relevant tax year, had no right to demand income from the trust in that year, and could not count on ever receiving income from the trust”. The US Supreme Court applied a 2-part test to determine if due process had been violated: 1) There must be some definite link or minimum connection between a state and the person, property, or transaction it seeks to tax, so as not to violate notions of fairness; 2) the income attributed to the state for tax purposes must be rationally related to values connected to the taxing state. The US Supreme Court said that the 2nd part of the test was not as relevant and focused on the first part. The Court determined that “When a tax is premised on the in-state residence of a beneficiary, the Constitution requires that the resident have some degree of possession, control, or enjoyment of the trust property or a right to receive that property before the State can tax the asset”. The Court held that “the presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it”. The North Carolina statute in question (N.C. Gen. Stat. Section 105-160.2) allows for the assessment of tax on any trust income that “is for the benefit of” a North Carolina resident. Very broadly, North Carolina has interpreted this to mean that it applies whether or not the beneficiary actually receives any income from the trust.
by Gregory S. Dowell February 28, 2019 T he lesson would seem to be clear but, surprisingly, this one had to end up in district court: Don’t think you can receive assets from an estate, and then be allowed to stiff the federal government on the federal estate taxes. A recent district court case concluded that beneficiaries of an estate were liable for the estate’s unpaid estate tax liability. Internal Revenue Code Section 6324(a)(2) states: If the estate tax imposed by chapter 11 is not paid when due, then the spouse, transferee, trustee (except the trustee of an employees’ trust which meets the requirements of section 401(a) ), surviving tenant, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent’s death, property included in the gross estate under sections 2034 to 2042 , inclusive, to the extent of the value, at the time of the decedent’s death, of such property, shall be personally liable for such tax. In this case, U.S. vs Ringling (DC SD 2/21/2019), there was no dispute about the amount of the federal estate tax or that fact that it was unpaid, and there was no dispute that the beneficiaries had received property that had been properly includible in the estate. A quick overview of the facts show that there were three beneficiaries of an estate that primarily involved a family farm, life insurance proceeds and crops. A special bequest of estate assets was also made to the grandson of the decedent. Letters of representative were issued to the beneficiaries, and a special administrator was appointed over the probate proceeding. A federal estate tax return and an amended state inheritance tax return were filed. One of the beneficiaries, acting in her capacity as a representative, signed the federal estate tax return, which reported a tax due of just under $29,000. However, no payments were made on the balance due. The IRS assessed the unpaid tax, as well as interest and penalties, bringing the total assessment to just under $66,000. When payment was not made, the IRS sent a notice of intent to levy. Ultimately, the IRS brought suit, seeking a judgment against each beneficiary. Only one response from a single beneficiary was received, which was in opposition to the motion for summary judgment. In what seems to have been a relatively clear case, the district court granted the IRS’ summary judgment and found that the beneficiaries were liable for the Estate’s unpaid tax liability, under Code Section 6324(a)(2).
The following letter was prepared and distributed to clients and friends of Dowell Group, LLP. The letter discusses individual and business tax planning ideas that may be appropriate in certain situations. This does not represent tax advice, as every situation must be considered on its own merits. We always encourage our clients to contact us for advice specific to their situation. December 10, 2018 Dear clients and friends, Proper planning for taxes is key for many taxpayers. Each of us should take some time to assess our situation, and then to determine what steps should be taken to optimize the income tax picture. Many changes will impact individuals and businesses this year. For individuals, there are new, lower income tax rates, a substantially increased standard deduction, severely limited itemized deductions and no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT). For businesses, the corporate tax rate is cut to 21%, the corporate AMT is gone, there are new limits on business interest deductions, and significantly liberalized expensing and depreciation rules. In addition, there is a new deduction for non-corporate taxpayers with qualified business income from pass-through entities. In this communication, we will provide checklists of actionable items you may wish to consider in the remaining days of 2018. Those checklists will be broken out between individuals and businesses for your ease of use. Please note that we have also included some non-tax matters for individuals to consider in these final days of 2018. The Tax Cuts and Jobs Act that was passed a year ago is only now being interpreted by the IRS. While many parts of the new Act are clear, there are many parts that were written vaguely and without specificity, leaving tax professionals in the position of trying to interpret the intent of Congress. New regulations and rulings will be issued periodically, and we encourage you to check our website for updates that might be relevant to you ( www.dowellcpa.com ). We have many articles posted on the site that are specific to individuals, business owners, fiduciaries, and nonprofits. Most importantly, please know that our professionals are here to serve you. If you have a question or concern, please call or email us. Whether you might be a client or a friend of the firm, we also want to take the time to thank you. In this busy world, we know that we do not say thanks often enough. We know that we would not be here without you. Whatever your faith or spiritual beliefs, we wish you peace and good health this holiday season, and in the years ahead. Dowell Group, LLP 2018 YEAR-END CHECKLISTS Individuals – Year-End Tax Planning Flexible Spending Account – Consider where you stand for this year, and determine if you need to adjust the deductions for next year in your employer’s health flexible spending account (FSA). Health Savings Account – Make sure you have maximized contributions to your health savings account (HSA). 401(k) plans – fully fund, if you are able, for 2018. Capital gains and losses – Determine the net short and long-term capital gains and losses recognized thus far; also consider any significant capital gain distributions you might receive from mutual funds or partnership investments, and take into account any capital loss carryovers. Once you understand the overall amounts of net gains and losses, strategize what action you may want to take by the end of this year. It may be appropriate to “harvest” capital losses in your account to offset gains (however, see discussion immediately following on “wash” sales). Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” (e.g., $77,200 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year, there is no benefit to selling stocks at a loss, as there is no taxable gain to offset. “Wash” sales – You might have a stock or bond that shows a loss, but you want to continue to hold that security because you think the price will recover. That security can be sold and the loss recognized, as long as the security is not repurchased for 30 days; if purchased before 30 days, the sale is deemed to be a “wash” sale and the loss is disallowed. Make an estimate of this year’s tax liabilities – If your situation has been volatile this year, make a quick projection of your Federal and State income taxes to see if you have paid in an adequate amount of Federal and State income taxes. If you are short, you may be able to increase withholdings or bump up the estimated tax payments before year-end. If you look to be overpaid, you can reduce the final quarterly installments. Using a distribution from a retirement plan to pay a shortfall before year end – Take an eligible rollover distribution from a qualified retirement plan before the end of 2018 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2018. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2018, but the withheld tax will be applied pro rata over the full 2018 tax year to reduce previous underpayments of estimated tax. Postpone or accelerate income and deductions – Postpone income until 2019 and accelerate deductions into 2018 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2018 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2018. For example, that may be the case where a person will have a more favorable filing status this year than next (for example, head of household versus individual filing status), or expects to be in a higher tax bracket next year. Defer a bonus – It may be advantageous to try to arrange with your employer to defer, until early 2019, a bonus that may be coming your way. This could cut as well as defer your tax. Charitable contributions – Consider making any additional charitable gifts by the end of the year. Gifts are only deductible if made to an organized 501(c)3 charity. Be sure to get a receipt from the charity as evidence of the timely gift. Charitable contributions of appreciated stock – Donating appreciated securities is an effective way of meeting the desire to support a charity while allowing the donor to deduct the full fair market value of the gift. The donor will not pay tax on the capital gain of those securities that were gifted. Non-cash charitable contributions – Consider making additional noncash charitable gifts by the end of the year, but pay particular attention to the substantiation rules if you are claiming that the fair market value of your gifts exceeded $250. Make a detailed dated list of the donated items and their condition, and affix the list to the receipt; it’s a good idea to take a picture of the goods as well. Prepay expenses – Consider using a credit card to prepay expenses that can generate deductions for this year (charitable, business, and medical expenses are good examples), even if you do not pay the credit card bill until 2019. State income taxes – If you expect to owe state and local income taxes when you file your return next year and fear you could incur a penalty for underpayment, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments) before year-end. Be aware that doing so, however, could push your total state and local taxes paid over the $10,000 limit for the year. AMT – Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2018. In many cases, AMT will not apply in situations where it has applied in the past for individuals, due to limits on the deductions for state and local taxes and the elimination of miscellaneous itemized deductions. Itemized deductions and “bunching” deductions in one year – Beginning in 2018, many taxpayers who claimed itemized deductions will no longer be able to do so, due to the increase in the basic standard deduction (to $24,000 for joint filers, $12,000 for singles, $18,000 for heads of household, and $12,000 for marrieds filing separately), and the elimination and restriction of some itemized deductions. The cap on deducting state and local income tax and real estate tax is set at no more than $10,000, and miscellaneous itemized deductions and unreimbursed employee expenses are no longer deductible. You can still itemize medical expenses to the extent they exceed 7.5% of your adjusted gross income, charitable contributions, and interest (also capped) on qualifying residence debt, but those deductions will not result in a benefit if they do not cumulatively exceed the new, higher standard deduction referenced above. Some taxpayers may be able to work around the new reality by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer will benefit by making two years’ worth of charitable contributions this year, instead of spreading out donations over 2018 and 2019. Personal exemptions – Bear in mind that the Act eliminated personal exemptions. Roth conversion – If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA in 2018 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2018, and possibly reduce tax breaks geared to AGI (or modified AGI). Required Minimum Distributions (RMDs) – RMDs must be taken from your IRA, 401(k) plan, or other employer-sponsored retirement plan if you have reached age 70-1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70 ½ in 2018, you can delay the first required distribution to 2019, but if you do, you will have to take a double distribution in 2019 (the amount required for 2018 plus the amount required for 2019). Gifting RMD to charity – If you are age 70-½ or older by the end of 2018, have traditional IRAs, and particularly if you can’t itemize your deductions, consider making 2018 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can result in tax savings. Gifting RMD to charity in the future, if you think you will not be able to itemize – If you were younger than age 70-½ at the end of 2018, you anticipate that in the year that you turn 70-½ and/or in later years you will not itemize your deductions, and you don’t have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs in 2018. If the immediately previous sentence applies to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs in 2018. Then, when you reach age 70-½, do the steps in the immediately preceding bullet point. Doing all of this will allow you to, in effect, convert nondeductible charitable contributions that you make in the year you turn 70-½ and later years, into deductible-in-2018 IRA contributions and reductions of gross income from age 70-½ and later year distributions from the IRAs. Gifts to family or friends – Make gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $15,000 in 2018 to each of an unlimited number of individuals. You can also gift $30,000 to one person by using your spouse’s exclusion, but note that the IRS requires you to file a gift tax return in this situation. Education funding – If educational funding is an issue in your family, consider funding 529 plans by the end of the year. Marriage or divorced during the year – If you married during the year, no matter what date, you and your spouse will file either as married with a joint return or as married filing separately. In most cases, it is advantageous to file married joint. Your incomes and deductions will be combined, and that often leads to increased tax liabilities for the year, compared to when you were both single. If divorced during the year, you will file as single or head of household, and you will need to make sure you have paid adequate taxes. If you had a change in marital status, we suggest you call your tax professional. Alimony – One of the changes in the Act was to eliminate the deduction for alimony (and inclusion as income) for divorces entered into after December 31, 2018. Dispose of passive activities – The owner of a business should consider disposing of a passive activity in 2018 if doing so will allow the owner to deduct suspended passive activity losses. Increase basis – The owner of an interest in a partnership or an S corporation may need to increase the basis in the entity so that the owner can deduct a loss from it for 2018. Individuals – Other Considerations at Year-End Review your portfolio – The end of the year is a perfect time to analyze your holdings and determine if the risk tolerances and asset allocations are still appropriate for your investment objectives. Consider your age, health, and family issues. Review the beneficiary designations – Review the beneficiaries named on retirement accounts or insurance policies; consider if assets are titled correctly; determine if a family member should be added as a signer on an account. Wills and Trusts – If you have not set up wills and trusts, then contact your attorney; call us if you need a reference. If it has been many years since you had your wills and trusts drafted, set up a meeting with your attorney or CPA to review the documents, including the named beneficiaries, guardians, and executors. Estate planning – For decedents dying from 2018 to 2025, the Act increased the amount that is exempt from Federal estate taxes to $11.18 million per individual, and to $22.36 million per married couple. States, in some cases, may have lower thresholds for the amounts that are subject to state inheritance taxes. Grantor (“Living”) trusts – If you have substantial assets, it is possible that you should have a grantor (also known as living or revocable) trust. Be sure that all of your brokerage accounts are re-titled in the name of the trust. Power of Attorney – As part of the review of wills and trusts, also consider powers-of-attorney and health care powers-of-attorney you have in force (or should have in force) for all of your family members. Insurance – Review the various types of insurance coverages you have in place and re-examine your needs. This includes homeowner’s, auto, life, health, disability, umbrella liability, and long-term care. Family meeting – Consider having a family meeting to give an overview of your investments and objectives, charitable giving strategies and desires, the location of key documents, and names of your key advisors (CPAs, attorneys, bankers, insurance agents, investment advisors, etc.). Safe deposit box – Make a special point to visit your safe deposit box and inventory (and organize) the contents. Make sure your executor, spouse, or other key person knows where the key is kept. Businesses – Year-End Tax Planning 20% qualified business income deduction – For tax years beginning in 2018, taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. If taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in for joint filers with taxable income between $315,000 and $415,000 and for all other taxpayers with taxable income between $157,500 and $207,500. 20% qualified business income deduction income planning – Considering the above, taxpayers may be able to achieve significant savings by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2018. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don’t make a move in this area without consulting your tax adviser. Cash basis of accounting – More “small businesses” are able to use the cash (as opposed to accrual) method of accounting in 2018 and later years than were allowed to do so in earlier years. To qualify as a “small business” a taxpayer must, among other things, satisfy a gross receipts test. The gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $25 million (the dollar amount used to be $5 million). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments. Expensing equipment purchases under Code Section 179 – In 2018, the expensing limit is $1,000,000, and the investment ceiling limit is $2,500,000. Most depreciable property (not buildings) and off-the-shelf computer software. Expensing also is available for qualified improvement property (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. Many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. The expensing deduction is not prorated for the time that the asset is in service during the year. Property acquired and placed in service in the last days of 2018, rather than at the beginning of 2019, can result in a full expensing deduction for 2018. Filing due dates – Remember from last year that C corporation and partnership filing deadlines have been swapped. Partnership returns will be due March 15th, while C corporation returns are due on April 15th. Bonus depreciation – Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment—bought used (with some exceptions) or new—if purchased and placed in service this year. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2018. Reasonable compensation – Shareholder-employees must take reasonable compensation for their services, and this continues to be a focus of the IRS. On the positive side, taking reasonable compensation can also open the door to larger retirement plan contributions for the employee-owners. Retirement plans – It is too late to set up a 401k or a Simple plan for 2018, but some options may still available to save on a business owner’s 2018 taxes. If you are self-employed and haven’t done so yet, consider setting a self-employed retirement plan. This is also a good time to consider which retirement plan is the right one for your business for 2019 and future years. Cancellation of debt – Analyze the specific facts and consider the effect on income and income taxes if debt is cancelled in 2018 or 2019. Research and development credit – The calculation for the R&D credit is complicated and will typically require a great deal of analysis. However, it provides a credit for every qualifying dollar spent on research and development activity. Historically, the credit has had limited immediate impact to start-up businesses because it was only helpful if the entity had taxable income. The credit can now be used (in a diminished capacity) as a refund to offset payroll taxes. In another change, privately-held businesses can now claim the R&D credit against the AMT. This is important because many new businesses have net operating losses in the early years, which pushes the business into AMT, limiting their ability to benefit from the R&D credit.
