Section 83(b) election simplified

posted by michaelgraycpa @ 9:27 AM
July 21, 2015

The IRS has issued proposed regulations that can be relied upon by taxpayers to eliminate the requirement that a copy of a Section 83(b) election must be attached to a taxpayer’s income tax return in order for it to be effective, applying for transfers on or after January 1, 2015. The IRS eliminated the requirement because tax return preparation software doesn’t consistently allow taxpayers to submit the election with electronically filed income tax returns.

The general rule when unvested property is received as compensation for services is taxable income is measured at the time the property becomes vested.

For example, XYZ Co. grants a nonqualified stock option to Jane Employee. Jane is granted the right to exercise the option before it is vested. (Vesting means Jane has all rights to the stock, including the right to sell it.) Jane exercises the option on June 1, 20X1 and the stock isn’t vested on that date.. The fair market value on that date is $1 per share, and the option price is also $1 per share. No income is taxable for 20X1. The stock vests on June 1, 20X2, when the fair market value is $11 per share. Jane has taxable wages income for 20X2 of $10 per share. The holding period for the stock starts on the vesting date.

Jane could have avoided having the increase in value after exercise taxed as wages by making a Section 83(b) election. When you make a Section 83(b) election, you are electing to disregard restrictions such as vesting at the date the property is received, which is the date of exercise for a nonqualified stock option. The election must be made within 30 days after the property is received, and it is irrevocable without the consent of the IRS once it is made. If Jane made a Section 83(b) election in the above example, there would be no taxable income when the option was exercised in 20X1 because the fair market value was the same as the option price. Any future appreciation for the stock would be taxed as a capital gain. The holding period for the stock would start on the date of exercise.

In the past, there were three requirements to make a valid election. (1) A written election must be filed at the IRS service center where tax returns are filed for the taxpayer within 30 days after the date the property is transferred; (2) a copy of the election must be given to the employer or entity for which services are performed; and (3) a copy of the election must be attached to the taxpayer’s income tax return for the year of the election.

Under the new proposed regulations, the last requirement has been eliminated.

What should you do if you’re audited by the IRS?

posted by michaelgraycpa @ 8:48 AM
May 6, 2015

This week’s interview on Financial Insider Weekly to be broadcast in San Jose and Campbell Friday, May 18 and repeated next Friday, May 15, is with William J. Mitchell, CPA. Our interview subject is “I’m being audited by the IRS! What should I do?” The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

What federal income tax developments should same sex couples know?

posted by michaelgraycpa @ 8:05 AM
April 29, 2015

This week’s interview on Financial Insider Weekly to be broadcast in San Jose and Campbell Friday, May 1, is with Professor Patricia Cain of Santa Clara University School of Law. Our interview subject is “Tax developments for same sex couples.” The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

How does the federal net investment income tax work?

posted by michaelgraycpa @ 7:52 AM
October 2, 2014

This week’s interview on Financial Insider Weekly to be broadcast in San Jose and Campbell this Friday, October 3, is with attorney G. Scott Haislet. Our interview subject is “The net investment income tax and real estate professionals.” The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

What should same sex couples know for 2013 tax reporting?

posted by michaelgraycpa @ 9:16 AM
February 19, 2014

This week’s interview on Financial Insider Weekly to be broadcast in San Jose and Campbell this Friday, February 21, is with Professor Patricia Cain of Santa Clara University School of Law.. Our interview subject is “Tax issues for same sex couples update.” The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

How does your title for your assets affect your income taxes?

posted by michaelgraycpa @ 11:14 AM
November 6, 2013

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This week’s interview on Financial Insider Weekly to be broadcast in San Jose and Campbell this Friday, November 8 is with attorney William Mahan, of counsel Gates, Eisenhart, Dawson. Our interview subject is “Tax considerations of title.” The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

IRS provides guidance for same sex married couples

posted by michaelgraycpa @ 11:07 AM
August 30, 2013

In response to the Supreme Court’s Windsor decision, the IRS has issued Revenue Ruling 2013-17 with guidance for same-sex married couples and registered domestic partners.

The IRS has ruled that same sex couples who are legally married in foreign or domestic jurisdictions shall be considered married for federal income tax purposes, even if they live in a state that doesn’t recognize such unions. This ruling follows a previous ruling in Revenue Ruling 58-66 that couples who had a common law marriage and moved to a state that didn’t recognize such marriages are still considered married for federal income tax purposes.

The rule also applies for the eligibility for employee benefits under the federal tax laws, such as the exclusion for employer-provided employee medical insurance covering a spouse.

“Husband” and “wife” will be interpreted to include a same sex spouse.

Registered domestic partners, civil unions or other similar formal relationships recognized under state laws that are not denominated as a marriage under that state’s law are not considered to be marriages under the federal tax laws. (Some states recognize these relationships as marriages. Consult with legal counsel for the applicable state.)

The ruling is effective September 16, 2013, but taxpayers have the option to apply it sooner, including filing amended income tax returns for years for which the statute of limitations hasn’t expired.

This week’s interview on Financial Insider Weekly to be broadcast in San Jose and Campbell this Friday, July 5 is with attorney and CPA G. Scott Haislet. Our interview subject is “Selling your principal residence”. The interview will be broadcast at 8:00 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

Should you terminate a bypass trust in light of recent tax law changes?

posted by michaelgraycpa @ 13:41 PM
June 28, 2013

The American Taxpayer Relief Act of 2012 passed on January 1, 2013, better known as the “fiscal cliff” tax legislation, includes provisions that dramatically change the tax planning environment for estate planning, including whether and how trusts will be used.

Most significantly, the lifetime exemption of $5 million, indexed for inflation ($5,250,000 for 2013) for a U.S. individual and the “portability” of the exemption of a deceased spouse were made “permanent.” Greatly oversimplified, this means a married couple currently can have a $10,500,000 combined estate and not be subject to federal estate tax. (The Obama administration has proposed reducing the exemption to $3,500,000 per person, or $7,000,000 for a married couple. Most families would still escape the federal estate tax with that exemption amount.)

Since the purpose of a “bypass trust” in an estate plan is principally to use the estate tax exemption of the first deceased spouse, the benefit has been greatly reduced for most families.

In addition, tax increases have been adopted that will seriously hurt trusts and estates. The new 39.6% maximum federal income tax rate (20% for long-term capital gains and qualified dividends) applies when estates or trusts have taxable income exceeding $11,950 for 2013. The new 3.8% (first effective for 2013) surtax on net investment income also applies at that point. (Almost all of the income of most trusts is investment income for the purposes of computing the net investment income tax.) These tax increases can possibly be avoided by currently distributing ordinary income to the beneficiaries, but capital gains generally aren’t distributable and are generally taxed to the trust or estate. (Distributed ordinary income is deducted on the income tax return for the estate or trust and reported as taxable income by the beneficiaries who receive the income.) Note the tax increase for long-term capital gains and qualified dividends has increased from 15% to 23.8%, almost a 59% increase!

But these trusts are irrevocable! Can they be terminated? Consult with your attorney. As I understand it, if all of the beneficiaries agree (each should consult with their own lawyer), a bypass trust can probably be terminated and usually distributed to the surviving spouse.

There is a side benefit of terminating a bypass trust. The assets of the trust may be eligible for a “stepped up basis” (provided they have appreciated) at the death of the surviving spouse.

On the other hand, a bypass trust can be used to “lock in” the current exemption amount for the first deceased spouse in case Congress reduces it later when that spouse is deceased when the current exemption is in effect.

Whether a trust should be terminated is more complex than just a tax question.

Assets held in an irrevocable trust are segregated from assets of the beneficiaries, so there is some protection from beneficiaries’ creditors. That protection will probably be lost if the assets are distributed.

The bypass trust document will indicate who the beneficiaries are for the income and ultimate distribution of the trust assets after the death of the surviving spouse. If the assets are distributed to the surviving spouse, the surviving spouse will control who the beneficiaries are. This can be a real problem when there are children from different marriages or relationships involved, or if the surviving spouse remarries.

Keeping a trust means having to pay fees for preparing annual income tax returns, legal counsel fees relating to fiduciary duties, and possibly expenses for providing accountings to beneficiaries.

If the trust is only distributed to the surviving spouse and the remainder beneficiaries release their interests in the assets, they will probably be deemed to have made reportable gifts of their remainder interests to the surviving spouse. The gifts may be applied to reduce their lifetime gift exemptions, $5,250,000 for 2013. Since the exemption is so large, there probably will be no gift tax liability, but gift tax returns should be filed. Depending on the circumstances and the applicable state law for the trust, the interest of a remainder beneficiary may be so contingent that no reportable gift will result. Alternatively, the trust may be distributed according to the ownership interests of the life and remainder beneficiaries so that no reportable gift results from the trust termination. See your tax advisor for details.

I’m not a lawyer, and the laws for trusts vary for different states. This is a serious decision that should only be made with legal counsel for each of the beneficiaries.

Everyone should make an appointment with their lawyer to review their current estate plan and old family estate plans.

This week’s interview on Financial Insider Weekly to be broadcast in San Jose and Campbell this Friday, June 28 is with attorney and CPA G. Scott Haislet. Our interview subject is “Passive activities and real estate professionals”. The interview will be broadcast at 8:00 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.