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
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.
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.
What is the new role of passive activities and real estate professional status for the new federal tax on net investment income?posted by michaelgraycpa @ 8:52 AM
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.
This week’s interview on Financial Insider Weekly to be broadcast in San Jose and Campbell this Friday, June 21 is with attorney and CPA G. Scott Haislet. Our interview subject is “The new federal tax on net investment income”. 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.
This week’s interview on Financial Insider Weekly to be broadcast in San Jose and Campbell this Friday, February 15 is with Professor Patricia Cain of Santa Clara University Law School. Our interview subject is “Federal tax developments for same sex couples.” 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.
This week’s interview on Financial Insider Weekly to be broadcast in San Jose and Campbell this Friday, February 17 is with Professor Patricia Cain of Santa Clara University School of Law. Our interview subject is, “Income tax problems of same sex couples”. 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.
This week’s interview on Financial Insider Weekly to be broadcast in San Jose and Campbell this Wednesday, March 16, is with Professor Patricia Cain of Santa Clara University School of Law. Our interview subject is, “Income tax problems for same sex couples in Community Property states”. The interview will be broadcast at 7:00 p.m. Pacific Time on Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org.
Remember you can find past episodes at www.financialinsiderweekly.com under “past episodes”.
As we begin a new year, many people are puzzling over what records they should keep and what they can throw away.
Unlike other areas of our legal system, taxpayers have the burden of proof to substantiate they are entitled to the deductions that they claim on their income tax returns. In other words, we are “guilty until proven innocent” or are required to satisfy the IRS (or other tax authorities) that we entitled to the deductions that we claim.
Basically, we are required to document the Payment and the Purpose for the items that we deduct. This means you shouldn’t throw away your documents immediately after your income tax returns are prepared and filed!
The payment (including who was paid, the amount, and date of payment) can be documented using a cancelled check or a credit card statement. These days, banks no longer return cancelled checks, and in many cases we don’t even receive paper bank statements. You will need to have access to these documents when you are examined by the tax authorities, which may be three or four years after filing your income tax returns. (More in the event of fraud or a substantial understatement of tax liability!) Since you probably won’t have access to them online more than a year or so after the statements are issued, I recommend that you get paper statements, including copies of the cancelled checks. If you have to pay a fee to get them, pay it. You can then scan these documents to save them on your computer, but keep a current backup in case your hard disk crashes!
The purpose can be documented using invoices and receipts. In most cases, a cancelled check or credit card statement isn’t enough to substantiate the purpose. In some cases, there isn’t enough information on the receipt to document a deductible purpose. In that case, it is a good idea to keep a copy of promotional material explaining the expenditure. (I am helping with an audit where an agent is proposing to disallow deductions for a business coach despite a letter of explanation from the coach and having invoices to document the expenses!)
Some items require longer record keeping. For example, the purchase documents for securities should be kept until the statute of limitations has expired after they are sold! You should keep quarterly or annual mutual fund statements showing the reinvestment of dividends. The IRS is trying to reduce this burden by requiring the mutual fund companies and stock brokerage companies to provide cost information when securities are sold. Sometimes, these companies just don’t have the information, such as when securities are transferred between companies.
Taxpayers who have interests in pass through entities like partnerships, limited liability companies and S corporations should keep documents showing amounts paid for their investments in these companies and the Schedules K-1 for all years so that a history of reinvested earnings less deductions and distributions can be substantiated. The IRS is routinely asking for this information to determine whether a taxpayer has sufficient investment in the entity to claim a tax loss.
Records should be kept for the purchase of major assets, like a residence, jewelry, furniture and appliances. Records for major improvements should be kept. These records can be helpful not only for tax documentation but for documenting losses for insurance claims.
Most of us just escaped the requirement to establish the “carryover basis” of inherited assets. If possible, we should be prepared in the event it is reenacted. (This means your executor or trustee will need to know when your acquired your assets and how much you paid for them. Good luck to them with that!)
Businesses should keep a file of purchase receipts for depreciable assets. The records are important for both income tax and property tax documentation.
The tax authorities are accepting technology updates, so “paperless” computer records (scanned copies) are being accepted. There is software available to help organize these records. Again, be sure to keep a backup, including offsite backups in case of a disaster.
Remember that receipts for charitable contributions should include a statement that no goods or services were received in exchange for the gift, or what the value of goods or services received was.
Your income tax returns are considered permanent records. You are supposed to keep them throughout your lifetime. Your executor or trustee can dispose of them after your death. (Seven years after death is a “safe” time for disposing of them, unless there is an audit or tax ligitgation still in process.)
Keeping good records can help preserve deductions and save tax dollars. It can also keep your stress level down and help you sleep better at night knowing you can substantiate your deductions.
When having your tax returns prepared, a good question to ask your tax return preparer is what records you should have to support what is reported on the return.
The IRS has two excellent publications on this subject available at their web site, www.irs.gov:
Publication 552, Recordkeeping for Individuals and Publication 583, Starting a Business and Keeping Records