Michigan Estate Planning Blog

Capital Gain Conundrum

A new tax season and a new tax reporting rule for capital gains. It’s not a big change but, as Robert Wood writing for Forbes reminds us, any change to something as important as the capital gains tax is worth noting, especially with tax season upon us. From the IRS news release: New Way to Report Capital Gains and Losses In most cases, taxpayers now use new Form 8949 to report capital gain and loss transactions. Schedule D, the form traditionally used to show these individual transactions, is now used as a summary sheet, reporting amounts for total sales price, basis and other adjustments for all individual transactions, and for figuring the tax. For securities both bought and sold in 2011, the Form 1099-B, issued by the broker, normally shows the taxpayer’s basis. The information on this form will help taxpayers correctly fill out Form 8949. See the instructions for Form 8949 and Schedule D for details. If nothing else, let this practical change remind you of the very practical reality of capital gains and losses, and what they mean to your estate planning strategies. Your goal, after all, is to leave your assets to your loved ones. However, depending on how you manage your planning, you also may be incurring unnecessary gift or estate taxes on your end… and inheritance or capital gains taxes on the recipient’s end. Accordingly, bearing this in mind can allow more precise footwork with your overall wealth transfer planning (especially when it comes to the taxable basis of the assets).

Reference: Forbes (January 11, 2012) “New Capital Gains Tax Reporting For 2011 Returns”; IRS.GOV news (January 2012) “2011 Changes Offer Tax Benefits to Almost Everyone; Special Tax Payment and Reporting Requirements Apply to Many”

New Lexus Under Your Christmas Tree? Mind The Gift Taxes!

Christmas is over and you might have even gotten all the tinsel out of the house by now, but that doesn’t mean you’re done giving gifts. It’s likely you’re just now turning to the largest “gifts,” as your think about taxes and your estate plan. To that end, an article about the “5 Common Tax Myths About Gift Giving” came out recently in Forbes. Myth: You have to pay taxes on gifts that you receive. False. You pay gift taxes on the gifts you give, not on what you receive. The reason for the gift tax is to keep people from avoiding the estate tax by simply “giving” it away while they are alive. Accordingly, the person that does the giving accepts the tax liability. (That said, the receiver may then owe other taxes since they now own the assets, but that’s all in the course of ownership). Myth: You pay a tax on gifts you make that are over $10k. This is not entirely true since there are a number of other factors. For starters, the amount is now closer to $13k worth of gifts in a year. However, gifts to spouses (so long as they are citizens) and approved charities don’t count against that limit. If you do exceed that amount, it will first count against your lifetime exemption of $5 million. Remember to file a gift tax return with your 2011 income tax filing. Myth: You can give freely by offering them as loans and then forgiving the loans. False, the IRS is out in front of you on that, too. Loans are loans anad gifts are gifts. Should the IRS feel you’re treating a loan as a gift, it will consider it as such. Myth: Charitable deductions can always be deducted against your taxable income. Not quite. First, charitable deductions can only be claimed if the IRS recognizes the charity as a charity. Second, you can only deduct the effective amount given. So, if you receive anything of value in return, then such value counts against the value of your charitable contribution (e.g., a $100 gift is only a $60 charitable deduction, if you receive a $40 steak dinner in return). Finally, one other myth is that you need not worry about how your home state treats gifts, independent of the IRS. No, each state has its own quirks regarding deductions and ownership. For that matter, too, it’s worth noting that these amounts and rules are subject to evolving tax law which is in the cross hairs of 2012 politics and may, therefore, change within a year.

Reference: Forbes (December 27, 2011) “5 Common Tax Myths About Gift Giving”

 

Estate Planning New Year’s Resolutions

Time has almost expired for 2011. So, with the exception of a few last minute gifts and end-of-year financial transactions, that usually means relaxing with eggnog and, a bit later, champagne. Of course, it also means that 2012 is about to start ticking and that’s big news. 2012 is going to be a big year for planning. Why? Because the end of 2012 also means the end of the foreseeable future regarding a huge swath of estate planning issues. Everything we know now about the estate tax, the gift tax, and the other wealth transfer taxes is only set in the tax code until the end of 2012… at least until Congress finishes battling it out and makes a decision about what to do going forward. In the end, proper planning these days is about taking advantage of what we know about 2012, and hedging our bets about the future thereafter. So what do we know? Smart Money recently provided a brief run-down here: The estate tax is still set at a $5 million exemption with a 35% rate thereafter but, barring action, it will revert back to a $1 million exemption and a 55% rate! To be precise, the estate tax is actually indexed for inflation and that means it is effectively set at $5.12 million for 2012 The exemption amount for the gift tax is the same as it is for the lifetime gift-tax exemption at the inflation indexed $5.12 million, and in like fashion will snap back in 2013 without any action. This means that it may be the last year ever to take advantage of that unprecedented gifting amount. Finally, a new and very progressive provision will still be in place for 2012: “portability.” Portability means that a spouse may pass along their unused estate/gift tax exemption to their surviving spouse. That makes the effective total a married couple can pass on without tax a whopping $10 million, or $10.24 once indexed for inflation. These at least are the basic facts. It may well be that we will see a situation not unlike what occurred in 2010, when the Bush-era laws expired at congressional inaction. Remember that? Taxpayers tried to hold out until 2010 and then tried to hold onto 2010 laws (or lack thereof) until the first moments of 2011. Will we be holding onto these laws currently in play through 2012 and their generous exemptions, or is 2013 going to be even more advantageous… or treacherous for taxpayers?

Reference: Smart Money (December 13, 2011) “Estate Planning for 2012”

Gift Tax In The Crosshairs

With the Super Committee in a deadlock over its tremendous task, the rumor mill is alive and well. What do those with their ears to the ground hear coming? It might be that our gift tax exemptions are in the “crosshairs.” The most recent source of the rumor has come from none other than Peter Reilly at Forbes, who is himself referencing Dean Mead’s blog. In its search for a solution to close the budget gap, the Super Committee might whack our new Gift Tax exemption from $5 million all the way down to $1 million. Not only that, but there is reason to fear that it will have an effective date of November 23, 2011! That may be the case and maybe it won’t be. After all, the rushed budget deal last December did include a retroactive estate tax law, but it also gave people the choice to use the 2010 law or the retroactive one. Accordingly, we might expect such a concession even if an effective date of November 23, 2011, has been posted. Nevertheless, this concern over the gift tax exemption has been growing for awhile and it may be a genuine concern after all. Why? The budget must be approved by Congress before Christmas and, as a result, the 2012 exemptions are still very much on the table. So, even if you’re one who waits for the facts before making your moves, consider making your gifting moves ASAP. If you’ve been putting off some estate planning moves until 2012 (thinking you’d still have that $5 million gift exemption amount), then you might find yourself shut out from those plans. Remember: Tax law rewards the diligent. Even if you’ve been pretty active in implementing your estate plan this year, you might have done so on the basis of next year. The question to ask yourself, then, is what this might mean to you? Society at large is in the hands of Congress (and its authority to tax), but it’s not yet clear where they’re taking us.

Reference: Forbes (November 9, 2011) “Reduction in Gift Tax Exclusion May Have A November 23 Effective Date”

Gift Tax Return Gotcha

Surprise. It’s a big year for the IRS and they’ve been opening many new fronts in the drive to assert tax law compliance. One of the largest and most unique fronts the IRS has opened has been a far-reaching gift tax audit on real estate transfers. As a recent Forbes article reports, the battle is tough going for the IRS, too. The IRS estimates that somewhere between 60% and 90% of taxpayers will fail to file a gift tax return, despite having engaged in activity that requires a filing. As a result, it’s clear this is neither a petty problem in the Service’s eyes nor is it merely chump change waiting to be claimed. The problem with enforcing the gift tax has been the inability to catch someone in the act. Never fear, the IRS has found just the right tool in the form of land records maintained at the state and local levels. Why? These public records allow the IRS to independently track the movement of properties between persons that haven’t shown up in gift tax returns. Family homes are just the sort of thing to pass easily between family members. However, things are rarely that easy when the IRS gets involved and that is just what’s happening now. The lesson to be learned, regardless whether you have transferred any land in the past, is to be aware and diligent. While there are many ways and means to accomplishing your wealth transfer goals, you have to use the right tools. Alternatively, those taxpayers who have transferred property without due diligence to the IRS’s gift taxes (and anyone following this story) have a grand development to watch. The IRS needs the states’ compliance to make their plan work and, while this has meant a great deal of cooperation in much of the country, it has met with resistance in California. There the courts have bristled at the IRS’s attempts to demand records. Forbes has a story to tell in the original article and the question remains: Will State courts further mire the IRS’s great gift tax audit effort?

Reference:  Forbes (October 19, 2011) “The New Gift Tax Audits: IRS Identifies Non-Filers Using State Property Records”