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Posts from the ‘Estate Planning-Estate Tax, Gift Tax, Elder Care, etc.’ Category

3
Jan

New Spending Package Includes Sweeping Retirement Plan Changes

The $1.4 trillion spending package enacted on December 20, 2019, included the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which had overwhelmingly passed the House of Representatives in the spring of 2019, but then subsequently stalled in the Senate. The SECURE Act represents the most sweeping set of changes to retirement legislation in more than a decade.

While many of the provisions offer enhanced opportunities for individuals and small business owners, there is one notable drawback for investors with significant assets in traditional IRAs and retirement plans. These individuals will likely want to revisit their estate-planning strategies to prevent their heirs from potentially facing unexpectedly high tax bills.

All provisions take effect on or after January 1, 2020, unless otherwise noted.

Elimination of the “stretch IRA”

Perhaps the change requiring the most urgent attention is the elimination of longstanding provisions allowing non-spouse beneficiaries who inherit traditional IRA and retirement plan  assets to spread distributions — and therefore the tax obligations associated with them — over their lifetimes. This ability to spread out taxable distributions after the death of an IRA owner or retirement plan participant, over what was potentially such a long period of time, was often referred  to as the “stretch IRA” rule.   The new law, however, generally requires any beneficiary who is more than 10 years younger than the account owner to liquidate the account within 10 years of the account owner’s death unless the beneficiary is a spouse, a   disabled or chronically ill individual, or a minor child. This shorter maximum distribution period could result in unanticipated tax bills for beneficiaries who stand to inherit high-value traditional IRAs. This is also true for IRA trust beneficiaries, which may affect estate plans that intended to use trusts to manage inherited IRA assets.

In addition to possibly reevaluating beneficiary choices, traditional IRA owners may want to revisit how IRA dollars fit into their  overall estate planning strategy. For example,  it may make sense to consider the possible implications of  converting traditional IRA funds to Roth IRAs, which can be inherited income tax free. Although Roth IRA conversions are taxable events, investors who spread out a series of conversions over the next several years may benefit from the lower income tax rates that are set to expire in 2026.

Benefits to individuals

On the plus side, the SECURE Act includes several provisions designed to benefit American workers and retirees.

  • People who choose to work beyond traditional retirement age will be able to contribute to traditional IRAs beyond age 70½. Previous laws prevented such contributions.
  • Retirees will no longer have to take required minimum distributions (RMDs) from traditional IRAs and retirement plans by April 1 following the year in which they turn 70½. The new law generally requires RMDs to begin by April 1 following the year in which they turn age 72.
  • Part-time workers age 21 and older who log at least 500 hours in three consecutive years generally must be allowed to participate in company retirement plans offering a qualified cash or deferred arrangement. The previous requirement was 1,000 hours and one year of service. (The new rule applies to plan years beginning on or after January 1, 2021.)
  • Workers will begin to receive annual statements from their employers estimating how much their retirement plan assets are worth, expressed as monthly income received over a lifetime. This should help workers better gauge progress toward meeting their retirement-income goals.
  • New laws make it easier for employers to offer lifetime income annuities within retirement plans. Such products can help workers plan for a predictable stream of income in retirement. In addition, lifetime income investments or annuities held within a plan that discontinues such investments can be directly transferred to another retirement plan, avoiding potential surrender charges and fees that may otherwise apply.
  • Individuals can now take penalty-free early withdrawals of up to $5,000 from their qualified plans and IRAs due to the birth or adoption of a child. (Regular income taxes will still apply, so new parents may want to proceed with caution.)
  • Taxpayers with high medical bills may be able to deduct unreimbursed expenses that exceed 5% (in 2019 and 2020) of their adjusted gross income. In addition, individuals may withdraw money from their qualified retirement plans and IRAs penalty-free to cover expenses that exceed this threshold (although regular income taxes will apply). The threshold returns to 10% in 2021.
  • 529 account assets can now be used to pay for student loan repayments ($10,000 lifetime maximum) and costs associated with registered apprenticeships.

Benefits to employers

The SECURE Act also provides assistance to employers striving to provide quality retirement savings opportunities to their workers. Among the changes are the following:

  • The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows employers to take a credit equal to the greater of (1) $500 or (2) the lesser of (a) $250 times the number of non-highly compensated eligible employees or (b) $5,000. The credit applies for up to three years. The previous maximum credit amount allowed was 50% of startup costs up to a maximum of $1,000 (i.e., a maximum credit of $500).
  • A new tax credit of up to $500 is available for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. The credit applies for three years.
  • With regards to the new mandate to permit certain part-timers to participate in retirement plans, employers may exclude such employees for nondiscrimination testing purposes.
  • Employers now have easier access to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, offer economies of scale, allowing small employers access to the types of pricing models and other benefits typically reserved for large organizations. (Previously, groups of small businesses had to be affiliated somehow in order to join an MEP.) The legislation also provides that the failure of one employer in an MEP to meet plan requirements will not cause others to fail, and that plan assets in the failed plan will be transferred to another. (This rule is effective for plan years beginning on or after January 1, 2021.)
  • Auto-enrollment safe harbor plans may automatically increase participant contributions until they reach 15% of salary. The previous ceiling was 10%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The foregoing is provided for information purposes only.  It is not intended or designed to provide legal, accounting, tax, investment or other professional advice.  Such advice requires consideration of individual circumstances.  Before any action is taken based upon this information, it is essential that competent individual professional advice be obtained.  JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources. This legislation maybe revised to correct errors and/or clarified.

2
Jun

Some reasons to review your estate documents.

There are many reasons why estate documents should be reviewed periodically.  Life events are often a reason to review estate documents.  These events may change circumstances, goals and priorities.  Another reason is changes in the applicable laws.  You may not be aware of the changes.  Following area few changes that make it advisable to have your estate documents reviewed.

Privacy regulations were issued after the passage of the  Health Insurance Portability and Accountability Act (HIPPA).  There are  situations when you want others to be able communicate with your employer, insurer or health care provider.  A written authorization with specific language is required to allow such communications.  You should have your estate documents reviewed if they do not include this authorization.

Changes in the federal estate tax in 2010 reduced rates and increased the exclusion.  Provisions in estate documents to minimize and/or postpone the estate tax may no longer apply.

Estate planning documents for married couples prior to 2013 often had provisions designed to minimize and/or postpone the estate tax until the death of the surviving spouse.    The cost of assets for purposes of determining gain for assets sold by the surviving spouse was generally the value at the death of the first spouse to die (“step-up basis”).  This may not be the  preferred strategy as a result of the above changes.  There are new strategies that will allow a “step-up basis” at the death of the surviving spouse.

You should contact your estate planning attorney if you are sure if these changes apply to you.

 

5
Jan

A helpful list for investors

It seems that everyone has a list on almost every topic, especially at year-end and the start of a new year.   I sometimes wonder what to do with this information.  Anna Prior’s Jan. 2, 2015 New York Times article, “The 15 Numbers Every Investor Needs to Know” is an exception.  It provides an approach to planning.  Following is a condensed discussion of the article:

  • Know what allocation of stocks, bonds and cash is appropriate for you.  Among the many factors to consider are: your financial goals, the value of your current investments, your health, your age, and your ability to withstand a drop in the value of your investments.
  • Take advantage of your ability to contribute to your employers’ 401(k) retirement plan, if applicable, for your situation.  The 2015 maximum contribution is $18,000 for a pretax traditional 401(k) plan and after-tax Roth 401(k) plan.  Those 50 or older can contribute an additional $6,000.  Understand the requirements and impact of taking distributions from your retirement plans.
  • Be familiar with the general valuations of stocks.  This will help you gage your investment risk.  Compare the average price/earnings (PE) ratio of stocks to the current PE.  The S&P 500 is commonly used as a proxy for the stock market.
  • Some consider bonds as a source of safety for investors.  It is difficult to predict how bonds will perform in the short-term.  The yield on the 10-year Treasury note will give you an indication of what the yield on bonds will be in the next 10 years or so.
  • High investment costs will reduce your returns  The expense ratios of your funds can be found in the fund prospectus, the website of the fund company and other media sources.
  • Be aware of your adjusted gross income (AGI).  This is the amount at the bottom of page one of you individual U.S income tax return.  The AGI will determine if other taxes or limitations will apply to you.  Examples are the 3.8% surtax on investment income, Medicare Part B & D premiums, deduction of some retirement plans, and some itemized deductions.
  • Estate-tax exemption of the states are often lower than the U.S. estate exemption.  This must be considered  in your planing for your family, heirs and charitable entities.
  • The amount of your essential and discretionary costs should be reviewed periodically.  This is important for: retirement planning, insurance planning and maintaining an adequate reserve fund for the unexpected and untimely expenditures.
  • Understand your health-care expenses.  This is need for; insurance planning, retirement planning and maintaining an adequate reserve fund.
  • Be aware of the difference between replacement cost and fair market value.  The difference to rebuilding a home can vary from what the home would sell for.  Replacing the contents of you home may be more than the fair market of the items.
  • The difference between owning and renting a home can have a major impact on your cash flow and quality of life.  The impact maybe more significant  when buying a first home and when retiring.
  • How long you are likely to live has a significant impact on your investment planning and cash flow planning.
  • Your approach to borrowing and repaying loans impacts your cash flow planning, investment planning and retirement planning.
  • Be aware of current and anticipated mortgage rates.  These impact planning relating to refinancing and debt repayment (cash flow planning).

There are many moving factors in planning.  An understanding of the parts and the alternatives are essential to a successful plan.

 

 

3
Aug

Do you know if you will owe tax as a shareholder of a company that completes an inversion?

“Inversions” are the subject of Laura Saunders August 1, 2014 article in the Wall Street Journal, “An ‘Inversion’ Deal Could Raise Your Taxes”.

An “inversion” is when a U.S. company merges into a foreign company.  Some U.S. companies (e.g. AbbVie, Applied Materials, Auxilium Pharmesuticals, Chiquita Brands International, Medtronic, Mylan, Pfizer, Salix Pharmaceuticals and Walgreen) have considered or are pursuing an “inversion” to reduce U.S. income tax.

It is expected that the “inversion” will be taxable to U.S. shareholders.  Technically the U.S. company is being acquired in a taxable transaction.  It is unlikely that the shareholders will receive any cash.

The tax consequences will vary based on each shareholder’s specific situation.
The net investment income tax (3.8%) will apply if your adjusted gross income (AGI) exceeds $200,000 if single and $250,000 if married filing jointly.

The long term capital gains rate is 20% if your AGI exceeds $400,000 if single and $450,000 if married filing jointly; 15% if your AGI exceeds $8,950 through $400,000 if single and $17,900 if married filing jointly.

The impact of the alternative minimum tax, itemized deduction phase-out and personal exemption are some of the other factors to consider.

Taxes will not be due if the stock is held in a traditional individual retirement account (IRA), Roth IRA, 401(k), or other tax-deferred vehicles.

Taxes are only on factor to consider, not the controlling factor, in deciding  if the stock of a company considering an “inversion” should be bought, sold or held.

“Inversions” will be especially unwelcome for long-term investors who were planning to hold their shares until death for estate-planning purposes.  At that point, there is no capital-gains bill, so some shareholders in firms doing “inversions” will owe taxes they would never have had to pay.”

The tax could be reduced if you have any unused losses from prior years.

Selling other stock or investments that have losses is a strategy to reduce tax from the “inversion”.

Gifting the stock to someone in a lower tax bracket (e.g. young child, grandchild, retired parent or grandparent)  is another stragey to reduce the tax.  The timing of the gift is important.

Contributing the stock to a charity is another approach if you have held the stock for more than a year and will have a gain.  The gain will not be taxed and the value of the stock may be deductible as a charitable contribution, subject to limitations.  Be sure to get a timely qualified acknowledgment.  Allow enough time to complete the transaction  before the “inversion”.

Among the other issues to be considered are: gift/estate taxes, “kiddie tax”, and possible retroactive legislation restricting “inversions”.

This is not intended as a complete discussion of all the factors and consequences to consider.  You should consult with your personal advisers to determine what if any action is appropriate for you.

 

 

 

 

 

22
Nov

Tax and Planning Impact of Supreme Court’s Ruling in the Defense of Marriage Act (DOMA) Same-Sex Marriage Rights Case

Background

On June 26, 2013, the U.S. Supreme Court ruled on a landmark case related to same-sex marriage (SSM) (United States v. Windsor).  The 5-4 decision changes the application of federal tax rules for married same-sex couples.  Generally, the ruling should enable same-sex married couples to obtain the same treatment under federal rules as has been available to heterosexual married couples.  Federal agencies are working on issuing guidance on the effect of the Windsor decision, including whether federal rules treat a couple as married based on the state of celebration (where the marriage was performed) or state of domicile (where the couple lives).  In late August, the IRS released guidance stating that for federal tax purposes, a marriage is recognized if validly entered into in a domestic or foreign jurisdiction that has the legal authority to sanction marriages.  Thus, for federal tax purposes, the IRS is following the state of celebration rule to determine if a couple is marriedThe Departments of Labor, Defense and Homeland Security have also adopted a state of celebration ruleHowever, it is important to realize that the Social Security Administration, by law, currently uses a state of domicile rule.

 Same-sex couples who have not been legally married are unaffected by this ruling until their marital status is legally changed according to domestic or foreign country law.

This discussion will provide:

  • An overview of the Supreme Court’s decision and what it may mean for you;
  • Considerations with respect to estate, retirement, income tax, and health and welfare benefits plans; and
  • Actions to consider with respect to long-term planning and tax return preparation.

Tax Implications

Federal tax treatment now available to legally married same-sex couples includes:

  • Joint filing of federal income tax returns
  • Amending of prior tax returns
  • Pre-tax basis of employer-provided health-care benefits
  • Deductible and includable alimony
  • Income tax-free transfers between spouses
  • Lifetime gift tax-free property transfers to spouses
  • Estate tax relief for surviving spouses
  • Spousal IRA contributions, rollovers, required minimum distributions

 Filing of Tax Returns

Guidance from the IRS issued in August 2013 provides that any original return, amended return, claim for refund or credit, filed on or after September 16, 2013 by a same-sex married taxpayer must use a married filing status.  So the married filing joint or married filing separately status, must be used for 2013 returns and beyond. 

Amending of Tax Returns

Consideration should be given to amending federal income tax returns and gift and estate tax returns (for years that are still open under the tax law’s statute of limitations) to change marital and filing status and other information that will alter the tax calculations and potentially result in a lower tax liability.  State tax implications also should be reviewed.  Returns may be amended to correct filing status, dependents, income, deductions, or tax credits.  Couples may want to estimate the income tax liability that would have been due in previous years if the couple had been able file a joint return.  Even basic items are impacted, such as standard deductions, child-related tax credits, and phase-outs of certain benefits, such as the education expense deduction.  Another example of a tax change is where one spouse could have had capital losses on investments in prior years that the other spouse’s gains would offset if they could have filed joint federal returns.  However, the “marriage penalty” could be applicable for some couples and the married filing joint or married filing separate filing status may result in a higher tax liability, especially high-earning couples where both spouses are working.  Each situation will need to be reviewed carefully.  The guidance from the IRS does not require the filing of amended returns for 2012 and earlier years.

Excludable Employer-Provided Fringe Benefits

Employer-provided fringe benefits for the same-sex spouse of an employee will now be excludable from gross income.  Employers should stop including this benefit in income as of September 16, 2013.  The IRS issued guidance on September 23, 2013, on how employers can claim a refund of Social Security and Medicare taxes that they and the employee paid on these benefits for prior years, as well as amounts withheld during the current tax year.

Also, now that taxes should no longer be a factor, some couples may want to re-evaluate their health insurance choices.  One spouse may now be able to move onto the other’s more generous plan, which may also be more affordable.  You should check with your employer to see if perhaps an open enrollment period was created for this purpose.

Also, even if not changing health plans, you can file an amended return to obtain a refund of taxes you paid on those benefits in previous years that are still open for amending (generally returns filed within the last three years).  We can discuss this option with you in more detail so you can see the tax effect of other changes that would occur on the amended return when you change your filing status.

 Adoption Credit

Some couples will need to consider the impact of amending past returns on the adoption tax credit and whether the change in federal filing status will have an impact on the credit.

Deductible and Includable Alimony

Married same-sex couples who later divorce should be able to take a deduction for alimony, which would be includable in the income of the recipient.  Previously married same-sex couples who are now divorced may be able to amend returns for the same reason.

Income Tax-Free Transfers of Property Between Spouses

Gain or loss should not be recognized on the transfer of property between same-sex spouses or between former spouses incident to a divorce.  It remains unclear how previous transfers and the basis of those assets will be affected.  The IRS may issue further guidance on this point.

Gift and Estate-Tax Free Transfers/Unlimited Marital Deduction

 Married same-sex couples may claim the unlimited marital deduction for federal estate and gift tax purposes, allowing a spouse to transfer an unrestricted amount of assets to his or her spouse at any time, including at the death of the transferor, free from gift and estate taxes.  The unlimited marital deduction is considered an estate preservation tool because assets can be distributed to a surviving spouse without incurring estate or gift tax liabilities.  Some couples that set up trusts to avoid double taxation on assets being passed along to their partners may find that a trust is no longer necessary now that assets can be passed directly to a spouse tax-free.  Others may want to update their trusts to give their spouses tax-free access to the trust’s income or principal, an option this is now available to married same-sex couples.

 In addition, married same-sex couples can now elect to split gifts in order to take advantage of doubled annual gift tax exclusion ($14,000 for 2013, for a total tax-free gift of $28,000).  Married same-sex couples may also share assets without being subject to gift taxes.  For example, prior to the ruling, couples that owned a house together but did not equally split mortgage payments and other expenses may have had those expenses covered by one spouse be subject to gift taxes if they exceeded $14,000 annually.  Now that same-sex marriages are recognized for federal tax purposes, some married same-sex couples may feel more comfortable adding their spouse’s name to the property title, knowing that they have more flexibility on how they choose to split those expenses and with no gift tax implications.

 Portability of Unused Estate Tax Exemption Amount

 The American Taxpayer Relief Act of 2012 extended permanently the concept of portability, which generally allows the estate of a surviving spouse to utilize the unused portion of the estate tax applicable exclusion amount ($5.1 million in 2012, and $5.25 million in 2013) of his or her last predeceased spouse.  Now, the surviving spouse of a married same-sex couple can take advantage of portability of the unused estate tax exemption amount of his or her deceased spouse.

Related Party Rules

Same-sex married couples who are now considered married for federal income and gift and estate purposes are subject to related party rules.  This could impact the tax consequences of transactions between same-sex spouses.  Prior to this ruling, married same-sex couples were treated for tax purposes as not related for certain transactions such as selling property between them and recognizing a loss.  After this ruling, recognition of this same loss would not be allowed under the related party rules.

Spousal IRA Contributions, Rollovers, and Required Minimum Distribution

Married same-sex couples now have many more retirement plan options and issues to consider, including spousal IRAs, contributions, beneficiary designations, rollovers, and required minimum distribution (RMD) rules.  Married same-sex couples with the only beneficiary a spouse who is more than 10 years younger can now use the joint table rather than the “uniform table” for distributions.  A surviving spouse can now consider whether to make a spousal rollover of a deceased spouse’s IRA or 401(k).  The IRS has promised further guidance regarding both prospective and retroactive changes to pension plans, IRAs and retirement distributions.

Other Federal Benefits

In addition, below are some of the federal benefits or protections that may now be available to legally married same-sex couples:

  • Social Security, Medicare, and Medicaid  benefits
  • Certain veterans benefits, such as pensions and survivor’s benefits
  • Military spousal benefits
  • Family medical leave rights
  • Spousal visas for foreign national spouses
  • Private pension benefit options (e.g., survivor annuities)
  • Application of the thresholds for the tax penalties and health insurance subsidies available under the Patient Protection and Affordable Care Act

Income and Estate and Gift Tax Planning Issues

Some of the specific individual income tax and estate and gift tax planning issues that may be impacted and should be considered are:

  • Income Tax Planning Issues
    • Joint tax returns
    • Amended income tax returns
    • Estimated tax payments for 2013
    • Income tax returns beyond the statute of limitations
    • Rollover IRAs at death
    • Spousal IRA contributions and rollovers
    • IRA required minimum distributions
    • Review of the designated beneficiary on retirement and other benefits provided by an employer
    • Divorce tax issues
    • Application of the adoption tax credit
  • Estate & Gift Tax Planning
    • Updated estate plans and documents
    • Inter vivos gifts
    • Amended gift tax returns
    • Gift and estate tax returns beyond the statute of limitations
    • Portability of unused applicable lifetime exemption
    • Grantor trusts
    • Spousal rollover
    • Beneficiary designations
    • Retirement plans
    • Community property rules
    • Marital Agreements

Guidance From the Federal Government

The Supreme Court’s DOMA ruling generally means that married same-sex couples are entitled to the same federal benefits as heterosexual couples, but it does not necessarily make financial planning and tax compliance for married same-sex couples less complicated.  Also, it may take time to fully implement the Supreme Court’s decision.  Marriage is the “trigger” for more than 1,000 tax and benefit provisions in the Tax Code and other federal statutes.

Federal government agencies, including the Treasury Department and Internal Revenue Service, will continue to review and modify rules and regulations.  Employers will need to review and revise their policies and procedures regarding benefits and withholding.  Married same-sex couples will need to consider the new rules and policies, including their tax situation.  Affected couples should consider updating their estate plans based upon the estate and gift tax impact, as well as their financial plans.

There may be some state tax issues to address as well.  For example, federal employees may be entitled to certain benefits that others are not, and states likely will need to clarify what the state tax treatment is if the state does not recognize same-sex marriage.  Also, for couples living in states that do not recognize same-sex marriage, the state will likely provide guidance on how to obtain the federal tax amounts to file state income tax returns. 

It is expected that the IRS publications and website information that provide guidance to married individuals will be revised.
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29
Aug

IRS provides guidance for recognition of same-sex marriages

IRS recently ruled (Rev. Rul. 2013-17) that all legal same-sex marriages will be recognized for Federal Tax purposes.  This applies to all taxes including: income, gift and estate taxes.  That would include qualified retirement plans and other employee benefits.  The determination is based on the status under the laws of the state where the marriage was established.  This is the rule even if the state of their domicile does not recognize the marriage.

 The ruling does not apply to registered domestic partnerships, civil unions or similar relationships recognized under state law that are not denominated as marriages.  Currently Illinois has authorized civil unions but does not denominate them as marriages.  Individuals that have had a civil union in Illinois are not considered married for Federal tax purposes.

The ruling was triggered by the recent decision of the Supreme Court in “United States v. Windsor”.  That case ruled that a portion of the “Defense of Marriage Act “ (DOMA) relating to the definition of “marriage’ was unconstitutional.  

Following are excerpts from the ruling:

“There are more than two hundred  Code provisions and Treasury regulations relating to the internal revenue laws that include the terms ‘spouse’, ‘marriage’ …” husband and/or wife.  “The Service concludes that gender-neutral terms in the Code that refer to marital status, such as ‘spouse’ and ‘marriage, ‘include, respectively, (1) an individual married to a person of the same sex if the couple is lawfully married under state law, and (2) such a marriage between “individuals of the same sex.”

“Given our increasingly mobile society, it is important to have a uniform rule of recognition that can be applied with certainty by the Service and taxpayers alike for all Federal tax purposes. Those overriding tax administration policy goals generally apply with equal force in the context of same-sex marriages.”

“For Federal tax purposes, the Service adopts a general rule recognizing a marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages.”

“Except as provided below, affected taxpayers also may rely on this revenue ruling for the purpose of filing original returns, amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax resulting from these holdings, provided the applicable limitations period for filing such claim under section 6511 has not expired. If an affected taxpayer files an original return, amended return, adjusted return, or claim for credit or refund in reliance on this revenue ruling, all items required to be reported on the return or claim that are affected by the marital status of the taxpayer must be adjusted to be consistent with the marital status reported on the return or claim.”

Taxpayers may rely (subject to the conditions in the preceding paragraph regarding the applicable limitations period and consistency within the return or claim) on this revenue ruling retroactively with respect to any employee benefit plan or arrangement or any benefit provided there under only for purposes of filing original returns, amended returns, adjusted returns, or claims for credit or refund of an overpayment of tax concerning employment tax and income tax with respect to employer-provided health coverage benefits or fringe benefits that were provided by the employer and are excludable from income under sections 106, 117(d), 119, 129, or 132 based on an individual’s marital status. For purposes of the preceding sentence, if an employee made a pre-tax salary-reduction election for health coverage under a section 125 cafeteria plan sponsored by an employer and also elected to provide health coverage for a same-sex spouse on an after-tax basis under a group health plan sponsored by that employer, an affected taxpayer may treat the amounts that were paid by the employee for the coverage of the same-sex spouse on an after-tax basis as pre-tax salary reduction amounts.”

 IRS recognizes marriaged based on state of the ceremony
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12
Jul

DOMA RULING POTENTIAL TAX IMPACT

The Supreme Court’s Ruling in the Defense of Marriage Act (DOMA) Same-Sex Marriage Rights Case impact planning.

Background

On June 26, 2013, the U.S. Supreme Court ruled on a landmark case related to same-sex marriage (SSM) (United States v. Windsor). The 5-4 decision increases the federal tax (and non-tax) benefits available to married same-sex couples.  The ruling affords same-sex couples, who are married and reside in a state which recognizes same-sex marriages, with the same federal rights and obligations (including tax benefits and rules) as heterosexual married couples.  As discussed further at the end of this letter, there are many remaining issues that need to be clarified, including if and how the right to federal benefits will be protected when a couple marries in a state where same-sex marriage is legal, then moves to a state where the marriage is not recognized.  For many of the possible impacts of this ruling mentioned below in this letter, it may depend on how the federal government interprets the decision and modifies the rules.  The IRS is already working on clarifying guidance, so we expect to know more details in the coming months. 

Same-sex couples who have not been legally married are unaffected by this ruling until their marital status is legally changed according to state or foreign country law.

The case has broad federal tax planning and compliance implications.  This letter will provide:

  • An overview of the Supreme Court’s decision and what it may mean for you;
  • Considerations with respect to estate, retirement, income tax, and health and welfare benefits plans; and
  • Actions to consider with respect to long term planning and tax return preparation.

Tax Implications

Tax benefits that may now be available to and issues facing legally married same-sex couples include:

  • Joint filing of federal income tax returns
  • Amending of prior tax returns
  • Filing of protective refund claims
  • Pre-tax basis of employer-provided health-care benefits
  • Deductible and includable alimony
  • Income tax-free transfers between spouses
  • Lifetime gift tax-free property transfers to spouses
  • Estate tax relief for surviving spouses
  • Spousal IRA contributions, rollovers, required minimum distributions

Filing of Tax Returns

Following the decision, same-sex couples that the federal tax law now recognizes as married may have the option or even be required to use married filing joint or married filing separate filing status.  Filing joint returns may also allow married same-sex couples to exclude up to $500,000 of gain from gross income on the sale of a principal residence, as opposed to $250,000 for unmarried individuals.  Married same-sex couples with foreign assets may want to reconsider their foreign information reporting requirements as filing thresholds for a married couple are often lower than the combined filing thresholds for two unmarried individuals and constructive ownership rules apply to spouses.

Amending of Tax Returns

Consideration should be given to amending federal income tax returns and gift and estate tax returns (for years that are still open under the tax law’s statute of limitations) to change marital and filing status and other information that will alter the tax calculations and potentially result in a lower tax liability.  State tax implications also should be reviewed.  Returns may be amended to correct filing status, dependents, income, deductions, or tax credits.  Couples may want to estimate the income tax liability that would have been due in previous years if the couple had been able file a joint return.  Even basic items are impacted, such as standard deductions, child-related tax credits, and phase-outs of certain benefits, such as the education expense deduction.  Another example of a tax change is where one spouse could have had capital losses on investments in prior years that the other spouse’s gains would offset if they could have filed joint federal returns.  However, the “marriage penalty” could be applicable for some couples and the married filing joint or married filing separate filing status may result in a higher tax liability, especially high-earning couples where both spouses are working.  Each situation will need to be reviewed carefully.

Amending returns most likely means that both spouses need to amend.  It is likely that one spouse will owe taxes (and interest) and the other will receive a refund.  Upcoming IRS guidance may indicate how these returns are to be filed, such as with some explanation or filed together.  IRS guidance may indicate whether amended returns are required or optional.

Filing of Protective Refund Claims

If the right to a refund is contingent on future events (including issuance of guidance by the IRS) and is not determinable until after the time period for amending returns expires, a taxpayer can file a protective claim for refund.  The claim is often based on current litigation (constitutionality); expected changes in tax law; changes in legislation, or regulations. A protective claim preserves the right to claim a refund when the contingency is resolved.  Generally, the IRS allows taxpayers to amend returns for up to three years after the filing deadline or up to two years after the taxes are paid.  Some couples may have more time if they filed protective claims for previous tax years that would give them an extension for amending returns.  If the statute is soon expiring on an extended return or estate tax return, we should discuss immediately the possibility of filing a protective refund claim, even if the forthcoming IRS guidance is not yet issued.

 Excludable Employer-Provided Fringe Benefits

Employer-provided fringe benefits used by the same-sex spouse of an employee should also be excludable from gross income.  Now that taxes should no longer be a factor, some couples may want to re-evaluate their health insurance choices. One spouse may now be able to move onto the other’s more generous plan, which may also be more affordable. 

Also, even if not changing health plans, some couples may be able to file an amended return to collect the taxes they may have paid on those benefits in previous years.  Consideration should be given to claiming refunds of overpaid income and payroll taxes based on previous denial of tax-free extensions of employer-provided medical and dental benefits.

Adoption Credit

Some couples may want to consider any adoption tax credit and whether a change in federal filing status will have an impact on the credit.

Deductible and Includable Alimony

Married same-sex couples who later divorce should be able to take a deduction for alimony, which would be includable in the income of the recipient.

Income Tax-Free Transfers of Property Between Spouses

In addition, gain or loss should not be recognized on the transfer of property between same-sex spouses or between former spouses incident to a divorce. 

Gift and Estate-Tax Free Transfers/Unlimited Marital Deduction

 Married same-sex couples should be able to claim the unlimited marital deduction for federal estate and gift tax purposes, allowing a spouse to transfer an unrestricted amount of assets to his or her spouse at any time, including at the death of the transferor, free from gift and estate tax. The unlimited marital deduction is considered an estate preservation tool because assets can be distributed to surviving spouses without incurring estate or gift tax liabilities.  Some couples that set up trusts to avoid double taxation on assets being passed along to their partners may find that a trust is no longer necessary now that assets can be passed directly to a spouse tax-free.  Others may want to update their trusts to give their spouses tax-free access to the trust’s income or principal, an option this is now available to married same-sex couples.

In addition, married same-sex couples should be able to elect to split gifts in order to take advantage of a doubled annual gift tax exclusion ($14,000 for 2013, for a total tax-free gift of $28,000). The ruling could also make it possible for married same-sex couples to share assets without being subject to gift taxes.  For example, prior to the ruling, couples that owned a house together but did not equally split mortgage payments and other expenses may have had those expenses covered by one spouse be subject to gift taxes if they exceeded $14,000 annually.  Now that those marriages are recognized by the federal government, some married same-sex couples may feel more comfortable adding spouses name to the property title, knowing that they have more flexibility on how they choose to split those expenses and with no gift tax implications.

 Portability of Unused Estate Tax Exemption Amount

The American Taxpayer Relief Act of 2012 extended permanently the concept of portability, which generally allows the estate of a surviving spouse to utilize the unused portion of the estate tax applicable exclusion amount ($5.1 million in 2012, and $5.25 million in 2013) of his or her last predeceased spouse.  Now, the surviving spouse of a married same-sex couple should be able to take advantage of portability of the unused estate tax exemption amount of their deceased spouse.

 Related Party Rules

Same- sex married couples who are now considered married for federal income and gift and estate purposes are subject to related party rules.  This could impact the tax consequences of transactions between same-sex spouses.  Prior to this ruling, married same-sex couples were treated for tax purposes as not related for certain transactions such as selling property between them and recognizing a loss.  After this ruling, recognition of this same loss would not be allowed under the related party rules.

Spousal IRA Contributions, Rollovers, and Required Minimum Distribution

Married same-sex couples now have many more retirement plan options and issues to consider, including spousal IRAs, contributions, beneficiary designations, rollovers, and required minimum distribution (RMD) rules.  Married ame-sex couples with the only beneficiary a spouse who is more than 10 years younger can now use the joint table rather than the “uniform table” for distributions.  A surviving spouse can now consider whether to make a spousal rollover of a deceased spouse’s IRA or 401(k).

Other Federal Benefits

In addition, below are some of the federal benefits or protections that may now be available to legally married same-sex couples:

  • Social Security, Medicare, and Medicaid  benefits
  • Certain veterans benefits, such as pensions and survivor’s benefits
  • Military spousal benefits
  • Family medical leave rights
  • Spousal visas for foreign national spouses
  • Private pension benefit options (e.g., survivor annuities)
  • Application of the thresholds for the tax penalties and health insurance subsidies available under the Patient Protection and Affordable Care Act

Income and Estate and Gift Tax Planning Issues

Some of the specific individual income tax and estate and gift tax planning issues that may be impacted and should be considered are:

  •          Income Tax Planning Issues
    • Joint tax returns
    • Amended income tax returns
    • Income tax returns beyond the statute of limitations
    • Rollover IRAs at death
    • Spousal IRA contributions and rollovers
    • IRA required minimum distributions
    • Divorce tax issues
    • Application of the adoption tax credit
  • Estate & Gift Tax Planning
    • Updated estate plans and documents
    • Inter vivos Gifts
    • Amended gift tax returns
    • Gift and estate tax returns beyond the statute of limitations
    • Portability of unused applicable lifetime exemption
    • Grantor trusts
    • Spousal rollover
    • Beneficiary designations
    • Retirement plans
    • Community property rules
    • Marital Agreements

IRS Guidance Expected Soon

The Supreme Court’s DOMA ruling means that married same-sex couples are entitled to the same federal benefits as heterosexual couples, but it does not necessarily make financial planning and tax compliance for married same-sex couples less complicated.  Even though federal benefits are immediately extended, it may take some time to fully implement the Supreme Court’s decision.  Marriage is the “trigger” for more than 1,000 tax and benefit provisions in the Tax Code and other statutory provisions.

Federal government agencies, including the Treasury Department and Internal Revenue Service, will need to review and modify rules and regulations.  Employers will need to review and revise their policies and procedures regarding benefits and withholding.  Married same-sex couples will need to consider the new rules and policies, including their tax situation.  Affected couples should consider updating their estate plans based upon the estate and gift tax impact, as well as their financial plans.

One tax issue to be addressed is the reality that at least 30 tax rules use the term “husband and wife” rather than married couple or spouses.  Another issue to resolve is whether the federal tax law treats a couple as married based on the law of the state of celebration (where the marriage was performed) or the state of domicile (where the couple resides).  The answers may not be the same for the federal tax law and Social Security law. This may be a matter that Congress may need to address rather than the IRS.

There may be some state tax issues to address as well.  For example, federal employees may be entitled to certain benefits that others are not, and states likely will need to clarify what the state tax treatment is if the state does not recognize same-sex marriage.  Also, if the federal tax law uses the state of celebration to determine if a married same-sex couple is married and the state of domicile does not respect that, the state will need to provide guidance on how to convert the federal joint return to separate state returns.

The day after the ruling, on June 27, 2013, IRS issued a statement that it will “move swiftly to provide revised guidance in the near future,” so we will keep you informed when such guidance is issued and what you should consider doing based on that guidance. We expect that various IRS publications and website information that provide guidance to married individuals will likely be revised.

It may take longer than expected for the IRS to respond.  The IRS has been given increased responsabilities and the congressional  budget process reduced their funding.  With reduced staff and training any resources they devote to these matter will reduce  their ability to administer the tax laws that Congress has passed.
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2
Mar

Did you realize how much you could have learned from “Downton Abbey”?

Kelly Greene’s March 1st article outlined some of the lessons from the British drama.

The timing and occurrence of future events require advanced planning.  The planning should include: who should get the assets, the management of the assets and how the assets should be used.

Keeping the family informed of one’s intention is important.  This is especially true for non-traditional and blended families.  The importance of medical directives was vividly demonstrated in the series.

Providing for family members and business associates in the event of incapacity or death is evident from the events portrayed in this TV drama.  Trusts, wills, powers of attorney and other agreements will see that the financial assets are used as intended.  Well drafted documents will provide for how the assets will be used and managed.  Experienced professionals can draft the documents to provide for the control of the assets and the flexibility in the case of future conflicts.

Change happens in life.  We need to monitor what is happening.  In the show an investment loss illustrated the importance of monitoring investments, the need for investment diversification and the need to change.

Involving the family early in the process can be very beneficial.  This helps avoid misunderstandings and provides a mechanism for implementing the plan.

READ MORE
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20
Dec

Is Your Will Up To Date

Wills and trust can be an essential part of financial planning. The planning includes the accumulation, enjoyment, conservation and distribution of your assets. Wills and trust are two of the most common documents used to control the disposition of your assets.

Wills are a legal document that states your intent of how your assets should be disposed of after your death. A will can be changed during your lifetime, assuming you are legally competent, and applies to the situation at the time of your death.

A trust is a legal arrangement in which you transfer property to another (trustee) for the benefit of you and your beneficiaries. There are many types and uses for trusts. Some can be changed, some are effective at the time of a specific event (such as death), and some exist for a specific time period. The powers of the trustee can be crafted to the specific use and purpose of the trust. The trustee is acting on behalf of the person creating the trust and the beneficiaries.

Other estate planning documents include: durable power of attorney, advanced medical directives and letters of instruction. The documents needed depend on the many factors unique to each individual.

It is a good idea to review your will and other documents when you experience a major life event, such as marriage, divorce, birth of a child, death of a parent, retirement, change in occupation or other significant milestones. Even if there are not any major life events, you should review the documents every few years to see if they still reflect your intent. Changes in the value of your assets and liabilities may require adjustments to the documents. The existence or likelihood of an heir requiring special needs may require changes in the documentations.

Your reviews may indicate that changes may be needed in other areas of your financial planning. Financial planning is not a onetime event. It is a continuous process that requires review and follow-up.
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17
Dec

Required Minimum Distributions from IRAs and Defined Contribution Plans

You may have read (possibly in one of my posts) or heard that when you are 70 1/2 you are required to start taking distributions from your Individual Retirement Plans (IRAs) and Defined Contribution Plans (generally profit sharing plans).  The distributions are called Required Minimum Distributions (RMD).  The Internal Revenue Service has posted on its website some useful tools to help understand the rules.
The RMD Comparison Chart (READ MORE) provides some of the basics.   The chart covers the following questions:
“When do I take my first RMD…”
“When do I reach age 70 1/2?”
“What is the deadline for taking subsequent RMD’s after the first RMD?”
“How do I calculate my RMD?” A link is provided to a distribution worksheet (READ MORE).
“How should I take my RMDs if I have multiple accounts?”
“May I withdraw more than the RMD?”
“May I take more than one withdrawal in a year in a year to meet my RMD?”
“What happens if I do not take the RMD?”

There are links to other resources.

These resources are very helpful in understanding the general rules.  Unfortunately they do not highlight the planning opportunities.  Titleling of the accounts and naming beneficiaries are 2 areas that require a deeper understanding.  Not considering these and other technical areas may result in an outcome that is not consistent with your financial planning.  This could result in reducing the funds available to you and your heirs.  Everyone should review their planning periodically.  Annually the titling and beneficiary designations should be reviewed.  Life events may require changes that might not otherwise be made.

 

 
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