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Posts from the ‘Income Tax, etc.’ Category

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.

 

 

16
Dec

IRA rollover rules change in 2015

IRS previously held that the timing rules applied separately to all IRAs owned by an individual.  They applied the rule to each IRA owned.  The Internal Revenue Code allow a tax-free distribution if the distribution is rolled into an IRA within 60-days.  The tax-free rollover is not allowed if you’ve already completed a tax-free rollover within the previous one-year (12-month) period.  The Tax Court held a taxpayer may make only one nontaxable 60-day rollover within each 12-month period regardless of how many IRAs an individual owns (Bobrow v. Commissioner).  The IRS will not apply the revised rule prior to 2015.

IRS issued guidance on how the revised one-rollover-per-year limit is to be applied (Announcement 2014-32).
The clarification includes the following:
1)  All IRAs, including traditional, Roth, SEP, and SIMPLE IRAs, are aggregated and treated as one IRA when applying the new rule.
2) The exclusion for 2014 distributions is not absolute.  Generally you can ignore rollovers of 2014 distributions when determining whether a 2015 rollover violates the new one-year-rollover-per year limit.  This special transition rule will not apply if the 2015 rollover is from the same IRA that either made or received, the 2014 rollover.

The one-rollover-per-year limit does not apply to direct transfers between IRA trustees and custodians, rollovers from qualified plans to IRAs, or conversions of traditional IRAs to Roth IRAs.

In general, it’s best to avoid 60-day rollovers whenever possible.  Use direct transfers (as opposed to 60-day rollovers) between IRAs, as these direct transfers aren’t subject to the one-rollover-per-year limit.  The tax consequences of making a mistake can be significant.  A failed rollover will be treated as a taxable distribution (with potential early-distribution penalties if you’re not yet 591/2) and a potential excess contribution to the receiving IRA.

 

4
Dec

2014 Year-End Charitable Giving

Two of the factors to consider in year-end tax planning are your own financial situation and the tax rules that apply.  Congress is considering making changes before year-end that may impact your situation.  Some changes may include reinstating all or some tax breaks the expired in 2013.  If you wait to determine what changes may be passed for 2014 you may not have enough time to implement your year-end tax planning moves.

Start by identifying the charities you would like to make contributions to and the amount to each charity.  Remember to consider the amounts you already contributed during the year.

Check to see if you will be able to deduct the contributions if receiving a tax benefit is part of you motivation for making charitable deductions.  In order to deduct your contributions you must file a tax return (Form 1040) and itemize your deductions.   That is, you will not receive a deduction if your itemized deductions are less than the standard deduction.  The 2014 standard deductions is: $12,400 if you are married and file a joint tax return, $9,100 if you qualify to file as head of household, $6,200 if you are single, and $6,200 if you are married filing a separate return.  Both spouses filing a separate tax rerun must itemize their deduction if one spouse itemized their deductions.  It maybe beneficial to postpone deductions to the next year if you receive a greater tax benefit in the next year.

The total deduction for contributions is limited to a percentage of your adjusted gross income (AGI).  For example gifts to public charities are generally limited to 50% of your 2014 AGI.  Other limitations, 30% or 20%, apply depending on the nature of the contribution and the type charity.  Amounts not deductible may generally be carried forward over the next 5 years in years that you itemize your deductions , subject to the income percentage limitations.

Contributions can only be deductible if made to a qualified organization.  IRS has a listing on their website, Exempt Organizations Select Check: https://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check

To claim a deduction for donated cash or property of $250 or more, you must have a written statement from the organization.  Generally you can deduct the fair market value of property rather than cash or a check.

The above is not intended as a complete discussion of this subject.  A tax professional, can help you evaluate your situation, keep you appraised of any legislative changes, and determine the best approach for your individual situation.

 

 

1
Nov

Now is the time to make 2014 charitable gifts of appreciarted assets.

Using appreciated assets for charitable gifts can be very beneficial.  The ta x deduction, if applicable,  is based on the fair market value on the date of the contribution.  The appreciation is not subject to income tax.  There are exceptions and special rules that may reduce or eliminate the benefit of the tax deduction.

The deduction limitations depend on the type of property given and the type of organization receiving the property.

Avoid using property that has depreciated in value.  The loss on such property cannot be deducted if the property if donated.  Sell the asset if you want to use it to fund a charitable contribution.  You can deduct the loss, subject to limitations and restrictions, if you sell the property and donate the proceeds.

Capital tax rates are determined by the type of asset and the holding period.  The appreciation will be taxed if the gain is does not qualify for capital gains (ordinary gain).    Make sure you have held the property long enough for capital gain treatments.

Do not assume the information is the same as the last time you used appreciated assets to make a charitable contribution.

Contact the charitable organization before making the contribution.  Verify that the organization is still a “qualified organization”.  Determine what their current procedures are before you make the contributions.  Make sure they will accept the property you want to donate.  Some organizations will not accept property other than cash, checks, credit card, etc.  Those that accept other forms of payment may only accept marketable securities.

Next check with your custodian to find out what their current procedures are. The forms required and the time to process the transaction may have changed.  All custodians (for corporations, brokerage, mutual funds, etc.) procedures are not the same.

Obtain a “qualified appraisal” if the property is not a marketable security.  The procedures are different depending on the type of property and the value of the contribution.

The above is not intended to be a complete discussion of this topic.  Be sure to consult with you tax advisor to determine how the transaction applies to you.

You may not be able to complete the gift before year-end if you wait too long.  Be sure to give your tax advisor adequate time to evaluate the planned transaction and see if the benefits are what you intend.

 

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.

 

 

 

 

 

4
Apr

New Law Offers Special Tax Option for Philippines Relief Donations

Under special legislation enacted last week, taxpayers can choose to treat cash contributions made on or after March 26, 2014, and before midnight on Monday, April 14, 2014, as if made on Dec. 31, 2013. This special provision only applies to charitable cash contributions for the relief of victims of Typhoon Haiyan.

Eligible contributions can be claimed on either a 2013 or 2014 return, but not both. Contributions made after April 14, 2014, but before the end of this year can only be claimed on a 2014 return.

Contributions made by text message, check, credit card or debit card qualify for this special option. Donations charged to a credit card before midnight on April 14, 2014, are eligible contributions even if the credit card bill isn’t paid until after that date.  Also, donations made by check are eligible if they are mailed by April 14.

The Philippines Charitable Giving Assistance Act, enacted March 25, 2014, does not apply to contributions of property. Gifts made directly to individual victims are not deductible.

This benefit is only available to an individual that itemize their deductions.  The deduction is not available to those that claim the standard deduction.

Contributions must go to qualified charities. Most organizations eligible to receive tax-deductible donations are listed in a searchable online database available on IRS.gov under Exempt Organizations Select Check. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov.

Contributions to foreign organizations generally are not deducted.  IRS  Publication 526, Charitable Contributions, provides information on making contributions to charities.

A record of the name of the charity, the date of the contribution and the amount of the contribution are required for any deductible contribution.  Donations by text message, a telephone bill will meet the record keeping requirement.  Donations of $250 or more, taxpayers must obtain a written acknowledgment by the charity.

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3
Apr

IRS Reverses Long-Standing Position on One-Rollover-per-Year Rule

I discussed a Tax Court case, Bobrow v. Commissioner, in my February 25th blog, “Tax Court Says One Tax-Free Rollover per Year Means just That”.  I mentioned that one tax-free rollover per IRA per year was permitted by an IRS publication and proposed regulations.  The decision held that a taxpayer may make only one tax-free, 60-day rollover between IRAs within each 12-month period, regardless of how many IRAs an individual maintains.

IRS will not apply this new interpretation to any rollover that involves an IRA distribution occurring before January 1, 2015.

Bobrow v. Commissioner
Mr. Bobrow (anecdotally, a tax lawyer) completed numerous rollovers from various IRAs within 60 days. This was consistent with IRS Publication 590 and the proposed regulations.

The Tax Court relied on its previous rulings, the language of the statute, and the legislative history in deciding this case.  The Tax Court held that regardless of how many IRAs an individual maintains, a taxpayer may make only one nontaxable rollover within each 12-month period. 

The IRS response
The IRS, in Announcement 2014-15, indicated that it will follow the Tax Court’s Bobrow decision, and apply the one-rollover-per-year rule on an aggregate basis, instead of separately to each IRA you own. However, in order to give IRA trustees and custodians time to make changes in their IRA rollover procedures and disclosure documents, the IRS will not apply this new interpretation to any rollover that involves an IRA distribution that occurs before January 1, 2015.

What this means to you
For the rest of 2014 the “old” one-rollover-per-year rule in IRS Publication 590 (see above) will apply to any IRA distributions you receive. So if you have a need to use 60-day rollovers to move funds between IRAs, you have only a limited time to do so without regard to the new Bobrow interpretation.

You can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule. So if you don’t have a need to actually use the cash for some period of time, it’s generally safer to use the direct transfer approach, and avoid this potential problem altogether. The tax consequences of making a mistake can be significant, so don’t hesitate to consult a qualified professional before making multiple rollovers.

 *Note: The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as rollovers for this purpose.

 

 

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.

 

 

 

 

 

 

 
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25
Feb

Tax Court Says One Tax-Free Rollover per Year Means Just That

   Background
The Internal Revenue Code says that if you receive a distribution from an IRA, you can’t make a tax-free (60-day) rollover into another IRA if you’ve already completed a tax-free rollover within the previous 12 months.

The long-standing position of the IRS, reflected in Publication 590 and proposed regulations, is that this rule applies separately to each IRA you own. Publication 590 provides the following example:

“You have two traditional IRAs*, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.”

Very clear. Clear, that is, until earlier this year, when the Tax Court considered the one-rollover-per-year-rule in the case of Bobrow v. Commissioner.

Bobrow v. Commissioner
In this case Mr. Bobrow (anecdotally, a tax lawyer) did the following:

       On April 14, 2008, he withdrew $65,064 from IRA #1. On June 10, 2008, he repaid the full amount into IRA #1.

       On June 6, 2008, he withdrew $65,064 from IRA #2. On August 4, 2008, he repaid the full amount into IRA #2.

Mr. Bobrow completed each rollover within 60 days. He made only one rollover from each IRA. So, according to Publication 590 and the proposed regulations, this should have been perfectly fine. However, the IRS served Mr. Bobrow with a tax deficiency notice, and the case went to the Tax Court. The IRS argued to the Court that Mr. Bobrow violated the one-rollover-per-year rule.

The Tax Court agreed with the IRS, relying on its previous rulings, the language of the statute, and the legislative history. The Court held that regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover within each 12-month period.

“Taxpayers may rely on a proposed regulation, although they are not required to do so. Examiners, however, should follow proposed regulations, unless the proposed regulation is in conflict with an existing final or temporary regulation (Internal Revenue Manual 4.10.7 issue resolution).   

“IRS Publications explain the law in plain language for taxpayers and their advisors. They typically highlight changes in the law, provide examples illustrating Service positions, and include worksheets. Publications are nonbinding on the Service and do not necessarily cover all positions for a given issue. While a good source of general information, publications should not be cited to sustain a position” (Internal Revenue Manual 4.10.7 issue resolution).  This maybe why neither the IRS nor Mr. Bobrow appears to have cited the Service’s long-standing contrary position in Publication 590 and the proposed regulations.

So what’s the rule now?
It’s not clear, but taxpayers who rely on the proposed regulations or Publication 590 to make multiple tax-free rollovers within a 12-month period do so at their own risk. It’s hoped that the IRS will clarify its position in the near future.

And don’t forget–you can make unlimited direct transfers (as opposed to 60-day rollovers) between IRAs. Direct transfers between IRA trustees and custodians aren’t subject to the one-rollover-per-year rule.

*The one-rollover-per-year rule also applies–separately–to your Roth IRAs. Roth conversions don’t count as a rollover for this purpose.

 

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. 

 

 

 

 

 
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9
Jan

Rules Eased for Health FSAs

Recent changes announced by the Internal Revenue Service (IRS) modify the “use-it-or-lose-it” rule that applies to health flexible spending arrangements (FSAs). Plan sponsors will now have the option of allowing participants in health FSAs to carry over up to $500 of unused funds in a health FSA to the following plan year.

Background
Health FSAs are tax-advantaged employer-provided benefit plans that employees can use to pay for qualifying medical expenses. While generally funded through voluntary employee salary reductions, employers are able to contribute as well. Prior to the start of a plan year, employees decide how much to contribute to the health FSA (the maximum annual employee contribution to a health FSA that is part of a cafeteria plan is $2,500 for 2014). Contributions to the plan are excluded from income for federal income tax purposes, as are any reimbursements made from the plan for qualified medical expenses, including co-payments, deductibles, and dental and vision care expenses.

Any funds left unspent in the health FSA at the end of the plan year are forfeited–this is commonly referred to as the “use-it-or-lose-it” rule. Plan sponsors have the option of providing for a grace period of up to 2½ additional months after the end of the plan year (e.g., a calendar year plan might cover expenses incurred through March 15).

 New rules
In Notice 2013-71, the IRS modified the “use-it-or-lose-it” rule that applies to health FSAs:

Plans may now be amended to allow participants to carry over up to $500 of unused health FSA funds at the end of a plan year.
Any carryover will not count against the $2,500 limit in the next plan year.
A plan may allow participants a grace period, as described above, or the ability to carry over unused funds–but not both.
A plan does not have to allow either the grace period or the carryover option.
To adopt the carryover option, plans must be amended on or before the last day of the plan year from which amounts may be carried over, and may be retroactive to the first day of the plan year, provided certain requirements, including participant notification, are met.
Special rules apply to plan years beginning in 2013–these plans may be amended to retroactively adopt the carryover provision at any time on or before the last day of the plan year that begins in 2014.

 Word of caution
A health FSA plan can’t have both a grace period and a carryover option, so plans with existing grace periods will have to be amended to remove the grace period feature in order to add carryovers. Plan sponsors should consult carefully with a benefit specialist before taking any action, however, as eliminating an existing grace period feature raises potential issues relating to the Employee Retirement Income Security Act of 1974 (ERISA). IRS Notice 2013-71 itself states that “the ability to eliminate a grace period provision previously adopted for the plan year in which the amendment is adopted may be subject to non-Code legal constraints.”
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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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