Monday, October 24th, 2011 | tax | No Comments
To preserve estate tax portability, executors must file Form 706 Estate Tax Return for decedents dying in 2011 and later. The nine month filing deadline may be extended an additional six months. This election is not available for decedents dying before 2011.
In the law reinstating the estate tax in 2010, Congress established an exclusion amount of $5 million per person in 2011 (adjusted for inflation in future years). An estate with a taxable value below this amount is not subject to federal tax (the limit remains at $1 million in Tennessee). The law also provided for any unused exclusion amount to be passed on to the surviving spouse. The election to do so is made, and the amount is established, by timely filing an estate tax return for the decedent. The return must be filed even though it may not be otherwise required under the estate tax rules.
In a common scenario, the estate assets of the first spouse to die are transferred to the surviving spouse, either through joint ownership with right of survivorship or by will. This may result in accumulation of assets in the surviving spouse’s estate that would exceed the $5 million exclusion, resulting in estate tax liability. The portability election allows the unused exclusion amount of the first spouse to die to be added to that of the second to die, sheltering additional assets from estate tax.
This election is a new estate planning tool that can help a family preserve its assets. Good estate planning may reduce or eliminate the need to take advantage of the portability election. If your family has substantial assets such as a family business or investments, you may benefit from a discussion with an accountant and an attorney who are both familiar with estate planning and tax reduction techniques, as we are. If a loved one passed away in 2011, timing is critical to preserving the estate tax portability election.
Thursday, September 15th, 2011 | tax | No Comments
The IRS has provided some estate tax filing relief for executors of the estates of those who died in 2010. Notice 2011-76 provides an automatic extension of time to file and pay the estate tax due. The rules generally apply to estates exceeding $5 million.
The estate tax was repealed for 2010 and was replaced with a complicated carryover basis calculation to determine the value of inherited assets. Congress reinstated the estate tax retroactively and let executors choose whether to be governed by the estate tax rules or opt out and use the carryover basis rules, adding another layer of complexity. As a result of the new law, guidance and forms were delayed. Updated instructions for Form 706 were posted only recently, and Form 8939 to make the election is still in draft form.
The IRS has changed the due date of Form 8939 to January 17, 2012. This is not an extension, so an additional form is not required.
For executors who timely filed an extension to file the estate tax return on Form 4768, the extended deadline is now March 19, 2012 for most decedents. For dates of death between December 16, 2010 and January 1, 2011, the extended deadline is 15 months after the date of death.
The notice also provides late-filing and late-payment penalty relief, although interest will still be charged for tax not paid by the original due date of the return.
Wednesday, March 30th, 2011 | tax | No Comments
Generous relatives may be the next targets of IRS hunting expeditions. The IRS has asked a federal judge for a “John Doe” summons on the California Board of Equalization to force the board to turn over records of property transfers for little or no consideration. They are looking for people who have not paid gift tax on transfers of property to relatives between 2005 and 2010.
The Tax Code allows the transfer of up to $13,000 annually from one family member to another. Husband and wife can combine to give up to $26,000 a year. For each gift larger than that, the giver must file a Form 709 gift tax return. The giver, not the recipient, is liable for gift tax. Each taxpayer enjoys a lifetime gift tax exemption of a million dollars, making gifts up to that amount free of federal tax. But cumulative gifts over a lifetime must be accounted for in the estate tax calculation of the giver. If gift tax is owed but not paid by the giver, then the liability shifts to the recipient.
Property tax records and registered deeds are public records available for viewing by anyone. The IRS has been quietly gathering compliance information for some time, assisted by many states and counties who have voluntarily disclosed their property transfer data. The summons in California is one of the boldest attempts yet in the IRS effort to ferret out non-compliant taxpayers. Over the years, gift tax audits have been few and far between, but that could change as the IRS begins matching property transfer records with taxpayers.
If you are worried about the implications this may have for your family, please contact us. We can shed light on your situation and help keep the IRS gift tax target off of you.
The Tax Relief Act extended several tax credits and deductions that expired at the end of 2009. As a result, the IRS has delayed processing of several 2010 tax returns. The delays impact these returns:
- Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return
- Form 941 (First Quarter 2011), Employer’s Quarterly Federal Tax Return
- Form 709, Gift Tax Return
- Form 706, Estate (and Generation-Skipping Transfer) Tax Return
- Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return for non-resident
- Form 8849 Schedule 3 (Calendar year 2011), Certain Fuel Mixtures and the Alternative Fuel Credit
The delay affects both paper and electronic filers. We can prepare these returns and hold them until the IRS is ready to process them. The starting date for these returns will be announced in the future by the IRS.
We had previously posted that IRS processing of certain individual tax returns will begin on February 14. This date has not been changed, but it does not apply to the forms listed above. We will keep you posted as we learn of developments.
Friday, December 17th, 2010 | consulting, tax | No Comments
The speculation is over now that the tax relief bill is ready for the President’s signature. The bill is wide-ranging, covering income tax rates, extending many temporary provisions, adding a payroll tax cut, and modifying estate tax law, among other things.
Estate planning has been particularly difficult in the past few years. With the repeal of the estate tax and generation-skipping tax for 2010 has come a complex set of rules covering basis issues that arise with the repeal. Before 2010, estates were valued at fair market value on the date of death (or six months after in certain cases). The heirs assumed this value as their basis in calculating gain or loss on anysubsequent sale of estate assets. Repeal of the estate tax also meant repeal of this basis rule, which means that the heirs must find not only the date-of death value, but each estate asset’s original cost (carryover basis). Except for an exemption amount, the heirs must use the carryover basis in calculating gain or loss on any sale of estate assets, which can substantially increase the tax liability when the heir sells an asset that was bought by the decedent many years ago whose value has appreciated.
The Tax Relief Act has created a special election to allow the estate of a decedent in 2010 to use the rules under the repeal provisions. If the executor chooses not to make the special election, the retroactive provisions of the new law, which effectively extend the 2009 provisions, apply:
- The estate tax exemption and generation-skipping (GST) tax exemption is $5 million in 2010, 2011, and 2012, subject to an inflation adjustment in 2012.
- The top estate and gift tax rate is 35% in 2010, 2011, and 2012.
- For dates of death after 2010, any exclusion amount unused by the decedent may be carried over to be used by the surviving spouse’s estate. (The GST exclusion is not portable.)
- Extensions of time for filing are allowed for most 2010 estate and GST returns to nine months after this law is enacted.
- Estate and GST tax changes that had been scheduled to sunset after 2010 are now scheduled to sunset after 2012.
Other details apply to specific circumstances, so you should consult with your tax adviser to learn more. Even though the new act is only temporary, we now have guidelines for the next two years that will enable us to effectively plan ahead to protect family assets.
Wednesday, July 14th, 2010 | tax | No Comments
Yankees owner George Steinbrenner’s death this week is a sad occasion for his family and friends. But because it happened this year, it resulted in a huge tax savings for his heirs. As explained in this Wall Street Journal article, the 2001 Bush tax cuts left a quirky Federal estate tax repeal for this year only. Congress did nothing to fix this anomaly.
With Mr. Steinbrenner’s estate estimated at $1.1 billion, that means his heirs will inherit as much as $600 million that would have gone into the Federal treasury, based on the rate when the estate tax resumes in 2011 (55% maximum on estates over $1 million). He joins another high-profile billionaire whose passing we wrote about a few weeks ago.
Here’s a morbid thought: Will death become the ultimate tax-planning tool this year? I shudder at the thought.
Tuesday, June 22nd, 2010 | tax | No Comments
Even though the federal estate tax only affected about 5500 decedents in 2009 before it was repealed for one year, Congress’s inaction in reversing the repeal has cost the government big money, even by their standards. In this New York Times story, we learned that Houston’s richest man died last spring. Dan L. Duncan was a natural gas tycoon (EPCO, Dan Duncan L.L.P., Enterprise GP Holdings) whose fortune was estimated by Forbes at $9 billion, ranking him number 74 among the wealthiest in the world. If he had died in 2009, his estate would have paid up to $4 billion in taxes; in 2011, that amount might have risen to $5 billion. This year, his estate passes tax-free to his wife, children, grandchildren, and various charities.
If and when his heirs were to sell some of the assets, the substantial gains would be taxed at rates ranging from the current 15% capital gains rate to the maximum income tax rate, which is still lower than the estate tax rate. But that could be many years in the future. In the meantime, the federal government has missed out on perhaps as much as $25 billion of revenue (the estate tax take in 2008).
There are strong and valid arguments on both sides of the estate tax issue, from political, economic, and humanitarian points of view. The plain fact is that this is one revenue stream for the federal budget that dried up for this year. Care to guess who they will tap to make that up?
The federal estate tax returns in 2011 for estates valued at $1 million, if Congress leaves current law intact. (The cutoff in Tennessee has been $1 million for several years, and was unaffected by the federal law.)
Savvy estate planning can help your family keep more of its assets and minimize the tax liability. We were part of a team of professionals who reduced a family’s taxable estate through good planning from about $8 million to about $2 million, saving them a $3 million tax hit that would have forced them to sell all of their real estate holdings into a depressed market.
Relax… We do more than taxes. We solve problems.
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