Archive for the ‘estate tax exemption’ Tag

Gifts Given and Received – Taxable?

Originally published in the Cedar Street Times

December 27, 2013

I remember when I was growing up, every year for Christmas, my grandfather would send a check to my brother and I for $75 each.  That seemed like an incredible amount of money to me at the time, and it really boosted my treasury each year!  One of those years, I can remember going to the bank with my mom to cash the check, and wanting to see what $75 felt like in my own two hands; I asked the teller to give it to me…all in ones.  She smiled, pulled some crisp ones from under her drawer, and counted them out for me.  I had never felt a wad of bills like that in my hands!  I tried folding them over, but I could not get them all in my pocket it was so thick, so I put them in lengthwise, and they just about stuck out the top of my pants pocket – I was a rich man!

After a week or so, we came back and deposited about half of them back into my bank account.  My dad had always encouraged us to save half of whatever we received or earned when we were growing up.  I admit, that ratio did not quite remain when I got into high school, and discovered a new and expensive hobby called, girls, but saving was ingrained in me.  When I left for college I had a measurable chunk of change in my bank account.

Throughout those years, it never occurred to me to wonder about the tax implications of the gifts I received.  Now, however, I think a lot about those things!

I do not know anyone that would hesitate to put a gift of $75 into his or her bank account.  But if you throw two or three zeroes on the end, then I definitely get questions from people wondering if it they will have to pay tax.  As the recipient of a gift, whether it is $75 or $75 million dollars, you do not have to pay taxes or report the receipt of the gift (with one exception that I can think of to be explained later).  If you receive something other than cash, such as stocks, real estate, or tangible property, you could have tax if you sell it.  The catch is that when you receive noncash gifts, you also receive the giftor’s cost basis, and when you sell you have taxable gain on the difference between the sales price and the cost basis.  For example, if someone gives you a share of stock worth $100, and that person bought it for only $10, you have to pay tax on the $90 gain if you sell it.

If you put yourself in the shoes of the person giving the gift, there are different rules you need to follow.  As long as you give less than $14,000 (2013 and 2014) a year in combined cash or noncash items to any one person, you have nothing to worry about, except providing the person evidence of your cost basis if the items are noncash items.  (You are doing a disservice if you do not provide proof of cost basis, since the person you give the noncash items to could potentially be held liable for tax on the entire amount of the gift if they sell it, and cannot prove your cost basis – this is often overlooked.)  You could give $14,000 to every person on earth each year and not have to file a gift tax return.

If you give $14,001 to just one person, then you have to file a Form 709 United States Gift Tax Return.  The portion in excess of $14,000 per person is then subtracted from your combined gift and estate tax exemption (currently $5.25 million and indexed for inflation).  For most people this is just an informational filing as they will never reach the limits, but it is required (and limits have gone up and down in the past).  If you exceed the limits, however, the person giving the gift has a tax liability at a rate as a high as 40 percent.  The only possible time I can think of that the IRS could pursue the recipient of a gift for taxes would be if the giftor gave away so much money that he or she had a tax liability and could not pay it.  The IRS in that case, could pursue the person receiving a gift for tax.

Keep in mind that a gift is different from inheriting when someone passes away.  You generally do not have tax on inherited amounts either, with the exception of tax liability on any earnings the assets you are entitled to accumulate between the date of the peron’s passing, and the date you receive the property.  Your cost basis with inherited assets is also generally more favorable as the cost basis you receive is typically the fair market value at the date the person passed away, and not their old, often lower, cost basis.

Crafty minds will sometimes think of schemes to call income a gift since gifts are not taxable.  Be careful of this – substance over form will rule the day.  Yes, it would be nice if I would do your tax preparation for free, and you also happen to be kind enough to give me money, but it ain’t gonna fly!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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New Tax Impacts for Trusts with Capital Gains – Part I

Originally published in the Cedar Street Times

November 1, 2013

In order to discuss the new challenge trustees have regarding capital gains, let us first review some basics regarding revocable and irrevocable trusts.

A revocable living trust is a trust created during your lifetime that spells out what you want to happen with, and who you want to control, your assets if you become incapacitated or pass away.  This is the most common type of trust, and many people set these up because it has many advantages over just having a will upon death: the chief reasons are that it provides more control, has more tax advantages, it is more private, it is faster, and it is less expensive than the default court process called probate.

I would say the one major drawback of a trust administration process compared to probate is that you do not have the standardized court oversight and genuine closure that you have with the probate process.  If there are difficult problems with trust administration, it often stems from that fact that most people appoint one of the recipients of their assets (beneficiaries) as the person responsible for carrying out the trust terms (the trustee).

Money does strange things to people, and I have witnessed it lead to families ripped apart when the non-trustee siblings start questioning the integrity of the sibling appointed as trustee.  Generally, beneficiaries want their money yesterday!  And they do not understand that it still takes a good bit of time, effort, and expense to handle everything.  That said, I would still choose to have a trust 98 percent of the time, instead of just a will.  If there are concerns about the solidarity of the beneficiaries, a corporate trustee could always be a solution.

Another characteristic of a revocable living trust is that it can be changed or even scrapped at anytime while you are alive – hence the name “revocable.”  As a result of this control feature, of being able to terminate the trust and retain the assets, the trust is disregarded as a separate taxpaying entity, and you just report all the eligible income and expenses of the trust on your personal 1040.  Everything gets reported under your Social Security Number instead of having a separate taxpayer identification number.

Now let us turn the tables and speak about irrevocable trusts.  These are trusts that generally cannot be changed once they are created.  (Of course, nothing is set in stone, and well drafted trusts with trust protector language can assist in making changes, or if all the beneficiaries agree and the court approves a petition, changes or even revocation of an irrevocable trust are possible!)

An example of  an irrevocable trust would be your revocable living trust after you pass away.  At that point, your wishes regarding the disposition of your assets are irrevocable – locked-in as you specified – and the trustee must carry out your wishes.  Often a revocable living trust will contain provisions to set up other trusts.  For married couples, it has been very common to create an irrevocable trust called a bypass trust, (aka credit shelter trust, ‘B’ Trust, etc.).

Prior to some new “permanent” laws passed in January ($5 million indexed-for-inflation estate tax exemption with portability), it was important for estate inheritance tax reasons for many people to create bypass trusts. For most people estate inheritance tax will not be a concern now, but bypass trusts, or similar types of trusts, can still be important for controlling where the deceased spouse’s assets end-up, especially in blended family situations with children from prior marriages.  In other words, dad doesn’t want mom to disinherit the children he had from a prior marriage once he dies!

Another type of common irrevocable trust is a gifting trust.  These are commonly created by a parent or a grandparent to permanently move assets out of their estate and into a trust for the benefit (or future benefit) of a child or grandchild with certain stipulations and protections governing the assets in the trust.  We saw a lot of these set up in 2012 due to the uncertainty of the estate tax laws and the possibility of missing an opportunity to save estate inheritance tax down the road.

Due to the fact that you have relinquished a lot of control with an irrevocable trust, and it will no longer be included in your estate, the taxing authorities view this trust as a separate tax paying entity.  This means it has its own tax return each year and gets its own taxpayer identification number.

In two weeks we will begin discussing the new tax rate changes and their impacts on trusts.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

American Taxpayer Relief Act of 2012

Originally published in the Cedar Street Times

January 11, 2013

The American Taxpayer Relief Act of 2012 was signed into law January 2, 2013.  There was lots in the bill, but I am going to hit on a few that are notable and others that having meaning to a lot of people.  I think making the Alternative Minimum Tax patch permanent and indexed for inflation was a huge victory for many taxpayers.  That patch has been kicked down the road for years.  The indexing will certainly alleviate concerns of a similar problem down the road.  Many middle class people do not realize they were on the cusp of paying thousands of dollars more on their 2012 tax returns due in April without this fix.

The estate tax exemption being set permanently at $5 million and also indexed for inflation is huge, especially for Californians that own property.  In a lot of ways, this simplifies estate planning for most individuals and will bring into question the need of the typical A-B split for many people that currently have it.  Having a B trust, or bypass trust, would require additional tax work in the future, so the ability to eliminate it, could be worth the cost of amending your trust.  Family dynamics may of course still dictate a B trust is prudent.

Various other temporary provisions we have been enjoying that were made permanent included marriage penalty relief for joint filers, better rules for student loan interest deductions and dependent care credit rules.

Quite a few things were extended but not made permanent.  A big one was extending the exclusion from income of cancelled debt on personal residences for another year.  This could be a lifesaver for those still struggling with mortgages that are “underwater.”  Deductions for grade school teacher expenses and an above-the-line deduction for qualified tuition and related expenses were other items extended through 2013.  More important than the deduction for tuition was the extension of the American opportunity tax credit through 2018 which saves taxpayers up to $2,500 each year as a result of education costs.  Enhanced provisions of the child tax credit were also extended through 2018.

Small businesses have had the luxury of writing off high dollar amounts of many capital asset purchases through code section 179.  This was slated to return to $25,000, but has been extended through 2013 at $500,000.  Bonus depreciation and accelerated expensing of qualified leasehold, restaurant and retail improvements on a 15 year schedule instead of returning to a 39.5 year schedule was also extended.

Bush-era tax rates and capital gains rates have been retained for everyone but the wealthy.  For people making over $400,000, their marginal bracket rose from 35% to 39.6%, and their capital gains tax went from 15% to 20%.  There is also a new 3.8% medicare tax on investment income for people generally making over $200,000 and a new hospital insurance tax of .9% for people generally making over $200,000.  Itemized deduction phaseouts have also returned for high income earners.

Everyday wage earners will be negatively impacted by the return of a 6.2% tax for Social Security rather than 4.2% tax we have had for the past two years, as they will see two percent less in their paychecks as a result.  Another negative impact for people with high uninsured medical expenses, is that the threshold for medical itemized deductions has moved from 7.5% of your adjusted gross income to 10%.  Individuals 65 and up will still enjoy the 7.5% rate for another three years.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.