Here is a neat info-graphic on the tax positions of the Presidential Candidates. Special thanks to MBACentral.org
Here is a neat info-graphic on the tax positions of the Presidential Candidates. Special thanks to MBACentral.org
On Friday, July 31, 2015, President Barack Obama signed HR 3236, the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” (the “Act”). Not sure how this name relates to taxes but in any event the following tax law changes and provisions became law under this Act:
With college tuition coming due, families should consider tax efficient ways to pay for these expenses. Grandparents who wish to help their children with tuition costs can take advantage of some special gift tax breaks.
Grandparents have the usual annual present interest gift tax exclusion (now $14,000) and a lifetime exclusion (now $5,340,000). When a spouse joins in the gift (the called “spousal joinder”), these amounts double .
But these are not the only tax breaks available to a grandparent who wants to help the family. In addition, grandparents have an unlimited gift tax exemption for amounts paid for tuition. By using this special educational exclusion, such payments do not count against the annual gift tax or lifetime exclusions.
Here are the basic rules to qualifying these gifts for such unlimited educational exemption:
This exclusion from the gift tax for gifts of tuition is unlimited in amount. However, the scope of the exclusion applies to tuition only.
There is no exclusion for amounts paid for the following:
See Treasury Regulations 25.2503-6(b)(2) for more details.
The gift tax is not imposed on amounts paid as tuition for a student to a qualifying domestic or foreign educational organization for the education or training of such person. See Code Section 2503(e)(1) and (2)(A).
Tuition payments for the student qualify where enrollment is part-time or full-time.
A qualifying educational organization is one which:
See Code Section 170(b)(1)(A)(ii) and Treasury Regulation 25.2503-6(b)(2).
The tuition payment must be made directly to the educational organization to qualify for this exclusion.
Neither a payment to the student for delivery to the organization nor a payment Continue reading
The excitement, joy and anticipation of getting married can be almost overwhelming. With the planning that goes into the wedding it is easy to overlook the tax implications of marriage. Although taxes are probably not high on your summer wedding plan checklist, it is important to be aware of the tax changes that come along with marriage. Here are some basic tips that can help keep those issues under control.
The names and Social Security numbers on your tax return must match your Social Security Administration (SSA) records. If you change your name, it is imperative to report it to the SSA.
A change in your marital status means you must give your employer a new Form W-4, Employee’s Withholding Allowance Certificate.
If you and your spouse both work, your combined incomes may move you into a higher tax bracket. Use the IRS Withholding Calculator tool at IRS.gov to help you complete a new Form W-4. See Publication 505, Tax Withholding and Estimated Tax, for more information.
To avoid problems and to get specific advice speak with your tax adviser.
Marriage can have an impact on insurance. It is important that you report changes in circumstances, such as changes in your income or family size, to your health insurance company (or Health Insurance Marketplace). You should also notify your insurance company when you move out of the area covered by your current insurance plan.
Let the IRS know if your address changes.
You should also notify the U.S. Postal Service. You can ask them online at USPS.com to forward your mail. You may also report the change at your local post office.
If you’re married as of December 31, that’s your marital status for the entire year for tax purposes. You and your spouse can choose to file your federal income tax return either jointly or separately each year.
Note: Once married, neither of you can file using single status.
Generally and in most cases, married filing jointly results in a lower amount of taxes due. However, you may want to figure the tax both ways to find out which status results in the lowest tax.
If you are legally married in a state or country that recognizes same-sex marriage, you generally must file as married on your federal tax return. This is true even if you and your spouse later live in a state or country that does not recognize same-sex marriage. See Same-Sex Marriage Tax Guide: 16 Essential Tax Rules and Tips for a more detailed discussion. Continue reading
A couple of weeks ago, I had someone come in my office who has lived abroad since he was 7 years old. He is a citizen of the United States and Netherlands. He has never filed United States income tax returns. We discussed the general rule that US citizens must file returns and pay tax on their worldwide income. This meant that he should be filing a Form 1040 Return each year. It also meant that he should have been filing for the last 20 years or so of his adult working years a Form 1040 even though he is not living or working in the US. We discussed that although there may be a Netherlands tax treaty with the United States it does not eliminate the need to file tax returns. To add insult to injury, there could be taxes due, along with a whole host of penalties.
In addition to income taxes, having a bank account in the Netherlands could subject him to the Foreign Bank Account Reporting (FBAR) rules and penalties for failure to file for at least the last six years.
To help certain United States taxpayers, the IRS has previously put in place procedures to deal with many foreign bank account problems and to reduce compliance problems. These programs are explored in some detail at Foreign Offshore Accounts: IRS Third Amnesty Program and Electronic Reporting of Foreign Bank and Financial Accounts (FBAR), and Quiet Disclosures of Offshore Foreign Accounts. However, these programs did not adequately address the tax and compliance hardships of many United States citizens living abroad. To make things easier for these taxpayers, the IRS announced yesterday, June 18, 2014, a new Streamlined Foreign Offshore Procedures under IR-2014-73. Here are the details:
A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with its requirements can avoid:
Even if returns properly filed under these procedures are subsequently selected for audit under existing IRS audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful.
However, any previously assessed penalties with respect to those years, however, will not be abated. Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.
Retirement and Savings Plan Deferral Elections: For returns filed under these procedures, retroactive relief will be provided for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by an applicable tax treaty. The proper deferral elections with respect to such plans must be made with the submission.
In addition to having to meet the general eligibility criteria of these offshore programs, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures must:
Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
Non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents (i.e., “green card holders”): Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days.
Under IRC section 911 and its regulations, which apply for purposes of these procedures, neither temporary presence of the individual in the United States nor maintenance of a dwelling in the United States by an individual necessarily mean that the individual’s abode is in the United States.
U.S. taxpayers eligible to use the Streamlined Foreign Offshore Procedures must do the following:
This is a very favorable development to US citizens living abroad who have no idea of their tax responsibilities to the United States. As always, the devil is in the details, so tax counsel should be sought to insure that the various submissions meet all requirements under this Streamlined Foreign Offshore Procedures. There is just too much at stake to do otherwise.
Disclosure and Disclaimer: As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws. This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.
Copyright © 2014 – Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved.
The sad and tragic death of Philip Seymour Hoffman at age 46 last month is yet another reminder of the importance of estate planning. Most of us go along each day not thinking or worrying about what would happen to our loved ones if we suddenly died. Some, in an attempt to be conscientious, draft an estate plan but fail to keep such plan up to date. But most people die without ever doing any estate planning leaving state laws and the courts to decide who should get their estate. When these matters are neglected, surviving family members can be left with momentous legal, tax and financial problems resulting in uncertainty and expensive attorney fees to sort it all out.
Although Mr. Hoffman drafted his will in 2004, he failed to update it after having two children and even after some significant estate tax law changes. Such changes and ten years usually triggers a meeting with your estate planning attorney. For more on a checklist of events that should result in a meeting with your estate planning attorney please explore Estate Planning Triggers.
Mr. Hoffman’s 2004 will leaves everything to the mother of his children, Marianne O’Donnell. He was not married to her and this is where the problems start, at least from an estate tax perspective.
It is estimated that Mr. Hoffman’s estate was around $35,000,000. Currently, $5,340,000 is exempt from federal taxes (the so-called unified credit) with amounts above that amount being subject to a federal estate tax rate of 40%. It would appear then that roughly $30,000,000 of his estate would be subject to estate tax at a 40% rate. This would generate a whopping $12,000,000 in federal estate taxes!
New York also has an estate tax with an exemption of $1,000,000. This New York estate tax has graduated tax rate that goes as high as 16%. It is estimated that roughly another $3,000,000 in will be paid in New York estate taxes.
Combined estate taxes: $15,000,000.
(Liquidity Side Bar: Be aware that estate taxes are due nine (9) months after the date of death so hopefully Mr. Hoffman’s estate has enough liquid assets to avoid a forced sale of assets to meet his tax obligations. Estate Planning Point: It is not known if Mr. Hoffman had life insurance but having life insurance to provide for liquidity is sometimes essential. In certain cases, the use of an irrevocable life insurance trust would allow for excluding the life insurance proceeds from being subject to estate tax.)
The point is that even though a meeting in 2004 may have explored marriage as a simple way to save estate taxes, Mr. Hoffman may, for whatever reason, not wanted to be married at that time. It also could have been that his wealth was not that great in 2004.
But here is the object lesson: Things change and so should one’s estate plan.
In a perfect world, Mr. Hoffman could have created a so-called marital deduction trust and a unified credit or by-pass trust by funding each trust based on a formula clause tied to the unified credit applicable in the year of his death. (Or he could have used the disclaimer trust discussed below to achieve this same result if he was married.) If he had implemented this estate planning strategy his 35,000,000 would have been split between Continue reading
With the increase of the federal estate tax exemption to $5,340,000 in 2014, most taxpayers are not subject to federal estate taxes. The focus for many now has shifted to the income tax implications that arise when wealth passes to the next generation. With no regard to the income tax implications, many times elderly people get the idea that the transfer of real estate to children during their lifetime is a good idea in trying to avoid probate and to make things easier for loved ones. Even uninformed realtors, attorneys and other financial advisers sometime make such a recommendation without knowing the tax impact. However well-meaning, this uninformed strategy can have disastrous income tax results for the children recipients of such ill-conceived lifetime gifts.
It is important to understand the following income tax basis rules for calculating gain or loss:
Example: DIY Dad wants to avoid probate and to transfer during his lifetime his real estate to his son, Sad Son. DIY Dad bought his house in the 1970s for $17,000 and made improvements during the years of $23,000. As a result his adjusted basis is $40,000. The house is now worth $540,000. To save lawyer fees, DIY Dad asks Sad Son to draft a deed to transfer the property. Sad Son does so and DIY Dad signs the deed and has it recorded with the recorder of deeds.