Georgia Education Expense Tax Credits: Do Not Wait!

June is the new November The Georgia Dept. of Revenue is approving education expense tax credits at 3½ times the rate for 2011. As of Mar. 16, the DOR had approved $8.6 million in tax credits. In 2011, the tax credit cap was met in November. This year, the cap is likely to be met in June—if not sooner. In 2011, 2,700 Georgia taxpayers were denied participation in the education expense tax credit program. Don’t let this happen to you in 2012! Apply today for your tax credit approval.


Joe Nagel Website PictureFor most clients, planning to obtain Medicaid is a last resort; however, with the catastrophic cost of long-term care exceeding $200,000 in many metropolitan areas, they are left with no choice.  A careful review of a client’s assets, as well as their short-term goals and long-term objections, will determine whether transferring property to an Irrevocable Income Only Trust (“IIOT”) would be an appropriate part of an estate plan.  Such planning, when used properly, can avoid the difficult decision to sell family legacy assets to pay for nursing care coverage.  

Government rules and regulations attempt to ensure that Medicaid is in fact the payer of last resort.  There are strict income and asset eligibility requirements, combined with a look-back penalty period, with rules and enforcement varying by state. The Deficient Reduction Act of 2005 extended the look-back period to five years on all transfers, including transfers to IIOTs. That means that clients must wait 5 years after transfer before applying for Medicaid.   Since the IIOT must be in existence for five years, a critical question when funding the trust must be what assets the elder client can live without for a period of five years.

Moreover, since the Omnibus Reconciliation Act of 1993, unless certain exceptions apply (such as Special Needs Trusts), assets of a self-settled trust are considered available to the Settlor for Medicaid eligibility purposes regardless of whether trustee discretion is exercised or whether the trust was established for purposes of qualifying for Medicaid.  Any trust principal which could be distributed under any circumstances, is considered an available resource for Medicaid purposes.  Trust restrictions on when or whether a distribution may be made are disregarded.  The intent of the 1993 Act was to minimize “Medicaid Planning”. 

An IIOT is a trust set up to allow clients to meet the stringent Medicaid rules and requirements while preserving family legacy assets for future generations.  The terms of the IIOT must be carefully drafted.  Trust principal may not be distributed, under any circumstances, to the Settlor or the Settlor’s spouse.  A “rainy day provision” can be added to allow the Trustee to distribute principal to family members, so long as the trustee does not have discretion to distribute to Settlor or Settlor’s spouse. 

All income can be distributed to the Settlor. Trust assets are often invested in income producing securities while the Settlor is living autonomously. Once the Settlor goes into a nursing home, the Trustee may want to invest the trust assets in non-income producing securities. Note, the fact that the Settlor retains the right to IIOT in

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

H&A Successful in another Estate Tax Audit

H&A has again successfully settled an estate tax audit.   In this case, the IRS confronted the Estate with an additional assessment of nearly $2.4 million dollars in estate taxes.  The IRS assessment was based largely on three issues.  First, the IRS argued that an LLC created prior to death should be included in the estate under IRC Section 2036.  Second, the IRS argued that a vacation home  previously owned by a QPRT and rented back to the decedent should be included in the decedent’s taxable estate under IRC Section 2036.  Finally, the IRS disallowed an estate tax deduction for interest on a Graegin loan taken from the recently created LLC to pay estate taxes.

H&A was able to successfully defend the Estate on each and every issue on which the IRS based its assessment. Through proper planning, creative thinking, and hard work by H&A, the Estate recently received from the IRS a no-change closing letter.  This was a collaborative effort across all firm departments, and is a testament to the wide ranging skills and knowledge offered to our clients.   I’d like to thank everyone involved for their efforts in bringing this matter to a successful conclusion.

We cannot guaranty similar results, as success or failure of any audit defense depends on the facts and circumstances of the individual case.  If you need help dealing with the IRS, please do not hesitate to contact us at (404) 255-7400.

2011 Year End Tax Letter

December 7, 2011 

Dear Tax Clients:

 As the 2011 tax year comes to a close, now is the time to review your financial situation and determine what tax planning opportunities exist to decrease your 2011 taxes.  We are ready to help you plan efficiently and effectively for 2011 and future years.  

Individual Income Tax 

While the lower Bush era tax cuts are currently not scheduled to expire until the end of 2012, there are still year-end tax savings opportunities available.  The additional twist for year-end 2011 tax planning is the uncertain future for tax rates after 2012.  Many political observers forecast that higher income taxpayers will only be asked to pay more. 

Year End 2011 Action Items: 

Make your 2011 State Income Tax payments in December 2011, instead of waiting until January 2012, unless you are in an AMT situation. 

Sell any stock “losers” this month to offset your 2011 capital gains, plus $3,000.  Avoid “wash sale” rules by not buying the same stock within 30 days before or after the sale of the stock.  Otherwise, the losses will not count. 

Has your 2011 Federal Income Tax been under-withheld?  Or have you had other income and not made estimated tax payments?  Have more tax withheld from your December paychecks.  This will avoid underpayment penalties. 

If you are 70 ½ and older, you can make charitable contributions directly from your IRA to a bona fide charity. No charitable deduction is available for the donation, but income tax will not be due on what would otherwise be a taxable distribution form the IRA.  This tax break is especially advantageous for retired taxpayers who are no longer able to itemize their deductions.  The limit is $100,000 and it is scheduled to expire at the end of this year. 

Consider converting your traditional IRA to a Roth IRA.  You would owe tax on the IRA amount currently, to the extent it exceeds basis, but retirement distributions from the Roth IRA would potentially be tax free – especially advantageous since it is expected that tax rates will increase after 2012. 

Provisions currently scheduled to expire 12/31/2011:  

Payroll Tax – For the 2011 tax year, the employee share of Social Security Tax withholding was reduced from 6.2% to 4.2% of the taxable wage base of $106,800.  This reduction is scheduled to expire at the end of the year.  President Obama has proposed a measure that would continue the payroll tax deduction for 2012 at an even lower rate of 3.1% of the scheduled 2012 taxable wage base of $110,100.  This new measure has not yet become law and is currently under debate in Congress. 

Alternative Minimum Tax Exemption – In order to prevent many moderate income tax payers from being subject to the AMT, the exemption amounts for 2011 were increased to $48,450 for single taxpayers and $74,450 for married taxpayers filing jointly and surviving spouses.  Unless Congress acts to extend the higher exemption amounts, the exemption for 2012 and beyond will decrease to $33,750 for single taxpayers and $45,000 for jointly filing married taxpayers and surviving spouses. 

Provisions currently scheduled to expire 12/31/2012: 

Federal Income Tax Rate Brackets – The current tax rates of 10, 15, 25, 28, 33 and 35% are scheduled to expire 12/31/2012.  If they were allowed to expire, the rates for 2013 and future years would revert to the “pre- Bush tax cut” rates of 15, 28, 31, 36 and 39.6%.  

All indications at this time are that President Obama supports extending the tax rate cuts, except to the highest tax brackets starting at $250,000 for married filling jointly taxpayers and $200,000 for all other taxpayers. The Republicans continue to only support an extension of the lower Bush-era rates across-the-board to all taxpayers.  This will continue to be a hotly debated issue in Washington.  We will keep you informed as new developments continue to unfold. 

Capital Gains/Dividends – In 2011 and 2012, qualified capital gains and dividends are taxed at a maximum rate of 15%.  Unless this provision is extended, the maximum rate on net capital gains would increase to 20% in 2013.  All dividends would be taxed as regular income, and therefore, could be subject to the maximum rate of 39.6%. 

Limit on Itemized Deductions – Unless the Bush tax cuts are extended, higher-income taxpayers will revert to a limitation on itemized deductions in excess of a statutory threshold of adjusted gross income.  There would also be a similar limitation on personal exemptions for high-income taxpayers. 

Marriage Penalty Relief – The provisions currently in place to mitigate the “marriage penalty” for two income couples will expire at the end of 2012. 

Small Business Tax 

Bonus Depreciation  – The bonus depreciation percentage for the cost of new equipment, including computers and software, purchased and placed in service in 2011 will be 100%.  The bonus depreciation rate is scheduled to drop to 50% in 2012. 

Action Item: Accelerate planned equipment purchases to December and you will be able to deduct the entire cost of the equipment on your 2011 tax return. 

Hiring Incentives for Veterans – The Returning Heroes Tax Credit and the Wounded Warriors Tax Credit were recently enacted on November 21, 2011.  Under this new law, employers are eligible for a tax credit when hiring certain qualified military veterans.  This provision is currently scheduled to expire on 12/31/2012.

Action Item: A certification form must be filed with the state workforce agency within 28 days of the employment date to certify that the individual is eligible for the Work Opportunity Tax Credit. 

From 1099 Reporting – There are new questions on this year’s Schedule C (Profit or Loss from Business) and Schedule E (Supplemental Income and Loss) regarding the 1099 reporting of certain payments made to individuals in the course of your trade or business.  IRS is asking taxpayers if they had any payments that would require 1099 reporting and if yes, were all required forms filed.

Action Item:  Confirm that you are in compliance – Penalties can add up quickly. 

Federal Estate and Gift Tax 

The current estate tax for 2011 is set at a maximum 35% rate and a $5 million exclusion.  For 2012, the maximum rate remains the same at 35% and the inflation-adjusted exclusion is $5.120 million.  Absent future legislation, after 2012, the exclusion amount will be $1 million with a maximum 55% rate. However, many experts are predicting that Congress will lower the exclusion to $3.5 million and raise the maximum rate to 45% after 2012. 

Action Item:  Lifetime gift giving should continue to be part of your master estate plan.  Individuals can currently gift up to $13,000 per year and married couples can gift up to $26,000 per year, to each individual gift recipient free of any gift tax. 

Other Items 

IRS “Phishing” Scams – The IRS continues to be diligent in their efforts to protect taxpayer information and “shut down” scams as quickly as possible.  They stress that the IRS does not solicit taxpayer information via e-mail.  Any emails received from the “IRS” requesting personal information should be deleted. 

Audits of Tax Returns – There has been an increase in audit and notice activity related to clients’ Individual Income Tax Returns (Form 1040) over the past couple of years.  As the federal government continues to struggle financially, the audit/notice activity for Estate and Trust Tax Returns (Form 1041) is also starting to increase.  This includes the assessment of severe non-filing penalties in cases where tax returns have not been properly filed.  It should be noted that tax returns are required to be filed even if no tax is due.  We are ready to help if you have any issues in this area. 

Health Care Directives – Once a child turns 18, a parent/guardian’s access to medical records is terminated.  Therefore, if you have young adult children, it is advisable for them to execute and Advanced Health Care Directive naming you (or someone they trust) as their personal representative so that these records do not become blocked from access. 

Health Care Act

 Small Business Tax Credit – Currently a tax credit is available to qualified small employers to help offset the cost of employer provided health insurance coverage. 

Medicare Payroll Surtax – Effective 2013 the law currently contains provisions for imposing an additional Hospital Insurance tax of .9% on earned income in excess of $200,000 for individuals and $250,000 for married couples filing jointly.  An additional 3.8% Medicare contribution tax is imposed on unearned income for higher-income taxpayers. 

Estates and Trusts – The 3.8% tax is also imposed on certain estates and trusts. 

Medical Expense Deduction – The threshold for the itemized medical deduction will increase after 12/31/2012.  However, individuals who are 65 and older will be exempt from this increase through 2016. 

State of Georgia Changes

 Individual Income Tax Retirement Exclusion – The income tax exclusion on retirement income, for taxpayers who are 65 or older, increases from the current $35,000 of retirement income to the following:

 2012        $ 65,000

2013        $100,000

2014        $150,000

2015        $200,000

2016        Unlimited

No need to move to Florida – Georgia is increasingly becoming a retiree friendly State.

Individuals who are ages 62 through 64 are still entitled to the $35,000 individual tax exclusion on retirement income.

Happy Holidays!

Deadline: Act Quickly to Take Advantage of Tax Savings

Direct your Georgia income tax dollars to private elementary and high schools (receive dollar for dollar tax credit for amounts contributed to charity) and still get a federal tax deduction to save more federal tax.  If you itemize, this is a “no brainer”!

Georgia Statute 48-7-29.16 establishes an income tax credit for taxpayer funds used to support a qualifying student scholarship organization.    Two examples are the Georgia GOAL Scholarship Program for 107 of Georgia’s private schools and the  GRACE Scholar program for Catholic Schools in Georgia.  A full listing of all student scholarship organizations can be found at the Georgia Department of Education’s website at 2, 2011 SSO List.pdf?p=6CC6799F8C1371F62F852EB6D75299360D76B6C7ABA0F68A8B177675F78FA12A&Type=D

Participants can give up to $1,000 per individual or $2,500 for married taxpayers filing a joint return.   For each dollar given, Participants will get a dollar of credit against their Georgia income taxes.  In addition, Participant’s, depending on their circumstances (whether they itemize or are subject to the AMT), may be entitled to take federal charitable deduction for the contribution.     For example, if a Participant contributes $1,000, she will get a $1,000 credit against her Georgia taxes and possibly a $1,000 charitable deduction for federal income tax purposes.

There is virtually no downside to taking this credit.  The Georgia credit allows you to simply redirect taxes you would otherwise pay to a scholarship program of your choice.  The federal charitable contribution deduction may reduce your federal taxes.  This is a no lose proposition.

To take advantage, Participants must fill out Georgia Department of Revenue Form IT-QEE-TP1 (see and submit it by November 1st (in order to assure that you will receive your confirmation back from the State of Georgia timely).    The participant should receive a confirmation that their contribution has been accepted.  Once received, the confirmation should be sent along with a check for the contribution amount to the scholarship program of the Participant’s choice.

The Georgia Department of Revenue is required to provide pre-approval within 30 days of submission of the form.  Therefore, to ensure you have sufficient time to make your contribution by year end, submit your application to the Georgia Department of Revenue in early November.

The form takes about ten minutes to fill out.  If you need help, call Joe Nagel in our office.  This is one of those tax items that is “too good to be true” but it works!

CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax information contained in this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.  If you would like a written opinion

Beneficiary Designation Forms

This is a reminder to clients of the importance of executing designated beneficiary forms for your retirement plan accounts.    If no designated beneficiary form is executed, the plan administrator will determine who receives the death benefit based on the plan document, which often names the spouse, or, if none, then the estate of the participant as the beneficiary.     Often these are not the best choices for the individual participant.  

Once executed, beneficiary designations should be reviewed every couple of years, particularly after life changing events such as marriage, divorce, or the birth or death of a family member.  Failure to do so can be catastrophic.  For example, in Kennedy v. Dupont, a 2009 U.S. Supreme Court case, a participant selected his wife as the sole designated beneficiary of his retirement plan account.   The couple divorced and the spouse waived her right to the retirement benefits under the divorce decree.  The participant later passed away, but never changed the designated beneficiary form.  The Supreme Court found that the ex-spouse had the right to receive the death benefit from the participant’s account despite her waiver.    

If you would like help regarding the tax and other consequences of choosing a designated beneficiary, please contact Joe Nagel at (404) 255-7400 ext. 16.

55K IRS Penalty Abatement

H&A recently obtained an abatement of $55k of late filing and late payment penalties owed by a taxpayer.  The penalties were assessed for tax years 2006 and 2007, and the taxes were not paid until 2010.  

We cannot guaranty abatement of penalties, and success or failure of any request for abatement of penalties depends on the facts and circumstances of each individual case.  If you need help dealing with the IRS, please do not hesitate to contact us at (404) 255-7400.

56K Penalty Abatement

H&A has again successfully obtained an abatement of penalties.  In this case, the client was assessed penalties for late payment of taxes.  The CPA filed a request for abatement, which was denied by the IRS.  On appeal of the denial of the abatement request, H&A was able to obtain an abatement of 6 months worth of penalties in the amount of $56,000.  

We cannot guaranty abatement of penalties, and success or failure of any request for abatement of penalties will depend on the facts and circumstances of the individual case.  If you need help dealing with the IRS, please do not hesitate to contact us at (404) 255-7400.

$103,000 Penalty Abatement

H&A has again successfully helped obtain abatement of an IRS penalty.  In this case, the estate failed to file a return due to accountant error.  The CPA who caught the mistake filed an estate tax return for the client within a reasonable time after identification of the error.  Despite there being obvious reasonable cause for the late filing, the IRS agent obstinately assessed a late filing penalty of over $103,000.  H&A consulted on the case and drafted the protest letter which was accepted by the IRS Appeals Officer.  

We cannot guaranty abatement of penalties, and success or failure of any request for abatement of penalties will be based on the facts and circumstances of the individual case.  If you need help dealing with the IRS, please do not hesitate to contact us at (404) 255-7400.

Urgent: Update Your Non-Compete Agreements to Take Advantage of New Law

Until now, there were no clear rules governing “non-competes” (a provision typically found in  employment agreements and similar contracts that restrict one parties ability to compete against the other) in Georgia except for a hodge podge of case law that made it extremely difficult for employers to rely on non-competes.  In December 2009 the Georgia Legislature passed HB 173 to govern enforcement of restrictive covenants in the commercial arena.    However, the Legislature conditioned HB 173’s effectiveness upon the public’s passage of a constitutional amendment.  That constitutional amendment passed on November 2, 2010.

The new law is not retroactive.  It will not apply to non-competes entered into before November 2, 2010.   So if employers want to take advantage of the new law, they should update their non-compete agreements and non-disclosure/confidentiality agreements now.

The new law offers many advantages for employers.

  • The new law allows courts to adjust or “blue pencil” overly broad covenants to make them reasonable and enforceable.  Previously, a court didn’t have this discretion – if the covenant was overly broad for any reason, no matter how minor, the covenant was held to be totally unenforceable.
  • The new law allows employers to identify specific competitors as prohibited employers during the period of the non-compete.
  • The new law provides that post-employment restrictions are enforceable if they give “fair notice of the maximum reasonable scope of the restraint… event if the description is generalized or could possibly be stated more narrowly to exclude extraneous matters”.  The statute also specifically provides a good faith safe harbor for “any good faith estimate of the activities, products and services or geographical areas that may be applicable at the time of termination”.  So now the employer may make reasonable assumptions about the role and geographical area of the employee at the outset and the non-compete will not be struck down as overly broad if those assumptions turn out to be mistaken.
  • The new law includes a provision stating that trade secrets and other confidential information are legitimate business interests which support non-compete covenants.
  • The new law provides that a restrictive covenant during the term of employment will not be  unreasonable because it lacks any specific limitation upon scope of activity, duration, or geographical area as long as it promotes or protects the purpose or subject matter of the agreement or relationship or deters any potential conflict of interest.    Previously, that was not the case in Georgia  –  covenants during the term of employment were subject to strict scrutiny just like those applying after the term of employment.
  • The new law does away with Georgia’s “all or nothing” approach.  Under the old rules, if one part of an employment agreement contained an unenforceable restrictive covenant, all other restrictive covenants in the agreement were unenforceable.  This is no longer the case.
  • The new law allows confidential information to remain protected as long as it remains confidential.  Previously, Georgia was one of two states that required a non-disclosure agreement to have a time limit, except as relates to trade-secrets.   Under the new statute confidential information is not required to have an expiration date.

If you have questions or want to update your non-compete agreement, please contact Joe Nagel, Marc Dearth or Patrick Norris at (404) 255-7400.

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