Tax Law Changes Make Estate Planning Tougher

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If the IRS has its way, one of our prime estate planning techniques will soon be obsolete.

Earlier this month, the Treasury Department released proposed regulations under Section 2704 of the Internal Revenue Code that will severely undermine valuation discounts, which are commonly used by us and other estate planners to reduce the value of assets that are gifted or sold pursuant to a client’s estate planning.

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Planning 2016: Sophisticated Charitable Giving

mary_croppedSignificant tax savings can be achieved through a properly planned program of gifts to charity. Although a contribution may be motivated by humanitarian reasons, it is nevertheless wise to take the tax considerations into account when making a contribution. Charitable giving can be divided into two general categories. First, there are donations that are made on a regular basis and involve relatively small amounts. Second, there is the large extraordinary donation often associated with estate planning. Different planning concepts govern each type of donation.

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Multi-State Record Keeping

Doug Image CroppedAs our society becomes increasingly mobile and the economy causes taxpayers to work in multiple locations, it is important to understand the impact of state income taxation when you live and work in different states.  Many retirees establish their state residency in Florida or one of the other states without state income taxes.  Successfully managed, it keeps their non-earned income from being taxed at the state level.

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Changes in Overtime Pay Regulations

IAN M. FISHERSmall business owners may be in for a shock later this year when new Department of Labor Regulations governing overtime go into effect. On December 1, 2016, a Final Rule by the Wage and Hour Division will go into effect, causing approximately 4.2 million currently exempt workers to have a right to time and a half pay from their employers.

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A Lesson Learned from the Bobbi Kristina Tragedy

We have all seen the headlines about Bobbi Kristina Brown, the daughter of the illustrious Whitney Houston, and her tragic death.  After being found unconscious in the bathtub of her Roswell, Georgia townhome, she was admitted to the hospital and placed in a medically induced coma for months before being transferred to hospice and subsequently passing away.  Her death is tragic for many reasons: her young age, the eerie similarities between her death and her mother’s, the allegations of domestic abuse, and the immediate fight among family members to gain control over her care and her assets.  With proper estate planning, at least the last tragedy would have been avoided.

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Update On The IRS Regulations Project

michael w. hoffmanLast July, I wrote in my column that the IRS made it known that it would issue proposed regulations as early as September (2015) which would severely restrict valuation discounts for transfers among related entities (such as transfers of limited partnership or LLC interests to other family members or trusts).  Not surprisingly, here we are in the spring of 2016 and there are no regulations.

Early this month, an IRS representative spoke at the ABA Tax Section meeting and spoke about upcoming IRS guidance.  She predicted that in the next couple of months the IRS would issue 5 or 6 new regulations, the first of these being the proposed regulations under Section 2704, which would place further restrictions on valuation discounts.  While we don’t know what the scope of these new restrictions will be, we are certain that they will have a significant impact on valuing property transferred between related family entities.  As I expressed last year, our concern is exacerbated by the fact that the IRS will likely make these rules effective retroactively to the date of the proposed regulations.

The judicious use of valuation discounts has long been a responsible tenant in estate planning.  Whether it’s getting the “biggest bang for the buck” out of annual gift tax exclusions, use of your one-time lifetime applicable exclusion amount (currently $5,450,000 in 2016), or reducing actual estate or gift taxes, applying appropriate discounts has always been pertinent to accurately determine the fair market value of the property being transferred.

For instance, if Father owned a piece of property worth $100 and gifted 50% of that property to Daughter, the valuation of the undivided one-half interest might only be $40, as opposed to the mathematical value of $50.  In a similar vein, if gifts of limited partnership interest or non-voting LLC membership interests in family enterprises are gifted, appropriate valuation discounts for things like lack of control and lack of marketability are applicable.

If the new regulations change the rules and re-define how property is valued for gift and estate tax purposes, the impact will be huge.

As one of my colleagues recently wrote, “The first (regulation project issued this spring) will be new proposed regulations under Section 2704, with time estimates of ‘very, very shortly’ and ‘this spring, before summer’.”  If you have put off any estate planning concerning freezing or gifting, time is of the essence.  If you are planning to include the many benefits of family limited partnerships and family limited liability companies, or merely gifts of fractional interests, as illustrated in the example above, you may want to get with your advisor immediately.

For further information regarding this or any other estate planning concern, please visit Hoffman & Associates at www.hoffmanestatelaw.com, call us at 404-255-7400, or send us an email.

IRS Warns of 2016 Tax Scams

douglas mcalpineWe posted last year about bogus phone calls claiming to be from the IRS.  The article below highlights the more recent techniques being used as the scammers adapt their methods and provides information on what you should do if contacted. Please do not hesitate to contact us with any questions or concerns at 404-255-7400.

Consumer Alert: Scammers Change Tactics, Once Again

WASHINGTON — Aggressive and threatening phone calls by criminals impersonating IRS agents remain a major threat to taxpayers, but now the IRS is receiving new reports of scammers calling under the guise of verifying tax return information over the phone.

The latest variation being seen in the last few weeks tries to play off the current tax season. Scam artists call saying they have your tax return, and they just need to verify a few details to process your return. The scam tries to get you to give up personal information such as a Social Security number or personal financial information, such as bank numbers or credit cards.

“These schemes continue to adapt and evolve in an attempt to catch people off guard just as they are preparing their tax returns,” said IRS Commissioner John Koskinen. “Don’t be fooled. The IRS won’t be calling you out of the blue asking you to verify your personal tax information or aggressively threatening you to make an immediate payment.”

The IRS reminds taxpayers to guard against all sorts of con games that continually change. The IRS, the states and the tax industry came together in 2015 and launched a public awareness campaign called Taxes. Security. Together. to help educate taxpayers about the need to maintain security online and to recognize and avoid “phishing” and other schemes.

The IRS continues to hear reports of phone scams as well as e-mail phishing schemes across the country.

“These schemes touch people in every part of the country and in every walk of life. It’s a growing list of people who’ve encountered these. I’ve even gotten these calls myself,” Koskinen said.

This January, the Treasury Inspector General for Tax Administration (TIGTA) announced they have received reports of roughly 896,000 phone scam contacts since October 2013 and have become aware of over 5,000 victims who have collectively paid over $26.5 million as a result of the scam. Just this year, the IRS has seen a 400 percent increase in phishing schemes.

Protect Yourself

Scammers make unsolicited calls claiming to be IRS officials. They demand that the victim pay a bogus tax bill. They con the victim into sending cash, usually through a prepaid debit card or wire transfer. They may also leave “urgent” callback requests through phone “robo-calls,” or via a phishing email. They’ve even begun politely asking taxpayers to verify their identity over the phone.

Many phone scams use threats to intimidate and bully a victim into paying. They may even threaten to arrest, deport or revoke the license of their victim if they don’t get the money.

Scammers often alter caller ID numbers to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legitimate. They may use the victim’s name, address and other personal information to make the call sound official.

Here are some things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam.

The IRS will never:

  • Call to demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you several bills.
  • Call or email you to verify your identity by asking for personal and financial information.
  • Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  • Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  • Ask for credit or debit card numbers over the phone or email.
  • Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money or to verify your identity, here’s what you should do:

If you don’t owe taxes, or have no reason to think that you do:

  • Do not give out any information. Hang up immediately.
  • Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
  • Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

If you know you owe, or think you may owe tax:

  • Call the IRS at 800-829-1040. IRS workers can help you.

Stay alert to scams that use the IRS as a lure. Tax scams can happen any time of year, not just at tax time. For more, visit “Tax Scams and Consumer Alerts” on IRS.gov.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

 

 

Tax Extender Deal Signed

IAN M. FISHERChristmas came a week early for many taxpayers in 2015.

On Friday, December 18, President Barack Obama signed into law a tax and spending package containing numerous tax breaks for individuals and businesses.

Of particular interest to many Hoffman & Associates clients may be the Conservation Easement Enhanced Incentive. In 2014, there was a provision in Sec. 170 of the Internal Revenue Code that allowed the value of qualified conservation contributions to be deducted up to 50 percent of a taxpayer’s contribution base (similar to AGI) and carried over to 15 succeeding tax years. For qualified farmers or ranchers, the deduction limit was 100 percent of the contribution base.

However, that enhanced incentive ended at the end of 2014 without Congress’s action and the easement limit reverted to 30 percent of a taxpayer’s contribution base and 5 years of carryover. As part of the now signed tax extender deal, the enhanced incentive is now permanent. The bill completely deletes the language in the code section that makes the enhanced incentive expire, so taxpayers now have peace of mind when considering conservation easements going forward.

Some other tax breaks included in the package include the following:

  • IRA charitable rollover, which means once a taxpayer reaches age 70 1/2, he or she can make direct gifts from his or her IRA to charities of up to $100,000 per year. This would be more beneficial than taking withdrawals and then gifting to charity.
  • Research and Development Credit, which incentivizes small businesses and startups to invest in research and development by allowing them the use of this credit against alternative minimum tax or even payroll taxes in some limited instances.
  • Reduced S Corporation Built-In Gains recognition period, which is important for C corporation owners who are interested in converting to S Corporations. Under previous law, the corporation had to hold appreciated assets for 10 years or it would be taxed on their gains. Now, that holding period has been reduced to 5 years.
  • Itemized deduction for state and local sales tax in lieu of income taxes. This could be beneficial if a taxpayer made a large purchase during the year that is greater than his or her state income tax obligation. This is particularly useful for taxpayers who live in states without a State income tax, such as Florida.
  • Enhanced Sec. 179 Deductions, which allow businesses to deduct full purchase price of qualifying equipment and/or software purchased during the tax year. Businesses may deduct up to $500,000 of qualifying expenses on up to $2,000,000 of equipment. These were set to drop to $25,000 and $200,000 had this not been included in the tax extender bill.
  • Once the Sec. 179 cap is reached, bonus depreciation was also made permanent in this tax deal. What that means is a taxpayer can deduct 50% of the depreciation in the first year instead of the normal 20%.

 To illustrate this in conjunction with the enhanced Sec. 179 deductions, let’s say a company bought $750,000 worth of new equipment. They would be able to deduct the following:

  • $500,000 – Sec. 179 deduction ($250,000 remaining after Sec. 179 deduction)
  • $125,000 50% Bonus first year depreciation (of the remaining $250,000)
  • $25,000 normal 20% depreciation (20% of the $250,000-$125,000)

 

  • $650,000 Total First Year Deduction ($500,000+$125,000+25,000)
  • $227,500 Cash Savings, assuming 35% tax rate

The tax extender bill contained numerous other provisions benefitting both individual taxpayers and businesses. If you have any questions about them, please feel free to contact Hoffman & Associates.

Educational Savings Plans

Hoffman17As a parent with young children, you are faced with many rewards and challenges. One of which may be saving for the high cost of a college education. However, there are two tax-favored options that might be beneficial: a qualified tuition program and a Coverdell education savings account. In addition, you might also want to invest in U.S. savings bonds that allow you to exclude the interest income in the year you pay the higher education expenses. Each of these options has their benefits and limitations, but the sooner you choose to make the investment in your child’s future, the greater the tax savings.

Qualified Tuition Program (QTP). A qualified tuition program (also known as a 529 plan for the section of the Tax Code that governs them) may be a state plan or a private plan. A state plan is a program established and maintained by a state that allows taxpayers to either prepay or contribute to an account for paying a student’s qualified higher education expenses. Similarly, private plans, provided by colleges and groups of colleges allow taxpayers to prepay a student’s qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.

529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualifies as higher education expense.

Coverdell education savings accounts. Coverdell education savings are custodial accounts similar to IRAs. Funds in a Coverdell ESA can be used for K-12 and related expenses, as well as higher education expense. The maximum annual Coverdell ESA contribution is limited to $2,000 per beneficiary, regardless of the number of contributors. Excess contributions are subject to an excise tax.

Entities such as corporations, partnerships, and trusts, as well as individuals can contribute to one or several ESAs. However, contributions by individual taxpayers are subject to phase-out depending on their adjusted gross income. The annual contribution starts to phase out for married couples filing jointly with modified AGI at or above $190,000 and less than $220,000 and at or above $95,000 and less than $110,000 for single individuals.

Contributions are not deductible by the donor and distributions are not included in the beneficiary’s income as long as they are used to pay for qualified education expenses. Earnings accumulate tax-free. Contributions generally must stop when the beneficiary turns age 18, except for individuals with special needs. Parents can maximize benefits, however, by transferring the older siblings’ account balance to a younger brother, sister or first cousin, thereby extending the tax-free growth period.

U.S. Savings Bonds. If you redeem qualified U.S. savings bonds and pay higher education expenses during the same tax year, you may be able to exclude some of the interest from income. Qualified bonds are EE savings bonds issued after 1989, and Series I bonds (first available in 1998). The tax advantages are minimized unless the redemption of the bonds is delayed a number of years, therefore some planning is required.

The exclusion is available only for an individual who is at least 24 years of age before the issue date of the bond, and is the sole owner, or joint owner with a spouse. Therefore, bonds purchased by children or bonds purchased by parents and later transferred to their children, are not eligible for the exclusion. However, bonds purchased by a parent and later used by the parent to pay a dependent child’s expenses are eligible. The exclusion is, however, phased out and eventually eliminated for high-income taxpayers.

Of course, in planning for higher-education costs, parents may also choose to use funds from an individual retirement account or a traditional form of savings. In addition, higher education costs may be supplemented with scholarships, loans and grants. However, having a viable plan as early as possible in a child’s life will make maximum use of a family’s financial resources and may provide some tax benefit. If you would like to explore how these opportunities can work for you and have us fully evaluate your situation, please do not hesitate to call.

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

Year-End Trust Planning

Hoffman17Year-end tax planning for individuals, trusts and businesses provides not only the opportunity to review the activities of the past year, it also generates an invaluable opportunity to leverage tax planning techniques as they relate to new developments.  Many of the tax planning strategies for individual taxpayers are also applicable to trusts.  As with individuals, spreading the recognition of income between tax years may minimize trust taxes. Another tax minimization strategy for a trust is to shift trust income from a high rate trust to a lower rate beneficiary.  We are ready to help you plan efficiently and effectively for 2015 and future years.

Income and Capital Gains/ Dividends: The tax brackets for trusts are  more compressed than the tax brackets for individuals.  For example, in 2015, the 39.6% tax bracket for individuals filing jointly begins at $464,850 of taxable income, but for trusts the 39.6% bracket begins at only $12,300 of taxable income.  As a result, shifting trust income to the beneficiary may produce significant tax savings.  One way this can be achieved is by makingdistributions from the trust to the beneficiary.

Net Investment Income Tax: While the 3.8% NII tax threshold for individuals is $250,000 for married filing joint and $200,000 for individuals filing single, the 2015 NII tax threshold for trusts begins at only $12,300 of taxable income.  This can result in a substantial amount of trust income being subject to the additional 3.8% NII tax.  However, trust exposure to the NII tax may be reduced through distribution planning (See the following paragraph).

Beneficiary Distributions & The 65 Day Rule: When distributions are made from the trust to the beneficiary, the trust is allowed a deduction for the distribution of certain classes of income.  The income is then included on the beneficiary’s individual income tax return.  In many cases, the beneficiary’s individual income tax rate is lower than the income tax rate for the trust.  This results in less total income tax on the trust income.

A trust can elect to treat distributions made in the first 65 days of the tax year as a distribution of current year or prior year income.  Therefore, a distribution made byMarch 5, 2016, can be treated as a distribution of 2015 trust income.  This allows some additional time to determine the income for the trust and determine if a distribution should be made to the beneficiary.

The decision on whether to make a distribution, and the amount of the distribution, should be reviewed each year.  The tax related factors can change from year to year and there are also other non-tax factors that should be considered.

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

 

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