Estate Tax Planning

Congress radically changed the estate planning landscape in 2010 when it introduced the portability election, and it is time for you to learn how to take advantage of it.

 

Prior to 2010, the estate tax regime ignored the reality that married couples think of themselves as a single economic unit, and instead treated them as individuals.  Every individual was entitled to a basic exclusion amount (an amount of assets the value of which would not be subject to gift or estate taxes) which could be used by transferring their assets to any individual other than to a spouse (transfers to spouses were already excluded through the marital deduction).  This structure placed individuals in the difficult position of deciding how much of their assets to leave to their spouses for their support and well-being, and how much to leave to their children in order to take advantage of the basic exclusion amount.  This was a "use it or lose it" system because any unused portion of the basic exclusion amount would disappear.

 

This all changed in 2010 with the creation of the portability election.  If a valid portability election is made, a spouse may take the unused portion of their last deceased spouse's basic exclusion amount and add it to their own.

 

For example, Jacob and Sarah are a married couple.  Jacob dies in 2013 without having made any taxable gifts in his life, and his will directed his executor to leave his entire estate to his wife and to make the portability election.  This allows Sarah to inherit his $5.25 million basic exclusion and add it to her own basic exclusion.  Sarah would then be able to make gifts of up to $10.5 million in 2013 to her children without having to pay gift or estate taxes.

 

I would encourage you to talk to an estate planning attorney regarding your specific needs and desires.  The portability election is a great estate planning tool, but it should be used in conjunction with a will and trusts in order to ensure that your assets are disposed of in the manner that you want.

 

There are a number of issues relating to the portability election that I have not discussed here.  If you would like to learn more about this election or have any questions, please do not hesitate to send me an e-mail.

 

Also feel free to contact me if you would like a referral to a great estate planning attorney.

 

As always, I appreciate your feedback in the comments section below.

End of Year Tax Planning

Its already October, which means that time is quickly running out for you to minimize your 2013 tax liability.  While there are a number of tax-saving strategies that can be employed before year end, after December 31st the only viable way to reduce your tax liability would be to make a contribution to a qualified retirement plan (Plan For Your Retirement; What is an IRA?).

End of year tax planning is more important this year than it has been in a long time.  Here is why:

• Tax rates have gone up for high-income earners.  Single individuals making more than $400,000 per year and married couples (filing jointly) making more than $450,000 per year will have to be a top federal tax rate of 39.6%.
• Those same individuals will now be paying a 20% federal capital gains rate on qualified dividends and long-term capital gains.
• Single individuals making more than $200,000 per year and married couples (filing jointly) making more than $250,000 per year will be subjected to the 3.8% Medicare Surtax on net investment income.
• In addition to all this, California has raised its top tax rate to 12.3%, plus a 1% surtax on taxable income above $1,000,000.

There are ways to minimize the impact that these additional taxes will have on you!

The first thing you need to do is talk to a CPA.  There is plenty of advice you can find online about how to reduce your taxes, but this is not a "one size fits all" issue.  You are a unique individual with a unique financial situation.  What may work for Joe down the street may not be the ideal tax-minimization strategy for you.

Here is what a CPA can do for you:

1. Explain the New Tax Laws.  The Medicare Surtax is a brand new tax that operates in a different manner than the income taxes that you are used to.  A CPA can explain exactly how it works in a way that will make sense to you.
2. Prepare a Tax Projection.  A tax projection will allow you to see what your tax situation will be if you do not employ a new tax-minimization strategy. This will allow your CPA to identify what issues affect your tax situation and begin to develop a strategy to minimize your taxes.
3. Develop a Personalized Tax-Minimization Strategy.  A CPA will work with you to determine the best way to reduce your taxes in a way that best fits your life and desires.

If you have any questions, or would like to talk to me about your end-of-year tax planning, please do not hesitate to send me an e-mail.

As always, I appreciate you leaving any feedback you have below.

How does the Government Shutdown affect Taxes?

As I am sure you already have heard, as of October 1st, 2013, the federal government has "shut down" until a budget can be passed.  As you have been seeing on the news, this means that among other things national parks are closed and nearly 800,000 federal employees are on furlough.  But how does the government shutdown affect your taxes?

For individuals who have filed a tax extension, they must still file their tax returns by October 15th.

 

The IRS will only be processing tax returns that are filed electronically.  Any tax returns that are mailed to the IRS will not be deemed late, as long as they are still mailed by October 15th, but will not be processed until after the government shutdown ends.

 

The IRS will not be issuing any tax refunds.  Sorry, but this means that if the federal government owes you money you will not receive it until after the government shutdown ends.  I would expect that there will be delays even after the government is back to operating normally because it will take the IRS some time to process all of the tax returns.

 

Most customer service assistance will not be available.  There will not be any live telephone assistance and the IRS walk-in taxpayer assistance centers will be closed.  However, most automated telephone applications will still work.

 

IRS audits are on hold.  The IRS's auditors have been furloughed, so any meetings related to IRS audits, collections, or appeals have been cancelled.  If you are currently involved in an IRS audit, you should assume that it will resume once the government shutdown ends, but you have some extra time now to prepare for it.

 

Automated IRS notices will continue to be mailed.  This means that despite the government shutdown you may receive a notice from the IRS.  However, the IRS will not be working on any paper correspondence during this time.  If you receive an IRS notice, talk to your CPA about it just like you normally would.

 

If you would like to talk privately about how the government shutdown will affect your tax situation, please do not hesitate to send me an email.

 

What are your thoughts about the tax consequences of the government shutdown?  Please leave your comments below.