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Your role as an executor or personal administrator of an estate involves a number of responsibilities. Did you know that part of your responsibility involves making sure the necessary tax returns are filed? And there might be more of those than you expect.

Here's an overview:

  • Personal income tax. You may need to file a federal income tax return for the decedent for the prior year as well as the year of death. Both are due by April 15 of the following year, even if the amount of time covered is less than a full year. You can request a six-month extension if you need additional time to gather information.
  • Gift tax. If the individual whose estate you're administering made gifts in excess of the annual exclusion ($14,000 per person for 2017), a gift tax payment may be required. Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, is due April 15 of the year following the gift. The filing date can be extended six months.
  • Estate income tax. Income earned after death, such as interest on estate assets, is reported on Form 1041, Income Tax Return for Estates and Trusts. You'll generally need to file if the estate's gross income is $600 or more, or if any beneficiary is a nonresident alien. For estates with a December 31 year-end, Form 1041 is due April 15 of the following year.
  • Estate tax. An estate tax return, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is required when the fair market value of all estate assets exceeds $5,490,000 (in 2017). One thing to watch for: Spouses can transfer unused portions of the $5,490,000 exemption to each other. This is called the "portability" election. To benefit, you will need to file Form 706 when the total value of the estate is lower than the exemption.
  • Form 706 is due nine months after the date of death. You can request a six-month extension of time to file.

Give us a call if you need more information about administering an estate. We're here to help make your task less stressful.

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Estate Planning Regulations Deceased Spouse Delaware

The IRS has issued final regulations on the applicable estate and gift tax exclusion amount and the portability of a deceased spouse’s unused exclusion amount. As a surviving spouse, this guidance may impact your estate planning opportunities.

In general, the estate tax is imposed on a decedent’s gross estate as increased by the decedents’ taxable lifetime gifts, and reduced by any allowable estate tax deductions, such as the charitable or marital deduction.

In addition, the estate of every decedent is allowed a credit (the "applicable credit amount") in determining the amount of estate tax due. The applicable credit amount effectively acts to exclude a certain amount of property from the estate tax (the “applicable exclusion amount”). With proper planning a married couple could take advantage of the applicable exclusion amount in each of their respective estates.

However, prior to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) it was possible for a married couple to waste the applicable exclusion amount of the first spouse to die. Consequently, the 2010 Tax Relief Act introduced the concept of “portability” with respect to the unused portion of the applicable exclusion amount of a predeceased spouse, referred to as the deceased spousal unused exclusion (DSUE) amount. The American Taxpayer Relief Act of 2012 then made portability permanent.

For estates of decedents dying after 2010, the applicable exclusion amount is equal to the sum of the basic exclusion amount and any available DSUE amount, if previously elected. The basic exclusion amount is $5 million. The exclusion is adjusted for inflation and has risen to $5.43 million in 2015. A “portability election” passes along a decedent’s unused estate and gift tax exclusion amount to a surviving spouse.

The IRS guidance discusses the following:

  1. the estate and gift tax applicable exclusion amount, in general;
  2. the requirements for electing portability of any DSUE amount to the surviving spouse; and
  3. the applicable rules for the use of the DSUE amount by the surviving spouse.

The estate tax return on which the portability election is made must be filed within the time prescribed by law. In that way, the surviving spouse can take advantage of the DSUE amount.

The IRS guidance explains the requirements for what is considered to be a “complete and properly-prepared return.” If the return is being filed only for the purpose of electing portability, the executor does not have to report the value of certain property qualifying for the marital or charitable deduction. The total value of the gross estate must be estimated based on a determination made with good faith and due diligence regarding the value of all assets includible in the gross estate.

If the executor does not wish to make the portability election, regulations require the executor to make an affirmative statement on the estate tax return indicating this to be the case. When no return is required to be filed for the decedent’s estate, not filing a timely filed return will be considered to be an affirmative statement of the decision not to make a portability election. With certain limited exceptions, only the executor of the estate is allowed to file the estate tax return and make the portability election.

IRS guidance also clarifies the computation of the DSUE amount in certain circumstances and addresses the use of the DSUE amount by the surviving spouse, including: 

  1. the date the DSUE amount may be taken into account by the surviving spouse;
  2. the last deceased spouse limitation on the DSUE amount available to a surviving spouse; and
  3. the DSUE amount available in the case of multiple spouses and previously applied DSUE amount.

The portability election is effective as of the deceased spouse’s date of death. As a result, the surviving spouse may take into account the DSUE amount in determining his or her applicable exclusion amount and applied against gifts made after the date of death of the deceased spouse. The DSUE amount, however, is applied first before the surviving spouse’s own exclusion amount.

The portability election should be reviewed as part of your overall estate planning. We are available to discuss all of your options. Please call our office for an appointment.

 

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2013 Tax Planning post-it note

In the third part in our series on 2013 Year-End Tax Planning for individuals, we focus on the new provisions that you must become familiar with, as they may affect your overall tax strategy:

Same-Sex Marriage Ruling

The same-sex marriage ruling states that same-sex couples who are legally married in a state that recognizes their marriage are considered married for federal tax purposes, regardless of whether their state recognizes same-sex marriage. Although this ruling was effective September 16, 2013, it is applied retroactively for 2013. As a result, in 2013 and all future years, legally married same-sex couples must file their federal income tax returns as married filing jointly (MFJ) or married filing separately (MFS).

The ruling opens the door for same-sex married couples to enjoy all of the federal tax-related benefits previously available only to opposite-sex married couples. Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country is covered by the ruling. These benefits include (but are not limited to):

  • Income tax benefits such as marriage penalty relief
  • Estate and gift tax benefits
  • MFJ or MFS filing status and standard deduction
  • Claiming personal and dependency exemptions
  • Claiming child-driven credits
  • Taxpayer-friendly employee benefits
  • Spousal IRAs

Every tax situation is different and requires a careful and comprehensive plan. We can assist you in aligning traditional year-end techniques with strategies for dealing with any unconventional issues that you may have. Please call our office at (302) 225-5000 or email at info@gunnip.com to schedule an appointment.

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The "American Taxpayer Relief Act of 2012" approved by Congress just after we plunged over the "fiscal cliff" restores and modifies several expired tax breaks, but doesn't address other issues. Here are the highlights of the new law's provisions for individual taxpayers.

* Individual income taxes. Only the wealthiest taxpayers face an income tax increase in 2013. A new individual tax rate of 39.6% will apply to single filers with income above $400,000 and joint filers with income above $450,000. Otherwise, the 2012 tax rate structure is permanently extended. However, beginning in 2013, a new 3.8% Medicare surtax authorized by the 2010 health care law also applies to certain high-income investors.

* Capital gains and dividends. Under prior law, the maximum tax rate for net long-term capital gains would have been boosted to 20%, while qualified dividends were scheduled to be taxed at ordinary income rates, beginning in 2013. The new law extends the favorable 15% tax rate for most taxpayers and extends the zero tax rate for those in the 10% and 15% brackets for ordinary income. However, for single filers with income above $400,000 and joint filers with income above $450,000, the maximum tax rate on long-term gains and qualified dividends increases to 20%.

* Alternative minimum tax. Retroactive to January 1, 2012, the new tax law permanently revamps the alternative minimum tax (AMT) to avoid increased exposure to this "stealth tax." Without the latest fix, an estimated 30 million more filers would have been required to pay the AMT for the 2012 tax year.

* Payroll tax holiday. The 2% reduction in payroll taxes ends. Employees will pay a 6.2% social security tax instead of the 2012 rate of 4.2%. Similarly, the social security tax rate for self-employed individuals reverts to 12.4% from 10.4%.

* Itemized deductions and personal exemptions. Restrictions are imposed on high-income taxpayers with income above a specified threshold. For single filers with adjusted gross income (AGI) above $250,000 and joint filers with income above $300,000, certain itemized deductions are reduced by 3% above the threshold, but the overall reduction can't exceed 80%. Personal exemptions are phased out above the same AGI thresholds without the 80% cap.

* Tax extensions. The new law generally extends, for varying time periods and with certain modifications, several favorable provisions that had expired. The list includes the child, dependent care, adoption, and earned income credits; tax relief from the "marriage penalty"; the American Opportunity Tax Credit for higher education expenses; the deduction for tuition and related fees; the optional state sales tax deduction; the enhanced deduction for student loan interest; the $250 deduction for an educator's classroom expenses; energy credits for qualified home improvements; a conservation donation tax benefit; and the tax-free IRA-to-charity contribution of assets up to $100,000 for taxpayers age 70 ½ and older.

* Estate and gift taxes. The new law avoids drastic changes for several provisions that had officially ended after 2012. Significantly, the estate tax exemption, which had been scheduled to drop to $1 million from $5 million (inflation-indexed to $5.12 million in 2012) remains at $5 million with inflation indexing. Portability of exemptions between spouses is preserved. The top estate tax rate, which had been scheduled to increase from 35% to 55% in 2013, is bumped up to 40%. The estate and gift tax changes are permanent.

* Business provisions. The new law also temporarily preserves several tax breaks for businesses -- including the research credit, the enhanced work opportunity tax credit, a higher Section 179 deduction, 50% bonus depreciation and faster write-offs for qualified leasehold improvements -- as well as extending unemployment benefits and higher payments to Medicare providers.This latest tax law is not likely to be the final word on taxes in 2013. Congress is once again talking about a complete revision of the tax code. Also, the spending side of the "fiscal cliff" issue is yet to be dealt with. Stay tuned for ongoing changes that could affect your personal and business tax planning. 

The U.S. Senate overwhelmingly passed legislation to prevent the so-called fiscal cliff on January 1, 2013 sending the American Taxpayer Relief Act of 2012 (HR 8, as amended by the Senate) to the House, where it was likewise approved on January 1, 2013.  The American Taxpayer Relief Act allows the Bush-era tax rates to sunset after 2012 for individuals with incomes over $400,000 and families with incomes over $450,000; permanently patches the alternative minimum tax (AMT); revives many now-expired tax extenders, including the research tax credit and the American Opportunity Tax Credit and for a maximum estate tax of 40 percent with a $5 million exclusion. The bill also delays the mandatory across-the-board spending cuts known as sequestration.  President Obama said that he will sign this legislation as soon as it reaches his desk. For detailed information, read the full American Taxpayer Relief Act of 2012 Tax Briefing.

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President Obama secured a second term in office November 6, 2012, in the end winning the Electoral College by a wide margin. The President's re-election now sets in motion what will likely be difficult negotiations between Democrats and Republicans over the fate of the Bush-era tax cuts, nearly $100 billion in automatic spending cuts, and the more than 50 expiring tax extenders, which include the alternative minimum tax (AMT) patch for tens of millions of taxpayers. The President's re-election has also significantly changed the dynamics for reaching an eventual agreement over long-term tax reform.For more information, read the full CCH Tax Briefing Special Report.

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The IRS is required by law to adjust certain tax numbers each year. Here are some of the adjusted numbers you'll need for your 2012 tax planning.

STANDARD MILEAGE RATE for business driving remains at 55.5¢ a mile. Rate for medical and moving mileage decreases to 23¢ a mile. Rate for charitable driving remains at 14¢ a mile.

SECTION 179 maximum deduction decreases to $139,000, with a phase-out threshold of $560,000.

TRANSPORTATION FRINGE BENEFIT limit decreases to $125 for vehicle/transit passes and increases to $240 for qualified parking.

SOCIAL SECURITY taxable wage limit increases to $110,100. Retirees under full retirement age can earn up to $14,640 without losing benefits.

KIDDIE TAX threshold remains at $1,900 of unearned income and applies up to age 19 (up to age 24 for full-time students).

NANNY TAX threshold increases to $1,800.

HSA CONTRIBUTION limit increases to $3,100 for individuals and to $6,250 for families. An additional $1,000 may be contributed by those 55 or older.

401(k) maximum salary deferral increases to $17,000 ($22,500 for 50 and older).

SIMPLE maximum salary deferral remains at $11,500 ($14,000 for 50 and older).

IRA contribution limit remains at $5,000 ($6,000 for 50 and older).

ESTATE TAX top rate remains at 35%, and the exemption amount increases to $5,120,000.

ANNUAL GIFT TAX EXCLUSION remains at $13,000.

ADOPTION TAX CREDIT decreases to $12,650 for adoption of an eligible child.

ALTERNATIVE MINIMUM TAX (AMT) exemption decreases to $33,750 for singles and to $45,000 for married couples.  Over the past few years this has been increased at the last minute, so there may be hope of an increase, but you should use the exemption amounts state here when planning your 2012 tax liability.


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