Experience is the Difference®

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.

Posted in: 

Grandparents often want to play a role in financing their grandchildren’s education. If you’re one of them, it’s important to consider the impact that different financing options will have on your estate plan.

Make direct tuition payments

A simple but effective technique is to make tuition payments on behalf of your grandchild. So long as you make the payments directly to the educational institution, they avoid gift and generation-skipping transfer (GST) taxes without using up any of your $5.49 million gift or GST tax exemption or $14,000 gift tax annual exclusion.

But this technique is available only for tuition, not for other expenses, such as room and board, fees, books, and equipment. So it may be desirable to combine it with other techniques.

Is a HEET an option?

Another disadvantage of direct payments is that, if you wait until the student has tuition bills to pay, there’s a risk that you’ll die before the funds are removed from your estate. Other techniques allow you to set aside funds for future education expenses, shielding those funds from estate taxes. A tool that’s particularly attractive for grandparents is the health and education exclusion trust (HEET).

A HEET is a “dynasty” trust designed to make direct payments of tuition (and, if you desire, medical expenses) on behalf of its beneficiaries. You can use your annual exclusions and lifetime exemption to make gift-tax-free contributions. Contributed assets are removed from your estate.

Most significant, a properly designed HEET allows you to avoid GST tax without using up any of your GST tax exemption. A trust can trigger GST taxes in two ways: 1) a taxable distribution to your grandchild or another “skip person” (that is, a person more than one generation below you), or 2) a taxable termination, in which all nonskip trust interests terminate and only skip interests remain.

A HEET avoids taxable distributions by making direct payments to educational or health care organizations. And it avoids taxable terminations by granting a significant interest (usually 10% or more) to a charity, which ensures that there’s always at least one nonskip interest.

Explore all of your options

It’s possible that gift, estate and GST taxes could be repealed later this year. But even if this happens, as long as funding your grandchild’s education is an important goal of yours, implementing one or both of these strategies likely won’t have any negative impact. And doing so can be beneficial if these taxes aren’t repealed or if they return in the future. If you’d like to learn more about your options to help fund your grandchild’s education expenses, please contact us.

Posted in: 

Gift Tax Return. Picture of a children, parents and grandparents on a walk. Delaware CPA

Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return. 

Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required.

When filing is required

Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:

  • That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
  • That exceeded the $148,000 annual exclusion for gifts to a noncitizen spouse,
  • That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions, 
  • To a Section 529 college savings plan for your child, grandchild or other loved one and wish to accelerate up to five years’ worth of annual exclusions ($70,000) into 2016,
  • Of future interests — such as remainder interests in a trust — regardless of the amount, or
  • Of jointly held or community property.

When filing isn’t required

No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file. 

Meeting the deadline

The gift tax return deadline is the same as the income tax filing deadline. For 2016 returns, it’s April 18, 2017 (or October 16 if you file for an extension). If you owe gift tax, the payment deadline is also April 18, regardless of whether you file for an extension.

Have questions about gift tax and the filing requirements? Contact us to learn more.

Posted in: 

Gifting Company StockEveryone needs a solid estate plan to distribute assets according to their wishes and benefit their heirs. But this necessity is especially keen for business owners, many of whom have spent years working hard to build up the values of their companies.

If you can relate to this statement, one effective way to reduce estate taxes is to limit the amount of appreciation in your estate — and your company may provide just the ticket for doing so.

Why appreciation?

You’ll save the most in estate taxes by giving away assets with the highest probability of future appreciation. Why? Because gifting these assets today will keep future appreciation on those assets out of your taxable estate. Thus, there may be no better gift than your company stock, which could be the most rapidly appreciating asset you own.

For example, assume your business is worth $5 million today but is likely to be worth $15 million in several years. By giving away some of the stock today, you’ll keep a substantial portion of the future appreciation out of your taxable estate.

What are the limits?

Naturally, there are limits to how much you can give without tax consequences. Each individual is entitled to give as much as $14,000 per year per recipient without incurring any gift tax or using any of his or her $5.45 million lifetime gift, estate or generation-skipping transfer tax exemption amount.

Also be aware that, because you’re giving away company stock, the IRS may challenge the value you place on the gift and try to increase it substantially. The agency is required to make any challenges to a gift tax return within the normal three-year statute of limitations — even when no tax is payable with the return. But the statute of limitations applies only if certain disclosures are made on the gift tax return. Generally, for gifts of stock that isn’t publicly traded, a professional business valuation is highly recommended.

Who can help?

If the idea of giving away portions of your business to reduce estate tax exposure intrigues you, please contact us. We can help you fully assess the feasibility of this strategy as it pertains to your specific situation.

Posted in: 

Are you a grandparent who wants to help pay for a grandchild's college education? You'll find several ways to do this, each with its own limitations and tax consequences.

GIFTS. The simplest way is to make an outright cash gift to your grandchild each year. In 2014, you can give up to $14,000 without any gift tax liability. If your spouse joins in the gift, you can jointly give each grandchild up to $28,000 each year.

DIRECT PAYMENTS. You can give unlimited amounts without gift tax consequences if you make the payments directly to a qualified education institution on behalf of your grandchild. Payments can only be for tuition, not for dorm fees, meals, books, etc.

EDUCATION ACCOUNTS. You could set up a Coverdell education savings account or a Section 529 plan for your grandchild. These plans offer tax-free growth of amounts you contribute to them. Age, income, and contribution limits apply, however.

To discuss the options best suited to your circumstances, contact our office at info@gunnip.com or 302.225.5000.

 

Posted in: 

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.

Posted in: 

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.

Posted in: 

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.

Posted in: 

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.

Pages


Experience is the Difference®

Subscribe to RSS - Gift tax