Here Are The IRS 2017 Standard Business, Medical and Moving Mileage Rates

 

The Internal Revenue Service has recently issued the 2017 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 53.5 cents per mile for business miles driven, down from 54 cents for 2016
• 17 cents per mile driven for medical or moving purposes, down from 19 cents for 2016
• 14 cents per mile driven in service of charitable organizations

The business mileage rate decreased half a cent per mile and the medical and moving expense rates each dropped 2 cents per mile from 2016.

The charitable rate is set by statute and remains unchanged.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle

2017 PENNSYLVANIA TAX AMNESTY PROGRAM

What Is The Pennsylvania Tax Amnesty Program?

The PA Tax Amnesty program creates an incentive for taxpayers to pay there tax liabilities during a narrow time period that ends on June 19, 2017.  While this program is open, the PA Department of Revenue will waive all penalties and half of the interest for anyone who participates in the Tax Amnesty program.

 

What tax periods are eligible for the Tax Amnesty program?

Eligible periods for tax amnesty are those where a delinquency exists as of December 31, 2015, whether the delinquency is known or unknown to the department.

What taxes are eligible for the Tax Amnesty program?

The taxes administered by the department, listed below, are eligible for the Tax Amnesty program:

• Agriculture Cooperative Tax;
• Bank and Trust Company Shares Tax;
• Capital Stock or Foreign Franchise Tax;
• Cigarette Tax;
• Corporate Net Income Tax;
• Corporate Loans Tax;
• Electric Cooperative Tax;
• Employer Withholding Tax;
• Financial Institutions/Title Insurance Company Shares Tax;
• Fuel Use Tax;
• Gross Premiums Tax;
• Gross Receipts Tax
• Hotel Occupancy Tax, including the state administered 1% Local Hotel Occupancy Tax for Philadelphia and Allegheny    County;
• Inheritance and Estate Tax;
• Liquid Fuels Tax;
• Malt Beverage Tax;
• Marine Underwriting Profits Tax;
• Motor Carriers Road Tax, for IFTA vehicles, PA portion only;
• Motor Vehicle Carriers Gross Receipts Tax;
• Mutual Thrift Institutions Tax;
• Oil Company Franchise Tax;
• Parimutuel Wagering and Admissions Tax;
• Personal Income Tax;
• Public Transportation Assistance (PTA);
• Public Utility Realty Tax;
• Realty Transfer Tax, including Local Realty Transfer Tax;
• Sales and Use Tax, including Local Sales and Use Tax for Philadelphia and Allegheny County;
• Surplus Lines Tax;
• Unauthorized Insurance Tax, monthly; and Vehicle Rental Tax (VRT)

Note:  The Tax Amnesty program does not apply to Unemployment Compensation because it is administered by the Pennsylvania Department of Labor and Industry.

Note:  Also, the Tax Amnesty program does not apply to any tax administered by another state, local government or the federal government/Internal Revenue Service.

What are the benefits of the Tax Amnesty program?

You may resolve your tax amnesty eligible debt by paying the tax and half of the interest. The benefits of the tax amnesty program are the following:

IRS Installment Agreements: 2017 User Fee Schedule and Options

Starting in 2017, the IRS has revised its user fee schedule for installment agreements. The new fee schedule applies to installment agreements entered into, restructured or reinstated on or after January 2, 2017.

The final regulations increase the existing user fees (except for low-income taxpayers) and create two new types of online installment agreements, each subject to a separate fee. Five of these rates are based on the full cost of establishing and monitoring installment agreements, while the sixth rate is for low-income taxpayers.

Here are the new fees effective starting in 2017:

(1) A top rate of $225, up from the current rate of $120, applies to taxpayers who enter into installment agreements in person, over the phone, by mail, or by filing Form 9465, Installment Agreement Request, with the IRS.

Note: This includes taxpayers requesting installment agreements with their e-filed returns.

(2) A reduced rate of $107, up from $52, applies to a direct debit agreement.

(3) A taxpayer who sets up an installment agreement through IRS.gov and agrees to make payments either by mailing a check or through the Electronic Federal Tax Payment System (EFTPS) will pay $149.

A Handy Chart of 2017, 2016 and 2015 Retirement Plan & IRA Contribution Limits, Maximum Benefits, Maximum Income Subject to Social Security

IRS Warns & Updates Taxpayers of Numerous Tax Scams Nationwide: All Taxpayers, Tax and Financial Advisers Need To Read This

You Do Not Want To Be In This Position

 

As tax season approaches, the Internal Revenue Service, in IR-2016-164,  has just reminded taxpayers to be on the lookout for an array of evolving tax scams related to identity theft and refund fraud.

Every tax season, there is an increase in schemes that target innocent taxpayers by email, by phone and on-line. Taxpayers and tax professionals can not be too careful and should be on the lookout for these deceptive schemes.

“Whether it’s during the holidays or the approach of tax season, scam artists look for ways to use tax agencies and the tax industry to trick and confuse people,” said IRS Commissioner John Koskinen. “There are warning signs to these scams people should watch out for, and simple steps to avoid being duped into giving these criminals money, sensitive financial information or access to computers.”

Here are Seven of the Most Prevalent IRS Impersonation Scams:

Do You Want To Know About Your IRS Account Balance? IRS Launches New Online Tool to Assist Taxpayers with Basic Tax Account Information

The Internal Revenue Service announced on December 1, 2016 (IR-2016-155) the launch of an online application that will assist taxpayers with straightforward balance inquiries in a safe, easy and convenient way.

This new and secure tool, available on IRS.gov allows taxpayers to view their IRS account balance, which will include the amount they owe for tax, penalties and interest.

It also should be pointed out that taxpayers may also continue to take advantage of the

Tax Update: Governor Christie Reverses and Repeals New Law and Reinstates Pennsylvania-New Jersey Reciprocal Tax Agreement Preventing Adversely Impacting 250,000 Workers & Thousands of Employers

IMPORTANT TAX ALERT:

New Jersey Governor Chris Christie on Tuesday, November 22, 2016, reinstated a four-decade old tax reciprocity agreement with Pennsylvania that allows residents who work in either state to pay income taxes at their home state’s rate. You can almost hear the collective sigh of relief of the many commuters that would have been adversely impacted by this new law.

City of Philadelphia Department of Revenue Announces Wage Tax Reduction for July 1, 2016

Philadelphia Landmark:

The Famous and Quirky 45 Foot Steel Clothes Pin Created by Sculptor Claes Oldenburg Across from City Hall

 

The City of Philadelphia has reduced the City Wage Tax rate effective July 1, 2016.

• The new Wage Tax rate for residents of Philadelphia is 3.9004% (.039004).

• The new Wage Tax rate for non-residents of Philadelphia who are subject to the Philadelphia City Wage Tax is 3.4741% (.034741).

What does this mean to you?

Any paycheck that you issue with a pay date after June 30, 2016 must have Philadelphia City Wage Tax withheld at the new rate.

Did You Get a Letter in the Mail from the IRS? Here is What You Need to Do

Each year, the IRS mails millions of notices and letters to taxpayers for a variety of reasons. This can be extremely upsetting when receiving this form of communication, whether it is from the IRS or any other taxing authority.  The following tips are presented to reduce your anxiety and to provide a specific action plan for any correspondence received from the IRS (or from your state or local taxing authority):

• Don’t Panic: You can usually deal with a notice simply by responding to it. You should immediately contact your tax attorney, CPA or tax adviser to discuss this matter in more detail.
  • Tip: Waiting can only compound and complicate your tax problems.

• Most IRS notices are about federal tax returns or tax accounts: Each notice has specific instructions, so read your notice carefully because it will tell you what you need to do.  Follow the instructions very carefully.  The goal here is to give a specific and detailed response to the tax issue in question.
  • Tip: Only respond to the particular issue and do not provide or discuss issues that are not being raised by the IRS.

• Taxes You Owe or Payment Request:  Your notice will likely be about changes to your account, taxes you owe or a payment request. However, your notice may ask you for more information about a specific issue.
  • Tip: Do not assume that the taxes owed are correct. In many cases, the IRS calculates taxes without all the relevant facts.

2016 Standard Mileage Rates for Business, Medical and Moving

The Internal Revenue Service on December 18, 2015 issued the 2016 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 54 cents per mile for business miles driven, down from 57.5 cents for 2015

• 19 cents per mile driven for medical or moving purposes, down from 23 cents for 2015

Tax Positions of Presidential Candidates

Here is a neat info-graphic on the tax positions of the Presidential Candidates. Special thanks to MBACentral.org

New 2015 Tax Law Changes Tax and FBAR Filing Deadlines & Other Noteworthy Compliance Provisions: The Good, The Bad & The Ugly

On Friday, July 31, 2015, President Barack Obama signed HR 3236, the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” (the “Act”). Not sure how this name relates to taxes but in any event the following tax law changes and provisions became law under this Act:

• Changes to the due dates for various returns. The Act sets new due dates for partnership returns, C corporation returns.
• Foreign Bank Account Reporting:  New due dates for the important and often overlooked foreign bank account reporting (FBAR) forms, known as FinCEN Form 114, Report of Foreign Bank and Financial Accounts have been implemented.
• Changing the six year statute of limitations to apply to understatements of income that resulted from taxpayers overstating tax basis when calculating sales.  This change overturns the Home Concrete case where the Supreme Court ruled that understatements of income as a result of basis miscalculations would not trigger the extended six-year statute of limitations applicable to understatements of income.
• Requiring consistent basis reporting for estates and estate beneficiaries.
• Requiring additional information to be included in mortgage information statements.
• Other Information Returns:  The new act imposes new filing requirements for several other IRS information returns.

Small Businesses Can Get IRS Penalty Relief for Unfiled Retirement Plan Returns

Minimize Penalties For Failure To File Returns For Retirement Plans

Have you failed to file your retirement plan reporting form for your retirement plan?

If you have failed to do so, the Internal Revenue Service on July 14, 2015 provides eligible small businesses a low-cost penalty relief program enabling them to quickly come back into compliance with IRS filing rules.

The program is designed to help small businesses that may have been unaware of the reporting requirements that apply to their retirement plans. In most cases, retirement plan sponsors and administrators need to know that  a return must be filed each year for the plan by the end of the seventh month following the close of the plan year. For plans that operate on a calendar-year basis, as most do, this means the 2014 return is due on July 31, 2015.

Small businesses that fail to file required annual retirement plan returns, usually Form 5500-EZ, can face stiff penalties – up to $15,000 per return! However, by filing late returns under this program, eligible filers can avoid these penalties by paying only $500 for each return submitted, up to a maximum of $1,500 per plan. For that reason, program applicants are encouraged to include multiple late returns in a single submission.

The program is generally open to small businesses with plans covering a one hundred percent (100%) owner or the partners in a business partnership, and the owner’s or partner’s spouse (but no other participants).

Key Point:  However, those who have already been assessed a penalty for late

Philadelphia Use & Occupancy Tax Rate Change Effective July 1, 2015

Lit Brothers: Back in the Day

Philadelphia has just increased its Use and Occupancy Tax as of July 1, 2015. The new Use & Occupancy Tax rate will be 1.21%. This is an increase from the prior rate of 1.13%.

This new rate will be effective with the July 2015 Use & Occupancy tax Return that is due July 27, 2015.  Remember that as of January 2015, all U&O tax returns must be filed and paid on-line through the Philadelphia Department of Revenue website.  So when filing in July, 2015 be aware of this increased tax rate and resulting tax increase.

The City of Philadelphia Department of Revenue Announces Wage Tax Reduction for July 1, 2015.

Philadelphia business owners and those that withhold taxes on employees that live in Philadelphia should take notice that the City of Philadelphia has reduced the City Wage Tax rate effective July 1, 2015.

• The new Wage Tax rate for residents of Philadelphia is 3.9102% (.039102).

• The new Wage Tax rate for non-residents of Philadelphia who are subject to the Philadelphia City Wage Tax is 3.4828% (.034828).

What does this mean to you as an employer of Philadelphia employees?

Any paycheck that you issue with a pay date after June 30, 2015 must have Philadelphia City Wage Tax withheld at the new rate that applies to your employee.

If you have any questions about the new Philadelphia City Wage Tax, please call us at 215-735-2336. We will gladly assist you.

Philadelphia Estate and Tax Blog Named The Best Tax Blog in America For 2015

My very own Philadelphia Estate and Tax Attorney Blog has just won as the Best Tax Blog In America for 2015!

I am most appreciative of all of you who took the time to vote for my blog.  You can see the final voting results by going to: http://wallethub.com/blog/best-tax-blog/10470/?user=sjfpc.

Thanks so much to everyone who voted!

Philadelphia Businesses Must Now Provide A New Tax Notice To Employees and Non-Payroll Workers

Philadelphia notice Requirements for Businesses for 2015

If you are a business that has employees or independent contractors who live in Philadelphia, the City of Philadelphia is now imposing new notice requirements.

Beginning January 1, 2015, Title 19, Chapter 19-4000, of the Philadelphia Code, entitled “Income Inequality Initiative – Earned Income Tax Credit,” requires all employers to provide notice of the federal Earned Income Tax Credit (“EITC”) program to all Philadelphia resident employees and non-payroll workers at the same time as their W-2, 1099, or comparable forms are provided.

This new law applies to not only companies in Philadelphia but to those entities not located in Philadelphia that employ or pay residents of the City of Philadelphia.

About the Earned Income Tax Credit:

The Earned Income Tax Credit (“EITC”) is a refundable credit available to low to moderate income individuals and families. Over 40,000 Philadelphia residents are not claiming EITC, which has an average benefit of $2,400 per return. The goal of this law change is to help help more of its citizens take advantage of this tax break and ultimately infusing an extra $100 million into the Philadelphia economy.

The City of Philadelphia Earned Income Tax Credit Notice Requirements:

Under Title 19, Chapter 19-4000 of the Philadelphia Code, an employer must do the following:

(A) The employer must give the employee or non-payroll worker the “2014 Earned Income Tax Credit (‘EITC’) Notice,” at the same time it provides a W-2, 1099, or comparable form

OR

2014 Year-End Tax Planning Guide For Businesses: Discover 9 Proven Tax Planning Strategies

Business Year-End Tax Planning

The arrival of year-end presents special opportunities for most small businesses to take steps in lowering their tax liability. The starting point is to run projections to determine the income and tax bracket for this year and what it may be next year.  Once this is known, decisions can be made as to whether any of the following planning tools should be employed to cut taxes before the tax year closes.

Last second tax law changes also must be considered.  It is also important to know that on December 19, 2014, the President passed the Tax Increase Prevention Act that extended many expired tax provisions some of which are discussed in more detail below.  Note that these tax breaks are only available through the end of  2014.  If any of these tax breaks are available to you, it would be prudent to take advantage of them before they expire.

Also keep in mind ordinary income tax rates for individuals can be as high as 35% to 39.6%  so members of flow through entities such as partnerships, limited liability companies (LLCs) and S Corporations need to recognize this and other tax changes and plan accordingly.

The following presents some year-end tax strategies that may prove helpful to  businesses of all shapes and sizes:

1. Accelerating or Deferring Income and Deductions as Part of a Year-end Tax Strategy

A good part of year-end tax planning involves techniques to accelerate or postpone income or deductions, as your tax situation dictates. The idea is to keep income even from year to year. Having spikes in taxable income in any one tax year puts you in a higher average tax bracket than you would be in if you had evened out the amount of taxable income between current and later year(s).  (Historical note:  For those of you old enough to remember, there was an income averaging rule built into the tax code that actually corrected for the inequity that can result in big shifts in income from year to year.  That provision has long been abolished.)

So every year, businesses can take advantage of the traditional planning technique that involves alternatively deferring income or accelerating deductions. For example, business taxpayers such as pass-through entities (limited liability companies, partnerships, S corporations, sole proprietorship) should consider accelerating business income into the current year and deferring deductions until 2015 (and perhaps beyond) if they expect income to rise next year.

Year End Tax Planning Tips: Instantly Discover What You Can Do Now To Start Saving Taxes Before Year End With Proven Tax Attorney Strategies

As the year-end quickly approaches, there is still time to do year-end tax planning to generate significant tax savings.  As many of you know, changes to the tax laws in 2013 made many tax rates (subject to cost of living adjustments) and certain tax breaks permanent.  But some tax breaks expired in 2013 (discussed in more detail below) and Congress has not as yet revived them making year-end planning more complicated and frustrating. 

The President has signed the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). Some tax breaks have been made permanent, some have been extended through 2016, and some have been extended through 2019. See Expired Tax Provisions below for more details.

Overview:

This 2014 tax year will again be challenging as taxpayers will have to deal with the following recent tax law changes:

• Higher marginal income tax rates
• Higher capital gain tax rates
• Restoration of the phase out of itemized deductions and exemptions: If your adjusted gross income exceeds applicable thresholds, certain itemized deductions are reduced.  The applicable thresholds for 2014 are $254,200 for singles, $279,650 for head of household and $305,050 for joint filers
• The new 3.8 % Medicare tax on unearned income, including interest, dividends and capital gains. etc.  For more details please read 2013 Sneaky New Tax – Not Too Early to Plan for 3.8 % Medicare Tax on Investment Income
• The new 0.9% tax on earned income in excess of $200,000 for single taxpayers and $250,000 for married taxpayers filing jointly
• Same Sex Couples:  The recent Supreme Court decision in Windsor may result in same-sex couples with dual income paying more income taxes filing jointly than if they were still able to file singly. For more details on the tax implications for same-sex couples please read Same-Sex Marriage Tax Guide: 16 Essential Tax Rules and Tips

It is important to know that this year-end tax guide only provides an overview of various tax strategies and some of the more important tax provisions and by no means covers all tax minimization techniques.  Each taxpayer situation is unique and as a result tax strategies and projections should be developed for each client for the greatest results.

Where To Begin:

As a starting point, it is essential to know the customary year-end planning techniques that can cut income taxes.  It all starts with a tax projection of whether you will be in a higher or lower tax bracket next year. In some cases it is imperative to project income and expenses for multiple years to smooth income out over time to avoid higher tax brackets over an extended period.  This type of planning is beyond the scope of this discussion and should be explored directly with tax counsel.

Once your tax bracket for this year and next year are known, there are two basic income tax planning considerations:

• Should income be accelerated or deferred?
• Should deductions and credits be accelerated or deferred?

However, life is never that simple.  Tax laws always make for some real guesswork.  As discussed below, when it comes to certain deductions that have

College Tuition: Discover How Grandparents Can Help Their Grandchildren and Save Taxes Too

With college tuition coming due, families should consider tax efficient ways to pay for these expenses. Grandparents who wish to help their children with tuition costs can take advantage of some special gift tax breaks.

Grandparents have the usual annual present interest gift tax exclusion (now $14,000) and a lifetime exclusion (now $5,340,000). When a spouse joins in the gift (the called “spousal joinder”), these amounts double .

But these are not the only tax breaks available to a grandparent who wants to help the family. In addition, grandparents have an unlimited gift tax exemption for amounts paid for tuition. By using this special educational exclusion, such payments do not count against the annual gift tax or lifetime exclusions.

Here are the basic rules to qualifying these gifts for such unlimited educational exemption:

Unlimited Exclusion For Tuition Only

This exclusion from the gift tax for gifts of tuition is unlimited in amount. However, the scope of the exclusion applies to tuition only.

Books, Supplies and Other Items Not Covered

There is no exclusion for amounts paid for the following:

• Board or other similar expenses that are not direct tuition costs.
• Books
• Supplies
• Laboratory fees
• Dormitory fees

See Treasury Regulations 25.2503-6(b)(2) for more details.

While Only Tuition Qualifies, This Educational Exemption Can Be For Part-Time or Full-Time Tuition

The gift tax is not imposed on amounts paid as tuition for a student to a qualifying domestic or foreign educational organization for the education or training of such person. See Code Section 2503(e)(1) and (2)(A).

Tuition payments for the student qualify where enrollment is part-time or full-time.

Qualifying Educational Organization

A qualifying educational organization is one which:

• Normally maintains a regular faculty and curriculum and
• Normally has a regularly enrolled body of students in attendance at the place where its educational activities are regularly carried on.

See Code Section 170(b)(1)(A)(ii) and Treasury Regulation 25.2503-6(b)(2).

Direct Payment of Tuition to Educational Organization

The tuition payment must be made directly to the educational organization to qualify for this exclusion.

Critical Point:

Neither a payment to the student for delivery to the organization nor a payment

Weddings: Quick and Easy Tax Guide For Those Getting Married and Newlyweds

Rita and Joe, My Wonderful In-Laws, On Their Wedding Day, June 23,1950

The excitement, joy and anticipation of getting married can be almost overwhelming.  With the planning that goes into the wedding it is easy to overlook the tax implications of marriage.  Although taxes are probably not high on your summer wedding plan checklist, it is important to be aware of the tax changes that come along with marriage. Here are some basic tips that can help keep those issues under control.

Name Change:

The names and Social Security numbers on your tax return must match your Social Security Administration (SSA) records. If you change your name, it is imperative to report it to the SSA.

Change Income Tax Withholding:

A change in your marital status means you must give your employer a new Form W-4, Employee’s Withholding Allowance Certificate.

If you and your spouse both work, your combined incomes may move you into a higher tax bracket. Use the IRS Withholding Calculator tool at IRS.gov to help you complete a new Form W-4. See Publication 505, Tax Withholding and Estimated Tax, for more information.

To avoid problems and to get specific advice speak with your tax adviser.

Changes In Circumstances:

Marriage can have an impact on insurance. It is important that you report changes in circumstances, such as changes in your income or family size, to your health insurance company (or Health Insurance Marketplace).  You should also notify your insurance company when you move out of the area covered by your current insurance plan.

Address Change:

Let the IRS know if your address changes.

You should also notify the U.S. Postal Service. You can ask them online at USPS.com to forward your mail. You may also report the change at your local post office.

Change In Filing Status:

If you’re married as of December 31, that’s your marital status for the entire year for tax purposes. You and your spouse can choose to file your federal income tax return either jointly or separately each year.

Note: Once married, neither of you can file using single status.

Generally and in most cases, married filing jointly results in a lower amount of taxes due.  However, you may want to figure the tax both ways to find out which status results in the lowest tax.

Filing Status For Same-Sex Couples:

If you are legally married in a state or country that recognizes same-sex marriage, you generally must file as married on your federal tax return. This is true even if you and your spouse later live in a state or country that does not recognize same-sex marriage. See Same-Sex Marriage Tax Guide: 16 Essential Tax Rules and Tips for a more detailed discussion.

US Citizens Living Outside America: Streamlined Foreign Offshore Procedure Offers Tax and Compliance Relief

United States Citizens Living Abroad: New IRS Streamlined Procedure Offers Relief

A couple of weeks ago, I had someone come in my office who has lived abroad since he was 7 years old. He is a citizen of the United States and Netherlands. He has never filed United States income tax returns. We discussed the general rule that US citizens must file returns and pay tax on their worldwide income. This meant that he should be filing a Form 1040 Return each year.  It also meant that he should have been filing for the last 20 years or so of his adult working years a Form 1040 even though he is not living or working in the US.  We discussed that although there may be a  Netherlands tax treaty with the United States it does not eliminate the need to file tax returns.  To add insult to injury, there could be taxes due, along with a whole host of penalties.

In addition to income taxes, having a bank account in the Netherlands could subject him to the Foreign Bank Account Reporting (FBAR) rules and penalties for failure to file for at least the last six years.

To help certain United States taxpayers, the IRS has previously put in place procedures to deal with many foreign bank account problems and to reduce compliance problems. These programs are explored  in some detail at Foreign Offshore Accounts: IRS Third Amnesty Program and Electronic Reporting of Foreign Bank and Financial Accounts (FBAR), and Quiet Disclosures of Offshore Foreign Accounts.  However, these programs did not adequately address the tax and compliance hardships of many United States citizens living abroad.  To make things easier for these taxpayers, the IRS announced yesterday, June 18, 2014, a new Streamlined Foreign Offshore Procedures under IR-2014-73.  Here are the details:

Benefits of the New Streamlined Program:

A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with its requirements can avoid:

• Failure-to-file penalties
• Failure-to-pay penalties
• Accuracy-related penalties
• Information return penalties, or
• FBAR penalties.

Even if returns properly filed under these procedures are subsequently selected for audit under existing IRS audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful.

However, any previously assessed penalties with respect to those years, however, will not be abated.  Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.

Retirement and Savings Plan Deferral Elections: For returns filed under these procedures, retroactive relief will be provided for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by an applicable tax treaty. The proper deferral elections with respect to such plans must be made with the submission.

Eligibility For The Streamlined Program

In addition to having to meet the general eligibility criteria of these offshore programs, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures must:

• Meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement described below) and
• Have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and
• May have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and
• Such failures resulted from non-willful conduct.

Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents (i.e., “green card holders”):  Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days.

Under IRC section 911 and its regulations, which apply for purposes of these procedures, neither temporary presence of the individual in the United States nor maintenance of a dwelling in the United States by an individual necessarily mean that the individual’s abode is in the United States.

What Has To Be Done To Qualify Under This Program

U.S. taxpayers eligible to use the Streamlined Foreign Offshore Procedures must do the following:

• Income Tax Returns:  For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, file delinquent or amended tax returns, together with all required information returns (e.g., Forms 3520, 5471, and 8938) and
• FBAR:  For each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs.
• Tax and Interest Must Be Paid With Filings: The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.
• Compliance Details:  There are other submission details and the IRS warns that “Failure to follow these instructions or to submit the items described below will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.”  So extreme care must be taken to comply with all the details of this IRS program.

Conclusion:

This is a very favorable development to US citizens living abroad who have no idea of their tax responsibilities to the United States.  As always, the devil is in the details, so tax counsel should be sought to insure that the various submissions meet all requirements under this Streamlined Foreign Offshore Procedures.  There is just too much at stake to do otherwise.

 

Disclosure and Disclaimer: As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws. This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

Copyright © 2014 – Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved. 

Philip Seymour Hoffman: Estate Planning Lessons For Us and Especially Women

Attribution: Josh Jensen      CC-By-SA-2.0

The sad and tragic death of Philip Seymour Hoffman at age 46 last month is yet another reminder of the importance of estate planning. Most of us go along each day not thinking or worrying about what would happen to our loved ones if we suddenly died.  Some, in an attempt to be conscientious, draft an estate plan but fail to keep such plan up to date.  But most people die without ever doing any estate planning leaving state laws and the courts to decide who should get their estate. When these matters are neglected, surviving family members can be left with momentous legal, tax and financial problems resulting in uncertainty and expensive attorney fees to sort it all out.

Background

Although Mr. Hoffman drafted his will in 2004, he failed to update it after having two children and even after some significant estate tax law changes.  Such changes and ten years usually triggers a meeting with your estate planning attorney. For more on a checklist of events that should result in a meeting with your estate planning attorney please explore Estate Planning Triggers.

Mr. Hoffman’s 2004 will leaves everything to the mother of his children, Marianne O’Donnell.  He was not married to her and this is where the problems start, at least from an estate tax perspective.

Federal and State Estate Taxes

It is estimated that Mr. Hoffman’s estate was around $35,000,000.  Currently, $5,340,000 is exempt from federal taxes (the so-called unified credit) with amounts above that amount being subject to a federal estate tax rate of 40%.  It would appear then that roughly $30,000,000 of his estate would be subject to estate tax at a 40% rate.  This would generate a whopping $12,000,000 in federal estate taxes!

New York also has an estate tax with an exemption of $1,000,000. This New York estate tax has graduated tax rate that goes as high as 16%.  It is estimated that roughly another $3,000,000 in will be paid in New York estate taxes.

Combined estate taxes: $15,000,000.

(Liquidity Side Bar:  Be aware that estate taxes are due nine (9) months after the date of death so hopefully Mr. Hoffman’s estate has enough liquid assets to avoid a forced sale of assets to meet his tax obligations.  Estate Planning Point:  It is not known if Mr. Hoffman had life insurance but having life insurance to provide for liquidity is sometimes essential.  In certain cases, the use of an irrevocable life insurance trust would allow for excluding the life insurance proceeds from being subject to estate tax.)

The point is that even though a meeting in 2004 may have explored marriage as a simple way to save estate taxes, Mr. Hoffman may, for whatever reason, not wanted to be married at that time.  It also could have been that his wealth was not that great in 2004.

But here is the object lesson:  Things change and so should one’s estate plan.

• A later meeting to review his estate plan would have explored the huge estate tax benefit to being married.  No one is suggesting that people should get married only for tax reasons, however, under federal estate tax rules, inheritances to a surviving spouse are not subject to estate tax.
• Double Estate Taxation:  Since they were not married, the amounts Ms. O’Donnell receives will be taxed twice.  First, the amount she receives above the unified credit will be taxed at Mr. Hoffman’s death.  When she dies the balance in her estate above her unified credit will be taxed a second time.  Marriage eliminates this double estate tax.
• Marriage would have provided possible social security, retirement plan, income tax and other financial benefits.
• If Mr. Hoffman wanted to get married but did not want his wife to have absolute control of his assets, a qualified terminable interest trust (a QTIP trust) could have been used to obtain the estate tax savings while providing income and principal to her during her lifetime.  The assets in this trust would pass to his children at her death.  This would have been the best of both worlds: saving estate taxes but still providing for his wife and children.
• Sidebar:  A QTIP trust is often used in second marriages where there are children from a prior marriage.

One Strategy To Eliminate Estate Tax At His Death

In a perfect world, Mr. Hoffman could have created a so-called marital deduction trust and a unified credit or by-pass trust by funding each trust based on a formula clause tied to the unified credit applicable in the year of his death.  (Or he could have used the disclaimer trust discussed below to achieve this same result if he was married.) If he had implemented this estate planning strategy his 35,000,000 would have been split between

The Biggest (Tax) Loser: Misguided Gifts of Real Estate By Uninformed Do It Yourselfers, Realtors & Attorneys

“Son, I am sick and getting old, so fill out a deed to transfer my house into your name now.”

With the increase of the federal estate tax exemption to $5,340,000 in 2014, most taxpayers are not subject to federal estate taxes.  The focus for many now has shifted to the income tax implications that arise when wealth passes to the next generation.  With no regard to the income tax implications, many times elderly people get the idea that the transfer of real estate to children during their lifetime is a good idea in trying to avoid probate and to make things easier for loved ones. Even uninformed realtors, attorneys and other financial advisers sometime make such a recommendation without knowing the tax impact.  However well-meaning, this uninformed strategy can have disastrous income tax results for the children recipients of such ill-conceived lifetime gifts.

Basis Rules:

It is important to understand the following income tax basis rules for calculating gain or loss:

• Lifetime Gifts:  Children who receive lifetime gifts take a carryover basis in the property received.  The carryover basis is determined by what the maker of the gift originally paid for the asset plus any improvements made to the property.
• Bequest At Death:  Beneficiaries who receive assets at the decedent’s death get a step up in basis to the date of death value of such assets received.

Basis Rules:  Illustrating How These Rules Operate

Example:  DIY Dad wants to avoid probate and to transfer during his lifetime his real estate to his son, Sad Son.  DIY Dad bought his house in the 1970s for $17,000 and made improvements during the years of $23,000.  As a result his adjusted basis is $40,000.  The house is now worth $540,000.  To save lawyer fees, DIY Dad asks Sad Son to draft a deed to transfer the property.  Sad Son does so and DIY Dad signs the deed and has it recorded with the recorder of deeds.

• Since this was a lifetime gift, Sad Son takes a carryover basis for the house of $40,000.  Sad Son sells the house for $540,000 shortly afterwards and has a capital gain of $500,000 which he surprisingly  and shockingly learns from his accountant will cost him $100,000 (20% x $500,000) in federal taxes alone.  His accountant tells him there will also be state income taxes on this gain. Since Sad Son is a Pennsylvania resident, he will pay an extra $15,350 in Pennsylvania income taxes.  Total Taxes: $115,350.
  • Form 709:  Any lifetime gifts of over $14,000 require the filing of a Form 709, United States Gift Tax Return, in the year of the gift.  It should also be noted the IRS now checks recorded deeds.  For more on the IRS policing this area please see IRS Checking Real Estate Transfers For Unreported Gifts.
• Alternate Universe:  DIY Dad consults with his tax/estate attorney who drafts a will that provides for the transfer of his house at death to Sad Son. Sad Son (who now legally changes his name to Happy) Son, has a basis of $540,000 upon his receipt of the house from the estate.  Happy Son, now sells the house and has zero, yes, zero capital gain (Sale Price $540,000 less basis of $540,000 = 0)!
  • Note: Certain states have inheritance taxes.  For example, in Pennsylvania there would be a 4.5% inheritance tax on the real estate, but this is a smaller cost than the capital gains tax that results from taking a carryover basis via a lifetime gift.
• Fall Back Solutions:
  • If Sad Son stays in the house long enough to qualify the house as his primary residence and all statutory requirements for exclusion are met, he may then exclude $250,000 of the gain on the sale of the house once he sells the house.  If married and all statutory requirements are satisfied,  Sad Sam may be entitled to a $500,000 exclusion.

Small Businesses: 8 Great Year-End Tax Planning Tips and Tricks: A Must Read

2013 Year-End Tax Planning Guide For Small Businesses

The arrival of year-end presents special opportunities for most small businesses to take steps in lowering their tax liability. The starting point is to run projections to determine the income and tax bracket for this year and what it may be next year.  Once this is known, decisions can be made as to whether any of the following planning tools should be employed to cut taxes before the tax year closes.

It is also important to know that the recent tax act known as ATRA has extended many tax breaks for 2013.  If any of these tax breaks are available, it would be prudent to take advantage of them before they expire.

Also keep in mind that ATRA increased ordinary income tax rates for individuals from 35% to 39.6% starting in 2013 so owners of flow through entities such as partnerships, limited liability companies (LLCs) and S Corporations need to recognize this and other tax changes and plan accordingly.

The following presents some year-end tax strategies that may prove helpful to small businesses and other businesses:

1. Accelerating or deferring income/deductions as part of a year-end tax strategy

A good part of year-end tax planning involves techniques to accelerate or postpone income or deductions, as your tax situation dictates. The idea is to keep income even from year to year. Having spikes in taxable income in any one tax year puts you in a higher average tax bracket than you would be in if you had evened out the amount of taxable income between the current and later year(s).  (Historical note:  For those of you old enough to remember, there was an income averaging rule built into the tax code.  That provision has long been abolished.)

So every year, businesses can take advantage of a traditional planning technique that involves alternatively deferring income and accelerating deductions. For example, business taxpayers such as pass-through entities (limited liability companies, partnerships, S corporations, sole proprietorships) should consider accelerating business income into the current year and deferring deductions until 2014 (and perhaps beyond) if they expect income to rise next year or in the future.

The strategy of accelerating or deferring income and deductions may apply to a number of transactions affecting your business including but not limited to the following:

• Selling property
• Leasing
• Inventory
• Compensation and bonus practices
• Depreciation and expense elections.

Cash Basis Small Businesses

Generally, a cash-basis taxpayer recognizes income when received and takes deductions when paid. Here are some more rules for cash basis taxpayers:

• Income is generally taxable in the year received, by cash or check or direct deposit. You cannot postpone tax on income by refusing payment until the following year once you have the right to that payment in the current year. (This is the so-called the “constructive receipt” rule.)  Therefore, businesses using the cash basis method of accounting recognize and report income when the business actually or constructively receives cash or something equivalent to cash.
• However, if you make deferred payments a part of the overall transaction, you may legitimately postpone both the income and the tax into the year or years in which payment occurs. Examples include:
  • Installment sales, on which gain is prorated and taxed based upon the years over which installment payments occur
  • Like-kind exchanges through which no gain occurs except to the extent other non-like-kind property (including cash) may change hands
  • Tax-free corporate reorganizations under Section 368 of the Internal Revenue Code.
• Deductions, however, are generally not allowed until you pay for the item or service for which you want to take the deduction. Merely accepting the liability to pay for a deductible item does not make it deductible. Therefore, a supply bill does not become deductible in the year that the bill is sent for payment. Rather, it is only considered deductible in the year in which you pay the bill.
• Determining when you pay your bills for tax purposes also has its nuances. A bill may be paid when cash is tendered; when a credit card is charged; or when a check is put in the mail (even if delivered in due course a few days into a new calendar year).

Cash basis businesses that expect to be in a higher tax bracket in 2014 should shift income into 2013 by accelerating cash collections this year, and deferring the payment of deductible expenses until next year, where possible. In this situation, small businesses should try to collect outstanding accounts receivables before the end of 2013.

Accrual Basis Small Businesses

Basically, for accrual-basis taxpayers, generally the right to receive income, rather than actual receipt, determines the year of inclusion of income.  Accrual method businesses that anticipate being in higher rate brackets next year may want to accelerate shipment of products or provision of services into 2013 so that your business’s right to the income arises this year.

Taking the opposite approach:  If you will be in a lower tax bracket next year, an accrual basis taxpayer would delay delivering services or shipping products.

2. Tax Break For Small Business Expense Election Under Section 179

ATRA extended until the end of 2013 the enhanced Code Sec. 179 small business expense. Small businesses that purchase qualifying property can immediately expense up to $500,000 this year.  This amount is reduced dollar for dollar to the extent of the cost of the qualifying property placed in service during the year exceeds $2 million. If you plan to buy property (even computer software qualifies), consider doing so before year-end to take advantage of the immediate tax write-off.

Warning:  Remember that any asset must meet the “placed in service” requirements as well as being purchased before year-end.

Also included as qualified Code Sec. 179 property (only temporarily though) is “qualified” real property, which includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. However, businesses are limited to an immediate write-off of up to $250,000 of the total cost of these properties.

Note, the Section 179 expense limit goes down to $25,000 and the phaseout threshold kicks in at $200,000 starting in 2014.  Also the qualified leasehold-improvement breaks end at the end of 2013.  If you are planning major asset purchases or property improvements over time, you may want to take advantage of this break before year-end.

Final note:  In addition to new property, Section 179 can be applied to used property.

3. Bonus deprecation

ATRA extended this additional first year depreciation allowance into 2013.  This bonus depreciation allows taxpayers to immediately deduct fifty percent (50%) of the cost of qualifying property purchased and placed in service in 2013. Qualifying property must be purchased and placed into service on or before December 31, 2013.

Qualifying property must be new tangible property (refurbished assets do not qualify) with a recovery period of 20 years or less, such as office furniture, equipment and company vehicles, off the shelf computer software and qualified leasehold improvements.

Note that bonus depreciation is not subject to any asset purchase limit like Section 179 property.

4. Accelerated Depreciation

ATRA has retained through 2013 the tax break that allows a shortened 15 year recovery period for qualified leasehold improvements, restaurant and retail improvement property.  Normally the recovery period for this type of property is 39 years so this is a huge tax break.

5. Increased start-up expense deduction

New businesses can take advantage of the increased deduction for start-up expenditures. This start-up expense deduction limit is $10,000. The phaseout threshold is $60,000. Thus, if you have incurred during 2013 start-up costs to create an active trade or business, or the investigation of the creation or acquisition of an active trade or business, you may benefit from this increased deduction. Entrepreneurs can recover more small business start-up expenses up-front, thereby increasing cash flow and providing other benefits.

6. Repair Regulations

The so-called “repair” regulations include a valuable de minimis rule, which could enable taxpayers to expense otherwise capitalized tangible property. Qualified taxpayers may claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met.

The IRS with their issuance of final regulations relaxed many of the requirements contained in the earlier temporary regulations.  For example, the final regulations removed the ceiling requirements on deductions and now allows the de minimis rule for businesses that do not generate financial statement (applicable financial statements (AFS)).  This allows many small businesses to take advantage of these tax breaks.

The modified safe harbor allows businesses without an AFS to immediately deduct up to $500 or less (or $5,000 or less for taxpayers with an AFS) for qualified property purchases. For example, a business could deduct hundreds of lap-top computers or scanners costing $500 or less each year.

Bottom Line:  The modified safe harbor may be easier for certain small businesses than the Section 179 deduction and 100% bonus depreciation. Most importantly, the regulations now allow taxpayers that do not prepare financial statements to use de minimis safe harbor.  This provides a great benefit for many small businesses that do not normally generate these statements as part of their regular business operations.

7. Compensation arrangements

Timing of Compensation:

In a regular C corporation, compensation paid to employees reduces the taxable income of such corporation.  Ideally, compensation should be used to eliminate taxable income at the corporate level or at least minimize such income.  It is imperative that the total compensation paid is “reasonable” in light of the services performed and industry norms. For more insights into the reasonable compensation issue please read Reasonable Compensation:A Favorite Issue For IRS Auditors.

Use of Retirement Plans:

Corporate retirement plans such as profit sharing, money purchase pension, and defined benefit plans can generate large tax deductions for the entity.  These plans are quite useful when compensation has already reached the highest level of reasonableness.

Important Points:

• These corporate retirement plans must be drafted and signed before year-end to get tax deductions for that year.
• These plans can generate a deduction even though the plan is not funded until after year-end, so long as funded by the due date (or the extended due date) of the corporate or entity return.  This gives the small business owner some after the taxable year-end planning flexibility.
• For profit sharing, money purchase pension and other defined contribution plans, an employer can contribute up to $51,000 per participant.  For participants age 50 and older this amount can be $56,500 because of the catch-up contribution rules.
• For defined benefit plans, the plan retirement amount and funding are determined by various actuarial computations.  The maximum future benefit can be $205,000 per year upon retirement.  Depending on the age of a participant this can result in a very large contribution each year and one far in excess of the amounts available under the defined contribution plans discussed immediately above.
• There are various limits and rules specific to each of these plans and the particular make-up of the employees and their ages bear heavily in the proper choice of plan and the design of any plan chosen.

Additionally, and maybe more importantly, when compensation paid to owners is approaching their own:

• Highest marginal tax bracket,
• 3.8% medicare tax threshold. (To learn more please read New 2013 Medicare Tax: 3.8% Stealth Tax),
• 0.9% medicare tax, or
• Itemized deduction and exemption phase outs (To learn more on this and other individual tax planning issues please read 2013 Year End Tax Planning Strategies: Learn What Can Be Done Now To Save Taxes and Prevent Costly Mistakes),

additional taxes can be saved by making contributions to such plans instead of paying more compensation to the owner.  This can produce a double benefit:  huge income tax savings  and having money being put into a retirement plan to grow tax-free for the benefit of the small business owner.

Use of 2 ½ Month Bonus Rule:

Particularly relevant to employers at year-end is an annual bonus rule. Bonuses paid within a brief period after the end of the employer’s tax year are deductible in that tax year. Compensation is generally considered paid within a brief period of time if it is paid within two and one-half months of the end of the employer’s tax year.

Compensation and K-1 Distributions

Compensation and shareholder or partner distributions from a business, and drawing the often fine line between the two, can make a significant difference to a business owner’s overall tax liability for the year.  For example, for an S corporation, payment of salaries are subject to social security taxes while K-1 income is not subject to this tax.  The strategy here would be to pay less in salary and have more income reported on the Form K-1.  However, taxpayers can be in trouble here if they get greedy.  The IRS is policing this area to make sure that the salary paid is reasonable.  Therefore,   a reasonable salary must be carefully determined and supportable in a tax audit.

Deferring payments of accrued bonuses

In certain situations, it may be preferable to simply ask that your employer pay your bonus in the following year where you expect that your tax bracket will be lower.

8. Other Tax Planning Strategies and Ideas

Here are a number of other year-end tax planning strategies you may want to consider, depending on your particular tax and business situation:

• Accelerating installment sale proceeds or electing out of the installment method;
• Elect slower depreciation methods;
• Determine if you can write-off any bad debts;
• Consider changing your accounting method to advance income or defer expenses.  This one needs careful consideration, however, as accounting method changes can have a binding effect on taxpayers for many future years;
• Determining the difference between ordinary business activities and passive activities before implementing a year-end strategy also makes good sense. Rental income or losses, and other passive activity gains and losses, must be netted separately from business gains and losses. Year-end timing for one does not necessarily help control your bottom-line tax cost on the other;
• Cost Segregation Study:  For those who have purchased, constructed or rehabilitated a building this year, a cost segregation workup may save taxes.  It identifies property components and related costs that can be depreciated faster than the building itself, generating larger deductions.  For example, breaking out costs for fixtures, security equipment, landscaping and parking lots may generate larger tax deductions.  Be careful to take into account the impact of the alternative minimum tax and to consider states that do not follow the federal tax rules.

Final Thoughts:

The above are not intended as a comprehensive list of year-end tax planning tools for small businesses.  The point here is that each business has its own unique tax and business situation.  A case by case analysis to determine which tax planning tools will minimize taxes is the best course of action for small businesses.

If I have missed something or if there is a strategy you want me to explore or explain more fully, please leave a comment below.  I would be glad to help.

For an analysis of what deferral or acceleration planning at year-end may work best for you and your business, please do not hesitate to contact me.

Disclosure and Disclaimer: As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws. This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

 

Estate Planning 2013: Now What? A Must Read For Everyone

On Thanksgiving when you look around the room at your loved ones, think about whether they are legally protected with an estate plan that works to protect them and minimize taxes when you were gone.

Estate Planning 2013: Now What? A Must Read For Everyone.

Fraud Alert: Latest Reprehensible Tax and Financial Scam: Phony Charitable Contributions To Aid Typhoon Victims

Typhoon Haiyan Disaster

The Internal Revenue Service has just issued a consumer alert about possible scams taking place in the wake of Typhoon Haiyan.  As most of us know, on Nov. 8, 2013, this typhoon known as Yolanda in the Philippines – made landfall in the central Philippines, bringing strong winds and heavy rains that have resulted in flooding, landslides, and widespread damage and personal devastation.

Following major disasters, it is now increasing common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers.

Fraudulent Contact:

Such fraudulent schemes may involve contact in many ways including the following:

• Telephone
• Social media
• Email or
• In-person solicitations.

Tips To Avoid Being Scammed:

To avoid your own personal financial disaster, please follow these recommendations:

• To help disaster victims, donate only to recognized charities.
• Be wary of charities with names that are similar to familiar or sound like nationally known organizations.

1. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations.
2. The IRS website at IRS.gov has a search feature, Exempt Organizations Select Check, through which people may find legitimate, qualified charities; this will help make sure that the donations to these charities are tax-deductible.
3. Legitimate charities may also be found on the Federal Emergency Management Agency (FEMA) website at fema.gov.

• BASIC RULE OF LIFE:  Don’t give out personal financial information — such as Social Security numbers or credit card and bank account numbers and passwords — to anyone soliciting contributions.  Scam artists may use this information to steal your identity and money.
• Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.  Please read IRS Slams Taxpayers: Attention to Tax Details Matter to learn why this is so important from a tax perspective.
  
  • Ultra-Careful Tip #1:  In fact, it is probably better to use your credit card as your card company may protect you against such fraudulent charges.
• If you plan to claim a deduction for your contribution, see IRS Publication 526, Charitable Contributions, to read about the kinds of organizations that can receive deductible contributions.
  • Ultra-Careful Tip #2: Even in situations where there is no fraud, it is prudent to make sure the organization is a qualified tax-exempt organization under federal law.  You may be unpleasantly surprised to know that many organizations erroneously hold themselves out as tax-qualified.  This can result in some nasty tax consequences if an audit by the IRS determines that the organization was not tax-exempt and disallows your charitable deduction.

Bogus Websites and E-Mails:

Bogus websites may solicit funds for disaster victims. Such fraudulent sites frequently mimic the sites of, or use names similar to, legitimate charities, or claim affiliation with legitimate charities to persuade members of the public to send money or provide personal financial information that can be used to steal identities or financial resources.

Additionally, fraudsters often send e-mail that steers the recipient to bogus websites that seem affiliated with legitimate charitable causes.

Final Thoughts:

This is such a sad commentary about our world.  The old refrain “No good deed goes unpunished” is clearly applicable here.  It seems our best and noblest intentions can and will be used against us.  Vigilance, skepticism and prudence are imperative even when we are trying to do the right thing.

Does this kind of fraud strike a nerve or really make you angry?  Or are we just numb to it all and just pass it off as the way of the world? What are your thoughts?  Be sure to let me know what you think in the Leave a Reply below.

As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.

As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

Renewed Warning: IRS Tax Scam Alert and What To Do To Protect Yourself: Scary and Disturbing Tactics By Phony IRS Agents

“These scams are better scripted than some Hollywood movies.”
419 Nigerian Scam Victim

The IRS just renewed its October, 2013 warning about a pervasive phone scam that continues to target people across the nation, including recent immigrants. The Treasury Inspector General for Tax Administration called it the largest scam of its kind. As of March 20, this tax division reported that it has received reports of over 20,000 contacts related to this scam. It also stated that thousands of victims have paid over $1 million to fraudsters claiming to be from the IRS.

As some of you may recall, on Halloween the IRS announced (IR-2013-84) the newest and scariest phone scam.  Someone has a sick sense of humor out there.

This sophisticated and sinister phone scam targets taxpayers,  especially recent immigrants, throughout the country.

Details of This Phone Scam According to the IRS

In this scam, the thief poses as the IRS and makes an unsolicited call to their target. The caller tells the victim they owe taxes to the IRS. They demand that the victim pay the money immediately with a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.  As I said, this is really scary stuff.

“This scam has hit taxpayers in nearly every state in the country.  We want to educate taxpayers so they can help protect themselves.  Rest assured, we do not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer,” says IRS Acting Commissioner Danny Werfel. My advice: If you get such a call, hang up immediately!

“If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don’t pay immediately, that is a sign that it really isn’t the IRS calling.”  Be aware that the IRS does not contract taxpayers in this fashion.  In almost all cases, the first IRS contact with taxpayers on a tax issue occurs by mail.

Other characteristics of this scam that may lead you to believe that this is a legitimate phone call and to intimidate you into giving them what they want  include the following:

• These impostors use fake names and IRS badge numbers.
• They generally use common names and surnames to identify themselves.
• These con artists may be able to recite the last four digits of a victim’s Social Security Number.
• These crooks spoof the IRS toll-free number on caller ID to make it seem that it’s the IRS calling.
• They sometimes send bogus IRS emails to some victims to support their bogus calls.
• Victims hear background noise of other calls being conducted to mimic a call site.
• After threatening victims with jail time or driver’s license revocation, these charlatans hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

As you can see, these guys are good.  Do not under any circumstances give them any information or pay them a thing no matter how threatened you may feel!

How To Protect Yourself

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

• If you know you owe taxes or you think you might owe taxes, hang up immediately and call your tax attorney, your accountant or the IRS at 800-829-1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.  This way you know for sure you are dealing with the IRS.
• If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), once again, immediately hang up and then call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.
• If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Other Scams

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS. The 419 Nigerian scam depicted in the picture above resulted in losses to many victims in that country.  No matter how believable or how much you are intimidated, never let your guard down and stay skeptical and vigilant.

Know How The IRS Operates

• The IRS usually first contacts people by mail – not by phone – about unpaid taxes.
• The IRS does not initiate contact with taxpayers by email to request personal or financial information. In this case, “snail” mail is a good thing.
• They do not use any type of electronic communication, such as text messages and social media channels.
• The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts.
• The IRS won’t ask for payment using a pre-paid debit card or wire transfer. The IRS also won’t ask for a credit card number over the phone.
• Recipients should not open any attachments or click on any links contained in any message that seems to be from the IRS. Instead, forward the e-mail to phishing@irs.gov.

 

Bottom Line:

• Be wary of any unexpected phone or email communication allegedly from the IRS.
• Don’t fall for phone and phishing email scams that use the IRS as a lure.
• Thieves often pose as the IRS using a bogus refund or warnings to pay past-due taxes.
• If someone calls you about taxes, they will tell you whether it is the IRS or some state or local authority.  Get their name and badge number and do not give them any information or money.  Then hang up and call that taxing authority directly to get to the bottom of the situation.

Has anyone been a victim of this scam or other scams or fraud?  Please share your experiences in the Leave A Reply area below.

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As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

Same-Sex Marriage Tax Guide: 16 Essential Tax Rules and Tips

Supreme Court Decision on DOMA Impacts Tax Rules for Same Sex Couples

Federal tax rules for same-sex couples have recently been issued in response to the Supreme Court decision in Windsor, No. 12-307 (U.S. 6/26/13). This landmark case invalidated a key provision of the 1996 Defense of Marriage Act (“DOMA”) and resulted in major changes in the tax landscape for many same-sex partners.

These new tax rules were laid out in I.R. 2013-72  on August 29, 2013 and Revenue Ruling 2013-17 on September 16, 2013 and are effective on that date.  (Note that taxpayers who wish to rely on the terms of this Revenue Ruling for earlier periods may choose to do so, as long as the statute of limitations for the earlier period has not expired. More on this below.)

Although there are still some unresolved issues, the following will lay out many of the basic federal income tax rules for same-sex married couples:

1. State of Celebration Rule:  Same-sex couples that are legally married in jurisdictions that recognize their marriages are treated as married for federal tax purposes.
   • The rule applies even if this couple is currently living in a jurisdiction that does not recognize same-sex marriage.  The IRS states that this is consistent with its long-standing position (Rev. Rul. 58-66) that for federal tax purposes the IRS will recognize marriages based on the law of the state in where consummated and will disregard later changes in domicile.
   • For example, a same-sex couple validly married in New York will still be treated as married when they move to Pennsylvania.
2. Married:  Being married is 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.
3. Domestic Partnerships:  Registered domestic partnerships, civil unions or similar formal relationships are not considered legal marriages.
4. Married For All Purposes Under Federal Law:  Under the ruling, legally married same-sex couples are treated as married for all federal tax purposes, including income and gift and estate taxes.
5. Federal Income Tax Benefits For Married Same-Sex Couples:  Married same-sex couples can now enjoy the tax benefits associated with  being treated as married for all federal tax provisions, including but not limited to:
   • Filing status
   • Claiming personal and dependency exemptions
   • Taking the standard deduction
   • Employee benefits
   • Contributing to an IRA
   • Claiming the earned income tax credit
   • Claiming the child tax credit.
6. Married Filing Jointly or Married Filing Separately Only Option After September 16, 2013:  After September 16, 2013, legally married same-sex couples generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status.
7. Two High Income Family:  In some cases, especially where both spouses are high wage earners this may result in greater taxes than under earlier law.
   • Year-end tax planning and withholding and estimated taxes may need adjustments.  Run the numbers to avoid penalties.
   • For more on year-end tax planning please go to 2013 Year End Tax Planning Strategies: Learn What Can Be Done Now To Save Taxes and Prevent Costly Mistakes.
8. Civil Unions In Certain States May End Up Paying Less Taxes:  Civil unions or domestic partnerships that can still file singly or as head of household may end up in better tax shape in certain situations.
9. Prior Year Tax Refund Possibility: Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing married filing jointly for federal tax purposes for one or more earlier tax years still open under the statute of limitations.
10. Statute of Limitations For Refunds:  Generally, the statute of limitations for filing a refund claim is three years from the filing date of the return or two years from the date of the tax payment, whichever is later.
    • As a result, refund claims can still be filed for tax years 2010, 2011 and 2012.
    • Special Situations: For example, agreements with the IRS to keep open the statute of limitations for tax years 2009 and earlier will allow taxpayers to file refund claims for such open years .
    • For how to file an amended return please read Amending Tax Returns with the IRS.
11. Protective Claim: When the right to a refund is contingent and may not be determined until after the time period for amending returns expires, a taxpayer can file a protective claim for refund. The claim is often based on current litigation (constitutionality); expected changes in tax law; and other changes in legislation or regulations. A protective claim preserves the right to claim a refund until resolution of the matter.
    • Example:  Pennsylvania same-sex couples not considered married under current rules may want to file protective claims for any year where the statute of limitations period is ending.
12. Fringe Benefits: Employees who purchased same-sex spouse health insurance coverage from their employers or other fringe benefits on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.
    • The IRS now provides a mechanism to pursue for filing refund claims under Notice 2013-61.  The notice provides two streamlined administrative procedures for making adjustments or claiming refunds.
13. IRS Further Guidance: The IRS will be issuing further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before September 16, 2013.
14. State Taxes: State tax return filing status is still controlled by state law.  If same-sex marriages are not legal in their state then they cannot file as married.  This is the case even though the marriage took place in a state where same-sex marriages are recognized.
15. Estate Planning:  Review estate plans to take advantage of the federal estate and gift tax breaks now given same-sex marriages. For insights into estate planning please read Estate Planning 2013: Now What? A Must Read for Everyone
16. Estate Tax Refunds: Additionally, claims for refunds of any estate taxes paid on deceased spouses that are still open under the statute of limitations should also be carefully examined.
    • Taxpayers who wish to file a refund claim for gift or estate taxes should file Form 843, Claim for Refund and Request for Abatement.

These are just some of the tax and financial implications in this area.  Same-sex couples affected by these changes should explore estate planning, retirement planning, employee benefits, and social security implications with their estate planning attorney, accountant and financial adviser team.

Stay tuned because this area will continue to evolve and change.

As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

2013 Year End Tax Planning Strategies: Learn What Can Be Done Now To Save Taxes and Prevent Costly Mistakes

Don’t Wait For A Last Minute Miracle:
Get Busy Now on Year End Tax Planning

As the year-end quickly approaches, there is still time to do some year-end tax planning.  This 2013 tax year will be tough on many taxpayers due to recent tax law changes and the uncertain future of tax reform.  Basically, taxpayers will have to deal with the following recent tax law changes:

• Higher marginal income tax rates.
• Higher capital gain tax rates.
• Restoration of the phase out of itemized deductions and exemptions.
• The new 3.8 percent Medicare tax on unearned income, including interest, dividends and capital gains. etc.  For more details please read 2013 Sneaky New Tax – Not Too Early to Plan for 3.8 % Medicare Tax on Investment Income.
• The new 0.9 percent tax on earned income in excess of $200,000 for single taxpayers and $250,000 for married taxpayers filing jointly.
• Same Sex Couples:  The recent Supreme Court decision in Windsor may result in same-sex couples with dual income paying more income taxes filing jointly than if they were still able to file singly.

As always, it is essential to know the customary year-end planning techniques that can cut income taxes.  It all starts with a tax projection of whether you will be in a higher or lower tax bracket next year. Once your tax brackets for this year and next year are known, there are two basic income tax planning considerations:

• Should income be accelerated or deferred?
• Should deductions and credits be accelerated or deferred?

However, life is never that simple.  Tax law uncertainty, always makes for some real guesswork.  As discussed below, when it comes to certain deductions that have tax threshold limitations, bunching of deductions to one year may force the timing into a tax year where the tax bracket is lower than the other tax year in question. But this may be the only way to get a tax break for these deductions.

As a further irritant, year-end tax projections must take into account the maddening alternative minimum tax and the new parallel universe of the 3.8% medicare tax.  Yikes.

For discussion purposes, the following strategies assume that the taxpayer’s income will be higher next year.  Where income will be taxed at a higher tax bracket next year, accelerating income to this year results in less taxes being paid.  At the same time deductions and tax credits deferred into next year will become more valuable as they offset income taxed at a higher marginal bracket.

Accelerating income to the current year and deferring deductions must take into account the impact on cash flow and the time value of money when paying taxes on income a year earlier.  However, due to our current low-interest rate environment, time value of money implications are quite minimal and may not be a significant consideration.

If a taxpayer expects income to decrease next year they should use the opposite approach.

So be sure to remember that the following lays out the basic ideas for income acceleration and deduction/credit deferral where income projects to be taxed at a higher level next year.

Income Acceleration: 

For taxpayers who think that they will be in a higher tax bracket next year, here are some targeted forms of income to consider accelerating into this year.

• Bonuses: Receive bonuses before January 1 of the following year.  If your employer allows you the choice, this may result in some significant income tax savings to you.
• Accelerate billing and collections.  If you report income on a cash basis method of accounting, immediately sending out bills to increase collections before the end of the year may result in significant tax savings if you know income will be much higher next year.
• For Salary and Wages and Earned Income: Take Into Account the New 0.9% wage tax:  High income earners will pay an extra 0.9% in social security taxes on earned income above certain thresholds starting in 2013.  Where earned income is low this year and is going up next year, accelerating earned income into the current year may cut this wage tax on earned income entirely.
• Redeem U.S. Savings Bonds, Certificates of Deposit or Annuities:  Taking these items into income this year may make sense where income projects to be higher next year. (Be sure there are no penalties or surrender charges involved.)  Also where income this year will be below the new 3.8 percent Medicare tax threshold, accelerating this passive income may completely avoid this Medicare tax.  For more on this read 2013 Sneaky New Tax – Not Too Early to Plan for 3.8 % Medicare Tax on Investment Income.
• Capital Gains: Selling appreciated assets if you expect capital gains at a higher rate next year:  In such situation it may make sense to sell such assets before the end of the year.  For a complete discussion of this issue please see 2012 Year End Tax Planning: Should Taxpayers Sell in 2012 Before Rates Rise?  
  

Example:  Mr. Appreciation has low basis stock that has appreciated in value. The rate for capital gains can rise as taxable income increases.  So before selling any securities he needs to run the numbers to see if it makes sense to sell this year or next year or spread such sales between the two years. He also needs to consider in the 3.8 percent surcharge on capital gains and how such decision impacts itemized deduction limitations.

Important Planning Point:  For an older taxpayer or one in ill-health, this strategy may not make income tax sense.  When a person dies their assets get a step up in basis to the date of death value.  As a result, when the estate sells such assets there is no capital gain.  So a sale right before death would trigger a needless capital gain tax.

Planning Note:  The wash sale rules do not apply when selling at a gain, so taxpayers can cash out their gains and then repurchase identical securities immediately afterwards.

• Complete Roth conversions.  Taking into income the monies in IRA accounts in a year before your tax bracket is due to rise may make for some significant tax savings.
• Accelerate debt forgiveness income with your lender.  In addition to being taxed at a lower tax bracket this year, acceleration also may make sense because of the possibility that tax law reform may end this tax break.  See Expiring Provisions below.
• Maximize retirement distributions.  Remember the minimum required distributions (MRDs) are the amounts distributed each year to avoid the draconian 50% MRD penalty.  However, taxpayers with IRAs can choose to take larger distributions this year to have such income taxed at a lower income tax rate than the one projected in future years.
• Electing out or selling outstanding installment contracts.  Disposing of your installment agreement may bring the deferred income into this year at a lower tax rate than anticipated in future years.  It may be helpful to pay tax on the entire gain from an installment sale this year by electing out of installment sale treatment under Section 453(d) of the Internal Revenue Code, rather than deferring tax on the gain to later years.  Conversely, in certain situations installment sale treatment may be a better option since it allows for spreading of income over multiple years.  So it really depends on the specifics of each taxpayer’s tax situation.
• Take corporate liquidation distributions this year.  Senior or retiring stockholders contemplating the redemption or sale of their shares of stock in their corporation can save considerable taxes by selling their shares this year if their expected tax bracket will be higher in later years.  Warning:  On the other hand consider carefully the step-up in basis implications for older or infirm taxpayers before considering this tax maneuver.

Deductions and Tax Credit Deferrals:

For taxpayers who think that they will be in a higher tax bracket next year, here are some actions to consider in deferring deductions into next year.  Remember, we are assuming that income will be higher next year, so deductions are more valuable next year.  (Obviously, if income is higher this year, it is better to have deductions accelerated into this year).  In any event, taxpayers must watch out for the impact of the alternative minimum tax.

• Bunch itemized deductions into the year in which they can exceed the applicable threshold.  For certain expenses such as elective surgery, dental work, eye exams, it would be better to have it done in the year that you are already above the applicable AGI threshold.
• Where income will be greater next year, taking the standard deduction this year and bunching itemized deductions to next year would yield an optimum tax result.
• For medical expenses, the adjusted gross income (AGI) limitation rises to 10% in 2013 for those under age 65.  Those over age 65 still have an AGI limitation of 7.5%.  Taxpayers at age 64 this year and 65 next year may want to bunch elective medical procedures into next year to get over the lower threshold next year.
• Postpone paying certain tax-deductible bills until next year to generate a greater tax benefit.
• Pay fourth quarter state estimated tax installment on January 15 of next year.
• Postpone “economic performance” for tax-deductible expenses until next year if you are an accrual basis taxpayer.
• As mentioned above, watch the AMT. Missing the impact of the AMT can make certain year-end strategies counterproductive. For example, aligning certain income and deductions to cut regular tax liability may not work if the deductions reduce regular income but do not cut alternative minimum taxable income.  It is very easy to have your tax planning backfire by missing the difference between the regular tax and AMT tax rules.
  • Example and Important Warning: Do not prepay state and local income taxes or property taxes if subject to the AMT.  It will generate no income tax savings.

• Watch net investment interest restrictions.
• Match passive activity income and losses.
• Harvest tax losses by selling securities or mutual funds.  Selling shares of stock or mutual funds that have gone down in value can offset capital gains and generate a tax loss of up to $3,000 against other income.
  • Warning: If you want to buy back the same security beware of the so-called “wash sale” rules.  These rules are complex but with proper planning losses can be taken while avoiding the wash loss limitation rules.
• Purchase machinery and equipment before the end of 2013.  Even if you are in a higher tax bracket next year, it may make sense to take advantage of the generous current Section 179 deductions and 50% bonus depreciation.  These tax breaks may not last past 2013.  Or they may be significantly reduced next year.

Other Strategies:

• Credit Cards To Claim Deductions:  Expenses charged to credit cards before year-end are deductible this year even though paid next year.  Use credit cards to pay:
  • Business Expenses
  • Medical Expenses
  • Property Taxes
  • Other deductions

• Increase Withholding:  Many taxpayers pay both estimated taxes and withholding taxes. If you have fallen behind on quarterly estimates, it may be a good idea to increase withholding on your remaining wages to avoid underpayment penalties.
  • Key Tax Planning Point: The IRS treats withheld taxes as if spread out evenly throughout the year. This strategy can cut or even eliminate penalties for the failure to pay timely.
• Do not invest in mutual funds at year-end:  Many mutual funds pay accumulated dividends and capital gains in November and December.  This will result in a needless tax bill and a rude surprise come tax time for the unknowing investor.

Expiring Provisions:

In the past, Congress has extended many, but not all, expiring provisions to future years.  However, there is a lot of uncertainty now as there is talk of major tax reform and still out of control budget deficits.  Prudence may dictate the possible loss of some of the following tax provisions:

• Sales Tax Deductions:  This deduction has an uncertain future.  So for those in low or no income tax states or who are contemplating a very large purchase, completion before year-end may be warranted.
• IRA Distributions To Charity:  This provision also faces an unknown future.  Currently, the tax law allows those age 70 1/2 and older to make required distributions directly to charity.  This allows them to avoid income taxation on such distributions.  Note: They do not also get a charitable deduction for such contribution.
• Discharge of Principal Residence Debt:  Taxpayers who get discharged from debt on their home can avoid being taxed on this form of income.  Those taxpayers involved in a foreclosure should complete this transaction before year-end in the event this law is eliminated next year.
• Other Expiring Tax Breaks where the taxpayer may want to consider paying before year-end:
  • Residential Energy Property Tax Credit
  • Qualified Tuition Deduction
  • Contribution of Real Estate for Conservation
  • Teachers Classroom Deduction
  • Qualified Tuition Deduction
  • Van-pooling or Mass Transit Benefits
  • Mortgage Insurance Premiums

Final Thoughts and Warnings:

Remember that these are just some of the major year-end income tax strategies and are not all-encompassing.  Taxpayers must take into account possible tax law changes for next year and last-minute tax laws enacted before year-end.

Most importantly remember that income tax strategies depend on the specific income or expenses of each taxpayer and their overall income, gift and estate tax setting.  This discussion offers some, but not all tax strategies.

The one certainty in this uncertain tax environment is to “run the numbers” to find the best approach for each taxpayer’s particular tax and financial situation.

As always, it is quite beneficial to have tax counsel look at the details of your particular income tax situation to carve out specific tax strategies to cut taxes owed.

I hope this article has been of value to my readers. Please feel free to contact me, ask a question or make comments below.

New Inheritance Tax Exemption For Family Businesses In Pennsylvania

Pennsylvania Inheritance Tax Break For Family Businesses

Pennsylvania has just created a new tax break for transfers of businesses to certain family members.  This new inheritance tax law applies to estates of some one who dies on or after July 1, 2013.

Qualification For Inheritance Tax Exemption:

To qualify for this Qualified Family Owned Business exemption under new Section 9111(t), the following criteria must be met:

• Type of Organization that qualifies can be either:
  • A proprietorship or
  • Entity

  engaged in a trade or business;

• The entity or proprietorship had a Net Book Value of Less Than $5,000,000 at the date of death;
• The entity or proprietorship had been in existence for 5 years at the date of death;
• The entity or proprietorship had less than 50 employees at the date of death;
• The entity or proprietorship must be wholly owned by the decedent and other qualified family members (defined as qualified transferees as defined below).
• The transfer of ownership must be to qualified transferee in most cases individual family members under Section 9111(t)(5).  A “qualified transferee” is the decedent’s spouse, lineal descendent, sibling (and the sibling’s lineal descendants) and ancestors (and the ancestor’s siblings). The exemption is lost if the business does not continue to be owned by a “qualified transferee” for seven years after the death of the decedent;
• Where the transfer of an interest into an entity took place within one year prior to death, such transfer must have been the result of a legitimate business purpose;
• Family Ownership after death must continue for 7 years.  If this period of ownership is not met then inheritance taxes will have to be paid when ownership ceases. This is the so-called recapture tax and must be reported if this ownership period is not met.  Important Compliance Point: This requires annual certification to the Department of Revenue that the family-owned business interest qualifies for the exemption, as well as notification to the Department of Revenue within 30 days of any failure to qualify;
• Any expenses or debts related to or incurred in connection with this exemption are not allowed under new Section 9130 (5).

Entities Engaged In Investment Activities Do Not Qualify For This New Exemption:

This tax break is not available to entities with a principal purpose of “management of investments or income producing assets” held by such entity.  Section 9111(t)(5). The principal purpose of an entity cannot be simply managing its own investments.

Estate Planning Implications:

A cursory look at the new law appears to show that transfers to trusts would not be eligible for exemption.  Those attempting to do estate planning where they own an active business in Pennsylvania may have a very difficult choice to make.  They can either give the business outright to children to save inheritance taxes or they must give up this exemption if  family issues, financial reasons or federal estate tax considerations dictate the use of trusts.  For more insights into these estate planning implications please read Estate Planning 2013: Now What? A Must Read For Everyone.

Final Thoughts:

Since this law is so new and some of its terms may not be fully understood or defined, more guidance will probably be forthcoming from the Pennsylvania Department of Revenue.  Stay tuned.

Playing Games With Employees: IRS May Come Knocking

IRS Wants to Know: Are You Playing Games with Your Employees?

The Treasury Inspector General of For Tax Administration recently issued a report entitled Employers Do Not Always Follow Internal Revenue Service Determination Rulings that indicated the employers just do not get it when it comes to treating workers correctly for tax purposes.  This report sheds more light on non-compliance and will result in more audits of small businesses who have miss-classified workers as independent contractors.  So employers beware!

Employers illegally treating employees as independent contractors can come clean through a program called the Voluntary Classification Settlement Program (VCSP).  To explore in more detail the merits of this VCSP program and how it works, readers should look at Risky Business: Playing Fast and Loose with Worker Classification.  Basically, this program allows employers to voluntarily correct erroneously classified workers from independent contractors to employees in exchange for paying less taxes and penalties than if audited by the IRS.  Recently, the IRS provided some needed clarifications of this standard VCSP program under IRS Announcement 2012-46:

• An employer can now be eligible for this program even if being audited by the IRS, except for a payroll tax audit.
• An employer that is part of an affiliated group can not use the VCSP program where an employment tax audit involves one of its group members.
• An employer that is in court contesting classification of workers from a previous audit by the IRS or Department of Labor is not eligible for the VCSP program.
• An employer no longer has to agree to extend the limitation period on employment tax assessments as part of the closing agreement.  Under the original VCSP program, employers had to extend the statute of limitation for three years for the three taxable years after the date of the closing agreement.  This is no longer required under the standard VCSP program.

Additional Information and Insights:

For those interested in gaining greater insight into this problem and a lot more, please give a listen to my guest appearance on Money For Lunch.  We discuss not only the VCSP program but also explore the allowable “piercing of the corporate veil” by the IRS to impose individual personal tax liability on shareholders and officers for corporate tax obligations under Section 6672 of the Internal Revenue Code.  We also discuss related criminal tax implications.  So please click on the triangle to hear our discussion:

Bottom Line:

Employers should objectively and carefully review their employment policies.  If they are playing fast and loose with their classification of employees it could blow up in their face down the road.  The voluntary payments under this special program could be far less than the cost of an IRS employment tax audit for all open years resulting in the required payment of back taxes, interest and penalties.  With the IRS audit presence in this area, this may end up being a costly and in some cases a fatal gamble for a business and its shareholders or owners.  The sure thing is to use the current or the temporary VCSP to clean up a looming and expensive tax problem.

Estate Planning: Now What? A Must Read For Everyone

How Do I Create An Integrated Estate Plan?

We now know what the federal estate tax laws will be this year and in the future.  Our federal government has stated that these estate tax rules are now permanent after a decade of uncertainty.  (A cynic may say that these federal tax laws are permanent until our federal government says they are not!). Anyway, here are some of the more important federal estate tax law changes made on December 31, 2012 along with some related estate planning strategies:

• The federal estate and gift tax exemption is now permanently (there is that word again) $5,000,000, with annual inflation adjustments.  These inflation adjustments generate exemptions of $5,120,000 in 2012 and $5,250,000 in 2013, $5,340,000 in 2014 and $5,430,000 in 2015.
  • A husband and a wife each have this exemption, so a family can transfer $10,860,000 free of federal estate taxes in 2015. These very generous tax exemptions will allow the opportunity to transfer large amounts of wealth during lifetime or at death free of federal taxes.
  • Planning Point:  Taxpayers who used their full $5,120,000 exemption in 2012 can now make more gifts of $310,000 in 2015.
  • Planning Point:  With inflation adjustments each year, taxpayers can continue to transfer more each year.
  • Important Shift in Focus To State Inheritance Taxes:  Understand that we are only talking about federal estate and gift taxes and that these large exemptions are only applicable at the federal level. With these large federal exemptions, for most people, estate tax planning now will focus more on minimizing state inheritance taxes. For example, Pennsylvania does not follow the federal exemption rules and taxes almost all assets owned by a decedent.  To learn more about Pennsylvania inheritance tax rules see Pennsylvania Inheritance Tax: The Basics.
• Once assets are above the exemption threshold the estate tax rate is 40%.  This results in a very heavy tax bite and is a real concern for anyone above the threshold.  The following taxpayers may end up above the threshold:
  • A taxpayer or a surviving spouse with assets above the exemption threshold or
  • A family (husband and wife) that has accumulated wealth above the $10,860,000 threshold, or
  • A taxpayer that has made lifetime gifts that have exhausted or substantially depleted their exemption.  See the following Example 1.
• The tax law changes have once again unified the exemption for lifetime gifts and transfers at death.  So, if you use your exemption during your lifetime it is not available when you die.
  • Example 1:  Generous John, gave away his shares of stock of his business corporation valued at $5,000,000 to his son in 2012.  He uses his $5,000,000 exemption to transfer such shares free of gift tax.
  • Example 1A: Generous John dies in 2015 with other assets of $1,430,000 that make up his taxable estate. In 2015, he has a remaining exemption of $430,000 (2015 exemption of $5,430,000 less the $5,000.000 of his exemption used in 2012). Generous John has a taxable estate of $1,000,000 which results in $400,000 in federal estate tax liability.
• Portability is now permanent.  Portability allows for the exemption that was not used by the first spouse to die to be used by the surviving spouse.  In theory, this provision protects those who have failed to plan or for those who have made errors in estate planning.
  • Important Planning Point:  Portability should be looked at as a fallback position where there was no estate planning done.
    • Employing traditional estate planning techniques may prove more advantageous and in some cases is essential in crafting a well conceived estate plan. For example, in most situations the combined use of a unified credit and a marital deduction trust (or the use of a disclaimer trust mechanism) would result in better tax outcome than relying on portability.
    • In second marriages, it is often imperative to use  a certain form of marital deduction called a Qualified Terminable Interest Property (QTIP) trust, to provide for both the surviving spouse and children of a first marriage.
    • Where assets are expected to appreciate in value over time, use of a by-pass or unified credit trust would offer a better result than relying on portability.
  • There are some very important limitations and concerns with using portability, especially in second marriages or where the surviving spouse remarried.  These issues are more fully explored in my article entitled Estate Planning Mistakes: 5 Not So Easy Pieces.
  • Portability Does Not Save the GST Exemption:   The new tax act provides that the Generation-Skipping Transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5,000,000, adjusted for inflation). The GST tax, which is in addition to the federal estate tax, is imposed on amounts transferred (by gift or at death) to grandchildren or others more than one generation below the decedent.  The important point here is that “portability” does not apply to the generation skipping transfer (GST) tax rules. Where grandchildren and future generations are part of an estate plan, portability will not save the unused GST tax exemption of the first spouse to die.  In such cases, using something called a “dynasty” or GST exempt trust is the better course of action.
    • Caveat:   In situations where there the estate size is large and there are many generations who are going to share the estate, failure to understand and use the more traditional dynasty trust could result in a very expensive and disastrous mistake.
• Annual Donee Exclusion:  Although not part of the tax law changes, this traditional estate and gift tax planning tool allows for annual tax-free gifts of $14,000 in 2015 (up from $13,000 in 2012 as a result of the annual inflation adjustment).  As a result, taxpayers can now give up to $14,000 to as many people as they wish each year and not use up their unified credit or pay a gift tax.
  • Important Note:  Only gifts that qualify as “present interest” gifts are eligible for the annual donee exclusion.
  • Planning Point:  If you are married, your spouse can join you and, together, you can give up to $28,000 per person per year.
  • Planning Point:  This exclusion is in addition to the $5,250,000 estate tax exclusion and can be combined with such exclusion.  For more insight into how to combine these exclusions as well as the lack of marketability and minority interest discounts please read Gifting Shares of Stock In A Bad Economy.
• Capital Gains and Basis Implications:  Lifetime Gifts versus Transfers At Death:  Although not an estate tax rule, under the new federal tax rules, capital gains on appreciated assets will now be taxed at a 20% rate for taxpayers with income above certain thresholds.  Capital gains below these thresholds will be taxed at the previous 15% rate.  These rules bear heavily in the estate tax planning context especially where recipients receive lifetime gifts versus gifts received at death.
  • Important Tax Basis Rule:  Taxpayers who receive appreciated property by a lifetime gift take a carryover basis, while beneficiaries who receive assets at the decedent’s death get a step up in basis to the date of death value of such assets received.
  • Tax Disaster for the Uninformed, Do It Yourself Estate Planners:  Many times elderly people transfer real estate to children during their lifetime in trying to avoid probate.  For a recipient of such lifetime gift, a disastrous income tax result awaits the uninformed taxpayer as illustrated by the following Example 2.
  • Example 2:  Sam Senior is very sick and wants to avoid probate.  He transfers by quit-claim deed his real estate to his son, Sad Son.  Sam Senior bought his house in the 1970s for $17,000 and made improvements over time of $23,000.  As a result his adjusted basis is $40,000.  The house is now worth $540,000.
    • Sam Senior transfers the house to Sad Son in 2012.  Sad Son takes a carryover basis for the house of $40,000. Sad Son sells the house for $540,000 shortly afterwards and has a capital gain of $500,000 which he surprisingly and sadly finds out will cost him $100,000 (20% x $500,000) in federal taxes alone.  His accountant tells him there will also be state income taxes on this gain. Since he is a Pennsylvania resident, he will pay an extra $15,350 in Pennsylvania income taxes.
    • Alternate Universe:  Sam Senior consults with his tax/estate attorney who drafts a will that transfers the house to son at death. Sad (who now legally changes his name to Happy), has a basis of $540,000 upon his receipt of the house from the estate.  Happy, now sells the house and has zero, yes, zero capital gain (Sale Price, $540,000 less basis of $540,000 = 0)!
      • Note, state inheritance taxes may be applicable in certain states.  For example, in Pennsylvania there would be a 4.5% inheritance tax on the real estate, but this is a lot smaller cost than the capital gains that results from taking a carryover in basis via a lifetime gift.

Final Thoughts and Recommendations:

Federal Estate Tax Implications: The federal estate tax law changes provide for some very generous federal estate tax breaks.  For those close to or above the federal estate tax threshold, the discussion above has explored some of the many planning opportunities to save federal estate taxes.  Such taxpayers should not rely on portability and should meet with an estates attorney to plan the proper course of action based on their particular family situation, needs and goals.

Shift In Focus To State Inheritance Tax Matters: Taxpayers below the federal estate tax thresholds also must continue to plan but the tax focus needs to shift to minimizing state inheritance taxes.

Create An Estate Plan That Fits Your Particular Family and Financial Situation:  It is most important to recognize that everyone has a unique situation with various assets, family members and ideas on how their family members are to be provided for and who should be in charge once they are gone.  As a result, all taxpayers still need to set up an estate plan for non-tax issues such as making sure their assets go to their loved ones in the way they wish.  They need to choose the proper people to administer their estates and any trusts they create.

Young Families:  In younger families, determining a proper guardian for their children and setting up trusts for the protection of their assets and a distribution scheme for such children is of paramount importance and has little to do with taxes.  An objective and unbiased assessment of how much life insurance is required is often needed.

Second Marriages:  Many with second marriages face unique challenges.  An estate plan needs to be developed and implemented to meet the diverse needs and goals of such blended families.

Special Needs Trust:  Those with disabled children or those receiving government benefits may need special needs trusts.

Do Not Try This On Your Own:  Get an Experienced Estate Attorney:  Having experienced estate counsel explore these issues and offer various strategies is at the heart of estate planning.  Coordinating probate and non-probate assets into an integrated estate plan is often overlooked and little understood.

Attention To Details and Documentation: Finally, make sure that you have an experienced estate attorney that can create an integrated estate plan.  Such attorney should have the skills to draft appropriate wills, trusts, durable powers of attorney, living wills and other related documents tailored to your specific family and financial needs.

Please feel free to post comments or ask questions.

Liking and sharing this blog with others in cyberspace is always welcomed and appreciated.

As always, do not hesitate to contact me if you want further insight or need my advice or legal assistance.

Copyright © 2013, 2015 – Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

2012 Year End Tax Planning Strategies

With less than 30 days left in 2012, there is still time to do some year-end tax planning.  This 2012 tax year is more difficult in that no one knows how the tax laws may change before the end of the year.  With certain tax deductions and credits due to expire at the end of 2012 (sunset provisions) and new higher tax brackets kicking in next year (end of the Bush-era tax cuts), year-end tax planning is harder than ever.

However, income tax planning must go on even in this uncertain tax environment.  As a result, it is essential to know the customary year-end planning techniques that cut income taxes.

It all starts with a tax projection of whether you will be in a higher or lower tax bracket next year. Once your tax brackets for 2012 and 2013 are known, there are two basic income tax considerations:

• Should income be accelerated or deferred?
• Should deductions and credits be accelerated or deferred?

Example: For income taxed at a higher tax bracket next year, accelerating such income to 2012 results in less taxes being paid.  At the same time deductions and tax credits deferred into next year will become more valuable as they offset income taxed at a higher bracket.

However, life is never that simple.  Tax law uncertainty, especially this year, makes for some real guesswork.  As discussed below, when it comes to certain deductions that have tax threshold limitations, bunching of deductions to one year may force the timing into a tax year where the tax bracket is lower than the other tax year in question. Year end tax projections must take into account the maddening alternative minimum tax.

In any event, the following lays out the basic ideas for income acceleration and deduction/credit deferral in a rising income tax bracket environment.

Income Acceleration: 

For taxpayers who think that they will be in a higher tax bracket, here are some targeted forms of income to consider accelerating into 2012.

• Receive bonuses before January 1, 2013.  If your employer allows you the choice, this may create some significant income tax savings.  Also, be aware that certain high income earners will pay an extra 0.9% in social security taxes on earned income above certain thresholds starting in 2013.
• Sell appreciated assets.  With capital gains being taxed at a higher rate in 2013, it may make sense to sell such assets before the end of the year.  For a complete discussion of this issue please see 2012 Year End Tax Planning: Should Taxpayers Sell in 2012 Before Rates Rise?  Important 

Example:  Mr. Appreciation has low basis stock that has appreciated by $200,000 as of December, 2012.  He thinks he will need to liquidate his positions either this year or next. His $200,000 gain will generate $30,000 in federal taxes in 2012 (15% tax).  If Mr. Appreciation waits until 2013, the tax rate may be 25% (or more due to the 2013 higher capital gain rate and 3.8 percent surcharge and itemized deduction limitations) with a tax of $50,000 in 2013.  As a result,  a sale in 2012 may save $20,000.

Note, however, that for an older taxpayer or one in ill-health, this strategy may not make sense since there would be no capital gains (because of the step up in basis rules) if the assets passed through his or her estate.

Planning Note:  The wash sale rules do not apply when selling at a gain, so taxpayers can cash out their gains and then repurchase the securities immediately afterwards.

• Redeem U.S. Savings Bonds.  Be aware that starting in 2013, a new 3.8 percent Medicare tax on unearned income, including interest, dividends and capital gains, will take effect.  So cashing in these bonds may make sense in the proper situation. For more on this read 2013 Sneaky New Tax – Not Too Early to Plan for 3.8 % Medicare Tax on Investment Income.
• Complete Roth conversions.  Taking into income the monies in IRA accounts in a year before your tax bracket is due to rise may make for some significant tax savings.
• Accelerate debt forgiveness income with your lender.
• Maximize retirement distributions.  Remember the minimum required distributions (MRDs) are the amounts distributed each year to avoid the draconian 50% MRD penalty.  However, taxpayers with IRAs can choose to take larger distributions this year to have such income taxed at a lower income tax rate than in 2013.
• Electing out or selling outstanding installment contracts.  Disposing of your installment agreement may bring the deferred income into 2012 at a lower tax rate than anticipated in future years.  It may be helpful to pay tax on the entire gain from an installment sale in 2012 by electing out of installment sale treatment under Section 453(d) of the Internal Revenue Code, rather than deferring tax on the gain to later years.  Conversely, in certain situations installment sale treatment may be a better option since it allows for spreading of income over multiple years which may keep taxpayers below the modified adjusted gross income threshold.
• Accelerate billing and collections.  If you report income on a cash basis method of accounting, immediately sending out bills to increase collections before the end of the year may result in significant tax savings.
• Take corporate liquidation distributions in 2012.  Senior or retiring stockholders contemplating the redemption or sale of their shares of stock in their corporation can save considerable taxes by selling their shares in 2012.

Deductions and Tax Credit Deferrals:

• Bunch itemized deductions into 2013 and take the standard deduction into 2012.  Note, however, the AGI limitation rises to 10% in 2013 from the current 7.5% (except for those over age 65), so this limitation may dictate the opposite strategy in certain taxpayer situations.
• Postpone paying certain tax-deductible bills until 2013.
• Pay last state estimated tax installment in 2013.
• Postpone economic performance until 2013 if you are an accrual basis taxpayer.
• Watch adjusted gross income (“AGI”)  limitations on deductions/credits.  For certain expenses such as elective surgery, dental work, eye exams, it would be better to have it done in the year that you are already above the applicable  AGI  threshold.  However, it may be better to incur these expenses in 2012 where the applicable AGI limit (7.5%) is lower than the 2013 limit (10 % for those under 65).  It all depends on the particulars of each taxpayer.
• As mentioned above, watch the AMT. Missing the impact of the AMT can make certain year-end strategies counterproductive. For example, aligning certain income and deductions to cut regular tax liability may in fact increase AMT liability.  It is very easy to have your tax planning backfire by missing the difference between the regular tax and AMT tax rules.

Example: Do not prepay state and local income taxes or property taxes if subject to the AMT.  It will generate no income tax benefit.

• Watch net investment interest restrictions.
• Match passive activity income and losses.
• Purchase machinery and equipment before the end of 2012.  The very generous current Section 179 deductions decline in 2013 to $25,000 and there is no 50% bonus depreciation in 2013.

Final Thoughts and Warnings:

Remember that these are some of the customary year-end income tax strategies and are not all-encompassing.  Taxpayers must take into account slated tax law changes for next year and last-minute tax laws enacted before year-end.  Accelerating tax payments must take into account the impact on cash flow and the present value of money.  This is why it is essential to “run the numbers” to find the best steps to reduce the impact of these new tax laws.

Also keep in mind that recent tax law changes, like the 3.8 medicare tax that applies to 2013, bear heavily on income tax planning.  For more details please read 2013 Sneaky New Tax – Not Too Early to Plan for 3.8 % Medicare Tax on Investment Income.

Most importantly remember that income tax strategies depend on the specific income or expenses of each taxpayer and their overall income, gift and estate tax setting.  This discussion offers some but not all tax strategies.

As always, it is quite beneficial to have tax counsel look at the details of your particular income tax situation to carve out specific tax strategies to cut taxes owed.

Hurricane Sandy: Tax Deductions For Casualty Losses

My last post talked about when we can trash tax and other important records. Well, Hurricane Sandy brought a whole new meaning to the concept of trashing records and a whole lot more.

Experts estimate that Hurricane Sandy has caused $50 billion of damage.  Eqecat Inc., a financial advisory firm out of Oakland, California predicts that insurance will cover $10 to $20 billion of such losses.  Storm victims will be on the hook for the other $30 billion of losses.

A couple of points to keep in mind before talking about the casualty loss tax implications:

• If your house is damaged from this disaster, contact local building authorities to see if the home is inhabitable,
• Establish an insurance claim, but don’t settle immediately,
• Make temporary repairs and take other remedial action to prevent further damage to homes and belongings, and
• Take photos of the damages.

With so many lives in complete turmoil, many of us on the East coast  crushed by Sandy’s wrath are not thinking of  claiming a casualty loss for tax purposes. However, knowing about how taxpayers can claim tax deductions under casualty loss provisions of the Internal Revenue Code is essential in dealing with insurance companies.  While memories are fresh and evidence is still available, now is the time to develop, document and support such casualty losses.

To aid those affected by this devastation readers should look at my article entitled Casualty Losses For Hurricane Sandy.  This article details  the tax qualification rules for being eligible for casualty losses.  It is a must read for anyone devastated by Sandy.

Can I Trash It Now? Tax Record Retention Guidelines

Papers, papers and still more papers.  When can I destroy these documents?

There are no hard and fast rules in this area.  The following offers some general guidance to carefully consider when determining any destruction of documents.

Against the urge to purge, remember that maintaining documents and records is often essential if a tax audit by the IRS, state or local taxing authority occurs.  Be aware that it is the burden of the taxpayer to provide sufficient proof and support for any tax position taken on a tax return.  Prematurely disposing of relevant documentation and proof supporting a tax deduction or tax position could have a disastrous tax impact.

Tax rules offer some guidance as to minimum document retention periods. It is imperative to keep records such as receipts, canceled checks, and other documents that support an item of income or a deduction, or a credit appearing on a return until the statute of limitations expires for that return. Here are some of the key statute of limitation rules for federal tax returns:

• For most returns the statute of limitations is 3 years from the date you filed the return. However, the following are some very important exceptions to this 3 year statute of limitation.
• There is no period of limitations to assess tax when a return is fraudulent or when no return is filed.
• If income that you should have reported is not reported, and it is more than 25% of the gross income shown on the return, the time to assess is 6 years from when the return is filed.
• For filing a claim for credit or refund, the period to make the claim generally is 3 years from the date the original return was filed, or 2 years from the date the tax was paid, whichever is later.
• For filing a claim for a loss from worthless securities the time to make the claim is 7 years from the date the return was due.
• If you are an employer, you must keep all of your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later.

Additionally, it is often imperative to check state and local statute of limitation rules before destroying files and records.

Keep in mind that documents may need to be retained and preserved for legal reasons other than taxation, such as, insurance claims or facilitating the transfer of  assets in the case of deceased family member.  Documents like death certificates, estate tax closing letters should be kept indefinitely.

For more detailed guidance on how long to keep specific documents and other document retention considerations and safeguards, please read my article Record Retention For Individuals .

For more detailed guidelines for record retention rules and other protective housekeeping measures for businesses see Record Retention Guidance For Business: A Conservative and Basic Approach.

A discussion with your tax attorney and tax accountant may be a prudent and conservative course of action before destroying any documents or files.

Philadelphia Now Allows A Tax Credit for Hiring Veterans

Philadelphia Tax Breaks Involving Veterans

Philadelphia has recently amended its Business Privilege Tax (business income and receipts tax)  to allow a credit for employment of veterans of the Armed Forces.  This new Philadelphia tax law defines a “veteran” as a person who has received an honorable discharge, served a minimum of six months in active full-time duty within the past 10 years and has met the qualifications under the federal Vow to Hire Heroes Act of 2011. The period of eligibility for hired veterans is between July 1, 2012, and June 30, 2014.

The law requires that the veteran’s compensation is to other employees in the same position or, if a similar position does not exist, at an average hourly rate of at least 150% of the federal minimum wage.

The business will receive a credit of $2,000 for a full-time position, multiplied by the percentage of the tax year that the veteran worked for the business or $1,000 for a part-time position, multiplied by the percentage of the tax year that the veteran worked for the business.

The credit is available for a total of 24 months of employment, and the total amount of credit a business may receive for a full-time employee over all tax years is $4,000. For a part-time employee for the 24 months of employment, the total credit allowable for the business is $2,000.

This new law is the result of Bill No. 120491, City of Philadelphia, effective June 27, 2012

Risky Business: Playing Fast and Loose with Worker Classification

Risky Business 1920 Silent Film With Gladys Walton

In light of the IRS’s fairly recent Voluntary Worker Classification Settlement Program (VCSP) issued in 2012, employers need to consider the benefits and risks of their current classification of employees as independent contractors. This window of opportunity is only available before the IRS or Department of Labor initiates an examination.

Small companies and businesses of many sizes have classified their workers as independent contractors and not employees to gain the following illegal advantages and savings:

• Avoid paying payroll taxes including Social Security, Medicare, Unemployment, and Federal tax withholding.
• Avoid having to pay for medical insurance.
• Avoid making payments of contributions into employer retirement plans.
• Obtaining services at a fixed rate, no matter what the time required to complete the assignment.
• Reducing employee record keeping, clerical and other administrative cost savings.

These tempting advantages have created a tremendous incentive for employers to classify workers as independent contractors when they are truly employees.  The IRS has warned that it is stepping up its policing of this area.  Here are some of the costs and penalties employers face if caught by the IRS:

• Payroll tax liability, plus significant penalties and interest.
• Various civil and criminal sanctions brought by the IRS, including fines and imprisonment.
• Retirement plan disqualification or remediation and penalties.  If these workers were wrongly excluded from coverage under any and all retirement plans, such plans would not meet certain plan qualification tests and could be disqualified.  In the alternative,  the employer would have to go through an IRS plan remediation application and pay various penalties and costs to salvage the plan. For more details on plan remediation see Failing To Update Retirement Plans: Avoid Plan Disqualification & Penalties By Using the VCP Program
• Personal liability for corporate officers of up to 100% of the amount the employer should have withheld from the employee’s compensation in payroll taxes.  Section 6672 imposes personal liability on officers, shareholders and board of directors as “responsible persons.”  For more details read Personal Liability For Corporate Employment Taxes.
• Legal fees, the lost time spent litigating this matter and the related out-of-pocket costs of litigation.  In these cases, payments to accountants and other experts are necessary for the attorney to prepare for the case and for such experts to appear in court. Even if the case avoids full-blown litigation, legal fees and out-of-court settlement fees will result.

A battle with the IRS is only part of the employer’s problem.  Additionally, a disgruntled or vengeful worker can make real trouble for the employer by making the following claims against the employer:

• Medical coverage:  If the employer had medical plans for its other employees, these excluded workers may make claims for lack of coverage.
• Retirement Benefits:  For all the years in which they were erroneously treated as independent contractors, such workers may demand to have contributions made to the employer’s profit-sharing, 401(k), pension or other retirement plan.  This could be a very large liability if the claim involves multiple employees over multiple years.
• Other Fringe Benefits: In addition to retirement plans, workers may demand stock options, disability payments, workers’ compensation and any other fringe benefits being offered by the employer to its other employees.
• Overtime Pay:  These workers would be entitled to overtime pay under the Fair Labor Standards Act if the hours he or she provided to the employer in the past exceeded the standard workweek.
• Unemployment claims.  For those workers erroneously treated as independent, they may assert a claim to collect unemployment for past employment.
• Lawsuits:  Lawsuits brought against the worker may trigger legal action against the employer to hold the employer legally responsible.

Where the worker seeks reclassification and complains to the authorities, the IRS or the Department of Labor may then get involved by auditing the employer  on how it classifies all of its independent contractors. A full-blown audit could result in economic disaster or ruin for an employer.

Bottom Line:  Any employer playing fast and loose in this area needs to look at their employment practices very carefully.  For determining whether a worker is truly independent please read my article Employee or Independent Contractor?  Finally, see Employers Playing Tax Games with Workers: IRS Offers Way to Come Clean for the details and qualification requirements for coming within the IRS’s Voluntary Worker Classification Settlement Program (VCSP).

The key here is to get with your tax attorney to review your situation and take advantage of the VCSP before the IRS comes knocking on your door.

IRS Slams Taxpayers: Attention to Tax Details Matter

IRS Slams Taxpayers On Bad Documentation

Taxpayers found out the hard way that the documentation rules imposed by the IRS better be followed exactly and to the letter.  In Durden, TC Memo, 2012-140, taxpayers claimed a $22,517 charitable contribution for 2007.  The IRS disallowed this deduction and the United States Tax Court agreed.

The taxpayers had canceled checks and a letter dated January 10, 2008 from the church confirming this contribution.  Seems like that would be enough.  Wrong!

The IRS did not accept the church’s acknowledgement because it lacked certain language as required under IRS rules.  For a charitable contribution deduction, Section 170(f)(8) of the Internal Revenue Code requires that a monetary contribution of $250 or more must be substantiated by:

1. A contemporaneous written acknowledgment,
2. That indicates the amount paid by the taxpayer, and
3. Whether the organization provided any goods and services in consideration (or in exchange) for the contribution, and if so, a good faith estimate of the value of such goods and services.

The problem for the taxpayers was that the church failed to include part 3 in their January 10, 2008 letter to the taxpayers.  They then went back to the church and got a second letter dated January 21, 2009 that revised the first letter by containing the required language under part 3 of this test.

But now the problem was that the revised letter was too late so it could not be considered contemporaneous by the IRS.  To be contemporaneous under Section 170(f)(8)(C) of the Internal Revenue Code it must be obtained by the due date of the tax return (here April 15, 2008) plus any extensions or, if earlier, the date the taxpayer files the return.  So now the taxpayers flunked part 1 of the test!

You might think that this is pretty harsh since the taxpayer’s really came close here.  So did the taxpayers.  The taxpayers argued that since they substantially complied they should still get the deduction.  The substantial compliance test has been successfully argued where a taxpayer can show that despite strict compliance they have met the essential statutory purpose of such requirement.  The court pointed out that the essential statutory purpose of the acknowledgement rules are  two-fold:

1. Assist taxpayers in determining their deduction, and
2. To aid the IRS in processing returns.

The court determined that without a statement from the church that no goods and services were provided,  neither of these two essential statutory purposes can be met.

This is a pretty harsh result for the taxpayers, especially since it was clearly the church that failed to provide the requisite language.  But the object lessons here are clear.

First, when dealing with charitable contributions you better make sure this language is present, especially in cases where large gifts are involved.

Second, when it comes to taxes attention to details is essential.

Third and finally, complying with the various federal, state and local income taxes is complicated.  Having an attention-to-detail minded tax attorney, or tax accountant is greatly recommended and probably essential.  With the loss of this large charitable deduction and the cost to bring this matter before the United States Tax Court, the Durdens definitely found this out the hard way.

Helping Elderly Parents with Their Finances and Estate Plan

Estate Planning For Elderly Parents

As our older parents age it is harder for them to deal with the financial details of their lives. With the complicated financial products out there and the low-interest rate environment it becomes very difficult for them to make sound financial decisions. In addition, dealing with one’s own mortality can prevent parents from focusing on their estate plan. As many know, if they fail to have a will, trust or overall estate plan, the state will decide who gets their wealth via the laws of intestate succession.

The situation becomes even more acute in those many cases where there are second and sometimes third or more marriages. Most of these couples do not appreciate the problems that can occur for the surviving family members. A Russian Roulette situation can arise for the families depending on who dies first. Planning and careful drafting is almost certainly necessary in these situations to avoid family warfare and large and usually inevitable litigation costs. Couple this with the emotional toll that these situations engender, you can readily see why estate planning is so vital.  (For more on the estate planning process readers should explore Estate Planning Mistakes: 5 Not So Easy Pieces)

The point here is that children need to help their parents in getting their financial and estate plan in order. However, they must tread very carefully to avoid having their parents think they are acting in a self-serving way. Additionally, children should carefully deal with and tell their siblings of such involvement to avoid any later challenges of overreaching, duress, fraud and undue influence.

So how does one talk with their elder parents about these important issues? To get some ideas about how to approach parents on these vital issues please read my article entitled Estate Planning for Elderly Parents: Discussing Finances and Estate Planning with Your Aging Parents

Copyright © 2012 – Steven J. Fromm & Associates, P.C., 1420 Walnut Street, Suite 300, Philadelphia, PA 19102. All rights reserved.

New 2013 Medicare Tax: 3.8% Stealth Tax

The Supreme Court has recently ruled that the new health care act is constitutional.  As a result, on January 1, 2013, as part of this health care law, the new 3.8% medicare tax will start to impact many taxpayers.  It would seem prudent for taxpayers to plan now for this new stealth tax.   Basically, this new extra 3.8% tax applies to the lesser of

1. Net investment income or
2. The excess of modified adjusted gross income (MAGI) over the “threshold amount.”

Threshold Amount: The threshold amounts are dependent on the type of taxpayer.  Here are the threshold amounts for various taxpayers:

1. For married taxpayers filing jointly, the threshold amount is $250,000
2. Married filing separately, the threshold amount is $125,000
3. All other individual taxpayers, the threshold amount is $200,000.
4. For trusts and estates, the threshold amount is $11,650.

This is just a basic overview.  To learn more about this stealth tax please read 2013 SNEAKY NEW TAX:  Not Too Early to Plan For The 3.8 Percent Medicare Tax On Investment Income.  This article provides more details about this tax, its scope, limitations and exclusions.  The article also provides examples of how this tax operates.

With 2013 quickly approaching, it is not too soon to become aware of this new stealth tax and look at methods to possibly lessen the impact of this tax.

Summer Camp: Tax Breaks For Those Working or Looking For Work

Now that the summer is in full bloom, parents who have sent or considering sending their children to summer camps may not be aware of the tax implications.  Parents who have placed children in camp while they are working or looking for work may be eligible for various tax breaks such as the dependent care credit  and the deduction for medical expenses in certain special situations.  To get a better grasp of the various tax breaks and the special rules and limitations in this area readers should explore Summer Camp: Tax Treatment.

Quiet Disclosures of Offshore Foreign Accounts

Quiet Disclosures: Telling the IRS Quietly May Not Be A Good Idea

Taxpayers with foreign accounts are in a tight spot now.  They can take advantage of the current voluntary disclosure program  (as discussed Foreign Offshore Accounts: IRS Third Amnesty Program) to minimize their tax exposure and to resolve these looming and unresolved problems.  However this disclosure program brings IRS scrutiny and potential civil penalties, and in the most serious situations criminal penalties. In light of these exposures, some taxpayers with interests in foreign assets have tried to sidestep these issues by employing a strategy called a “quiet disclosure.”

The quiet disclosure is implemented by simply amending a previously filed tax return to show the foreign accounts, report the income associated with the account and paying the tax with the amended return.  The problem with this strategy is that the IRS has made clear that this strategy is not acceptable.  The IRS clearly states in its Questions and Answers of May 6, 2009 that quiet disclosures do not satisfy reporting requirements.  On June 1, 2011, IRS announced that it would be opening up examinations against such taxpayers who have employed this strategy.  They have made clear from Q&A #10 of 2009 and Q&A #15 of 2011 of their disclosure programs that such taxpayers who have made quiet disclosures would be best served to come forward to take advantage of the penalty framework of the voluntary disclosure programs.

Be aware that the civil and criminal penalties for foreign bank accounting reporting (hereinafter referred to as FBAR) violations are in most cases based on the intent of  the taxpayer.   (For more on these reporting requirements see Foreign Bank Account Reporting.) Where a taxpayer is aware of the FBAR requirements and the disclosure programs but knowingly attempts a quiet disclosure, the IRS may argue and a judge or jury may decide that this strategy is indicative of negligent, reckless, or perhaps willful conduct.

Equally important to note is that quiet disclosures may be  lacking in other ways.  Although amended returns (quiet disclosures) report income, taxes, and related interest, they do not show accuracy related penalties.  More importantly the amended return may not show the information required by the FBAR form (Form TD F 90-22.1) .

For taxpayers with foreign accounts they need to seek tax counsel to decide the proper course of action in this messy area.  But it would seem that using the quiet disclosure strategy would only compound the problem.  To take advantage of the IRS current amnesty program and to see the operative rules please read Foreign Offshore Accounts: IRS Third Amnesty Program.

Tax Practitioner Warning:  For those accountants subject to SSTS No.1, Tax Return Positions the following sobering warning should be kept in mind:  Tax advisors should “not take a questionable position based on the probabilities that the client’s return will not be chosen by the IRS for audit.”  Additionally, the various criminal and civil penalties under the Internal Revenue Code for tax practitioners should be taken very seriously in this context.  In light of these exposures, practitioners should take pause before  recommending a quiet disclosure.

FBAR Deadline is Quickly Approaching For Those With Foreign Bank Accounts

The filing deadline for FBAR is June 30, 2012, and there are no exceptions.  Be aware that FBAR filings  must be received by June 30, not just post-marked.

For more about FBAR filing requirements please read Foreign Bank Account Reporting at the following link: http://www.sjfpc.com/foreign_bank_account_tax_reporting_90-22-1.html

IRS Now Examining Recorded Deeds For Unreported Gifts

The IRS is now reviewing recorded deeds to discover gifts of real estate interests transferred without reporting such gifts on the Form 709 gift tax return. Please see my article entitled IRS Checking Real Estate Transfers For Unreported Gifts  that provides an overview of the federal gift tax and the related income tax implications at the following link: http://www.sjfpc.com/IRS_Auditing_Real_Estate_Gifts_Tax_Rules_Returns_Form_709.html  

This area of the law has taken on greater importance as the IRS has now begun an aggressive campaign in auditing taxpayers for gifts of real estate interests.  This is a must read for anyone contemplating a gift or death-bed transfer of real estate as well as real estate agents and real estate attorneys recommending gifting real estate.  Without insight into the gift and income tax implications huge tax mistakes may result.  

Bottom Line:  Before making any gift taxpayers would be well served  to discuss this strategy with their tax attorney or tax accountant to see if it really makes practical, financial and tax sense in your particular situation. 

 

Employers Playing Tax Games with Worker Classification: Part II: Employee or Independent Contractor?

Our previous post discussed the IRS new Voluntary Worker Classification Settlement Program (VCSP) offering past payroll tax relief when the employer agrees to reclassify workers as employees.  For the details and discussion of this VCSP program please see our just published article at my website at the following link:  http://www.sjfpc.com/IRS_Payroll_Taxes_VCSP.html.  Many have inquired as to what distinguishes an employee from an independent contractor.  For a discussion of this issue and the IRS and case law criteria involved please see our article entitled Employee or Independent Contractor? at http://sjfpc.com/IRS_tax_rules_employee_versus_independent-contractor.html.  Both of these articles can be seen at our website  (www.sjfpc.com).

New Tax Alert: Employers Playing Tax Games with Workers: IRS Offers Way to Come Clean

The IRS has just introduced a new Voluntary Worker Classification Settlement Program offering past payroll tax relief when the employer agrees to reclassify workers as employees.  For the details and discussion of this VCSP program please see my just published article at my website at the following link: http://www.sjfpc.com/IRS_Payroll_Taxes_VCSP.html at my website (www.sjfpc.com).

Hidden Offshore Bank Accounts: IRS Offers A Second Chance To Come Forward

The Internal Revenue Service announced on February 8, 2011 a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes.  Here are some of the basic provisions of this program.

 

1. Deadline To Come Forward: August 31, 2011

This second new voluntary disclosure initiative will be available to taxpayers through Aug. 31, 2011.

2. 2011 Offshore Voluntary Disclosure Initiative Makes Raises Penalty Charges and Makes Other Changes to the 2009 OVDP

The new IRS program is called the 2011 Offshore Voluntary Disclosure Initiative (OVDI). It includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting.

3. New Penalty Framework

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 12.5 or 5 percent penalties instead of the 25% penalty. Please see the discussion below for such exceptions.

4. Back Taxes Must Be Paid

Participants also must pay back-taxes and interest for up to eight years.

5. Additional and Usual Penalties Imposed

Taxpayers must pay accuracy-related penalties. No reasonable cause arguments can be made to avoid the such penalties. The IRS will also assert failure to file and failure to pay penalties.

6. Returns To Be Filed By August 31 Deadline

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.

7. Special 12.5% Category Instead of 25% Penalty

The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.

8. Special 5% Category Instead of the 25% Penalty

If a taxpayer meets all four of the following conditions, then the offshore penalty is reduced to 5%:

 (A) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account);

(B) has exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address;

(C) has, except for a withdrawal closing the account and transferring the funds to an account in the United States, not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and

(D) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

9. Special 5% Category for Foreign Resident

If a taxpayer is a foreign resident who was unaware that he or she was a U.S. citizen, then the offshore penalty is reduced to 5%.

10. Benefits of 2011 Initiative: Avoid Higher Penalties and Possible Criminal Prosecution

The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.

Copyright © 2011, Steven J. Fromm.  All rights reserved. No part of this article may be reproduced or used in any form or fashion without the written permission of Steven J. Fromm.

Failing To Update Retirement Plans: How to Avoid IRS Plan Disqualification & Penalties by Using VCP

In our fast paced world, many retirement plans are drafted and then often neglected.  In extreme cases, plans are put aside without ever being updated.  Some plan sponsors have failed to restate their plans for years or even decades.  For many individuals, retirement plan accounts represent the largest portion of their wealth.  As the following discussion will illustrate, the failure to protect this most valuable and important asset by keeping the retirement plan in full compliance with applicable retirement plan laws could result in some very nasty, costly and unforeseen financial repercussions.

The retirement plan laws have always required that plans be updated for tax law changes.  Before 2003, the IRS allowed plans to be periodically restated for tax law changes that occurred over many years.  This resulted in large, periodic major plan restatements.  However, since 2003 the IRS has required amendments to retirement plans for each new tax law resulting in more frequent “interim amendments.”  [For those of you interested in a more detailed discussion of these required interim amendments since 2003, please go to my questions answered at my Linked-In profile.]  For many plans, the deadlines for many of these plan restatements or interim amendments have now expired.  Current rules provide that plans that have not been redrafted to comply with required prior restatements or interim amendments cease to be qualified as of their applicable deadlines.

In the worst case scenario, the IRS may demand that the plan be retroactively disqualified.  If the IRS is successful in disqualifying the plan, the plan sponsor’s tax deductions for contributions taken in the year of disqualification and in later years would be disallowed.  The taxes owed by the plan sponsor due to the disallowance of previously claimed retirement plan deductions plus applicable interest and penalties could be enormous.  In addition, participants of the plan would have to treat as taxable income the value of their plan account as of the date of such disqualification.  The taxes, interest and penalties to the participants from the date of plan disqualification could be equally exorbitant. This would be a truly disastrous and harsh result for both the employer plan sponsor and participants in the disqualified plan.

However, in most cases, the current policy of the IRS is to impose monetary penalties instead of the more severe penalty of plan disqualification.  Even so, when the IRS raises these failures as the result of an audit the penalties can be quite severe.   Penalties can range from $2,500 to $80,000 depending on the failures involved and the size of the plan.  It is worth noting that in recent years, the IRS has increased its auditing of retirement plans.

 Here is Good News: How to Solve This Looming Problem 

The IRS has a voluntary remedial program called the VCP (voluntary compliance program) to correct these plan document deficiencies.  The IRS position is that retirement plans may be re-qualified only by having the plan sponsor voluntarily come forward before an IRS audit by submitting the newly drafted delinquent restatements and/or interim amendments to the IRS in accordance with some very detailed procedures and documentation pursuant to Revenue Procedure 2008-50.  Once the IRS reviews and hopefully approves the application and the newly drafted required documentation, the plan is deemed to be in full compliance with applicable law and such plan is retroactively tax qualified.

Instead of paying a steep monetary penalty, the VCP submission results in the paying of a filing fee to the IRS.  Sometimes, if the violation is quite limited the filing fee can be as low as $375.  (Remember, you will still need to pay for documentation services associated with plan restatements and interim amendments.  However, these costs would have been incurred in any event to keep your plan in full compliance with the law.)  The important point here is that the use of the VCP program avoids the risk of plan disqualification or the imposition of a large monetary penalty.

 How We Can Help:

Numerous VCP program applications under the applicable Revenue Procedure 2008-50 have been submitted by this office.  This application along with the needed plan restatements and interim amendments must be carefully drafted to ensure efficient negotiations and a successful outcome with the IRS.

The Bottom Line:

Plan sponsors should immediately and voluntarily move to correct plan deficiencies pursuant to the more taxpayer friendly and cheaper VCP program before the IRS audits your plan.  Once the IRS commences an audit, the VCP submission strategy is no longer an option and your plan is exposed to disqualification and/or severe monetary penalties.

Looking forward, you must establish a program with your plan adviser to ensure that your plan is kept in compliance with the laws concerning plan restatements, interim amendments and the changing IRS submission requirements and deadlines.  This will avoid having to deal with all of these problems again in the future.  In fact, the Revenue Procedure requires a disclosure in the VCP application as to what new procedures the plan sponsors will use to avoid this problem in the future.

 Do Not Wait

Do not wait for the IRS to audit your retirement plan as it then will be too late to get the cheaper and less painful VCP deal.

Copyright © 2009 and 2015, Steven J. Fromm

Michael Jackson & Farrah Fawcett: Estate Plan Wake Up Call

In the wake of the sad and tragic deaths of Michael Jackson and Farrah Fawcett, we are all reminded how fragile our lives can be and how quickly things can change. The death of these two iconic figures should be a call to many to put their estate plan in order. It should be noted that the reality is that most people die without wills in our country. Some really smart and famous people, Abraham Lincoln, Howard Hughes, and Pablo Picasso, die without taking the time to draft a will.

Many of us procrastinate, minimize our personal need or the legal importance of drafting wills, trusts, living wills, and durable powers of attorney. The complexities of combining and coordinating diverse assets such as individual assets, jointly held assets, retirement plans, life insurance, annuities and business interests seem just too daunting for some. For others, they do not realize the importance of looking at all of their assets from an overall perspective; namely, when all is said and done who ends up with what.  Is the division of assets fair and equitable to all concerned after the payment of taxes, debts and estate administration costs?

For many, Michael Jackson’s untimely death has raised these and many other estate planning issues. At this point, no one knows whether he had a will and/or trust for his kids, or whether his estate plan was up to date. But by looking at his situation (and speculating a bit), some important estate planning considerations for the rest of us can be explored:

Guardianship: It is unclear what provisions Mr. Jackson had in his will (assuming there is a valid will) for his children. The early word from the media is that this will be a messy battle in the courts over the issue of guardianship of his children, even if his will indicated his preference for guardian.  Even if  challenged, the designation of guardian in a will would still be a very significant factor in any court challenge and laying out your wishes is always a prudent thing to do in any event.  The object lesson is clear: Parents with young children clearly should see the need for a will that indicates their choice of guardian for their children.

Trusts: No one knows whether Mr. Jackson had set up trusts for his children. Although it appears that his estate is now insolvent, this situation will probably change with post-mortem sales of his music someday providing assets and wealth for his children (think after-death income of the Elvis Presley estate).  Hopefully, he set up trusts that will protect and manage his assets.  To increase the possibilities of becoming competent adults, perhaps he drafted provisions in his trust in a way that develops their sense of personal initiative and responsibility yet still provides for their basic needs.  Experienced estate planning attorneys explore this type of forward looking planning when it comes to dealing with children and their anticipated needs if parents die prematurely.

Specific Bequests: The media has speculated that a very large asset of his estate (his Beatles song rights) was gifted to Paul McCartney. This generosity may be commendable, but from an estate planning perspective this bequest may raise problems. First, if his estate is in fact insolvent, this bequeathed asset would not be available to his estate to be sold and the proceeds used to pay down estate debts and/or benefit his children. Secondly, generally, bequests like these are often times given in a way that they bear no estate taxes. This could distort how the assets are divided between beneficiaries. The point here is that this bequest may have made sense when the will was originally drafted when Mr. Jackson was wealthy, but this bequest could be quite problematic in the current situation. The lesson here is that an estate plan needs to be looked at periodically as the family needs and financial situations change over time.

Special Needs Trusts: Farrah Fawcett died leaving a son who is in jail with addiction problems. The issues for people with children with special needs is often minimized, overlooked or not fully considered. As her only child, did she leave all of her wealth to her son? Did her will provide that he was to get his inheritance at her death or did she provide for a trust for his benefit? If she established a trust, what kind of provisions and conditions did she make in providing benefits to him? These tough questions arise not only for children with addiction issues, but for children with cognitive impairments, physical disabilities and emotional issues.  In addition, special needs trusts may be required where children are receiving public assistance from state and local governments.

The Bottom Line: Protect your family and protect your hard earned wealth. Spend the time to plan your affairs with an experienced estate planning attorney.  Remember, if you die without a will and trust, your state intestacy laws will control who will get your assets and how they get your assets. When young children are involved, courts generally place the children’s inheritances in trust in accordance with what a judge deems appropriate.  In addition, the judge will determine who will be the trustee of any trust they impose on your children and they will determine who should be the guardian of your children. These and other important considerations should be determined by you and not by a court of law, so do it and do it now so you do not leave problems like the ones Michael Jackson and Farrah Fawcett may have left behind.

© Steven J. Fromm, 2009