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Redo Your Estate Plan Before You Remarry

Monday, August 29th, 2011 by Moore McLaughlin

If you are getting remarried, you obviously want to celebrate, but it is also important to focus on less exciting matters like redoing your estate plan. You may have created an estate plan during your first marriage, but this time it will probably be more complicated–especially if you have children from your first marriage or more assets. The following are some pointers for ensuring your interests are taken care of when you remarry:

  • Take an inventory. The first thing you and your partner should do is each take an inventory of your assets and debts and share it with the other person. Don’t forget to include life insurance policies and retirement plans in your inventories. It is important to be open and honest about money if you want to prevent bad feelings in the future.
  • Decide how you want to handle finances. Once you know what you are dealing with, then you need to decide if you want to combine (or not combine) assets when you are married. For example, if one partner is selling a house and moving in with the other partner, will he or she contribute to the cost of the house? If one partner has significant debt, you may not want to combine finances or make any joint purchases. These decisions need to be made upfront so everyone is clear on what to expect.
  • Decide what you want to happen when you die. You and your future spouse need to figure out where each of you wants your assets to go when you die. If you have children from a previous marriage, this can be a complicated discussion. There is no guarantee that if you leave your assets to your new spouse, he or she will provide for your children after you are gone. There are a number of options to ensure your children are provided for, including creating a trust for your children, making your children beneficiaries of life insurance policies, or giving your children joint ownership of property. Even if you don’t have children, there may be family heirlooms or mementos that you want to keep in your family. Again, open discussions can prevent problems in the future.
  • Consult an elder law or estate planning attorney. Even if you don’t have a lot of assets, you should consult an attorney, especially if you have children. You will definitely need to update your will. You may also need to update or create other estate planning documents such as a durable power of attorney and a health care proxy. If you have significant assets, a prenuptial agreement may be appropriate. In addition, the attorney can help you decide if a trust is necessary to protect your children’s interests.
  • Change your beneficiaries. You may want to change the beneficiaries on your life insurance policy, annuity, and/or retirement plan. If you are divorced, however, you may not be able to change some of the beneficiaries. Bring your divorce decree with you to the attorney so he or she can make sure you do not violate the decree. If you can’t change your beneficiaries, you may want to buy additional life insurance or retirement plans that will include your new spouse.
  • Consider a prenuptial agreement. While you are intending to stay married, things happen. Unlike a first marriage, you may be bringing property to this marriage that you spent decades accumulating and you may be merging two families. You need to decide together what your intentions are for the use of funds while you are living together, if you get divorced and when one of you dies before the other. Failure to think and plan ahead can mean severe heartache and financial costs for you and your family.
  • Consider purchasing long-term care insurance.The physical, emotional and financial cost of long-term care can deplete the savings of all but the most wealthy. While you may be willing to spend your lifetime of savings on the care of a spouse with whom you raised a family and accumulated the funds, you may not want to lose this to the care of a relatively new spouse. Long-term care insurance, while expensive, can permit you and your new spouse to get the care you need without impoverishing the other.

The most important thing to remember is to be open and honest with your future spouse and your family members about your wishes.

For more information on estate planning, please contact Jill E. Sugarman, Esq. at JSugarman@McLaughlinQuinn.com or by phone at 401-421-5115 ext. 215.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, Tax planning

Seven Tax Tips for Recently Married Taxpayers

Thursday, August 25th, 2011 by Moore McLaughlin
IRS Summertime Tax Tip 2011-20, August 19, 2011

With the summer wedding season in full swing, the Internal Revenue Service advises the soon-to-be married and the just married to review their changing tax status. If you recently got married or are planning a wedding, the last thing on your mind is taxes. However, there are some important steps you need to take to avoid stress at tax time. Here are seven tips for newlyweds.

  1. Notify the Social Security Administration Report any name change to the Social Security Administration so your name and Social Security number will match when you file your next tax return. File a Form SS-5, Application for a Social Security Card, at your local SSA office. The form is available on SSA’s website at www.ssa.gov, by calling 800-772-1213 or at local offices.
  2. Notify the IRS if you move If you have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from www.IRS.gov or order it by calling 800–TAX–FORM (800–829–3676).
  3. Notify the U.S. Postal Service You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence or refunds. 
  4. Notify your employer Report any name and address changes to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year. 
  5. Check your withholding If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on www.irs.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will give you the information you need to complete a new Form W-4, Employee’s Withholding Allowance Certificate. You can fill it out and print it online and then give the form to your employer(s) so they withhold the correct amount from your pay.
  6. Select the right tax form Choosing the right individual income tax form can help save money. Newly married taxpayers may find that they now have enough deductions to itemize on their tax returns. Itemized deductions must be claimed on a Form 1040, not a 1040A or 1040EZ.
  7. Choose the best filing status A person’s marital status on Dec. 31 determines whether the person is considered married for that year. Generally, the tax law allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but usually filing jointly is more beneficial.

For more information about changing your name, address and income tax withholding visit www.irs.gov.  IRS forms and publications can be obtained from www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, Tax planning

Using IRAs in Estate Planning

Monday, August 22nd, 2011 by Moore McLaughlin

Individual Retirement Accounts (IRAs) are a popular investment tool for retirement, but they also need to be taken into account when doing estate planning. Although IRAs can be used to provide for heirs either directly or through a trust, to what extent your heirs will benefit from the IRA and avoid unnecessary taxes depends on proper planning.

What Is an IRA?
IRAs are personal savings plans that allow you to set aside money for retirement and create tax savings. The advantage of IRAs is that you may be able to deduct some or all of your contributions to an IRA from your taxes and also be eligible for a tax credit equal to a percentage of your contribution. Earnings in a traditional IRA are generally are not taxed until distributed to you. At age 70 1/2 you have to start taking distributions from a traditional IRA. Earnings in a Roth IRA are not taxed nor do you have to start taking distributions at any point, but contributions to a Roth IRA are not tax deductible. Any amount remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.

Rule Number One: Name Beneficiaries
From an estate planning perspective, the most important thing to remember with an IRA is to name a beneficiary. While a spouse is usually the logical choice for a beneficiary, you should be sure to name contingent beneficiaries as well. If you and your spouse died at the same time and there was no contingent beneficiary, then the IRA would go to your estate and be subject to probate (the legal process of administering the estate of a deceased person).

Stretching an IRA
If you don’t need the funds in your IRA for retirement and want to use them to provide for your beneficiaries instead, you may be interested in “stretching out” your IRA. To do this, when you reach 70 1/2, take only the required minimum distributions, leaving more assets in your IRA. When you die, your beneficiary can also stretch distributions out over his or her lifetime and then designate a second-generation beneficiary. It makes sense to name a young beneficiary because the younger the beneficiary, the smaller each distribution must be, which gives the funds in the IRA extra tax-deferred years to grow.

Trusts as Beneficiaries
In some cases, it may make sense to name a trust as a beneficiary. This is particularly true if you have minor children, children with special needs, or a beneficiary with poor spending habits. But the trust must be properly drafted to avoid negative tax consequences. If the trust is a “see-through” trust or “conduit” trust, then the distributions from the IRA to the trust after the participant’s death can be stretched out over the life expectancy of the oldest trust beneficiary. If you are planning to leave your IRA to a trust, you must consult with your attorney to ensure that the trust is properly drafted.

An IRA can be a valuable part of an estate plan, but the rules can be complicated. Consult with a qualified elder law or estate planning attorney, such as Jill E. Sugarman, Esq. to find out your options.  You may reach Attorney Sugarman at 401-421-5115 ext. 215 or by e-mail at JSugarman@McLaughlinQuinn.com.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, Self-directed IRAs, Tax planning

Massachusetts Enacts 2011 Sales Tax Holiday and Provides Guidelines

Monday, August 8th, 2011 by Moore McLaughlin

On August 1, 2011, Massachusetts Governor Deval Patrick signed legislation, establishing a sales tax holiday on August 13 and 14, 2011. The bill provides that the state sales tax will not be imposed on nonbusiness sales at retail of tangible personal property with a purchase price of $2,500 or less. Telecommunications, tobacco products subject to the cigarette excise tax, gas, steam electricity, motor vehicles, motorboats, and meals will be excluded. Transfer of possession of or payment in full for the property shall occur on one of those days, and prior sales or layaway sales are ineligible. The Department of Revenue has issued guidelines implementing the 2011 sales tax holiday. (applicable to sales on 08/13/2011 and 08/14/2011)

Qualifying purchases. The sales tax exemption applies to sales of tangible personal property for personal use only. Purchases exempt from sales tax are also exempt from use tax. Therefore, eligible items of tangible personal property purchased on the Massachusetts sales tax holiday from out-of-state retailers for use in Massachusetts are exempt from Massachusetts use tax.

Nonexempt sales. The sales tax holiday does not apply to sales of motor vehicles, motorboats, meals, telecommunications services, gas, steam, electricity, tobacco products, and any single item costing in excess of $2,500.

“Motor vehicle” means a motorized, self-propelled vehicle which is constructed and designed for transportation or travel over a land surface, including low-speed vehicles and limited use vehicles, but not including motorized bicycles. It also means snow vehicle and recreation vehicle. Rentals of motor vehicles are also not eligible for the holiday.

Motorboats, including jet skis, are not exempt under the sales tax holiday. Generally, the sales tax holiday will apply to purchases of canoes, kayaks, rowboats, and other types of watercraft with no mechanical propulsion, provided that the sales price is $2,500 or less.

“Meals” are any food or beverage, or both, prepared for human consumption and provided by a restaurant, where the food or beverages is intended for consumption on or off the restaurant premises, and includes food or beverages sold on a “take out” or “to go” basis, whether or not they are packaged or wrapped and whether or not they are taken from the premises of the restaurant.

Gas for purposes of the holiday refers to natural gas. Sales of gasoline are not subject to the sales tax.

“Telecommunications services” are any transmission of messages or information by electronic or similar means, between or among points by wire, cable, fiber optics, laser, microwave, radio, satellite or similar facilities but not including cable television. Sales of prepaid calling arrangements and cards are not eligible for the sales tax holiday. Telecommunications equipment, such as a telephone or cell phone purchased for nonbusiness use, is eligible for the sales tax holiday

Tobacco products include cigarettes, cigars and smoking and smokeless tobacco. Layaway sales do not qualify for the exemption even if the last required payment or payments necessary to complete the transaction are made on August 13 or 14, 2011. Sales of the excluded items remain taxable.

Specific rules. The Department provided specific rules to be applied by retailers in administering the Massachusetts sales tax holiday exemption.

Threshold: Generally, sales or use tax is due on the entire sales price of a single item worth more than $2,500. The sales price is not reduced by the threshold amount. However, since there is no sales tax on any article of clothing worth less than $175, only the increment of the sales price of the article of clothing over $175 is subject to tax.

Multiple items on one invoice: Separate invoices do not have to be prepared when a customer purchases multiple items during the sales tax holiday. As long as each item is priced $2,500 or less, there is no upper limit on the tax-free amount each customer may purchase.

Bundled transactions: When several items are offered for sale at a single price, the entire package is exempt if the sales price of the package is $2,500 or less. Items that are priced separately and are to be sold separately qualify for the sales tax holiday exemption if the price of each item is $2,500 or less.

Coupons and discounts: If a store coupon or discount reduces the sales price of an article, the discounted sales price determines whether the sales price is within the sales tax holiday threshold. If the purchaser bought both an eligible property and a taxable property and the coupon or discount applies to the total amount paid by the purchaser, the seller allocates the discount on a pro rata basis to each article sold.

Exchanges: In case of an even exchange of an eligible item purchased during the sales tax holiday no tax is due even if the exchange is made after the sales tax holiday.

Special orders: Special order items are eligible for the sales tax holiday exemption provided they are ordered and paid in full on the sales tax holiday weekend and the cost of each item is $2,500 or less even if the items are delivered at a later date. A prior special order purchase with a deposit made before August 13, 2011 will not qualify for the sales tax holiday exemption even if the customer pays the entire remaining balance due on August 13 or 14, 2011.

Rain checks: Eligible property bought with the use of a rain check during the sales tax holiday weekend qualifies for the exemption regardless of when the rain check was issued. Issuance of a rain check during the sales tax holiday weekend will not qualify otherwise eligible property for the sales tax holiday exemption if the property is actually purchased after the sales tax holiday.

Rentals: Generally, rentals for 30 days or less of eligible tangible personal property are eligible for the sales tax holiday even if the rental period covers days before or after the holiday provided payment in full is made during the sales tax holiday weekend.

Rebates: A rebate is generally treated as a cash discount and is excluded from the sales price. So, the discounted sales price determines whether the sales price is within the sales tax holiday threshold. If the customer receives a rebate after the sale by mailing a coupon to the manufacturer, the full purchase price of the property determines whether the sales price is within the sales tax holiday price threshold and tax must be charged on the full purchase price if it is over $2,500. If the customer receives a cash discount from the vendor upon the purchase of tangible property and a manufacturer’s rebate after the sale, only the cash discount given by the vendor is excluded from the sales price for purposes of the sales tax holiday exemption.

Internet sales: An eligible property ordered over the Internet is exempt if it is ordered and paid for on August 13 or 14, 2011, Eastern Daylight Time, even if the property is delivered after the sales tax holiday period.

Splitting items normally sold together: Articles normally sold as a single unit cannot be priced separately and sold as individual items in order to qualify for the sales tax holiday exemption.

Returns: Under the law, sales tax may only be refunded if returns are made within 90 days of the sale. During the 90-day period after August 13 or 14, 2011, a retailer may not credit a retail customer who returns an item that could have qualified for the sales tax holiday exemption, unless the customer provides a receipt or invoice showing the tax was paid or the seller’s records show that tax was paid.

Erroneously collected taxes: Customers who were erroneously charged sales tax for an exempt purchase may obtain a tax refund from the vendor. The vendor that has remitted erroneously collected tax to the Department may file an abatement application within three years with satisfactory evidence that the vendor credited or refunded the tax to the purchaser.

Retailers’ responsibilities. All Massachusetts businesses normally making taxable sales of tangible personal property on August 13 and 14, 2011 and out-of-state retailers registered to collect Massachusetts sales and use taxes must participate in the sales tax holiday. Any sales or use tax erroneously collected by a retailer during the sales tax holiday must be remitted to the Department. Retailers must keep normal business records showing the date of sale, items purchased and selling price. Purchasers paying for tangible personal property with business credit cards or checks must be charged tax on the items purchased. Normal business records showing the date of sale, items purchased, and selling price must be kept by the retailer/vendor. However, a separate certification from the purchaser on transactions of $1,000 or more will not be required for the 2011 sales tax holiday.

Penalties. Retailers that back-date sales occurring after August 14, 2011 or that forward-date sales that occurred before August 13, 2011 in order to make them appear to qualify for the sales tax holiday may be subject to the tax evasion penalties of Mass. Gen. L. § 73 , including a felony conviction, a fine of not more than $100,000 or $500,000 in the case of a corporation, or by imprisonment for not more than five years, or both, and may also be required to pay the costs of prosecution.

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Posted in IRS and state tax collections, Tax Current Events and News, Tax planning

Two Tax Court Decisions Clarify When Long-Term Care Expenses Are Deductible

Thursday, July 28th, 2011 by Moore McLaughlin

Long-term care can be very expensive, but many long-term care expenses can be deducted from your taxes. Two important recent decisions by the U.S. Tax Court provide guidance on when caregiving services are deductible. In one decision, the court ruled that payments to non-medical caregivers are still deductible as medical expenses; in the other, the court held that a written agreement is required in order for a deceased woman’s estate to deduct more than $1 million in care that her son allegedly provided her.

In the first case, Estate of Lillian Baral v. Commissioner, Lillian Baral suffered from dementia and her doctor recommended that she get 24-hour-a-day care. Her brother hired caregivers to assist Ms. Baral with daily activities. On her tax return, Ms. Baral included a deduction for medical expenses for the payments to the caregivers. The IRS said the expenses were not deductible and asked for more money. Following Ms. Baral’s death, her estate appealed the matter to the U.S. Tax Court.

Under tax law, expenses for medical care may be claimed as an itemized deduction if they exceed 7.5 percent of adjusted gross income. (Note that this threshold will rise to 10 percent of adjusted gross income in 2012.) The definition of medical expenses includes the cost of long-term care if a doctor has determined you are chronically ill. “Chronically ill” means you need help with activities like eating, going to the bathroom, bathing, and dressing, or you require substantial supervision due to a severe cognitive impairment.

The Tax Court agreed with Ms. Baral that the payments to the caregivers for assisting and supervising Ms. Baral are deductible medical expenses. The expenses qualified as long-term care services even though the caregivers were not medical personnel because a doctor had found that the services provided to Ms. Baral were necessary due to her dementia.

In the second case, Estate of Olivio v. Commissioner, New Jersey resident Anthony Olivo provided nearly full-time care to his mother from 1994 to 2003, during which time he largely abandoned his practice as an attorney. After his mother died, Mr. Olivo became administrator of her estate.

Mr. Olivo filed a tax return for the estate and claimed a deduction of $1.24 million as a debt he said the estate owed him for the care he had provided his mother over the years. He claimed he had an oral agreement with his mother that after she died she would compensate him for his services. The IRS disallowed the deduction and Mr. Olivo filed a petition with the Tax Court.

The U.S. Tax Court agreed with the IRS that the estate is not entitled to the deduction. Applying the law in New Jersey, which presumes that services to a family member living in the same household are given for free (many states have similar laws), the court ruled that without a written agreement between Ms. Olivo and her son, it must assume that Mr. Olivo provided the services without any expectation he would be repaid.

Check with your CPA to determine if your long-term care expenses are deductible.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, IRS and state tax collections, Tax Current Events and News, Tax planning

Proposals to reform or eliminate the mortgage interest deduction

Thursday, July 21st, 2011 by Moore McLaughlin

As lawmakers continue to debate how to handle the nation’s debt and do “something big” rather than simply patch the problem, it seems probable that many broader tax reform issues may resurface during the course of the negotiations. One such issue, which was addressed by President Obama in his 2012 and 2011 budget proposals, is the mortgage interest deduction—one of the largest tax expenditures. According to various estimates, the deduction cost the Treasury Department somewhere between $80 and $103 billion in 2010, and its value over the 10-year budget window is expected to exceed $1 trillion. This post examines the mechanics of the deduction, arguments for and against reforming it, reform proposals, and the projected effect of any changes on both taxpayers and the budget.

Background. Interest paid with respect to a mortgage on real estate is deductible interest on indebtedness. Itemizing taxpayers can deduct their mortgage interest on up to $1 million of qualifying acquisition debt on a qualified principal and, if applicable, secondary residence. A residence includes a house, condominium, cooperative, mobile home, house trailer, or boat. In effect, this deduction reduces the after-tax cost of financing a home. In contrast, taxpayers are not permitted to deduct the costs of renting a home.

Itemizing taxpayers can also deduct interest on up to $100,000 ($50,000 for married individuals filing separately) of home equity debt—i.e., debt secured by a taxpayer’s qualified residence up to the fair market value of the residence, as reduced by the amount of acquisition indebtedness on it.

Arguments for and against reforming the deduction. The mortgage interest deduction is often criticized as being an “upside-down” subsidy, in that it tends to provide greater benefit to taxpayers with higher incomes. The amount of interest paid by lower- and moderate-income taxpayers is less likely to be sufficiently high to make it worthwhile to forego the standard deduction, so they are less likely to claim any benefit from it.

Proponents of the deduction argue that it encourages home ownership and makes it affordable to taxpayers who would otherwise not be able to own a home. Critics claim in response that, rather than encouraging home ownership, the deduction actually encourages middle-class and wealthy taxpayers to take on more debt and buy larger homes than they otherwise would. Further, critics argue that the deduction tends to benefit taxpayers with larger incomes who likely would have purchased a home regardless of the deduction.

M&Q illustration : A married couple who takes out a $150,000 mortgage on January 1, 2011, payable over 30 years with 7% interest, pays $9,584.85 in interest in the first year. Unless the couple has other itemized deductions, they may simply opt for the $11,400 standard deduction.

If the same couple were to double their mortgage to $300,000, same interest and term, their interest payment in the first year is $19,169.71.

If the couple were to again double their mortgage to $600,000, the interest payment would be $38,339.42.

Critics of the deduction also claim that the deduction artificially drives up home prices. However, this same argument is cited by its proponents, who observe that eliminating the deduction could further impact home prices in an already depressed market.

M&Q observation: The effect of driving up prices may have contributed to the problem of “underwater” mortgages, where taxpayers owe more on their homes than the home is actually worth.

Proposals. A number of different proposals have been advanced regarding the mortgage interest deduction. In light of the popularity of the provision, and the strength of the real estate lobby, it appears unlikely that it would be repealed outright. In general, the proposals tend to focus on converting the deduction to a credit, capping the maximum mortgage amount, and limiting the credit to a primary residence.

The President’s Fiscal Commission proposed a 12% nonrefundable credit on up to a $500,000 mortgage, with no credit for a second residence or for home equity. The Debt Reduction Task Force would have a 15% refundable tax credit capped at $25,000. Other proposals suggest a 20% credit, whereas another proposal is to simply have a fixed credit for owning a home as opposed to having a mortgage.

President Obama’s 2012 budget proposal, as well as his 2011 proposal, suggested capping itemized deductions, including mortgage interest, for taxpayers in the top two tax brackets (33% and 35%). Under the proposal, these taxpayers would only be able to reduce their tax liability by a maximum of 28%.

M&Q illustration : The current structure of the mortgage interest deduction reduces the after-tax cost for each $100 borrowed by a taxpayer in the 35% bracket to $65. However, the after-tax cost for each $100 borrowed by a taxpayer in the 10% bracket is $90. In other words, the higher a taxpayer’s tax bracket, the greater relative benefit he will receive from the deduction. The Administration’s proposal would limit the benefit to higher-income taxpayers by five or seven percentage points, such that the after-tax cost for each $100 borrowed would rise to $72.

M&Q observation: The effect of this proposal on taxpayers who are subject to the alternative minimum tax (AMT) would depend on a number of factors, including the taxpayer’s particular mix of income and deductions and the taxpayer’s marginal statutory rate. Although AMT taxpayers are already effectively subject to a 28% limit on deductions, the President’s proposal has an AMT element that would nonetheless result in an increase in the tentative minimum tax liability of certain AMT taxpayers.

Economic effect. Given the amount of foregone revenue from the deduction, the effects of reforming or repealing the provision could be significant.

If the deduction was repealed flat out, the Urban-Brookings Tax Policy Center (TPC) estimates that the average tax bill of those who claim the mortgage interest deduction would increase by $710. However, this increase would vary widely among taxpayers—those with $30,000 to $40,000 incomes would face an average increase of $70, whereas taxpayers making over $1 million would face an average increase of $4,000. However, given the popularity of the deduction, its outright repeal seems unlikely.

According to the TPC, replacing the current mortgage interest deduction with a 20% nonrefundable credit, limiting mortgages eligible for the credit to $500,000, and limiting the credit to primary residences would only have a nominal or positive effect on the majority of the tax bills of those who claim the deduction. Again, those who would face the largest increase are taxpayers in the top tax brackets with the largest mortgages.

The economic effect of replacing the deduction with a flat credit for home owners, regardless of whether their home debt-financed, would obviously depend on the amount of the credit. In general, credits are considered more progressive than deductions, and the benefit of a flat credit to higher-income taxpayers would presumably be less than that under the current regime. However, the incentive towards home ownership would remain intact.

The Joint Committee on Taxation estimates that President Obama’s proposal to limit upper-income taxpayers’ itemized deductions to 28% would yield $293,261 million over the 2011 through 2021 period.  This increased revenue would be largely attributable to the limits on mortgage interest and charitable contribution deductions.

Conclusion. While it seems unlikely that the deduction will be repealed outright, it is nonetheless possible that this popular tax expenditure could be somehow reformed or curtailed. The context of the looming debt crisis may well provide the necessary push for lawmakers to take action on this issue. What choices will be made and when remains to be seen—stay tuned.

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Posted in Asset Protection Planning, Tax Current Events and News, Tax planning

Massachusetts Enacts 2012 Budget Act

Wednesday, July 13th, 2011 by Moore McLaughlin

On July 11, 2011, Governor Deval Patrick signed the 2012 budget act, which postpones the Statement of Financial Accounting Standards 109 (FAS 109) deduction allowed certain corporations by a year, shortens the tax audit process, allows a deduction related to human organ donation, provides for recalculation of the dairy tax credit or trigger price in certain circumstances, and establishes a life sciences tax incentive program. It also provides certain sales tax exemption and revises certain administrative provisions.

Income tax. Life sciences tax incentive program: Effective as of January 1, 2009, a life sciences tax incentive program is established. The Life Sciences Center, in consultation with the Department of Revenue may authorize incentives not exceeding $25 million annually. Effective for tax years beginning on or after January 1, 2012, a taxpayer who commits to the creation of a minimum of 50 net new permanent full-time positions in Massachusetts is allowed, to the extent authorized by the life sciences tax incentive program, a refundable jobs credit against personal and corporate income taxes.

FAS 109 deduction: The implementation of the deduction allowed to limit the impact of combined reporting on the financial statements of some publicly traded corporation is delayed to 2013. The deduction was to be prorated over the 7-year period beginning with the combined group’s taxable year that begins 2012.

Organ donation related expenses: Effective for taxable years beginning on or after January 1, 2012, a resident individual who donates an organ to another person for human organ transplantation may claim a deduction in an amount equal to the travel expenses, lodging expenses and lost wages not to exceed $10,000 that the individual incurred in donating his or her organ. Human organ means all or part of human bone marrow, liver, pancreas, kidney, intestine or lung.

Daily farmer tax credit program: Effective July 1, 2011, the law requires that the regulations for the implementation, administration, and enforcement of the daily farmer tax credit program must provide that when the board of food and agriculture determines that an error has been made in calculating the trigger price or in reporting or collecting data used in the calculation of the trigger price or the tax credit, the Commissioner must recalculate said trigger price or tax credit.

Sales tax. Effective July 1, 2011, a sales tax exemption is provided for sales of physician-prescribed, medically necessary breast pumps.

Property tax. A person required to file a true list of taxable personal property may not be prevented from inspecting or receiving a copy of his or her submission.

Cigarette tax. Applicable to stamps purchased on or after January 1, 2012, a higher amount that a stamper may withhold as compensation in case of encrypted stamps purchased is provided. A stamper who has complied with cigarette tax law may withhold from each payment to be made by that stamper for such stamps as compensation the following amounts: (1) for encrypted stamps purchased and not returned for an abatement, $12 per roll of 1,200 stamps; and (2) in each fiscal year, $600 per roll of 30,000 encrypted stamps for the first 50 rolls purchased and $200 per each additional roll of 30,000 encrypted stamps purchased. Current law only provides for non-encrypted stamps purchases, which is $1.85 for each 600 stamps purchased.

Administrative provisions. Interests on deficiency assessments: Applicable to interest accruing on deficiency assessments where the audit resulting in the deficiency assessment commences after July 1, 2011, the tax audit cycle is shortened by reducing some interest penalties charged businesses if the Department takes more than 18 months to perform an audit provided the taxpayer meets certain conditions.

Abatement and assessment periods: Applicable to requests for refund or applications for abatement filed with the Commissioner on or after July 1, 2011, the statutes of limitations for assessment and abatements are revised. However, the change will not apply with respect to tax periods where the statute of limitations for refund or abatement, as applicable, had expired prior to July 1, 2011.

A request for a refund or credit of an overpayment of any tax where a required return has not been timely filed must be made by filing the overdue return within three years from the due date of the return, taking into account any extension of time for filing the return, or within two years of the date that the tax was paid, whichever is later. A request for a refund or credit of an overpayment of any tax where no return is required must be made by the taxpayer within two years from the time the tax was paid. A request for a refund or credit of an overpayment of tax where the required return was timely filed must be made within the period permitted for abatement for that return. Where a refund or credit results from an abatement, the amount of the refund or credit must be limited to the amount paid or deemed paid within three years of the date that the application for abatement is filed, taking into account any extension of time for filing the return. Previously, a request for a refund or credit of an overpayment of any tax where a required return has not been timely filed must be made by filing the overdue return within three years from the due date of the return, without regard to extension of time for filing the return, or within two years of the date that the tax was paid, whichever is later.

Any person aggrieved by the assessment of a tax, other than taxes assessed under the laws on taxation of legacies and successions or on taxation or transfers of certain estates, may apply in writing to the Commissioner for an abatement at any time within three years from the date of filing the return, within two years from the date the tax was assessed or deemed to be assessed or within one year from the date that the tax was paid, whichever is later.

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Posted in Current Events, Estate Planning, IRS and state tax collections, Tax Current Events and News, Tax planning

Rhode Island Budget Bill Expands Sales Tax Base, Imposes Various Filing Fees Among Other Changes

Wednesday, July 6th, 2011 by Moore McLaughlin

On June 30, 2011, Rhode Island Governor Lincoln Chafee signed the budget for fiscal year 2012. The budget bill broadens the sales tax base, lowers the sales tax rate to 6.5% if a change in federal law requires all remote sellers to collect and remit sales tax, and limits certain sales tax incentives. In addition, the budget bill requires corporations to file a pro forma Rhode Island corporate income tax return as if the state had adopted combined reporting for two successive years starting with the 2011 tax year, and requires recipients of certain tax incentives to comply with new or expanded reporting, accountability and transparency requirements. Further, limited liability partnerships (LLPs) are subject to an annual charge and the annual charge for limited liability companies (LLCs) is modified. Further the legislation provides for lottery winnings offset, estate filing fees, letter of good standing fees, and a surcharge on compassion centers.

Income taxes. Combined reporting study: As part of its tax return for a taxable year beginning after December 31, 2010 but before January 1, 2013, each corporation which is part of a unitary business must file a report, in a manner prescribed by the Tax Administrator, for the combined group containing the combined net income of the combined group. The use of a combined report does not disregard the separate identities for the members of the combined group. The combined report must include, at minimum, for each taxable year the following: the difference in tax owed as a result of filing a combined report compared to the tax owed under the current filing requirement; the difference in tax owed as a result of using the single sale factor apportionment method as compared to the tax owed using the current 3-factor apportionment method; volume of sales in the state and worldwide; and taxable income in the state and worldwide. Any corporation that fails to file a timely report or files a false report will be assessed a penalty not exceeding $10,000. The penalty may be waived for good cause shown for failure to timely file. Based on the information provided in the income tax returns and the data submitted, the Tax Administrator must submit a report on or before March 15, 2014, to the chairpersons of the house finance committee and senate finance committee, and the house fiscal advisor and the senate fiscal advisor analyzing the policy and fiscal ramifications of changing the business corporation tax statute to a combined method of reporting.

Taxpayer accountability: On or before September 1, 2011, and every September 1 thereafter, the project lessee of the following tax incentives must file an annual report with the Tax Administrator containing the name, Social Security number, date of hire, and hourly wage of each full-time equivalent, part-time or seasonal employee: project status through the Rhode Island Economic Development Corporation; the incentives for innovation and growth credit; enterprise zone tax credits; and motion picture production tax credits.

Lottery setoff for unpaid taxes: Effective June 30, 2011, if a taxpayer wins a lottery prize valued at more than $600 and is delinquent on state taxes owed to the Tax Administrator, the Lottery Director is authorized to setoff against the amount due to that person, after state and federal tax withholding, an amount up to the balance of the unpaid taxes owed. The Lottery Director will make payment of such amount directly to the Tax Administrator. Offsets are made based on a schedule of priorities.

Letter of good standing fee. Effective June 30, 2011, the fee for obtaining a letter of good standing from the Division of Taxation is increased from $25 to $50.

LLC annual charge. Effective June 30, 2011, any LLC that is not taxed as a corporation for federal tax purposes must pay a fee equal to the corporate minimum tax, which is currently $500; and the due date is the 15th day of the fourth month following the close of the fiscal year. Previously, a LLC that was not treated as a partnership for federal tax purposes had to pay a fee equal to the corporate minimum tax.

LLP annual charge. For tax years beginning on or after January 1, 2012, LLPs must pay an annual charge equal to the corporate minimum tax, which is currently $500. The charge is due upon the filing of the LLP’s return: on or before the April 15 for calendar year filers or the 15th day of the fourth month following the close of the fiscal year for fiscal year filers. If the annual charge is not paid by the due date, a delinquency charge of $100 is added to the annual charge.

Sales tax. Rate and base: If federal law is enacted that requires remote sellers to collect and remit taxes, the sales tax rate is decreased from 7% to 6.5%, the 1% local meals and beverage tax would increase to 1.5%, and the 1% local hotel tax would increase to 1.5%. Such rate changes would be effective the first day of the first state fiscal quarter following the change. In addition, effective October 1, 2011, the 7% sales and use tax is broadened to include the following: nonprescription drugs, also known as over-the-counter drugs; prewritten computer software delivered electronically or by “load and leave,” including applications for smartphones and similar devices; furnishing package tour and scenic and sightseeing transportation services as set forth in the 2007 North American Industrial Classification System (NAICS) codes 56120 and 487; and marijuana for medical use.

Rhode Island Economic Development Corporation: The sales tax exemption applicable to firms that use bond financing programs offered through the Rhode Island Economic Development Corporation or which are given project status by the Rhode Island Economic Development Corporation will no longer be allowed after June 30, 2011. The incentives will only apply to projects approved before July 1, 2011.

Rhode Island Industrial Facilities Corporation. Sales tax incentives related to projects involving the Rhode Island Industrial Facilities Corporation will no longer be allowed after June 30, 2011. The incentives will only apply to projects approved prior to July 1, 2011.

Hospital licensing fee. Applicable to hospitals that are duly licensed on July 1, 2011, the amount of the hospital licensing fee imposed on the net patient services revenue of every hospital for the hospital’s first fiscal year ending on or after January 1, 2010 is 5.43%. Every hospital must file a return and pay the licensing fee by electronic transfer to the Tax Administrator on or before July 16, 2012. Each hospital must file a return with the Tax Administrator on or before June 18, 2012, containing the correct computation of net patient services revenue for the hospital fiscal year ending September 30, 2010, and the licensing fee due on that amount.

Compassion Center Surcharge. Effective June 30, 2011, a 4% monthly surcharge is imposed on the net patient revenue received each month by every compassion center. Each center must file a return to the Tax Administrator and make payment by electronic transfer to the General Treasurer no later than the 20th day of the month following the month that the net patient revenue was received. Such surcharge is in addition to any other authorized fees that have been assessed on a compassion center. A “compassion center” means a registered not-for-profit entity that acquires, possesses, cultivates, manufactures, delivers, transfers, transports, supplies, or dispenses marijuana, or related supplies and educational materials, to registered qualifying patients and their registered primary caregivers who have designated it as one of their primary caregivers.

Estate tax filing fees. Effective June 30, 2011, the estate filing fee is increased from $25 to $50. The filing fee applies to the statement that executors, administrators and heirs-at-law must file with the Tax Administrator within nine months of a decedent’s death showing the value of the decedent’s estate and certain other items.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, IRS and state tax collections, Tax Current Events and News, Tax planning

Who Gets Copies of the Will After a Person Dies?

Monday, June 20th, 2011 by Moore McLaughlin

Many movies and television shows have a scene where a family gathers around a big table after a relative has died to listen to the reading of the will. While this is a great dramatic scene, it doesn’t usually happen like that in the real world. There is no requirement that a will be read out loud to anyone. So what does happen with the will?

Once the will is located, it should be given to the estate’s attorney. Instead of reading the will out loud, the estate’s attorney sends copies of the will to anyone who may have an interest in it. Obviously the person who is named as executor or personal representative is entitled to a copy of the will. He or she is in charge of applying for probate, managing the decedent’s property, and making sure the instructions in the will get carried out.

The estate attorney will also send a copy of the will to anyone who is named as a beneficiary. If any minor children or incapacitated individuals are named as beneficiaries, then their guardians should receive a copy of the will. In addition, if there is the possibility of a legal challenge to the will, the attorney may want to send a copy to any legal heirs, close family relatives, or previous beneficiaries who aren’t included in the will, so that they have notice. This will limit the time frame for them to file a will contest.

Another person who may be entitled to a copy of the will is the estate’s accountant, and if the estate is taxable, then the IRS may get a copy of the will as well. If the will funds a revocable trust, then the successor trustee of the trust is entitled to a copy of the will. Note that once a will is probated, it is available to the public and anyone can read it.

For more information on estate administration, contact Attorney Jill E. Sugarman at 401-421-5115 or by e-mail at JSugarman@McLaughlinQuinn.com.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, Tax planning

Be Sure To Update Your Estate Plan When Your Finances Change

Monday, June 20th, 2011 by Moore McLaughlin

In the recent economic downturn, many homes have lost considerable value and stock portfolios have plummeted. If this is the case for you, do you need to change your will? What if your income and assets have increased significantly? If your finances have changed markedly since you wrote your will, you should check your estate plan to see if you need to make any changes.

If your will or estate plan divides your estate into percentages for beneficiaries, then changes in value won’t affect how your estate is distributed. However, if you include specific bequests in your will, a fall or rise in your estate could have consequences. For example, if your estate plan gives $50,000 to your favorite charity and the rest of your estate to your children, a reduction in the value of your estate could mean your children won’t get as much as you intended.

A change in value of assets could also affect your estate plan if you intended to treat your children equally by giving them assets of equal value. For example, suppose your will gives your house worth $500,000 to your daughter and your stock worth $500,000 to your son. If the value of either the house or the stock portfolio increases or decreases significantly in value, your children will no longer receive equal gifts. It is also important to update your estate plan if the overall nature of your assets has changed. For example, if you sold the stock and bought real estate instead, this will affect the distributions to your children.

In addition, if your estate has significantly increased in value, it is important to reassess whether your estate will be subject to estate taxes. In 2008, estates worth more than $2 million are subject to federal estate taxes. In 2009, estates subject to federal taxes must be worth more than $3.5 million. After that, it isn’t clear what the estate tax will be, so it is important to be prepared for any eventuality.

Contact Attorney Jill E. Sugarman at 401-421-5115 or by e-mail at JSugarman@McLaughlinQuinn.com for more information.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, Tax planning

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