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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

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

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

Tax Tips from the IRS on Capital Gains

Wednesday, June 8th, 2011 by Moore McLaughlin
Ten Important Facts About Capital Gains and Losses
 
IRS Tax Tip 2011-35

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When a capital asset is sold, the difference between the amount you paid for the asset and the amount you sold it for is a capital gain or capital loss.

Here are ten facts from the IRS about gains and losses and how they can affect your Federal income tax return.

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

2. When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.

3. You must report all capital gains.

4. You may deduct capital losses only on investment property, not on property held for personal use.

5. Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.

6. If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.

7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2010, the maximum capital gains rate for most people is 15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.

8. If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

10. Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.

For more information about reporting capital gains and losses, see the Schedule D instructions, Publication 550, Investment Income and Expenses or Publication 17, Your Federal Income Tax. All forms and publications are available at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
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Posted in Current Events, Tax Current Events and News, Tax planning

Congress passes bill repealing expanded 1099 information reporting requirements

Wednesday, April 6th, 2011 by Moore McLaughlin

On April 5, the Senate by a vote of 87-12 approved H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011.” The measure, which retroactively repeals expanded Form 1099 information reporting rules added by recent legislation, was passed by the House on March 3 by a vote of 314-112. Thus, H.R. 4 (the Act) is cleared for the President’s expected signature.

Here are highlights of the tax changes in the Act.

Original information reporting rules. Before amendment by the Small Business Jobs Act of 2010 (P.L. 111-240) and the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148), Code Sec. 6041 generally required payments totaling at least $600 in a single calendar year to a single recipient to be reported to IRS. Reporting on Form 1099 was required only when the payor was considered to be engaged in a trade or business and has made the payment in connection with that trade or business. The type of payment that most commonly triggered the reporting requirement was payment for services.

There were a number of exemptions from Code Sec. 6041 ‘s reporting requirements under prior law, notably including payments to corporations (which were exempt under Reg. § 1.6041-3(p)(1)).

Pre-Act law—changes made by 2010 legislation. Beginning in 2012, Sec. 9006 of PPACA added payments of amounts in consideration for any type of property and gross proceeds—i.e., it added payments for goods or other property—to the list of payments subject to information reporting.

Sec. 9006 of PPACA further provided that, beginning in 2012, payments to non-tax-exempt corporations—which had previously been exempt from the reporting requirement—would be subject to information reporting.

Additionally, for payments made after 2010, the Small Business Jobs Act of 2010 provided that, subject to limited exceptions, a person receiving rental income from real estate would be treated as engaged in the trade or business of renting property for information reporting purposes. In particular, rental income recipients making payments of $600 or more to a service provider (for example, a painter or plumber) in the course of earning rental income would have to provide an information return to the service provider and IRS.

New law. For payments made after December 31, 2011, the Act repeals the provisions in Sec. 9006 that impose a reporting requirement for payments to corporations and payments for goods or other property. (Code Sec. 6041(a), Code Sec. 6041(i), and Code Sec. 6041(j), as amended by Act Sec. 2) And for payments made after December 31, 2010, the Act also repeals application of the information reporting requirements to recipients of rental income from real estate who are not otherwise considered to be engaged in the trade or business of renting property. (Code Sec. 6041(h), as repealed by Act Sec. 3)

In other words, under the Act, the information reporting rules effectively revert to the way they read before enactment of PPACA and the Small Business Jobs Act of 2010.

Revenue offset. The Act provides an offset for the lost revenue from repealing the new information reporting provisions, estimated at $21.9 billion. It increases the amount of “excess advance payments” of the premium assistance credit (enacted as part of the 2010 health care reform legislation to help lower-income individuals acquire affordable health insurance coverage) that a taxpayer must repay under Code Sec. 36B(f)(2) for tax years ending after December 31, 2013. The credit is available for a taxpayer who does not receive health insurance through his employer (or his spouse’s employer) and whose income falls between 100% and 400% of the federal poverty line (FPL), based on the most recently filed tax return.

Under pre-Act law, if the taxpayer’s income increases such that the credit exceeds that to which his current income level actually entitles him to, but his income is still under 500% of FPL, he had to repay some credit amounts. The limit on amounts he had to repay were capped and ranged from $600 to $3,500.

New law. Under the Act, for tax years ending after December 31, 2013, the repayment caps are increased for taxpayers with household income of at least 200% but less than 400% of FPL, and full repayment is required for taxpayers whose incomes exceed 400% of FPL. (Code Sec. 36B(f)(2)(B)(i), as amended by Act Sec. 4)

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

Statutory glitch reduces portable estate tax exclusion for some surviving spouses

Thursday, March 31st, 2011 by Moore McLaughlin

Effective for estates of decedents dying after 2010 and before 2013, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) allows a deceased spouse’s unused estate tax exclusion to be shifted to the surviving spouse. The Joint Committee on Taxation (JCT) has released an errata sheet pointing out an error in the statutory language defining “deceased spousal unused exclusion amount.” As explained below, the current statutory language may result in a lower-than-intended exclusion for the surviving spouse of an individual who was previously married and received a portable estate tax exclusion from his or her former spouse. The JCT says a technical correction may be needed to fix the defect.

Background. A credit (the “unified credit”) is allowed against the estate tax imposed on U.S. citizens and residents. The credit is equal to the tentative tax on the “applicable exclusion amount,” determined under the estate tax rate schedule.

Pre-2010 Tax Relief Act law did not allow for any unused portion of a decedent’s applicable exclusion amount to be used by the estate of the decedent’s surviving spouse.

Portable exclusion. Under the 2010 Tax Relief Act, for estates of decedents dying after 2010 and before 2013, the applicable exclusion amount is the sum of (1) the “basic exclusion amount” and (2) in the case of a surviving spouse, the “deceased spousal unused exclusion amount.”

The basic exclusion amount is $5 million with an adjustment for inflation after 2011.

The “deceased spousal unused exclusion amount” is the lesser of:

(1) the basic exclusion amount, or

(2) the excess of the basic exclusion amount of the last deceased spouse dying after December 31, 2010, of the surviving spouse, over the amount on which the tentative tax on the estate of the deceased spouse is determined.

A deceased spousal unused exclusion amount may not be taken into account by a surviving spouse unless the executor of the estate of the deceased spouse files an estate tax return on which the amount is computed, and makes an election on the return that the amount may be taken into account by the surviving spouse. The election, once made, is irrevocable. No election may be made if the estate tax return of the deceased spouse is filed after the due date (including extensions) for filing the return.

A surviving spouse may use the deceased spousal unused exclusion amount in addition to his or her own $5 million exclusion for taxable transfers made during life or at death.

Illustration 1: Husband 1 dies in 2011, having made taxable transfers of $3 million and having no taxable estate. An election is made on his estate tax return to permit Wife to use his deceased spousal unused exclusion amount. As of his death, Wife has made no taxable gifts. Thereafter, Wife’s applicable exclusion amount is $7 million (her $5 million basic exclusion amount plus $2 million deceased spousal unused exclusion amount from Husband 1), which she may use for lifetime gifts or for transfers at death. (Committee Report)

If a surviving spouse is predeceased by more than one spouse, the amount of unused exclusion that is available for use by the surviving spouse is limited to the lesser of $5 million or the unused exclusion of the last deceased spouse.  This so-called “last deceased spouse” limitation applies whether or not the last deceased spouse has any unused exclusion, and whether or the estate of the last deceased spouse makes a timely election to allow the surviving spouse to use the deceased spousal unused exclusion amount.

Illustration 2: Assume the same facts as in illustration (1), except that Wife subsequently marries Husband 2. He predeceases Wife, having made $4 million in taxable transfers and having no taxable estate. An election is made on his estate tax return to permit Wife to use his deceased spousal unused exclusion amount. Although the combined amount of unused exclusion of Husband 1 and Husband 2 is $3 million ($2 million for Husband 1 and $1 million for Husband 2), only Husband 2′s $1 million unused exclusion is available for use by Wife because the deceased spousal unused exclusion amount is limited to the lesser of the basic exclusion amount ($5 million) or the unused exclusion of the last deceased spouse of the surviving spouse. Thereafter, Wife’s applicable exclusion amount is $6 million (her $5 million basic exclusion amount plus $1 million deceased spousal unused exclusion amount from Husband 2), which she may use for lifetime gifts or for transfers at death. (Committee Report)

Remarried surviving spouses who predecease new spouse. The following illustration, based on an example in the Committee Report, says that if a surviving spouse remarries, and then dies survived by a new spouse, the deceased spousal unused exclusion amount included for the surviving spouse’s estate is determined by taking into account the deceased spouse’s applicable exclusion amount and not just the basic exclusion amount.

Illustration 3: Assume the same facts as in Illustrations 1 and 2, except that Wife predeceases Husband 2. Following Husband 1′s death, Wife’s applicable exclusion amount is $7 million (her $5 million basic exclusion amount plus $2 million deceased spousal unused exclusion amount from Husband 1). Wife made no taxable transfers and has a taxable estate of $3 million. An election is made on Wife’s estate tax return to permit Husband 2 to use Wife’s deceased spousal unused exclusion amount, which is $4 million (Wife’s $7 million applicable exclusion amount less her $3 million taxable estate). Under the provision, Husband 2′s applicable exclusion amount is increased by $4 million, i.e., the amount of Wife’s deceased spousal unused exclusion amount. (Committee Report)

This view does not seem to reflect Code Sec. 2010(c)(4), which states that the deceased spousal unused exclusion amount equals the lesser of the basic exclusion amount (i.e., $5 million), or the excess of the basic exclusion amount of the last deceased spouse of such surviving spouse over the amount on which the tentative estate tax is determined under Code Sec. 2001(b)(1) on the estate of such deceased spouse. Rather, under the current statutory language, Husband 2′s applicable exclusion amount would seem to be increased by only $2 million.

The JCT Errata sheet confirms that the current statutory language does not support the conclusion in Illustration 3. It does so by adding a footnote to the example in the Committee Report on the 2010 Tax Relief Act. The footnote states that a technical correction may be necessary to replace the reference to the basic exclusion amount of the last deceased spouse of the surviving spouse with a reference to the applicable exclusion amount of such last deceased spouse, so that the statute reflects Congressional intent.

Under the technical correction, Husband 2′s applicable exclusion amount would be increased by $4 million.

Under the technical correction, it would be possible for the new spouse’s applicable exclusion amount to exceed $10 million, the combined amount of the basic exclusion amount of the surviving spouse and the new spouse. For example, if, in Illustration 3, the Wife’s taxable estate were only $1 million, then Husband 2′s applicable exclusion amount would be increased by $6 million (Wife’s applicable exclusion amount of $7 million less $1 million of taxable transfers). Thus, Husband 2′s applicable exclusion amount would be $11 million (Wife’s spousal unused exclusion amount of $6 million, plus Husband 2′s basic exclusion amount of $5 million).

Allowing a surviving spouse to wind up with a more than $10 million applicable exclusion amount is somewhat inconsistent with the last spouse limitation. That’s because the last spouse limitation prevents a spouse who survived two or more deceased spouses from getting an applicable exclusion amount that exceeds the combined basic exclusion amounts of a husband and wife. This combined figure presently is $10 million, but could exceed $10 million with inflation adjustments after 2011.

There is no word on when this or any other technical corrections may be forthcoming. Hopefully, IRS will address the matter when it provides guidance on the new portable exclusion.

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