Articles Posted in Tax Planning

Although there has recently been a lot of news out of Washington, D.C.—particularly the COVID-19 Relief Bill—many individuals are interested in the 2022 fiscal year budget and the proposed changes that will be made. This includes expected capital gains and dividend tax rate increases for high-income individuals, along with any potential individual income tax rate increases. Another critical change is the expected estate and gift tax exemption. These changes will be made through the budget in order to fund the COVID-19 Relief Bill. While President Biden’s proposed budget will not be released until later this month, below are common questions about potential changes that will be made and how Texans should prepare their estate plan in the meanwhile.

What Gift and Estate Tax Changes Are Likely to Occur?

Currently, the estate tax and lifetime gift tax exemption is $11.7 million per person and $23.4 million for married couples. This means that if an estate exceeds $11.7 million, currently, when the person passes away, their beneficiaries—the people they are leaving the estate to—will pay a tax of 40% on the remaining value of the estate. If a person’s estate is valued at lower than this, their beneficiaries do not need to pay a tax. Additionally, if a person leaves their estate to their spouse, the spouse does not have to pay an estate tax—even if the value is above the exemption limit.

When people reach retirement age, many assume that the majority of the taxes they will need to pay are over. However, in many cases, taxes may be even more burdensome once a person has retired. Be it in the form of an estate tax, Roth IRAs, or life insurance plans, seniors have many questions about making the most of their retirement savings and ensuring they are still passing along assets and contributions to their beneficiaries once they have passed. Below are some common questions individuals thinking about retirement planning have, along with explanations to these issues—so Texans can ensure their retirement plan is not chipped away by unknown taxes.

What is the SECURE Act, and How Will it Affect My Retirement?

The Setting Every Community Up for Retirement Enhancement Act of 2019—better known as the SECURE Act—changed many of the rules and regulations for retirement income planning. One fundamental change that affects retirees is the elimination of the stretch IRA. In the past, a stretch IRA has allowed non-spouses that are inheriting a retirement account to stretch out disbursements of the account over their lifetime. Generally, retirees who knew their spouse would have enough money for retirement would utilize a stretch IRA to maintain their family’s assets by naming the youngest person in their family as the beneficiary. Now, the rule requires the beneficiary to receive the full payout of the inherited IRA within ten years of the initial person’s passing.

With the recent election and inauguration of the 117th United States Congress, new bills are being introduced that impact all aspects of a person’s life. According to a recent news source, one such bill is Senator Bernie Sanders’ proposed estate and gift tax reform legislation. For individuals with an estate plan in place, the introduction of new legislation gives cause for concern that it may impact their estate plan. The bill will reduce the estate tax exemption to $3,500,000 and increase the estate tax rate from a flat rate to a progressive one. Because the nuances of such a law can be confusing, below are some common questions and answers about the new estate tax bill.

What Does the Bill Propose?

The bill seeks to reduce the estate tax exemption from $11,700,00 to $3,500,000. This means if an estate is valued at over $11,700,000 currently, the heirs of the estate will need to pay a tax. If the proposal is enacted, the heirs of an estate valued at over $3,500,00 will have to pay the tax. Additionally, if the bill passes, anyone who received more than $1,000,000 in gifts from a loved one as a part of their estate plan will have to pay a tax too. The proposed exemption limits are per person; therefore, for married couples, the total exemption limit would be $7,000,000. After 2022, the exemption will continue to rise with inflation.

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The Internal Revenue Service is postponing the date for filing gift tax and generation-skipping transfer tax returns and making payments until July 15, 2020, because of the novel coronavirus pandemic.

The IRS has expanded the list of deadline extensions for federal taxes and tax returns to include gift and generation-skipping transfer (GST) tax returns. An earlier notice had applied only to federal income tax returns and payments (including self-employment tax payments) due April 15, 2020, for 2019 tax years, and to estimated income tax payments due April 15, 2020, for 2020 tax years.

Notice 2020-20 updates earlier guidance to include the gift and GST deadline extensions.

Group of peopleSigned into law on Friday, March 27, the CARES (Coronavirus Aid, Relief, and Economic Security) Act is the biggest economic stimulus package in U.S. history. Below are essential highlights for individuals and small businesses.

Individuals

One-time direct deposits of up to $1,200 for individual taxpayers with incomes up to $75,000 and $2,400 for joint filers with incomes up to $150,000. An additional $500 for each eligible child can also

6a019b003fe4d5970b025d9b3eaf45200c-300x200The U.S. Small Business Administration (SBA) is offering up to $2 million in Economic Injury Disaster Loans for small businesses impacted by the coronavirus, in addition to a resource page detailing eligibility and how to apply.

It’s estimated that some 30 million US small businesses may fall victim to the coronavirus through closures, cancellations and other revenue losses. With no clear end in sight, the Small Business Administration (SBA) is offering eligible businesses low-interest disaster relief loans to cover operating expenses.

These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact. The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%. In order to keep payments affordable, they are offering long-term repayments, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.

6a019b003fe4d5970b0240a518c8f8200b-300x200“Treasury Secretary Steven Mnuchin announced Friday, March 20th,  that the administration has moved the IRS deadline for filing taxes from April 15 to July 15 due to the disruption caused by the coronavirus.”

There has been some confusion about the income tax filing / tax payment deadline extensions. However, on Friday, March 20th, Americans received much needed clarity that both the filing and the payment deadlines have been extended from April 15 to July 15 giving all taxpayers and businesses additional time to file and make payments without interest or penalties.

This allows taxpayers and businesses some time to breathe in such a strange and unknowing time.  If you are expecting a refund, however, the Treasury Department encourages you go ahead and file as soon as possible – the sooner you file, the sooner you will get your refund.

12.30.19It’s a problem that most people wish they had: a sudden influx of money, sometimes a lot of money. It can be overwhelming, and the most important thing to do is—nothing, at first.

The first thing to do when you are newly flush with money, is take a few deep breaths. Then take a long, clear look at your financial status, advises WMUR.com’s recent article, “Handling unexpected wealth.”

Depending on how much you have received, you could be in a very different place financially. You should take an in-depth look at your net worth and cash flow.

12.2.19Benefits for Social Security survivor children’s benefits are generally made out to a parent or guardian. They are taxable income, but most children do not have enough income to owe taxes on the benefits.

According to a recent article “Are Social Security survivor benefits for children considered taxable income?” from Investopedia, the only way the benefits would be taxed if half of the child's benefits in a year, plus other income earned by the child in that year, reached the level that required a tax return to be filed and for taxes to be paid.

If half of the annual benefits plus the child's other income is greater than a base amount set by the IRS, then a portion of the benefits is taxable.

10.21.19There are many inheritance scenarios, where people hope that a simple solution will save them time and money. Unfortunately, that’s not always the way estate or tax laws work.

A woman received joint ownership of her father’s house about a decade ago. Her father is still living there, and so is her sister. The woman doesn’t pay for any of the expenses; she and her father take care of their own costs. The sisters plan on selling the home, after their father passes. The woman wonders if she can simply give her sister her half of the home and avoid paying any taxes.

This situation is expanded upon in recent nj.com article, “My sister and I own my father’s home. How can I avoid taxes?” The article notes that a sibling may give her half of a home owned in joint ownership to a sibling, but there may still be some tax consequences.

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