Friday, April 15, 2011

Tax Deadline - Monday, April 18

The Internal Revenue Service today reminded taxpayers who have not yet filed their 2010 tax returns that individual returns and payments are due next Monday, April 18, 2011.

If you have a balance due, it’s important to pay your tax bill by April 18 to avoid penalties and interest. But even if you cannot pay your entire bill, pay as much as you can to minimize penalties and interest.

For those taxpayers who cannot pay in full by April 18, an installment agreement may be appropriate. Several options are available for setting up a payment agreement with the IRS:

Tuesday, April 12, 2011

Tips for Managing Your Records

Tips for Managing Your Tax Records
After you file your taxes, you will have many records that may help document items on your tax return. You will need these documents should the IRS select your return for examination. Here are five tips from the IRS about keeping good records.
  1. Normally, tax records should be kept for three years.
  2. Some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.
  3. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return.
  4. Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.
  5. For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at or by calling 800-TAX-FORM (800-829-3676).

Thursday, February 10, 2011

Many Tax Return Preparers Must Use IRS e-file Beginning in 2011

A new law requires many paid tax return preparers to electronically file federal income tax returns prepared and filed for individuals, trusts, and estates starting Jan. 1, 2011.
The e-file requirement will be phased in over two years. As a result of the new rules, preparers will be required to start using IRS e-file beginning:
  • January 1, 2011— for preparers who anticipate filing 100 or more Forms 1040, 1040A, 1040EZ and 1041 during the year; or
  • January 1, 2012— for preparers who anticipate filing 11 or more 1040, 1040A, 1040EZ and 1041 during the year.
The rules require members of firms to compute the number of returns in the aggregate that they reasonably expect to file as a firm. If that number is 100 or more in calendar year 2011 (11 or more in 2012 and thereafter), then all members of the firm must e-file the returns they prepare and file. This is true even if a member prepares and files fewer than the threshold on an individual basis.
Clients may independently choose to file on paper.

Frequently Asked Questions

Sunday, November 21, 2010

Estate Taxes 2010 and After?

I offered a couple days ago to post a an article about current outlook for estate taxes. I found this article very informatice. and appreciated the flow chart linked halfway down the page. I copied the article from a website name Business Java

Estate Tax for 2010 – Still No Change

About The Author
Joe Arsenault
Joe Arsenault is a CPA in the state of Arizona. Joe has a tax background and specializes in consulting in the field of retirement and pension taxation for Shurwest Financial Group. Joe is the founder and administrator of Cafetax.

Everyone expected that in 2010 Congress would reinstate the estate tax. Not many people seemed to have the opinion that we would be half way through the year looking at a real possibility of having no estate tax for 2010. Of course as good as an estate tax free year seems, 2011 goes back to the exemption amount of $1 million with a 55% tax rate. Not the friendly $3.5 million of that existed in 2009. There may also be some serious traps for the unprepared, discussed at the end.

I have been getting a lot of questions that are along the lines of..

What will happen if there is no estate tax?
What are the gifting rules in 2010?
What are the basis rules, I heard my clients will not get a step-up in basis?
How will this affect the funding of Bypass trusts since there is no applicable credit?

Unfortunately there really isn’t a simple answer, but if you want one, well… If there is no applicable credit and estate tax, anyone who dies this year will not be subject to estate tax regardless of the size of their gross estate. Of course the ugly truth is, there are many complicated facets to every estate and improper planning will negate any potential benefits of a 0 estate tax year.

Interestingly enough, even without an applicable credit, the $1 million dollar exemption for lifetime gifts that became permanent in 2003 is still in force. One thing did change, the top gift tax rate is only 35% this year. This alone opens up major possibilities for some clients and estates.

As far as the basis rules, I will cover that in another blog. The simple answer is that heirs will receive a total of $1.3 million in basis credit to step up ELIGIBLE appreciated assets. Any estate with over $1.3 million of built in gain will essentially hit the heirs. Otherwise, assets will be valued at the lower of fair market value or basis for beneficiary inheriting the asset.

The last question is the big dog for this blog. What about the Bypass trust? This is where you must focus and be very diligent and flexible with your estate planning and trust work. If a spouse died in 2009 with a sizable estate, it is very common that a provision in their living trust funded the assets into an ‘A’ trust and ‘B’ trust.

The ‘A’ trust is the marital trust that allows the spouse to fully inherit the assets while utilizing the unlimited marital deduction so the first deceased spouse does not have to include the assets in their gross estate. The ‘B’ trust is commonly referred to a Bypass Trust or Credit Shelter Trust. The assets in this trust are included in the first spouse’s estate but not the surviving spouse’s estate. So in 2009, if $3.5 million is funded in the ‘B’ trust, that maximized the gross estate without triggering tax because the applicable credit was $3.5 million, and removes $3.5 from the surviving spouse’s estate.

Below is a pdf of a flow chart I created that illustrates this concept in the most simple form. Assume a community property state where the living trust funds the A/B trust by 50 percent each. Note that this is hypothetical and simplified.

Fact pattern applied to flow chart:

$5 million dollar gross estate (asset type ignored for simplicity)
First spouse passes away
Trust is funded with full $5 million and split 50/50 between A and B trust
Bypass trust becomes funded with $2.5 million and grows outside of surviving spouse’s estate
Marital trust becomes funded with the other $2.5 million, spouse has full rights and amount will be included in their estate, including appreciation during his/her life.


Ok, so what happens in 2010 if there does not end up being an applicable credit and estate tax? Essentially, any amount passing through your estate does not have a transfer (estate) tax, even if its say $10 million. This creates an interesting dynamic for the Bypass trust. Bypass trusts are used to maximize the applicable credit and shelter assets from the surviving spouse’s estate, but there is no applicable credit! Two major issues arise and it all has to do with the wording of the trust instrument and how they are directed to fund.

There is a major risk that if your trust directs the Bypass trust to be funded with the maximum amount allowed to be passed free of estate tax you could COMPLETELY DISINHERIT YOUR SPOUSE. While the spouse may be an income beneficiary, they do not receive the remainder interest and have no power to change who does. If the trust is worded improperly, you could have a situation where your entire estate funds in the Bypass trust and the spouse is locked out.
On the opposite end of the spectrum, one may want to take advantage of not having estate tax this year and pass as much as possible through the estate transfer tax free. Sometimes the bequest language use phrases like “applicable credit exemption”. Well there is no applicable credit, so if nothing funds in the Bypass trust, the surviving spouse may be taxed much harder in the future. You lost your one year opportunity to transfer assets free of tax to another generation. Lets say in a non-community property state the spouse only needs 25% of the assets and 75% will go to the kids. In a $10 million dollar estate that is $7.5 million that may be removed without a transfer tax.
The type of assets in your estate and the built in gains are a very important aspect of this planning that I am not going to discuss. This may not be a concern in 2010 with a limited $1.3 million dollar basis step-up which is a large part of the planning. In any event, there is usually a balance between utilizing the applicable credit, the gifting during your lifetime and basis step-ups for eligible assets.

If you have a living trust and estate concerns, you should have your trust reviewed by a CPA or attorney. You may need to change the language in your trust to ensure that your intentions are properly carried out if you pass away in 2010. Even if you don’t, the landscape is currently invisible and a good review would be wise. Important planning can leave your spouse and heirs with a much larger chunk of your estate.

Remember, your situation is unique. You need a professional review if you think this applies to you.

Wednesday, November 17, 2010

I apologise

for having been so inattentive to this blog.

Here's an article about tax issues congress needs to resolve quickly. And it doesn't even address inheritance tax, which I will refer to in another post tomorrow.

Congress Faces Long List of Work to Complete in Short Work Period
By Brett Ferguson and Heather M. Rothman
Publication Date: 11/16/2010

Lawmakers returned to Washington Nov. 15 with a full agenda of unfinished business, but a desire for a short lame-duck session could result in short-term fixes needing to be addressed again in the 112th Congress, congressional aides said.

Congress's schedule allows for only about five weeks to complete what would normally take months to accomplish. At the top of the list is the extension of nearly $4 trillion in tax cuts originally passed in 2001 and 2003, an annual “doc fix” to keep Medicare reimbursement rates to physicians from falling, and passage of all of the annual appropriations bills.

The lame-duck schedule calls for a week of work beginning Nov. 15, followed by a one-week break for Thanksgiving, with Congress resuming the week of Nov. 29. Officially, Congress had been planning to adjourn for the year on Dec. 3, but aides now expect Congress to remain in session for an unspecified period of time as lawmakers try to forge deals on the tax issues, appropriations, and other pressing matters.

In addition to extensions of the Bush-era tax cuts, Congress is under pressure to deal with the $35 billion tax extenders package of tax breaks that expired at the end of 2009, a “patch” to keep the alternative minimum tax from affecting an additional 21 million households in the coming months, and a sharp increase in the estate tax.

Power Shift Poses Challenges
Aides said the already difficult task of completing the work also is made tougher because of the Democrats' midterm election losses that will leave Republicans in control of the House in January and Democrats with a diminished Senate majority.

The shift in power in Congress will give Republicans few reasons to accept tough compromises in the coming weeks if they feel they can strike a better deal on extending the tax cuts to higher-income taxpayers when the next Congress begins, aides said, noting there is a good possibility that the tax cuts will be allowed to expire at the end of the year as negotiations stretch on into the 112th Congress.

The most controversial issue remains whether Congress should permanently extend all of the 2001 and 2003 tax cuts, or just those that apply to households earning less than $250,000 per year. Republicans argue that they ran for Congress this year on the promise to make all of the tax cuts permanent and have no intention of allowing the current top tax rate of 35 percent to return to its pre-2001 level of 39.6 percent. They say that the increase would hurt small businesses that pay taxes through the individual income tax system.

President Obama and House Speaker Nancy Pelosi (D-Calif.), however, have been clear that they believe extending the top tax rates would be fiscally irresponsible at a cost of roughly $70 billion per year.

“Our position in the House has been that we support the tax cut for the middle—for everyone, but not an additional tax cut at the high end. It's too costly. Those tax cuts have been in effect for a very long time; they did not create jobs,” Pelosi said Nov. 12.

Paychecks Set to Fall
The stalemate means that, if Congress does not act before Jan. 1, businesses will begin withholding more money from all of their workers' paychecks to reflect the expiration of the 10 percent tax bracket and 25 percent tax brackets, in addition to higher rates for upper-income households.

The tax cut expiration also would slash the value of the child tax credit to $500 from $1,000, reinstate the so-called marriage penalty, and raise the top tax rates on capital gains and dividends. The top capital gains rate would return to 20 percent, while dividends would be taxed at ordinary income tax rates.

Game Plan Unclear
While senators would not reveal much, what is clear is that even committee members are split over how to proceed. While Schumer left room for temporary extensions of some of the tax cuts for top-earning households, committee member Debbie Stabenow (D-Mich.) said she cannot support an extension of the Bush-era tax cuts for anyone making more than $250,000.

“Everyone gets a tax cut,” Stabenow said. “I don't support [one] for the top two rates because that has not created jobs or stimulated the economy in this country and certainly not in my state in the last 10 years.”

Asked how Democrats can get the votes in the Senate without a compromise, Stabenow said, “I guess Republicans have to decide whether or not they hold middle-class people and small businesses hostage for a few very, very wealthy people in the country who have done very well at the expense of everybody else.”

The entire Senate Democratic Caucus will meet Nov. 16 and the bicameral, bipartisan congressional leadership will meet Nov. 18 at the White House with President Obama.

The complete text of this article can be found in the BNA Daily Tax Report, November 16, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »

© 2010, The Bureau of National Affairs, Inc.