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.


LINK TO HELPFUL FLOW CHART

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.

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.

Proposed 1099 Misc Requirements

Most folks are aware that the IRS is going to require payment processors like PayPal to issue 1099 K's to payees starting in 2011. This recent article from CNN says recent legislation substantially expands 1099 Misc reporting requirements, so much so that I don't think implementation will be practicable. I'll make it a ptiority to update update this information soon. The most alarming projections are highlighted in bold print below.

Stealth IRS changes mean millions of new tax forms
By Neil deMause, contributing writer May 21, 2010: 1:51 PM ET


NEW YORK (CNNMoney.com) -- The massive expansion of requirements for businesses to file 1099 tax forms that was hidden in the 2,409-page health reform bill took many by surprise when it came to light last month. But it's just one piece of a years-long legislative stealth campaign to create ways for the federal government to track down unreported income.

The result: A blizzard of new tax forms that the Internal Revenue Service will begin rolling out next year.

"It was actually something that we were following back under the Bush administration under the 2008 budget -- we started to see these kinds of rumblings about the 'tax gap' and whether or not businesses were paying their fair share," says Tom Henschke, president of the Pennsylvania-based SMC Business Councils, which was one of the first organizations to call attention to the health care amendment when it was introduced last fall. "So two administrations can claim credit for this."

The first tax-reporting expansion was buried in a different bill, the Housing Assistance Tax Act introduced by House Speaker Nancy Pelosi and signed into law by President George W. Bush in July 2008. Best known for its first-time homebuyers' credit, the bill also created a new addition to the family of 1099 tax forms: the 1099-K.

The 1099 is a catch-all series of IRS documents used to report non-wage income from a variety of sources like contract work, dividends, earned interest and pension distributions. The new 1099-K aims to shine a light on a currently hard-to-track payment stream: credit cards. Starting in 2011, financial firms that process credit or debit card payments will be required to send their clients, and the IRS, an annual form documenting the year's transactions.

The rule comes with a floor to weed out the most casual retailers: The 1099-K is only required when a merchant has at least 200 payment transactions a year totaling more than $20,000. But it applies to all payment processors, including Paypal, Amazon.com, and others that service very small businesses.

The goal of the new regulations is to catch income that is going unreported to the IRS. The federal government loses an estimated $300 billion each year from the "tax gap" between what individuals and businesses owe and what they actually pay.

"Better information reporting helps the tax system work better by ensuring that everyone pays what they owe," IRS Commissioner Doug Shulman explained last year as his agency unveiled the 1099-K. "The new law gives us an important new tool for closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses."

For companies that currently report all their credit card and Paypal sales to the IRS, the 1099-K requirement will have little impact. All the paperwork will be done by the bank or payment processing service, and business owners will simply receive a form at the end of the year listing their total receipts.

The 1099 changes attached to the health care reform bill are another kettle of fish. These massively expand the requirements for filing the "1099-Misc" form, which companies use for recording payments to freelance workers and other individual service providers. Until now, payments to corporations have been exempt from 1099 rules, as have payments for the purchase of goods.

Starting in 2012, that changes. All business payments or purchases that exceed $600 in a calendar year will need to be accompanied by a 1099 filing. That means obtaining the taxpayer ID number of the individual or corporation you're making the payment to -- even if it's a giant retailer like Staples or Best Buy -- at the time of the transaction, or else facing IRS penalties.

In essence, the 1099-Misc is having its role changed from a form for tracking off-payroll employment to one that must accompany virtually any sizeable business transaction.

"Just with business travel it would include hotels, rental cars," Henschke says. "Phone service: 1099. Computer service: 1099. Whoever does your postage meter: 1099. You do a little advertising, Yellow Pages: 1099. Your landlord: 1099. You might as well just keep them in your pocket and hand them out as you go around every day."

How did this sweeping provision end up hidden in the health reform bill? No one is willing to take credit for introducing the new legislation, which appeared in the Senate Finance Committee's version of the health bill last fall. Committee chairs Don Baucus, D-Mont., and Chuck Grassley, R-Iowa, both referred calls to committee staffers, who wouldn't comment on the record.

But the provision appears to be a long-in-the-works change that was just waiting for the right moment to be attached to legislation.

Back in 2007, the Senate Finance Committee asked the government's General Accountability Office to conduct a tax-gap study. The resulting report estimated that establishing additional 1099 paper trails for income could provide up to $345 billion annually in new federal tax revenues.

Enter the health reform bill. Last fall, as the debate raged over its projected cost, Congressional supporters of the bill began a desperate search for "revenue enhancers" to bring the net cost down -- and eliminating the 1099 exceptions for corporations and goods was seen as an easy way to bring in more cash without raising tax rates.

House and Senate staffers "essentially have a cupboard full of convenient revenue raisers that they can put into bills when they need it," notes Chris Edwards, director of tax policy studies for the libertarian Cato Institute. In the case of the 1099 changes, he says, "this was sitting around, the IRS wanted it and had testified in favor of it, and they needed a revenue raiser. This was just a convenient thing."

Still, the form the new law took was surprising -- especially the requirement that businesses file 1099s when they purchase goods, which hardly anyone saw coming.

Henschke's group had previously surveyed its members and learned that they average 10 filings a year of 1099 forms, each of which takes about half an hour to prepare. That's in line with the GAO report, which found that a typical small business spent between three and five hours per year filing 1099s.

But SMC's survey found that extending 1099s just to services purchased from corporations would push that number to at least 200 filings per year for a typical small business -- adding an estimated $6,000 to the cost of preparing the average tax return. And that's without even accounting for the requirement that 1099s be filed for purchases of goods, a provision that Henschke's group didn't see coming when it conducted its survey last year.

"These folks are doing their paperwork in the evenings and on the weekends already," he says. "This certainly adds to the burden substantially."

The IRS has a draft version of the 1099-K form available now for public feedback, and will begin requiring the form's use next year. The additional 1099 requirements take effect in 2012. The agency is in the process of drafting its guidance on them.

How To Create a Workplace Recycling Program

I am fortunate to live in a community that recycles.We have separate bins for recycle and trash. I call it my clean trash and my dirty trash. Separate trucks come by each week to pick up the different bins. Even though I have been recycling for a decade it still surprises me just how much of my trash is recyclable. I would say 50% or more. I wish I could say that all my neighbors participate but some still see it as an inconvenience.

How To Create a Workplace Recycling Program

Choose a Recycling Coordinator
Pick Materials to Recycle
Decide Your Collection Method
Determine How it Will be Hauled Away
Set Up Recycling Bins and Guidelines
Monitor the Program
Promote Your Program Through Education
What Role Will the Custodial Staff Play?
Read Earth911 full article.

Tax-Free Employer-Provided Health Coverage

I think this is a good thing.

Tax-Free Employer-Provided Health Coverage Now Available for Children under Age 27


IR-2010-53, April 27, 2010

WASHINGTON — As a result of changes made by the recently enacted Affordable Care Act, health coverage provided for an employee's children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010.

The Internal Revenue Service announced today that these changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit.

IRS Notice 2010-38 explains these changes and provides further guidance to employers, employees, health insurers and other interested taxpayers.

“These changes give employers a unique opportunity to offer a worthwhile benefit to their employees,” IRS Commissioner Doug Shulman said. “We want to make it as easy as possible for employers to quickly implement this change and extend health coverage on a tax-favored basis to older children of their employees.”

This expanded health care tax benefit applies to various workplace and retiree health plans. It also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.

Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. This new age 27 standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes.

The notice says that employers with cafeteria plans may permit employees to immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.

In addition to changing the tax rules as described above, the Affordable Care Act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided not later than plan years beginning on or after Sept. 23, 2010. The favorable tax treatment described in the notice applies to that extended coverage.

Information on other health care provisions can be found on this website, IRS.gov.

If you are a small employer (business or tax exempt) that provides health insurance coverage to your employees there is a simple 3-step form to determine if you qualify for the new Heath Care Tax Credit for Small Business. It can be found on our website at Tax Talk.