ChamberLink February 2012 : Page 11

February 2012 • ChamberLink 11 Lifetime Giving Can Yield Tax Benefits By Brad Jones Lifetime giving strategies of property are among one of the most powerful tools available to accomplish many income tax and estate tax planning goals. Nontax objectives, such as avoiding probate, protection from creditors, shifting administra-tive and management burdens as well as the personal satisfaction of making gifts to loved ones can be achieved through properly struc-tured lifetime gifts. There are some nontax disadvantages too. The loss of control over transferred property, unintentional negative affects on ambition and incentives of donees, and of course the uncomfortable aspects of planning for one’s own death, all should be considered before diving in to the tax planning aspects. It is critical to note that the tax law surround-ing gifts and estates is in transition. The law in affect today results from the 2010 Tax Relief Act which reinstated the federal estate tax and generation-skipping transfer (GST) tax to the beginning of 2010 and reuni-fied the estate and gift tax exemptions for two years beginning in 2011. For these two years only, 2011 and 2012, the law provides broad relief with increased exclusion amounts of $5 million for 2011 and $5,120,000 for 2012 and a maximum tax rate of 35 percent for estate, gift and GST purposes. The law also provides for the portability of a decedent’s unused estate exclusion to the surviving spouse. All of these provisions are due to sunset at the end of this year. The political tension surrounding this body of law is at an all time high, at least in my memory, and changes are certain. What those changes will be is uncertain. Conventional wisdom tells us that no major tax legislation is likely in a presidential election year. But whether Congress acts or not there will be changes. If Congress does nothing, the law reverts to the 2001 law with an estate and gift tax applicable exclusion amount of $1 million, GST tax exemption of $1 million adjusted for inflation, a maximum tax rate of 55 percent and no portability of the first deceased spouse’s unused exclusion. If Congress does try to act to prevent the reversion to 2001 law and does so after the election in November, it would be doing so as a lame duck Congress negotiating with a potentially lame duck President. The legis-lative process is always a bit messy, but the possible statutory offspring crafted by such a cast of characters just described is absolutely bone-chilling. Whether we end up with some legislative ugly duckling or the problem is left to the 2013 Congress with new majorities and a strength-ened, weakened or new president we may not have certainty in this area, if at all, until after the year is concluded. Because of these uncertainties, planning is even more difficult and everyone involved should closely monitor developments in this area. But alas the world turns, the sun rises and life goes on, never waiting for Congress. 2011, and now 2012, may represent a once-in-a-lifetime opportunity to affect substantial wealth trans-fer. In addition to the elevated exclusions, many assets are depressed in value, interest rates are low, there is no current legislation restricting appropriate valuation discounts for family limited partnerships or limited liability companies (both potential targets of future legislation). Opportunities abound. Removing assets from an estate before they appreciate is a very straightforward way to eliminate future estate taxes. By making the transfer at today’s depressed value, a larger gift is possible. Any appreciation in the asset after the transfer is also outside the estate. If a gift is made in a properly structured complete gift to a grantor trust, the donor pays the income tax on the trust’s taxable income but the value initially transferred, the appreciation in the asset and the income tax paid by the donor all reduce the donor’s estate for estate tax purposes. In addition to reducing the size of a taxable estate, a gifting strategy may reduce income taxes by shifting income-earning property to a taxpayer in a lower tax bracket. As is usually the case, there are some down-sides. If the donor’s basis in the gifted property is substantially lower than the property’s fair market value, gifting may be ill-advised. The donee receives the donor’s carryover basis rather than a stepped up basis which would be the case at death. When the property is later sold, the donee may recognize significant capital gain. There is also an unsettled question about a potential claw-back of tax benefits of the increased exclusion if the law is permitted to sunset or if the ultimate exclusion is less than that provided in the 2010 Act. This is because of the manner in which taxable gifts are included when computing the estate tax base. Nevertheless, even if the claw-back were to apply it may still be beneficial to make the gifts by removing the appreciation in the assets transferred. Lifetime giving may be an effective strategy. It is complicated and there are numerous is-sues and uncertainties, but the benefits could be enormous. Brad Jones is a CPA and a partner with PBGH, LLP. Individual Tax Considerations for 2011 and 2012 By J. Denise Short With a new year underway and the April tax filing deadline looming, it is a good time to review some of the changes which may affect your individual tax filing for 2011 and your tax plan-ning for 2012. Two major changes which could affect your 2011 tax filing involve foreign financial asset disclosure and capital gain and loss reporting. Foreign FinanCiaL assets disCLosure The Foreign Account Tax Compliance Act of 2010 imposed a new reporting requirement for interests in foreign assets. Cer-tain taxpayers are now required to report their specified foreign financial assets in which they have an interest in tax years starting after March 18, 2010. For most individual taxpayers, this means they will start reporting by filing the new Form 8938, Statement of Specified Foreign Financial Assets, with their 2011 income tax return. The penalties for failing to comply are substantial, starting at $10,000 up to a maximum of $50,000. Taxpayers subject to this reporting requirement are U.S. citizens; resident aliens of the U.S. for any part of the tax year; a nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return; or a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico. Specified foreign financial assets include foreign financial ac-counts, and foreign non-account assets held for investment, such as foreign stock and securities, foreign financial instruments, con-tracts with non-U.S. persons, and interests in foreign entities. Form 8938 reporting is required if the aggregate value of the taxpayer’s specified foreign financial assets is more than the reporting threshold that applies to the taxpayer. For an unmarried taxpayer living in the U.S., reporting is required if the total value of the taxpayer’s specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. For married taxpayers filing a joint income tax return and living in the U.S., the threshold is double the amounts for an unmarried taxpayer. For a taxpayer living abroad, the threshold amounts are considerably higher. The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation, if there is one, under the Bank Secrecy Act to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (known as the “FBAR”). Taxpayers generally must file an FBAR if they have a financial interest in, signature authority or other authority over one or more accounts in a foreign country, and the value of the account exceeds $10,000 at any time during the calendar year. The FBAR must be received by the IRS on or before June 30 of the year following the calendar year being reported. The FBAR is not filed with the taxpayer's federal income tax return. Instead, it is mailed to the Treasury Department or filed electronically with the Treasury Department. CapitaL gain and Loss reporting There is a substantial change in the reporting of the capital gain and loss transactions on 2011 individual income tax returns. Individual transactions are no longer reported on Schedule D. In most cases, the sale of capital assets will be reported on the new Form 8949, with the totals flowing to the Schedule D. In addition, beginning in 2011, brokers became subject to additional reporting requirements for sales and exchanges. If you sold a covered security in 2011, your broker will send you a Form 1099-B which shows your basis in the security. Generally, a covered security is a security acquired after 2010. The start of a new year is also a good time to brush up on some of the changes in effect for 2012 that may affect your tax planning for the current year. Several popular tax benefits have expired effective Jan. 1, 2012. These include: • the itemized deduction for state and local sales tax in lieu of state income tax • the itemized deduction for qualified mortgage insurance premiums • the deduction from adjusted gross income for qualified higher education tuition and fees • the deduction from adjusted gross income for up to $250 of educator’s unreimbursed classroom expenses • the non-business energy property credit for improvements to a principal residence (such as insulation, exterior windows and doors, heating and air conditioning systems, and hot water heaters) which meet certain requirements for energy efficiency. In addition to tax provisions that expired effective in 2012, tax provisions scheduled to expire at the end of 2012 should also be considered in your tax planning. Under current law, the reduced individual income tax rates and the reduced capital gains/qualified dividends tax rates are scheduled to expire after 2012. If Congress does not act, starting Jan. 1, 2013, the top two income tax rates, currently 33 percent and 35 percent, will automatically rise to 36 and 39.6 percent, respectively. In addition, the preferential tax rates of 0 percent and 15 percent on qualified dividends will be eliminated in 2013, and such dividends will be taxed at the taxpayer’s applicable ordinary income tax rate. In 2013, the maximum capital gains tax rates of 0 percent and 15 percent will also increase to 20 percent and 10 percent. We have only covered a few of the many tax provisions that could impact your taxes, and tax law is constantly evolving. As always, you should consult with your tax professional regarding your specific tax situation. Denise Short is a CPA with PBGH, LLP.

Lifetime Giving Can Yield Tax Benefits

Brad Jones

Lifetime giving strategies of property are among one of the most powerful tools available to accomplish many income tax and estate tax planning goals. Nontax objectives, such as avoiding probate, protection from creditors, shifting administrative and management burdens as well as the personal satisfaction of making gifts to loved ones can be achieved through properly structured lifetime gifts. There are some nontax disadvantages too. The loss of control over transferred property, unintentional negative affects on ambition and incentives of donees, and of course the uncomfortable aspects of planning for one’s own death, all should be considered before diving in to the tax planning aspects. It is critical to note that the tax law surrounding gifts and estates is in transition. The law in affect today results from the 2010 Tax Relief Act which reinstated the federal estate tax and generation-skipping transfer (GST) tax to the beginning of 2010 and reunified the estate and gift tax exemptions for two years beginning in 2011. For these two years only, 2011 and 2012, the law provides broad relief with increased exclusion amounts of $5 million for 2011 and $5,120,000 for 2012 and a maximum tax rate of 35 percent for estate, gift and GST purposes. The law also provides for the portability of a decedent’s unused estate exclusion to the surviving spouse. All of these provisions are due to sunset at the end of this year. The political tension surrounding this body of law is at an all time high, at least in my memory, and changes are certain. What those changes will be is uncertain. Conventional wisdom tells us that no major tax legislation is likely in a presidential election year. But whether Congress acts or not there will be changes. If Congress does nothing, the law reverts to the 2001 law with an estate and gift tax applicable exclusion amount of $1 million, GST tax exemption of $1 million adjusted for inflation, a maximum tax rate of 55 percent and no portability of the first deceased spouse’s unused exclusion. If Congress does try to act to prevent the reversion to 2001 law and does so after the election in November, it would be doing so as a lame duck Congress negotiating with a potentially lame duck President. The legislative process is always a bit messy, but the possible statutory offspring crafted by such a cast of characters just described is absolutely bone-chilling. Whether we end up with some legislative ugly duckling or the problem is left to the 2013 Congress with new majorities and a strengthened, weakened or new president we may not have certainty in this area, if at all, until after the year is concluded. Because of these uncertainties, planning is even more difficult and everyone involved should closely monitor developments in this area. But alas the world turns, the sun rises and life goes on, never waiting for Congress. 2011, and now 2012, may represent a once-in-a-lifetime opportunity to affect substantial wealth transfer. In addition to the elevated exclusions, many assets are depressed in value, interest rates are low, there is no current legislation restricting appropriate valuation discounts for family limited partnerships or limited liability companies (both potential targets of future legislation). Opportunities abound. Removing assets from an estate before they appreciate is a very straightforward way to eliminate future estate taxes. By making the transfer at today’s depressed value, a larger gift is possible. Any appreciation in the asset after the transfer is also outside the estate. If a gift is made in a properly structured complete gift to a grantor trust, the donor pays the income tax on the trust’s taxable income but the value initially transferred, the appreciation in the asset and the income tax paid by the donor all reduce the donor’s estate for estate tax purposes. In addition to reducing the size of a taxable estate, a gifting strategy may reduce income taxes by shifting income-earning property to a taxpayer in a lower tax bracket. As is usually the case, there are some downsides. If the donor’s basis in the gifted property is substantially lower than the property’s fair market value, gifting may be ill-advised. The donee receives the donor’s carryover basis rather than a stepped up basis which would be the case at death. When the property is later sold, the donee may recognize significant capital gain. There is also an unsettled question about a potential claw-back of tax benefits of the increased exclusion if the law is permitted to sunset or if the ultimate exclusion is less than that provided in the 2010 Act. This is because of the manner in which taxable gifts are included when computing the estate tax base. Nevertheless, even if the claw-back were to apply it may still be beneficial to make the gifts by removing the appreciation in the assets transferred. Lifetime giving may be an effective strategy. It is complicated and there are numerous issues and uncertainties, but the benefits could be enormous. Brad Jones is a CPA and a partner with PBGH, LLP.

Individual Tax Considerations for 2011 and 2012

J. Denise Short

With a new year underway and the April tax filing deadline looming, it is a good time to review some of the changes which may affect your individual tax filing for 2011 and your tax planning for 2012. Two major changes which could affect your 2011 tax filing involve foreign financial asset disclosure and capital gain and loss reporting. Foreign financial assets disclosure The Foreign Account Tax Compliance Act of 2010 imposed a new reporting requirement for interests in foreign assets. Certain taxpayers are now required to report their specified foreign financial assets in which they have an interest in tax years starting after March 18, 2010. For most individual taxpayers, this means they will start reporting by filing the new Form 8938, Statement of Specified Foreign Financial Assets, with their 2011 income tax return. The penalties for failing to comply are substantial, starting at $10,000 up to a maximum of $50,000. Taxpayers subject to this reporting requirement are U.S. citizens; resident aliens of the U.S. for any part of the tax year; a nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return; or a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico. Specified foreign financial assets include foreign financial accounts, and foreign non-account assets held for investment, such as foreign stock and securities, foreign financial instruments, contracts with non-U.S. persons, and interests in foreign entities. Form 8938 reporting is required if the aggregate value of the taxpayer’s specified foreign financial assets is more than the reporting threshold that applies to the taxpayer. For an unmarried taxpayer living in the U.S., reporting is required if the total value of the taxpayer’s specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. For married taxpayers filing a joint income tax return and living in the U.S., the threshold is double the amounts for an unmarried taxpayer. For a taxpayer living abroad, the threshold amounts are considerably higher. The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation, if there is one, under the Bank Secrecy Act to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (known as the “FBAR”). Taxpayers generally must file an FBAR if they have a financial interest in, signature authority or other authority over one or more accounts in a foreign country, and the value of the account exceeds $10,000 at any time during the calendar year. The FBAR must be received by the IRS on or before June 30 of the year following the calendar year being reported. The FBAR is not filed with the taxpayer's federal income tax return. Instead, it is mailed to the Treasury Department or filed electronically with the Treasury Department. Capital gain and loss reporting There is a substantial change in the reporting of the capital gain and loss transactions on 2011 individual income tax returns. Individual transactions are no longer reported on Schedule D. In most cases, the sale of capital assets will be reported on the new Form 8949, with the totals flowing to the Schedule D. In addition, beginning in 2011, brokers became subject to additional reporting requirements for sales and exchanges. If you sold a covered security in 2011, your broker will send you a Form 1099-B which shows your basis in the security. Generally, a covered security is a security acquired after 2010. The start of a new year is also a good time to brush up on some of the changes in effect for 2012 that may affect your tax planning for the current year. Several popular tax benefits have expired effective Jan. 1, 2012. These include: the itemized deduction for state and local sales tax in lieu of state income tax the itemized deduction for qualified mortgage insurance premiums the deduction from adjusted gross income for qualified higher education tuition and fees the deduction from adjusted gross income for up to $250 of educator’s unreimbursed classroom expenses the non-business energy property credit for improvements to a principal residence (such as insulation, exterior windows and doors, heating and air conditioning systems, and hot water heaters) which meet certain requirements for energy efficiency. In addition to tax provisions that expired effective in 2012, tax provisions scheduled to expire at the end of 2012 should also be considered in your tax planning. Under current law, the reduced individual income tax rates and the reduced capital gains/qualified dividends tax rates are scheduled to expire after 2012. If Congress does not act, starting Jan. 1, 2013, the top two income tax rates, currently 33 percent and 35 percent, will automatically rise to 36 and 39.6 percent, respectively. In addition, the preferential tax rates of 0 percent and 15 percent on qualified dividends will be eliminated in 2013, and such dividends will be taxed at the taxpayer’s applicable ordinary income tax rate. In 2013, the maximum capital gains tax rates of 0 percent and 15 percent will also increase to 20 percent and 10 percent. We have only covered a few of the many tax provisions that could impact your taxes, and tax law is constantly evolving. As always, you should consult with your tax professional regarding your specific tax situation. Denise Short is a CPA with PBGH, LLP.

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