Starting in 2010, a provision in the new health care reform law requires self-employed workers, small businesses, charities and government agencies to issue Form 1099s to every vendor that they purchase more than $600 in goods from during the year.
So if your are a small business that buys $700 worth of office supplies from Office Depot then you will be required to send a Form 1099 to the store and the IRS.
This provision in the health care legislations is meant to give the IRS more information about small businesses with the hope that it will reduce the total amount of underreported income in this county.
But this provision will be more of a burden to small business owners than a benefit. Businesses that make qualified purchases from at least 250 vendors during a year will be required to file their 1099s electronically, which means that business owners have to purchase expensive software to comply. Overall you'll find more business owners receiving computer generated nastygrams from the IRS wanting additional taxes and penalties.
Let's hope this law is repealed before 2012.
Source: Small businesses, charities face more reporting rules, Sandra Block, USA Today
Wednesday, September 22, 2010
Thursday, September 16, 2010
What to Expect in 2011? Who knows?
I recently read a good article in the Wall Street Journal about many of the tax changes to come in 2011. The article addresses what's ahead regarding dividend rates, individual income tax rates, capital gains rates, estate taxes, gift taxes, charitable giving, the alternative minimum tax, and various other issues. It provides some good insight as to what readers can expect. It goes without saying that the Obama administration is keeping their sights set on individuals making more than $250,000 a year. Please keep in mind that all of these issues should be considered with a tax professional before making a move.
Wednesday, September 8, 2010
Non-Profit Filing Deadline
Nearly all tax-exempt organizations must file an annual return with the IRS. As a general rule, tax-exempt organizations must file a Form 990 unless they qualify to file a 990-EZ or 990-N. For several years, the smallest tax-exempt organizations (gross receipts of $25k or less) had no filing requirement. However, the IRS now requires the smallest tax-exempt organizations to electronically file Form 990-N (also called the e-Postcard).
Also any tax-exempt organization that fails to file required returns for three consecutive years, whether it be the Form 990-N, 990-EZ, or 990, automatically loses its federal tax-exempt status. If an organization loses its tax-exempt status, then it must reapply with the IRS to regain its tax exemption. Any income received between the revocation date and renewed exemption may be taxable.
If you are part of a small tax exempt organization, which has failed to file required returns for 2007, 2008, and 2009, then you are in luck. Small tax exempt organizations can preserve their status by filing returns by Oct. 15, 2010, under a one-time relief program provided by the IRS. The smallest tax-exempt organizations required to file Form 990-N can go to the IRS website and submit a simple form to bring itself back into compliance. While small tax-exempt organizations eligible for file a Form 990-EZ may participate in a voluntary compliance program (VCP), file delinquent annual returns, and pay a compliance fee.
If you don't know whehter your organizations has filed to file returns for the last three years, the IRS has posted on the following page the names and last-known addresses of these at-risk organizations, along with guidance about how to come back into compliance.
As always, we generally recommend that you contact a tax professional before doing anything.
Thursday, September 2, 2010
Irrevocable Life Insurance Trust (The ILIT)
Let's set up a hypothetical. Married couple age 40. Two children ages 10 and 12. Total value of their combined estate is $2.5 million.
Equity in home = $200k
Qualified Retirement Plan (i.e. IRA) = $200k
Stocks and Bonds = $100k
Term Life Insurance = $2 million
If we take the advice of the previous article and include a credit shelter trust into the couple's Wills, then all but $500k will be exempt from estate taxes (assuming both husband and wife die with a $1 million exemption amount).
The $500k could be subject to estate taxes at a top rate of 55% in 2011. But we can avoid all estate taxes if a life insurance policy is owned by an Irrevocable Life Insurance Trust ("ILIT"). An ILIT is one of a few techniques available to estate planning attorney to enable clients to transfer property to family members without having the property included in their estates at death.
Let's assume the life insurance policy is a ("Survivor Policy"), which insures both husband and wife and pays the proceeds on death of the second spouse to die. Now let's assume the couple establishes an ILIT, then transfers the existing insurance policy to the ILIT. The couple then transfers liquid assets sufficient to pay the first year's premium to the ILIT. Each year, the donor makes a gift to the ILIT sufficient to pay the premiums due. The children, as named beneficiaries, are given a 30 day "Crummy" right to withdraw the contributions (which they never exercise) so that each contribution is exempt from gift taxes.
At death, the life insurance proceeds are paid to the ILIT and distributed to beneficiaries under the terms of the ILIT. If the couple lives for three years after the transfer of the existing policy to the ILIT, then at death, the policy is totally excluded from their estates, which means the last spouse to die will only have a $500k estate and the children won't have to pay any federal estate taxes.
The trustee of the ILIT should be a third party (i.e. a trusted sibling or friend). Upon the death of the both spouses, the trustee will manage the property for any minor children until a certain age or ages at which point the trust proceeds may be distributed to the children outright.
In sum, the ILIT is a great way to transfer wealth to the next generation while avoiding estate taxes. As 2011 draws near, it is becoming more and more likely that we might be looking at a $1 million exemption per person. The lower the exemption the more ILITs will be used to transfer wealth.
Tuesday, August 17, 2010
Recent Question
Below is a recent question I answered on http://www.avvo.com/. It is a common question of many clients with creditor issues.
Q: does it make sense to purchase/transfer assets in the name of the spouse.: if you are in a profession/job subject to litigation, does acquiring/transferring assets in the name or your spouse keep those assets in the event you are sued. I live and work in the state of Washington.
A: Thomas' answer: Not necessarily. Washington is a community property state. Assets acquired during the marriage are presumed to be community property, which means each spouse has 1/2 interest in the whole. You may rebut the presumption if you can trace the funds used to purchase the asset to a separate property source (i.e. inheritance). But keep in mind, inheritance will only retain its separate character during marriage only if it has not been commingled with community funds. Separate entities such as limited liability companies and certain irrevocable trusts may be a better way to hold title to the assets depending on what assets you are acquiring. Also professionals should probably consider having malpractice insurance as well.
Visit my profile on Avvo.com
Q: does it make sense to purchase/transfer assets in the name of the spouse.: if you are in a profession/job subject to litigation, does acquiring/transferring assets in the name or your spouse keep those assets in the event you are sued. I live and work in the state of Washington.
A: Thomas' answer: Not necessarily. Washington is a community property state. Assets acquired during the marriage are presumed to be community property, which means each spouse has 1/2 interest in the whole. You may rebut the presumption if you can trace the funds used to purchase the asset to a separate property source (i.e. inheritance). But keep in mind, inheritance will only retain its separate character during marriage only if it has not been commingled with community funds. Separate entities such as limited liability companies and certain irrevocable trusts may be a better way to hold title to the assets depending on what assets you are acquiring. Also professionals should probably consider having malpractice insurance as well.
Visit my profile on Avvo.com
Friday, August 13, 2010
The Credit Shelter Trust
Typically people come to our office looking for a Will, which gives all of their assets to their spouse, if living, and if not, their children. Many times our clients know that there is an estate tax, but most have no idea that the estate tax could affect them.
I generally ask our clients to complete a brief asset worksheet which usually reveals something like this:
Equity in the Primary Residence = $200,000
Qualified Retirement Plan (i.e. IRA) = $200,000
Stocks and Bonds = $100,000
Term Life Insurance (Face Value) = $2,000,000
TOTAL = $2,500,000
Most people ask, "Why do you want to know the amount of our life insurance, its not subject to tax anyway?"
They are in part correct. Life insurance is not subject to income tax. But it is subject to the estate tax.
As stated in previous articles, the life-time exclusion amount for each person in 2011 will be $1,000,000 unless Congress acts. This means that if you die in 2011 the amount that exceeds $1,000,000 will be subject to an estate tax with a top rate of 55%.
Let play this out with the above clients. Assume that the above clients are a married couple and they would like an "I love you Will," which gives everything to one another first then their children.
Under current federal and Washington state estate tax laws, a husband and wife may transfer an unlimited amount of property to one another free of estate taxes (called the unlimited marital deduction). Assume that husband dies in January 2011 and gives everything to his wife. Now, the wife's estate is worth $2,500,000. If she dies the following December leaving everything to the kids, then $1,500,000 will be subject to the estate tax at a top rate of 55%. So wife's children could be looking at roughly a $800k tax bill.
However, if the couple had their estate planning attorney draft a "credit shelter trust" in their Will, rather than going with the standard "I love you," they could have saved their children the $800k.
So what's a credit sheleter trust? It is a paragraph in your will that says if I die before my spouse then I want a portion of my estate to go into a trust for the benefit of my spouse's health, education, support and maintence. The suriving spouse can be the trustee of this trust as well as the life-time beneficiary. When she dies, the rest will pass to the children in equal shares.
If husband dies with a credit shelter trust, then an amount equal to the life-time exemption amount ($1 million in 2011) of the husband's total estate goes into the credit shelter trust for the benefit of the surviving spouse. The rest of the husband's estate ($250,000) passes to the surviving spouse outright. No estate tax is paid at husband's death because he used his $1 million exemption amount to shelter the property that went into trust, and the $250,000 that transferred to wife passed tax free under the unlimited marital deduction.
Wife now has a $1,500,000 million dollar estate rather than a $2.5 million dollar estate. Now she can use her $1 million exclusion amount to shelter all but $500,000, saving over $500,000 in estate taxes.
The credit shelter trust is a widely used estate planning tool used by many people in this situtation. However, there are many other tools that can be used to save even more. In the articles to follow, I will address what the wife can do to shelter the remaining $500,000 from the estate tax.
I generally ask our clients to complete a brief asset worksheet which usually reveals something like this:
Equity in the Primary Residence = $200,000
Qualified Retirement Plan (i.e. IRA) = $200,000
Stocks and Bonds = $100,000
Term Life Insurance (Face Value) = $2,000,000
TOTAL = $2,500,000
Most people ask, "Why do you want to know the amount of our life insurance, its not subject to tax anyway?"
They are in part correct. Life insurance is not subject to income tax. But it is subject to the estate tax.
As stated in previous articles, the life-time exclusion amount for each person in 2011 will be $1,000,000 unless Congress acts. This means that if you die in 2011 the amount that exceeds $1,000,000 will be subject to an estate tax with a top rate of 55%.
Let play this out with the above clients. Assume that the above clients are a married couple and they would like an "I love you Will," which gives everything to one another first then their children.
Under current federal and Washington state estate tax laws, a husband and wife may transfer an unlimited amount of property to one another free of estate taxes (called the unlimited marital deduction). Assume that husband dies in January 2011 and gives everything to his wife. Now, the wife's estate is worth $2,500,000. If she dies the following December leaving everything to the kids, then $1,500,000 will be subject to the estate tax at a top rate of 55%. So wife's children could be looking at roughly a $800k tax bill.
However, if the couple had their estate planning attorney draft a "credit shelter trust" in their Will, rather than going with the standard "I love you," they could have saved their children the $800k.
So what's a credit sheleter trust? It is a paragraph in your will that says if I die before my spouse then I want a portion of my estate to go into a trust for the benefit of my spouse's health, education, support and maintence. The suriving spouse can be the trustee of this trust as well as the life-time beneficiary. When she dies, the rest will pass to the children in equal shares.
If husband dies with a credit shelter trust, then an amount equal to the life-time exemption amount ($1 million in 2011) of the husband's total estate goes into the credit shelter trust for the benefit of the surviving spouse. The rest of the husband's estate ($250,000) passes to the surviving spouse outright. No estate tax is paid at husband's death because he used his $1 million exemption amount to shelter the property that went into trust, and the $250,000 that transferred to wife passed tax free under the unlimited marital deduction.
Wife now has a $1,500,000 million dollar estate rather than a $2.5 million dollar estate. Now she can use her $1 million exclusion amount to shelter all but $500,000, saving over $500,000 in estate taxes.
The credit shelter trust is a widely used estate planning tool used by many people in this situtation. However, there are many other tools that can be used to save even more. In the articles to follow, I will address what the wife can do to shelter the remaining $500,000 from the estate tax.
Monday, August 9, 2010
Surprise! You're Wealthy!
Well, here we are almost two-thirds of the way through the year and it appears more and more that, by default, Congress will redefine the definition of what it means to be wealthy in this country. Assuming Congress doesn’t act soon, on January 1, 2011 “wealthy” will mean any person who has the ability to leave more than $1,000,000 to his or her family and friends. Granted, on its face, $1,000,000 is a lot of money and few of us think that we realistically have the ability to leave that much when we died, but when you take a closer look at how that number is calculated, it’s surprising how many of us it includes. Generally the calculation includes any asset you have “dominion and control over” at the time of your death. The obvious things are bank and investment accounts and properties, personal property (e.g., vehicles, home furnishings, jewelry and collectables), and home equity (is there such a thing these days?). Then you have your tax deferred retirement accounts (IRAs, 401(k)s, etc.) and business interests. And finally, the one that surprises most people: the death benefit of life insurance.
If, when you add the value of all of these things together, the total is over $1,000,000, then 55 cents of every dollar over that amount will go to the U.S. Treasury. A couple of things make it even more painful. With life insurance, for example, it just doesn’t seem right that the death benefit should be subject to estate tax – after all, you never see a penny of it while you’re living. For business and real estate owners, the tax is levied on the value of the business or property. That means, unless there are other assets to pay the tax with (like life insurance), the business or the home may have to be liquidated. And then, if you have a qualified retirement plan, all of the unpaid income tax (at a rate of up to 35%) may become due at death in addition to the 55% estate tax.
The simplest strategy for avoiding the estate tax is to be sure to get rid of it all before you die, but that may be difficult to execute and, as might be expected, the government has devised ways to foil that strategy too. That said, there are other things you can do short of impoverishing yourself. In my next article I’ll discuss some of those strategies. Until then, enjoy your wealth.
If, when you add the value of all of these things together, the total is over $1,000,000, then 55 cents of every dollar over that amount will go to the U.S. Treasury. A couple of things make it even more painful. With life insurance, for example, it just doesn’t seem right that the death benefit should be subject to estate tax – after all, you never see a penny of it while you’re living. For business and real estate owners, the tax is levied on the value of the business or property. That means, unless there are other assets to pay the tax with (like life insurance), the business or the home may have to be liquidated. And then, if you have a qualified retirement plan, all of the unpaid income tax (at a rate of up to 35%) may become due at death in addition to the 55% estate tax.
The simplest strategy for avoiding the estate tax is to be sure to get rid of it all before you die, but that may be difficult to execute and, as might be expected, the government has devised ways to foil that strategy too. That said, there are other things you can do short of impoverishing yourself. In my next article I’ll discuss some of those strategies. Until then, enjoy your wealth.
Subscribe to:
Posts (Atom)