Year-end tax planning for 2015

October 28, 2015 by · Leave a Comment 

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the challenge include turbulence in the stock market, overall economic uncertainty, and Congress’ failure to act on a number of important tax breaks that expired at the end of 2014. Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year, but Congress may not decide the fate of these tax breaks until the very end of 2015 (or later).

Opportunities for Individuals

These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70-1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.

Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax. The latter tax applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case).

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his or her estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

The 0.9% additional Medicare tax also may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over-withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s combined income won’t be high enough to actually cause the tax to be owed.

Opportunities for Businesses

For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first-year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year write-off for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.

Below is a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them.

    Year-End Tax Planning Moves for Individuals

Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

Postpone income until 2016 and accelerate deductions into 2015 to lower your 2015 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2015 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2015. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2016 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.

If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2015.

If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by re-characterizing the conversion—that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

It may be advantageous to try to arrange with your employer to defer, until 2016, a bonus that may be coming your way.

Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2015 deductions even if you don’t pay your credit card bill until after the end of the year.

If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2015 if you won’t be subject to the alternative minimum tax (AMT) in 2015.

Take an eligible rollover distribution from a qualified retirement plan before the end of 2015 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2015. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2015, but the withheld tax will be applied pro rata over the full 2015 tax year to reduce previous underpayments of estimated tax.

Estimate the effect of any year-end planning moves on the AMT for 2015, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses of a taxpayer who is at least age 65 or whose spouse is at least 65 as of the close of the tax year, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. If you are subject to the AMT for 2015, or suspect you might be, these types of deductions should not be accelerated.

You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.

You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-1/2. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2015, you can delay the first required distribution to 2016, but if you do, you will have to take a double distribution in 2016—the amount required for 2015 plus the amount required for 2016. Think twice before delaying 2015 distributions to 2016, as bunching income into 2016 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that year.

Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.

If you can make yourself eligible to make health savings account (HSA) contributions by Dec. 1, 2015, you can make a full year’s worth of deductible HSA contributions for 2015.

Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2015 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for Businesses & Business Owners

    Businesses should buy machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby secure a half-year’s worth of depreciation deductions in 2015.

    Although the business property expensing option is greatly reduced in 2015 (unless retroactively changed by legislation), making expenditures that qualify for this option can still get you thousands of dollars of current deductions that you wouldn’t otherwise get. For tax years beginning in 2015, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.

    Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2015.

    A corporation should consider accelerating income from 2016 to 2015 if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2016 if it will be in a higher bracket this year.

    A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2015. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.

    A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2015 (and substantial net income in 2016) may find it worthwhile to accelerate just enough of its 2016 income (or to defer just enough of its 2015 deductions) to create a small amount of net income for 2015. This will permit the corporation to base its 2016 estimated tax installments on the relatively small amount of income shown on its 2015 return, rather than having to pay estimated taxes based on 100% of its much larger 2016 taxable income.

    If your business qualifies for the domestic production activities deduction (DPAD) for its 2015 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2015 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2015, even if the business has a fiscal year.

    To reduce 2015 taxable income, if you are a debtor, consider deferring a debt-cancellation event until 2016.

    To reduce 2015 taxable income, consider disposing of a passive activity in 2015 if doing so will allow you to deduct suspended passive activity losses.

    If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

    These are just some of the year-end steps that can be taken to save taxes. Please contact us if you would like for us to tailor a particular plan that will work best for you or discuss any potential resuscitated tax-saving opportunities.

Recent Tax Developments in 2015

July 17, 2015 by · Leave a Comment 

The following is a summary of important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Supreme Court upholds subsidies for health care purchased on Federal Exchange.

The Supreme Court by a 6-3 vote determined that premium tax credits (also known as health insurance subsidies) under the Affordable Care Act (ACA), are not limited to taxpayers who live in States that have established their own health insurance Exchange, but are also available to taxpayers living in States that rely on a Federal Exchange. While acknowledging that the challengers’ arguments were strong, the Supreme Court found that the language of the law was ambiguous in light of the context and structure of the premium tax credit provisions, as well as the role of the subsidies in the ACA as a whole. With these considerations in mind, the Supreme Court concluded that allowing the subsidies for insurance purchased on any Exchange was consistent with the purpose of the ACA.

Supreme Court declares nationwide right to same-sex marriage.

The Supreme Court, in a 5-4 decision, struck down four state-wide bans on same-sex marriage, holding that the Fourteenth Amendment requires all States to license a marriage between two people of the same sex. Since same-sex couples may now exercise the fundamental right to marry in all States, the Court ruled that there is no lawful basis for a State to refuse to recognize a lawful same-sex marriage performed in another State. Tax ramifications of this decision include simplified tax filing for some taxpayers, and new filing choices for those who were in a State-sanctioned domestic partnership or civil union before the Supreme Court’s decision.

New trade laws include wide variety of tax provisions.

On June 29, President Obama signed into law two major trade bills: (1) the Trade Preference Extension Act of 2015 (TPE); and (2) and the Trade Priorities and Accountability Act of 2015 (TPA). These new laws contain a variety of tax provisions including the following:

Pre-age-59-1/2 withdrawals from retirement plans generally are subject to a 10% penalty tax unless one of several exceptions applies. Under one of these exceptions, distributions from a government pension-type plan are not subject to the penalty tax if made upon separation from service after age 50 to state or local police, firefighters or emergency medical services personnel. Effective for distributions made after Dec. 31, 2015, the TPA Act broadens the category of eligible governmental workers who can qualify for the penalty tax exception to include specified federal law enforcement officers, customs and border protection officers, federal firefighters, and air traffic controllers who reach age 50 and separate from service. Additionally, the TPA Act expands the types of plans from which distributions eligible for the exception can be made.

The tax rules impose a penalty on taxpayers that fail to file correct information returns (such as IRS Form 1099) with the IRS. There’s a separate, but parallel, penalty on taxpayers that fail to provide the payee with a correct copy of the information return that was required to be filed with the IRS. The penalties are based on the duration of the delinquency and whether the delinquency was intentional, and are subject to maximums that depend on the size of the taxpayer. Effective for returns and statements required to be filed after Dec. 31, 2015, the TPE Act increases these penalties. For example, where an unintentional delinquency is corrected no more than 30 days after the return due date, the TPE Act increases the per-return penalty from $30 to $50 and the maximum penalty for any calendar year, for certain “small” taxpayers, from $75,000 to $175,000.

Next year’s inflation adjustments for health savings accounts (HSAs).

Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employers, as well as other persons (e.g., family members), also may contribute on behalf of an eligible individual. A person is an “eligible individual” if he or she is covered under a high deductible health plan (HDHP) and is not covered under any other health plan that is not a HDHP, unless the other coverage is permitted insurance (e.g., for worker’s compensation, a specified disease or illness, or providing a fixed payment for hospitalization).

The IRS provided the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2016 for health savings accounts (HSAs). For calendar year 2015, the limitation on deductions is $3,350 (no change from 2015) for an individual with self-only coverage. It’s $6,750 (up from $6,650 for 2015) for an individual with family coverage under a HDHP. Each of these amounts is increased by $1,000 if the eligible individual is age 55 or older. For calendar year 2016, an HDHP is a health plan with an annual deductible that is not less than $1,300 (no change from 2015) for self-only coverage or $2,600 (no change from 2015) for family coverage, and with respect to which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 (up from $6,450 for 2015) for self-only coverage or $13,100 for family coverage (up from $12,900 for 2015).

Certain taxpayers can file delinquent FBARs without penalty.

“U.S. persons” (U.S. citizens or residents as well as many entities) who have financial interests in or signature authority over certain financial accounts maintained with financial institutions located outside of the U.S. must file a Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate maximum values of the foreign financial accounts exceed $10,000 at any time during the calendar year. The FBAR is a calendar year report and must be filed on or before June 30 of the year following the calendar year being reported. Those required to file an FBAR but who fail to properly file one may be subject to a civil penalty. The IRS’s Offshore Voluntary Disclosure Program (OVDP) offers people with unreported taxable income from offshore financial accounts or other foreign assets an opportunity to fulfill their tax and information reporting obligations, including the FBAR. In addition, streamlined filing compliance procedures are available to certain persons. The IRS said that U.S. persons should file delinquent FBARs if they don’t need to use either the OVDP or the streamlined filing procedures, have not filed required FBARs, are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent FBARs. The IRS will not impose a penalty for the failure to file the delinquent FBARs if the taxpayer: (a) properly reported on its U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs; and (b) has not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

Monday, April 18 will be 2016 tax deadline for most individual taxpayers.

When April 15 falls on a Saturday, Sunday, or legal holiday (which includes a legal holiday observed in the District of Columbia), a return is considered timely filed if filed on the next succeeding day that is not a Saturday, Sunday, or legal holiday. April 15, 2016 will fall out on a Friday, but the Emancipation Day holiday will be observed in the District of Columbia on that day. As a result, the IRS announced that most taxpayers will have until the next business day, Monday, April 18, 2016, to file their Form 1040s. However, because of a special rule for Patriot’s Day observance on Monday, April 18, 2016, taxpayers in Maine and Massachusetts will have until Tuesday, April 19, 2016 to file their tax returns.

Tax Free Savings Accounts for Disabled Persons

July 17, 2015 by · Leave a Comment 

Update on “Achieving a Better Life Experience” (ABLE) accounts:

For tax years beginning after Dec. 31, 2014, states may establish tax-exempt “Achieving a Better Life Experience” (ABLE) accounts, which can be created by disabled individuals to support themselves or by families to support their disabled dependents. Contributions to the accounts are made on an after-tax basis (i.e., contributions are not deductible), but assets in the account grow tax free. Withdrawals are tax-free if the money is used for qualified disability-related expenses. A nonqualified distribution is subject to income tax and a 10% penalty on the part of the distribution attributable to earnings. Each disabled person is limited to one ABLE account, and total annual contributions by all individuals to any one ABLE account can be made up to the inflation-adjusted gift tax exclusion amount ($14,000 for 2015).

Comprehensive IRS regulations provide details on how ABLE accounts work, including the following:

A qualified ABLE program may accept cash contributions in the form of cash or a check, money order, credit card payment, or other similar method of payment.

If the eligible individual cannot establish the account, the eligible individual’s agent under a power of attorney or, if none, his or her parent or legal guardian may establish the ABLE account for that eligible individual.

An eligible individual must present the disability certification, accompanied by the diagnosis, to the qualified ABLE program, and that certification will be treated as filed with the IRS once the qualified ABLE program has received the disability certification.

Qualified disability expenses are not limited to expenses for items for which there is a medical necessity or which provide no benefits to others in addition to the benefit to the eligible individual. For example, expenses for common items such as smart phones could be considered qualified disability expenses if they are an effective and safe communication or navigation aid for a child with autism.

__________________________________________________________________________________________________

Tax Free Savings Accounts for Disabled Persons

March 13, 2015

The tax laws have long encouraged Americans to save for college for their kids and to save for their retirement, but for families of those with disabilities, there was no tax-advantaged way for them to save for those individuals. A recent tax law enacted at the end of 2014 contains an important new provision which changes that.

The new law, which applies for tax years beginning after December 31, 2014, allows states to create “Achieving a Better Life Experience” (ABLE) accounts, which are tax-free accounts that can be used to save for disability-related expenses. Here are the key features of ABLE accounts:

• ABLE accounts can be created by individuals to support themselves or by families to support their dependents.

• There is no federal taxation on funds held in an ABLE account. Assets can be accumulated, invested, grown and distributed free from federal taxes. Contributions to the accounts are made on an after-tax basis (i.e., contributions aren’t deductible), but assets in the account grow tax free and are protected from tax as long as they are used to pay qualified expenses.

• No federal tax benefits are provided for those who contribute to an ABLE account.

• Money in an ABLE account can be withdrawn tax free if the money is used for disability-related expenses. Expenses qualify as disability related if they are for the benefit of an individual with a disability and are related to the disability. They include education, housing, transportation, employment support, health, prevention, and wellness costs, assistive technology and personal support services, and other similar expenses.

• Distributions used for nonqualified expenses are subject to income tax on the portion of such distributions attributable to earnings from the account, plus a 10% penalty on that portion.

• Each disabled person is limited to one ABLE account, and total annual contributions by all individuals to any one ABLE account can be made up to the gift tax exclusion amount ($14,000 in 2015, adjusted annually for inflation). Aggregate contributions are subject to the State limit for education-related Section 529 accounts.

• ABLE accounts can generally be rolled over only into another ABLE account for the same individual or into an ABLE account for a sibling who is also an eligible individual.

• Eligible individuals must be blind or severely disabled, and must have become so before turning 26, based on marked and severe functional limitation or receipt of benefits under the Supplemental Security Income (SSI) or Social Security Disability Insurance (DI) programs. An individual doesn’t need to receive SSI or DI to open or maintain an ABLE account, nor does the ownership of an account confer eligibility for those programs.

• ABLE accounts have no impact on Medicaid, but, in certain cases, SSI payments are suspended while a beneficiary maintains excess resources in an ABLE account. More specifically, the first $100,000 in ABLE account balances is exempted from being counted toward the SSI program’s $2,000 individual resource limit. However, account distributions for housing expenses are counted as income for SSI purposes. Assuming the individual has no other assets, if the balance of an individual’s ABLE account exceeds $102,000, the individual is suspended, but not terminated, from eligibility for SSI benefits, but remains eligible for Medicaid.

• Upon the death of an eligible individual, any amounts remaining in the account (after any reimbursements to Medicaid) will go to the deceased’s estate or to a designated beneficiary and will be subject to income tax on investment earnings, but not to a penalty.

• Contributions to an ABLE account by a parent or grandparent of a designated beneficiary are protected in bankruptcy. In order to be protected, ABLE account contributions must be made more than 365 days prior to the bankruptcy filing.

If you would like more details about these changes or any other aspect of the new law, please do not hesitate to call our office.

So…why do I need a Will OR what happens if I die without a Will?

January 13, 2015 by · Leave a Comment 

The following article was written by Albert Caproni III, and was featured in the January/February 2015 volume of Current Accounts published by the Georgia Society of CPAs. For more information about developing an estate plan or the probate process in Georgia, please contact our office.

Introduction.  In my law practice, I often encounter people that do not have a Will.  Sometimes, they know they should have a Will but just have not gotten around to having one prepared.  A significant number of people, however, do not have a Will because they assume they know what will happen with their assets if they die without a Will.  These assumptions are often wrong or only half right.  This article sets out the consequences of death by a Georgia resident who does not have a Will.  Please note that the law of the state where you live at the time of your death will govern and Georgia law does differ in several ways from other states.

Single?  If you are not married (whether never married, divorced or widowed), and die without a Will, Georgia law will cause your assets to pass in equal shares to your living children and the descendants of any deceased child of yours.  If you have never had any children, your assets will pass to your surviving parents equally (or to your sole surviving parent if one is deceased).  If both your parents are deceased, your assets will pass in equal shares to your surviving siblings (or nieces and nephews, who take the share that would have gone to their parent (your sibling)).  There are specific rules provided by Georgia law for more remote family members, such as nieces, nephews and grandparents, depending on who is then living.

Married?  If you have no Will and are married with children at the time of your death, your assets will be divided between your surviving spouse and your children.  If you have two or fewer children, your spouse and each child will receive an equal share.  Three or more children will split two-thirds of your assets among them, with your surviving spouse receiving one-third.  This pattern is rarely what the deceased  had in mind or would have chosen.

Please note that a pending divorce does not change these results.  If you are married at death (regardless of whether you are legally separated or not), your spouse still inherits his or her share.  Also note that the recent Federal court cases upholding same sex marriage are not honored in Georgia.  Thus, even if you are married for Federal purposes, if you die in Georgia without a Will, your partner/Federally recognized spouse will not inherit.

Similarly, married couples with children from prior marriages or relationships may wish to treat those children differently than children from the current marriage.  If there is no Will at the time of your death, however, all of your children are treated the same.

Minor Children?  If you die without a Will, and are survived by minor children, their share will most likely be controlled by their guardian absent a formal appointment of a conservator for them.  That person may be an appropriate choice, but is often an ex-spouse which the deceased would not have wanted in control of the children’s inheritance.  Further, upon attaining age 18, the minor child will receive his or her share of the inheritance, regardless of the financial skills or lack of skills the child possesses.

Further, if the other parent of your minor children is not then living, it will be up to a court to decide who will become the guardian of your minor children.  In contrast, a Will allows you to designate who you would like to have in that role in the event of your untimely death.

Probate Process.  If you die without a Will, your affairs will be administered by an “Administrator” appointed by the Probate Court.  Absent agreement among your heirs, a bond will have to be posted with the Probate Court by the Administrator and that individual will have to obtain Court approval to sell any assets that need to be sold.

Probate vs. Non-Probate Assets.  Georgia law, if you have no Will (or your Will if you have one), operates on your “probate” estate, but does not govern non-probate assets.  Non-probate assets include jointly owned bank or brokerage accounts and real estate that is owned as joint tenants with rights of survivorship, which pass to the surviving owner regardless of your Will or Georgia’s intestacy laws.  Other non-probate assets include life insurance on your life and retirement accounts (such as IRAs, 401(k) accounts, etc.), which pass to a designated beneficiary (or beneficiaries).  These assets will only pass to your estate if you name it as beneficiary or fail to have a beneficiary (as where your named beneficiary predeceases you).  Keep the distinction between probate and non-probate assets in mind when determining how your Will should operate.

Conclusion.  If you have any property or have children, you should have a Will.  Even those with simple financial affairs should use a Will to dictate who inherits their assets, when assets should be distributed, and what protections or “strings” are included for family members lacking in financial skills.

 

Reasons to consider establishing a trust

January 13, 2015 by · Leave a Comment 

Many people consider trusts a tool for the wealthy to avoid taxes. While trusts are a useful device for reducing estate taxes, there are many different types of trusts and tax planning is only one reason to create a trust. In fact, since the estate and gift tax exemption amounts have increased significantly over the last several years, only a small percentage of high net-worth families and business owners now face estate tax liabilities. Depending on your goals and needs for yourself or your family, the objectives for a trust can vary from the ability to direct your property after you are no longer able to control it (due to death or incapacity) to providing protection for vulnerable family members. A trust can be funded with as little or as much value as an individual desires. Property of any sort may be held in a trust.

Privacy

One simple reason to create a trust is to maintain privacy. A trust can be established purely for privacy, and, in many states, that is an attractive feature. In Georgia, an individual’s Will must be admitted to probate after death to have any force and effect. During the probate process the Will becomes a public record, open for inspection by anyone. A trust is created privately by the individual working with an attorney and is effective upon its execution and funding. There is usually no need for a court to be involved and thus, none of the trust’s assets or the operative provisions in the trust agreement are necessarily disclosed to the public. For some people, simply the attraction of keeping one’s affairs private makes a trust an idyllic option.

Avoid Probate

While the probate process in Georgia is not particularly difficult or expensive, in other states the probate process can be both time consuming and expensive. Even for a Georgia resident, trusts can be used to avoid the expense and delay of a probate procedure, especially if one owns real estate located in another state.  Establishing a trust during one’s lifetime can cause the assets to be distributed to the heirs efficiently without the cost, delay and publicity of probate. Avoiding probate may also be especially attractive if you have concerns about a conflict over your Will, since the creation and administration of a trust does not require notice to anyone.

Avoid Assets Passing to Minors

Trusts are commonly incorporated in a Will to plan for an individual’s premature death and to ensure that property is not transferred outright to minor children. In a testamentary trust (a trust created under a Will when the person dies), if the children are under 18, or under some other age prescribed in the Will (ages 25 and 30 are common), a trust will be created to provide for your children during their minority or until the contingency age is reached, so that a 16 year old child will not end up owning a house with the responsibility of making mortgage payments.

Control

An individual who would like to have control over his or her property after death may consider creating a trust to leave his or her estate to family members in a way that is not directly and immediately payable to them. For example, you may want to stipulate that your children receive their inheritance upon certain conditions being met, such as graduating from college, or you may provide for age-based distributions that provide for the trust assets to be distributed to your children in fractional shares upon attaining certain ages, such as 25, 30, and 35. This will allow them to grow into managing assets and/or to learn from their mistakes with only a portion of their inheritance. The trust can also stipulate that distributions only be made for specific purposes. For example, you can stipulate that a trust will make money available to your children or grandchildren only for college tuition or perhaps for future health care expenses.

Creditor Protection

Trusts are effective tools for individuals who have concerns about family members who are financially irresponsible or vulnerable to exploitation. In those situations, you can control how and when assets are distributed to your family members. Trusts used to protect beneficiaries against their inability to handle money can also be used to protect the beneficiary from creditors by including language in the trust that protects the trust’s assets from creditors of, or a legal judgment against, a trust beneficiary. If you have family members that are doctors, lawyers, accountants, or business owners that have liability exposure to third parties, you can create a trust which may provide protection of their assets and estate from creditors and judgments since the trust assets are not considered their personal assets.

Individuals with Special Needs

Individuals with a disabled child or family member may establish a trust to provide for the family member without compromising the beneficiary’s eligibility for government benefits. An outright distribution to a person who receives government benefits may cause him or her to forfeit important subsidies for housing and/or healthcare since such benefits are often determined based upon income and assets.

Incapacity

A trust can also be established to plan for your own incapacity, in which case the trust is a planning tool to protect your own assets in the event you are no longer able to manage your own affairs. You can give the trustee the power to take immediate control of your assets in the event that you become incapacitated and direct how your assets will be utilized for your care. In that case, you do not have to worry about burdening your children with making decisions regarding your care or with incurring the expense associated with your long term care.

Life Insurance

Life insurance trusts are useful since the death benefit from a life insurance policy payable to your estate would be subject to claims by your creditors or creditors of your estate. If the policy is purchased by an independent trustee and held in an irrevocable life insurance trust that is created and funded during your lifetime, then the life insurance proceeds can pass outside of your estate, but can still be used to help your family members, including help covering your estate expenses. An irrevocable life insurance trust holds a life insurance policy on the policyholder’s life and provides immediate benefits when the policyholder dies, without the necessity of having the proceeds pass through probate.

Business Owners

Individuals who own a business or hold an interest in a business may consider the use of a trust to hold their ownership in the business. Trusts can also be important for the management of family businesses and for families in the creation of a succession plan to transfer ownership between the family members. Transferring ownership of the business from one generation to the next in an efficient manner can very often be the difference among keeping the business in the family and being forced to sell it following the business owner’s death.

Marital Trusts for Blended Families

If you have been married more than once, and especially if you have children from different marriages, providing for your spouse while ensuring your children inherit from you can present some estate planning challenges. In a second marriage, each spouse brings different assets into the marriage and each may have different objectives regarding the passage of wealth to their children. You may want to support your surviving spouse, but also want to ensure that the balance of your estate ultimately goes to your children (instead of your spouse’s children) after your spouse dies. Addressing these complexities through a marital trust can provide income and even principal for a surviving spouse, while preserving the underlying assets and controlling how they are distributed to children from a previous marriage. Blended families may also want to consider establishing two trusts, one for the spouse and children of second marriage and one for the children born of a previous marriage.

Unmarried Couples

A trust should also be considered if a client is not married, but has a life partner (whether opposite sex or same sex couples). Married couples have more ability to transfer property to one another during life and after death, so unmarried couples may consider a trust to facilitate the same types of transfers even though they do not qualify for the same benefits. If unmarried partners desire to leave their property to one another, then a trust can be a useful tool to hold property jointly and to pass the property to the survivor upon death without incurring lifetime gift taxes or estate taxes.

Summary

There are many different situations which may indicate that trust should be considered. But no matter what the reason is for establishing a trust, ultimately knowing your property and the beneficiaries of your property are protected can give you peace of mind. Our attorneys have experience with all forms of lifetime and testamentary trusts and can assist you in evaluating whether a trust should be part of your estate plan.

Recent Developments and Key Tax Changes For 2015

January 13, 2015 by · Leave a Comment 

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

New tax-advantaged ABLE accounts.

A new law allows states to establish tax-exempt “Achieving a Better Life Experience” (ABLE) accounts, which are tax-free accounts that can be used to save for disability-related expenses. They can be created by individuals to support themselves or by families to support their dependents. Assets can be accumulated, invested, grown and distributed free from federal taxes. Contributions to the accounts are made on an after-tax basis (i.e., contributions aren’t deductible), but assets in the account grow tax free and are protected from tax as long as they are used to pay qualified expenses. Withdrawals are tax-free if the money is used for disability-related expenses including: education, housing, transportation, employment support, health, prevention, and wellness costs, assistive technology and personal support services. A nonqualified distribution is subject to income tax and a 10% penalty on the part of the distribution attributable to earnings. Each disabled person is limited to one ABLE account, and total annual contributions by all individuals to any one ABLE account can be made up to the inflation-adjusted gift tax exclusion amount ($14,000 for 2015).

Health care impacts 2014 income tax returns.

The IRS has provided details on how health care reform under the Affordable Care Act (ACA) affects the upcoming income tax return filing season. The most important ACA tax provision for individuals and families is the premium tax credit. Under another key provision, individuals without coverage and those who don’t maintain coverage throughout the year must have an exemption or make an individual shared responsibility payment, as separately detailed in final regulations and a notice issued by the IRS in November. The IRS stresses that most people already have qualifying health care coverage and will only need to check a box to indicate that they satisfy the individual shared responsibility provision when they file their tax returns in early 2015. Individuals and families who get coverage through the Health Insurance Marketplace (Marketplace, also known as an exchange) may be eligible for the premium tax credit. Eligible individuals and families can choose to have advance credit payments paid directly to their insurance company to lower what they pay out-of-pocket for their monthly premiums. Early in 2015, individuals who bought health insurance through the Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement, which includes information about their coverage and any premium assistance received. Form 1095-A will help individuals complete their return. Individuals claiming the premium tax credit, including those who received advance payments of the premium tax credit, must file a federal income tax return for the year and attach Form 8962, Premium Tax Credit.

Supreme Court to decide if premium credit is allowed for health insurance purchased on federal exchange.

A controversy has erupted concerning the ACA’s premium credit. The statute makes the credit available for insurance purchased on an exchange established by a state. A federal exchange was established for many states that did not establish their own exchanges. The IRS has issued regulations making the credit available for insurance purchased on a federal exchange. The regulations were challenged in court; one Circuit Court upheld them and another said they were invalid. After these conflicting decisions, the Supreme Court agreed to resolve the issue. The Supreme Court will hear the case in 2015. Its decision could affect about 5 million people getting a credit for insurance purchased on the federal exchange and could affect other key ACA provisions that are intertwined with the credit.

More guidance on toughened IRA rollover rule.

A law limits the number of IRA rollovers that can be made in any 1-year period to one. Earlier, the Tax Court held that the limit applies to all of an individual’s IRAs even though the IRS had stated that the limit applies to each separate IRA an individual owns. Shortly after this decision, the IRS announced that it will adopt the more restrictive view for distributions after 2014. Then, in November, the IRS issued more guidance to clarify the start of the new policy. As clarified, an individual receiving an IRA distribution on or after Jan. 1, 2015 cannot roll over any portion of the distribution into an IRA if the individual has received a distribution from any IRA in the preceding 1-year period that was rolled over into an IRA. However, as a transition rule for distributions in 2015, a distribution occurring in 2014 that was rolled over is disregarded for purposes of determining whether a 2015 distribution can be rolled over, provided that the 2015 distribution is from an IRA that neither made nor received the 2014 distribution.

Personal service corporation in group avoids flat tax.

Normally, a qualified personal service corporation (e.g., an employee-owned corporation performing legal, health or other professional services) is subject to a flat tax of 35%, unlike other corporations that are subject to graduated rates of 15%, 25% and 34%. In one case, the IRS sought to tax a qualified personal service corporation that was part of an affiliated group of corporations at the flat 35% rate. The Tax Court wouldn’t allow the IRS to do so. Rather, it said that the group’s consolidated income, including the income of the qualified personal service corporation, had to be taxed at the graduated rates.

Standard mileage rates up and down for 2015.

The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 57.5¢ per each business mile traveled after 2014. That’s 1.5¢ more than the 56¢ allowance for business mileage during 2014. But the 2015 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 23¢ per mile, 0.5¢ less per mile than the 23.5¢ rate for 2014.

Non-farmer escapes self-employment tax on conservation payments.

A recent case addressed a tax issue concerning payments an individual received under a U.S. Department of Agriculture voluntary conservation reserve program. Specifically, an appellate court held that payments received under the program by the taxpayer (who was not a farmer) were not subject to self-employment tax (i.e., social security taxes imposed on self-employed persons). Rather, they were rentals from real estate excludible from self-employment income.

Tenant’s death extinguished tax lien on jointly held property.

A district court has held that an IRS lien on a taxpayer’s interest in property was extinguished at his death because the property was owned jointly with a right of survivorship and the other joint tenant survived the taxpayer. Thus, there was no interest left to which the lien could continue to attach.

Tax developments involving West African Ebola outbreak.

The IRS has designated the Ebola outbreak occurring in the West African countries of Guinea, Liberia, and Sierra Leone as a qualified disaster for purposes of the income tax exclusion for qualified disaster relief payments. The IRS also made clear that employer-sponsored private foundations can provide disaster relief to employee-victims in areas affected by the outbreak without jeopardizing their exempt status. In addition, the IRS announced that employees won’t be taxed when they forgo vacation, sick, or personal leave in exchange for employer contributions of amounts to charitable organizations providing relief to Ebola victims in Guinea, Liberia and Sierra Leone. Employers may deduct the amounts as business expenses.