Archive for December, 2010

With the tax deal extending the Bush tax cuts for two years now passed by Congress, your year-end review of realized and unrealized capital gains and losses also changes. This year most taxpayers should not be selling appreciated assets solely for tax reasons. Many taxpayers have capital loss carry forwards in excess of $3,000. An article at Forbes.com explains the rules and why there is generally no advantage to recognizing capital gains or losses in this situation. Even for taxpayers with recognized capital gains, the case for capital loss recognition solely for tax purposes is not very strong this year due to potential capital gains tax increases in 2013.

The Rules
Short-term capital gains (meaning gains on assets held for less than a year) are taxed at ordinary income tax rates of up to 35%. Long-term capital gains are taxed at a top rate of 15%, with two big exceptions–gains that represent recapture of real estate depreciation are taxed at 25% and long-term gains on collectibles are taxed at 28%.

Short-term capital losses must first be used to offset short-term capital gains. If there are net short-term capital losses, they are then used as an offset against the net long-term capital gains. Similarly, long-term capital losses are first applied against long-term capital gains, with any excess applied against short-term capital gains.

Net long-term capital losses from any rate category are first applied against the highest tax rate long-term capital gains (meaning, for example, gains from collectibles taxed at 28%). Capital losses in excess of capital gains can be used to offset up to $3,000 of income from salary, taxable interest, or other ordinary income. Any remaining unused capital losses can be carried forward and used to offset gains in the next year, in the same order as describe above.

Unused capital losses expire in the year of the taxpayer’s death, to the extent they remain unused on the final income tax return.

On a joint tax return, each spouse’s capital losses must be tracked separately for purposes of this rule. However, the capital losses of the decedent spouse may be used to offset capital gains of the surviving spouse in the year of death, including those gains incurred by the surviving spouse after the decedent’s death.

Since the tax deal is only for 2011 and 2012, in 2013 the long-term capital gains rate is scheduled to return to the pre-Bush rates, generally 20%. However, with the budget deficits and proposals for a flat tax (without special treatment for capital gains), it is clearly possible that the long-term capital gains rate could be higher than 20% at some point in the future.

Read the rest of the article here and answers to common questions at No Rush To Take Capital Losses

The holidays can be a wonderful time of year for family gatherings and the embodiment of the spirit of giving. Unfortunately, many of us have a concept of the “perfect” holiday family gathering, and we strive for this, although it rarely happens just as we envision.

For caregivers, this concept of holiday perfection can add more stress to the already stressful “job” of these ultimate “givers.”

The National Care Planning Council recently published an article on this subject. The article can be found at Stress Relief for Caregivers. The author suggests some steps for caregivers to avoid feeling overwhelmed, frustrated, depressed, or resentful when watching other families that appear to be having a “perfect” holiday.

The first step to take is to remember that you are not alone. A recent study by the National Alliance for Caregiving and AARP indicates that 44.4 million Americans ages 18 years or older are providing unpaid care to an adult. Many of these caregivers have multiple roles, such as marriage, children, and work outside the home in addition to the caregiving role.

The typical caregiver in this study is a 46-year-old baby boomer woman with some college education, who works outside the home, and spends more than 20 hours a week caring for an adult, usually a mother. The average length of caregiving is 4.3 years.

Another step is to find help. The author suggests utilizing resources such as family members, friends, religious groups, agencies, or homecare providers. The local Department of Aging may be able to provide some assistance or a list of local resources. Non-medical home care agencies can provide help with the physical care of a loved one.

Family members are often willing to help, but are not sure what to do. Caregivers may present the image that they are only one who can give the best care. However, it is important to accept help that is offered (even if you need to ask for it initially), and to provide details on the type of help you need, and to be specific as to what they can and should do.

No matter what happens in Congress this year and next with estate taxes, this is a good time to review one of the simplest tax savings strategies that nevertheless often gets forgotten – using the annual exclusion from gift tax. People often ask me “what is the amount I can give tax free to my children?”

The gift tax annual exclusion is the maximum amount which a taxpayer can gift each year to any beneficiary without being required to use his or her $1 million lifetime gift exemption amount. If gifts are limited each year to the annual exclusion amount established in the year of the gift, the person making the gift is not required to file a gift tax return, and no gift taxes will be due. Since 1997, when the gift tax exclusion was $10,000, the gift tax annual exclusion amount has been adjusted annually based on cost of living increases in the Consumer Price Index.

Over the years, the annual exclusion has increased from $10,000 to $13,000. For 2010 and 2011, the gift tax annual exclusion amount is $13,000.

Each year you are able to give away money or property in the form of a gift. These gifts will be nontaxable as long as they are below the gift tax limit amount allowed by the IRS.

You may give up to $13,000.00 per calendar year to each individual you choose to gift. If you are married, then you and your spouse could gift up to $26,000.00 to each child, grandchild, daughter-in-law, etc.  This annual tax exclusion amount applies to each gift, not to a grand total of all gifts.

Here’s  some answers to the questions I am most  often asked about gifts and the annual exclusion from gift tax:

• The gift amount  cannot exceed the annual gift tax exclusion amount during one calendar year.

• There is a special, unlimited exemption if you pay for someone else’s education expenses. Then no matter how large the amount, this will remain nontaxable, as long as it’s been paid directly to the educational institution.

• Gifts to your spouse or a non-profit organization are non-taxable in any case.

• You may need to file a gift tax return under certain circumstances. To file a gift tax return you will need to use Form 709.

• If you have given gifts that are larger than the lifetime gift tax limit amount, then you will be responsible for the tax on the remaining gift amount. If you are married, then you will need to share the amount of that tax that is due on the gift amount.

Finally, if you are the recipient of a gift, then you don’t have to report it as income. You only pay income tax on the income  the gift  produces it after you’ve received it.

Charitable planning can be a win-win solution for your family. Charitable trusts such as charitable remainder trusts (CRATs and CRUTs) and charitable lead trusts (CLATs and CLUTs) produce income and estate tax benefits. You will have a choice of using a  family foundation, a supporting organization or a donor advised fund, depending upon how much involvement you choose for your family. Charitable planning techniques support charitable organizations allowing you to redirect taxes to the causes you support.

Advanced estate planning tools and techniques need to be implemented as part of a comprehensive wealth design. The irrevocable nature of these planning tools requires a coordinated, integrated design, carefully implemented and carefully maintained.You will need to get the benefit of a team of experts working for you. A qualified trusts and estate attorney, a certified public accountant, appraisers, and financial professionals who are skilled in income, gift and estate tax planning usually make up this team of experts.

If it’s a good fit, the savings to your family and the satisfaction of knowing that you have contributed to the causes near and dear to you make it all extremely worthwhile.

Here’s a link to a  good four page overview of the most common advanced tax planning charitable techniques. This is published by the Fiduciary Trust Company International. You can download the primer here
Primer

With estate taxes so uncertain, what is to be done?  You will want to make sure your plan is updated for maximum flexibility and that  your plan is designed to handle anything. Don’t be tempted to wait to update your estate plan until a new tax law is passed.  You will just be leaving  your  family unprepared.

In fact, even if  Congress does act within in the next few months, there will continue to be tax law changes in your future. You can  contact our office to find out how to make your plan more flexible and keep your family protected under current tax laws.

For families with taxable estates even after the foundation plan is in place, a life insurance trust may be a solution.

Many people mistakenly believe that life insurance policies are estate tax free. Life insurance grows income tax free but the death benefit is includable in your gross estate for estate tax purposes.

Even young couples who otherwise would not have taxable estates, often own a significant amount of life insurance that will be estate taxable and will reduce the benefits available for their children. An Irrevocable Life Insurance Trust (ILIT) will remove the proceeds from your estate with the result that the proceeds will be fully available to your family instead of being reduced by as mush as 55%.

The ILIT becomes the owner of your life policies. Annual exclusion gifts are often made to the policy for the benefit of the trust beneficiaries and then used to pay the policy premiums. These completed gifts allow the policy proceeds to be exempt from estate taxation at death. The proceeds can then be used in full to create liquidity in an estate, pay other estate expenses, or create wealth for loved ones.

Read more about 2011 estate tax laws and ILIT’s here November newsletter