California Estate Planning Blog by Kevin Staker

December 9, 2017

Differences Between Senate and House Tax Reform Bills by Kevin Staker

Filed under: estate tax,Kevin Staker,Uncategorized — Kevin Staker @ 6:22 am
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Differences Between Senate and House Tax Reform Bills by Kevin Staker

 

The two houses of Congress have passed two separate tax bills:

Major Differences:

  • Medical Expense Deduction – House repeals and Senate actually expands.
  • Mortgage Interest Deduction – House reduces maximum loan amount to $500.000 and Senate keeps at $1,000,000.
  • Graduate Student Tuition Waiver – House treats as taxable income and Senate keeps tax free
  • Pass Through Income – House caps rate at 25 percent but excludes service businesses and Senate adopts a 23 percent income deduction for all businesses, including professionals.
  • Alternative Minimum Taxable Income – House repeals corporate and individual, and Senate retains corporate and retains individual but with higher exemption.
  • Estate Tax – House increases exemption to $10 million indexed for inflation since 2010 with repeal in 2023, and the Senate does the same but no repeal.

The two houses will next have a conference committee to hash out the differences.  I suspect the final bill will be closer to the Senate version because they can afford to lose only one more Republican senator.

We shall see.

By Kevin Staker

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November 6, 2017

Estate Planning and the The Tax Cuts and Jobs Act, 2017 Tax Reform by Kevin Staker

Filed under: estate tax,estate tax news,Kevin Staker,Uncategorized — Kevin Staker @ 4:56 pm
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Estate Planning and 2017 Tax Reform

The Republicans in Congress have introduced the The Tax Cuts and Jobs Act, H.R. 1.  The is the 2017 attempt at tax reform by the Republicans in Congress.

The changes proposed include the following:

  • The exemptions from the Estate Tax and the Generation-Skipping Transfer Tax are doubled from $5 million (as of 2011) to $10 million, which is indexed for inflation. This provision would apply to tax years beginning in 2018.  Hence, with inflation the exemptions for 2018 will be $11.2 million.
  • Beginning in 2024, the estate and generation-skipping taxes are repealed.
  • The step up in income tax basis is maintained.
  • The gift tax is lowered to a top rate of 35 percent and retains a basic exclusion amount of $5.6 million for 2018, again indexed for inflation.
  • The annual exclusion of $14,000 increases to $15,000 in 2018 and is also indexed for inflation.

The stated reasons are:

• The estate and generation-skipping taxes impose additional levels on tax on income and
assets that have generally already been subject tax. By repealing the estate and
generation-skipping taxes, family businesses that would pass from one generation to the
next would no longer be subject to double or even triple taxation.
• By repealing the estate and generation-skipping taxes, a small business would no longer
be penalized for growing to the point of being taxed upon the death of its owner, thus
incentivizing the owner to continue to invest in more capital and hire more employees.

Current law provides property in an estate is generally subject to a top tax rate of 40
percent before it passes to the estate’s beneficiaries. When property is transferred during the life of a donor, it is subject to a top gift tax rate of 40 percent, with the first $14,000 being excluded from the gift tax on a per-donee, annual basis. Additionally, property that is transferred beyond one generation, whether by bequest or by gift, is subject to an additional generation-skipping tax
Transfers between spouses are excluded from these taxes, and when an individual dies
without his or her assets exhausting the basic exclusion amount, any unused basic exclusion amount passes to his or her surviving spouse, with a top basic exclusion amount of $10.98 million for 2017. When a beneficiary receives property from an estate, the beneficiary generally takes a basis in that property equal to its fair-market value at the time the decedent dies, which is known as taking a step-up in basis. However, when a donee receives a gift from a living donor, that donee generally takes the donor’s basis in that property, which is known as taking a carryover basis.

Please note: for the Act to pass, only two Republican senators can oppose it.  Otherwise, the Act will be defeated just as was Obamacare repeal.

By Kevin Staker

October 20, 2017

IRS Announces Increased Estate and Gift Tax Exemptions and Increased Annual Gift Tax Exclusion for 2018 – By Kevin Staker

Filed under: estate tax,estate tax news,Kevin Staker — Kevin Staker @ 8:32 am
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The Internal Revenue Service has announced adjustments for inflation in the estate/gift tax exemption and the annual gift tax exclusion for 2018.  In IRS press release IR-2017-178, released on Oct. 19, 2017, announced a number of adjustments for inflation.  The press release can be found at https://www.irs.gov/newsroom/in-2018-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-unchanged.

Two of the adjustments are important for estate tax planning.

The figure for the estate tax exemption, the gift tax exemption, and the generation-skipping transfer tax exemption will be increased from $5,490,000 in 2017 to $5,600,000 in 2018.  Hence, a couple can pass along a total of $11,200,000 in assets to individuals without incurring any death tax.  A couple can do this using what is commonly called an “A-B Trust” or just relying on what is called estate tax portability.

By Kevin Staker

April 21, 2017

The Future of the Gift Tax by Kevin Staker

Filed under: Kevin Staker,Uncategorized — Kevin Staker @ 8:17 pm
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Allyson Versprille in an article at bna.com, Gift Tax Tweaks Could Lead to Unsavory Avoidance Tactics, speaks of the reasons for or against repeal of the Federal Gift Tax if the estate tax is repealed as part of the Republican’s tax reform effort in 2017.

Some of her points are as follows:

Changes to the gift tax could create unintended consequences or make it easier to avoid income or other taxes using new and existing techniques. Republicans’ proposals vary—from ignoring the gift tax, retaining it as is, or repealing it altogether. Some of the impacts are as follows:

Repealing both the estate and gift taxes—with no other changes—could impact the most. Many think if the estate tax is repealed, the gift tax should be as well. But there are several reasons not to do it.

First, the gift tax backstops the federal income tax. Without a gift tax, an individual could give property to another, such as a child, probably resulting its income being taxed at a lower rate, even if sold.

Second, there would be more gaming the system.  People would give away assets, but not really giving them away until death.  For example, instead of giving a child $1,000,000 it could be a loan with the note given to the child at death. Neither the House GOP’s tax blueprint nor President Trump’s campaign proposal mention the gift tax. However, Trump has proposed replacing the estate tax with a capital gains tax on estates over $10 million.   This would include an exemption for small businesses and family farms.  (Oh, the planning possibilities start to dance in my head already.) If this change is made, it would make sense a gift would also trigger a capital gains tax.

However, how this would affect trusts set up for generations makes my head hurt. Repealing both the estate tax and the gift tax could accelerate gift-giving if it appears the estate tax is about to be reinstated. On the other hand, if estate tax repeal appears it will be permanent, Congress keeps the gift tax is retained and the “step up in basis” at death, the wealthy may not make gifts. In this case, the wealthy would hold onto their assets until death, get the step up in basis, and then allow the asset to go to the next generation with an estate tax .

Note: estate tax repeal will likely only be temporary for 10 years.  This happens because of “reconciliation”.  The bottom line is only 51 votes needed in the Senate as compared to 60 if will be permanent (needed to avoid a filibuster in the Senate).

January 14, 2017

Estate Tax is Irrelevant for Substantially All Americans but the Step Up in Basis Is Very Valuable for Them by Kevin Staker

Filed under: estate tax,Kevin Staker — Kevin Staker @ 10:33 am
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Estate Tax is Irrelevant for Substantially All Americans but the Step Up in Basis Is Very Valuable for Them

The federal estate tax exemption is 5 million, indexed for inflation since 2010. “Portability” allows a surviving spouse to use the unused federal estate tax exemption of their deceased spouse.  The exemption in 2017 is $5,490,000.  Thus, a couple can transfer nearly $11 million to their children or other beneficiaries at their deaths without any federal estate tax.

The basis of appreciated assets is “stepped-up” (or down) to fair market value at death.  This eliminates any built-in capital gain on these assets. This happens even if the estate is not subject to estate tax.  For example, the estate is less than the federal exemption or passes to a surviving spouse.

Even the few taxpayers is estate tax territory should think twice before giving assets to their beneficiaries during their.   Even though such transfers would remove the appreciation in the transferred assets from their estate for estate tax purposes, the basis of these assets given away during life is not stepped-up at their deaths. Thus, the donees are stuck with their likely low income tax basis, and so income tax may be paid if the donee sells the asset.

Therefore, the benefit of the estate tax savings achieved by transferring an asset during a taxpayer’s life will likely be outweighed by  the cost of subsequent capital gains taxes when the donees later sell the asset.

By Kevin Staker

January 13, 2013

It is Official: Exemptions Will Be $5,250,000

The IRS in Revenue Procedure 2013-15 announced the estate and related tax exemptions will be $5,250,000 in 2013. See http://www.irs.gov/pub/irs-drop/rp-13-15.pdf

Thanks to Brian Bergman at MacLean & Ema for passing along to me the citation.

We shall see.

Kevin Staker
Estate Tax News Blog

January 11, 2013

Bloomberg Claims the IRS Has Announced a $5,250,000 Exemption But I Cannot Find Proof

Bloomberg claims the IRS has announced a $5,250,000 exemption for the estate and related taxes.  See http://www.bloomberg.com/news/2013-01-11/irs-increases-exemption-from-estate-tax-to-5-25-million.html

However, I cannot find any proof.  They do not cite any IRS announcement.  The following is the link to where new IRS announcements are listed:  http://apps.irs.gov/app/picklist/list/formsPublications.html;jsessionid=Sr5t6S1uXbmUFGq86OUCcA__?sortColumn=postedDate&indexOfFirstRow=0&value=&criteria=&resultsPerPage=25&isDescending=true

We shall see.

Kevin Staker

Estate Tax News Blog

January 2, 2013

House Passes Estate Tax Act

On a vote of 257 to 167, the House of Representatives passed the American Taxpayer Relief Act which returns the estate tax law to as it was in 2012.  Technically the exemption had gone down to $1 million on January 1st and so this is a tax cut.  However, just from a technical standpoint; the Act is retroactive.

The mainstream news media is stating the exemption has gone to $5 million but that is not correct.  It is $5 million adjusted for inflation since 2010.  I estimate the exemption will be around $5.2 million.  We need to hear the calculation from the IRS.  Its should come in the next few days.

The President has yet to sign the Act.  Hence, we technically still have a $1 million exemption as I write this post.

We shall see.

Kevin Staker

Estate Tax News Blog

January 1, 2013

Senate Passes the Change to the Estate Tax, 89-8; Exemption for 2013 To Be Over $5.2 Million and Rate To Be 40 Percent

It is official. The Senate passed the “American Taxpayer Relief Act of 2012” on a vote of 89-8 early on January 1, 2013.  We will now have an estate tax rate of 40 percent.   The estate tax and related exemptions will now be $5,000,000 adjusted for inflation from 2010.  That number was $5,120,000 for 2012.  The news media erroneously reports the exemption at $5,000,000 now.   The Senate bill technically (and simply) makes permanent the changes made to the estate tax by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

I must admit I am still trying to find out what the inflation adjusted number for 2013 will be.  The IRS it appears has not come out with an official number.  IRS Revenue Procedure 2012-41 announced the inflation adjustments for 2013 but specifically fails to state the number for the estate tax exemption.

See http://www.irs.gov/pub/irs-drop/RP-12-41.pdf

My guess is the estate, gift, and generation-skipping transfer tax exemptions will be increased to $5,270,000.  The number is the $5,120,000 exemptions of 2012 adjusted for 3 percent inflation in 2011 ($5,273,600) rounded down the the nearest $10,000.  It is a wild guess on my part as to the inflation number to be used.  United States inflation was an even 3.0 percent for 2011, and I assume they use the figure for the year two years before the year to be adjusted because you do not know the figure for the prior year until you are already in the year to be adjusted.

The bill is technically House Resolution number 8, a bill passed by the House that the Senate technically gutted and substituted in the language of the their tax act. They had to do it this way because revenue acts technically have to start in the House.

The full text of the bill can be found at http://www.businessinsider.com/breaking-full-text-of-the-157-page-bill-to-avert-the-fiscal-cliff-2013-1 or at http://i2.cdn.turner.com/cnn/2013/images/01/01/american.taxpayer.relief.act.pdf

The bill now goes to the House of Representatives for approval. The Tea Party folk will not be happy. This bill has all sorts of tax pork in it. They especially will not like the increase in income tax rates for higher income folk. However, this is the best they are going to get. And they will have another chance to rein in federal government spending next in the fight over increasing the federal debt limit.

We shall see,

Kevin Staker
Estate Tax News Blog

December 31, 2012

Latest Word: Estate Tax Law to Remain As Is But With 40 percent Top Rate

Exemptions and all else as the law is now, in 2012, but with top rate going to 40 percent. What a coup for the Republicans!. Reported by JULIE PACE and BEN FELLER at Associated Press: See http://www.wvva.com/story/20471309/fiscal-cliff-disputes-remain-as-deadline-nears

On the other hand, CNN reporting no deal as of 1:01 pm eastern.  See http://politicalticker.blogs.cnn.com/2012/12/31/latest-updates-final-fiscal-cliff-scramble/?hpt=hp_t1

We shall see.

Kevin Staker

Estate Tax New Blog

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