Will you leave a mess or a legacy? Don’t die without a plan

“where did they leave it?”

Estate planning is not fun.  You have to face what the world will be like after you leave it.  You want to leave a legacy so your survivors are happy.  However, less than one in five of you have taken the steps needed. 

If you completely ignore creating a post-death plan, then you will leave a chaos and confusion for others to sort out at a time when they will be grieving from your loss.  They will have to find where you put everything and sort out where you wanted everything to go. 

If people depend on you financially, not providing enough on which they can survive will mean major lifestyle changes for them.  Not something you want. 

You want survivors to focus on cherished memories, not on probate courts.  Take action! 

Now, what do you do?

First, leave enough so survivors can survive

Make sure you have provided for those who depend on you.  Usually, that means purchasing some form of life insurance.  You want to replace your earning power from now until the time that they are independent, either when a spouse or partner retires or when your children become gainfully employed. 

If you have been saving for retirement, those accounts may be enough so you don’t need to purchase life insurance.  Reviewing your potential estate with an advisor is wise to make sure survivors have enough. 

Second, sign the documents

Execute documents that ensure that your estate goes to the people who you want to benefit.  This usually means signing beneficiary designations for retirement plan accounts and executing a will.  You may even need a trust for young survivors.  We wrote this post detailing the steps a few years back.  If that’s too technical, ask me questions. 

You may want to consult an advisor to get all the proper documents in place.  Here is a good checklist to review.

Third, have the conversations

Talk to your spouse, to your adult children and to the people you name in your documents.  Make sure they understand your wishes.  Do you want to be buried or do you want to be cremated?  Do you want donations made to charities? 

What if you have a catastrophe the doesn’t kill you, but leaves you hooked up to machines forever?  Have a conversation so your loved ones know your wishes.  And, make sure you sign a health care proxy or medical directive, living will and even a “do not resuscitate” or DNR order. 

Fourth, leave a trail

Make sure the key people know how to find everything.  One way is to write a memorandum listing your passwords, where to find the safe deposit box key, and where you stored the life insurance policies.  Give copes to key people, such as the personal representative named in you will or the trustee of your trust. 

Finally, leave a legacy

When you take care of all you can, in advance, your survivors don’t have to suppress feelings while they clean up a mess:

“WE WERE WORRIED ABOUT MY MOM after my dad died, but he had everything in order. It allowed us to focus on our grief instead of being bogged down in financial paperwork and family bickering.” That’s one of the candid responses Merrill Lynch and Age Wave received when they interviewed more than 3,000 Americans 55 and older for a comprehensive look at attitudes and practices surrounding legacy planning.  From How do you want to be remembered…

planning and taking action

You will need to review and update your plan over time.  But, just knowing you took all these steps should improve matters for you and your family now!  Contact our office if you have questions so you can “don’t worry, be happy!”

Do you need to amend for tax extenders, SALT workarounds, state tax domicile and empowerment zone gains?

This tax update may give you reasons to amend your tax returns regarding the tax extenders, SALT workarounds, domicile audits and empowerment zones. Let me know if you need help.

Tax Deduction Superhero?

Tax extenders

Many tax returns were prepared assuming that Congress would pass a law for the “tax extenders” as it has in past years. However, the bill extending deductions and credits for 2018 and 2019 has not passed. Other matters have the attention of Congress.

The tax extenders include 26 tax breaks that expired at the end of 2017 and 2018. Some are for businesses, such as motor speedway depreciation, biodiesel credits, and disaster relief. Others are for individuals, such as retaining the 7.5% threshold instead of 10% for medical expenses, the private mortgage insurance (PMI) deduction, exclusion of up to $2 million from income from mortgage debt forgiveness on your home, and an above-the-line deduction college tuition and qualified expenses.

If you filed your 2018 returns relying on passage, and the extender bill does not pass, you could face an inquiry form the IRS. If you filed without relying on the extenders, and the bill does pass, you may be able to amend your 2018 filing to obtain a refund.

SALT and work around attempts by states

As you know from the first post in our series on the Tax Cut and Job Act (“TCJA”), the new tax law places a $10,000 cap on state and local taxes, or “SALT.” This includes state and city income taxes, property taxes, sales taxes and excise taxes.

Some states, including New York and New Jersey, felt that TCJA targeted them and responded with workarounds. One such measure provides that certain payments of state income taxes would be treated as charitable contributions, so that the full amount would be allowed as part of your Schedule A deductions.

The IRS reacted by indicating that only the IRS determines what are allowable Schedule A deductions and this workaround was not one of them. As Christy Rakoczy Bieber wrote recently on creditkarma.com:

If you’re counting on a SALT cap workaround from your state to keep your federal taxes low, you may face an unpleasant surprise at tax time since the IRS has made clear it won’t allow you to take deductions for charitable donations if you received tax credits.

Trying to avoid the state taxes

Some people with homes in more than one state have taken another approach to SALT limits by claiming to be residents of the state imposing less income taxes. For example, if you have homes in Massachusetts and in Florida, you would clearly pick Florida because there is no state income tax.

If you do pick a no or low-income tax state, be careful. The state that is missing out on tax revenue may conduct a domicile audit. Having the documentation to prove your residency is key. While residency is based on your “state of mind,” an audit would focus on a list of facts, including where you spend more time, the state in which you have a driver’s license and vote, where you receive your mail, and where you worship. Be sure to take the necessary steps and retain proof.

Empowerment Zone rollovers and Qualified Small Business Stock Sales (QSBS)

There are provisions for favorable treatment of certain capital gains transactions. Here are two:

  • If you purchased stock in a qualified small business, you may be able to exclude gain on the sale. The exclusion is even higher for certain empowerment zones, and;
  • You can roll over gain from certain sales into investments in an empowerment zone, delaying or even reducing the tax on the gain. There are opportunity funds into which you can invest for this deferral. If you think you need to amend, or if you have any questions on this post or any other matter, let me know. I am here to help.
thinking about a refund?

If you think you need to amend, or if you have any questions on this post or any other matter, let me know. I am here to help.

Tax Planning Hacks for your Itemized Deductions and more

The Tax Cut and Jobs Act brought the most significant changes to our income taxes in the last thirty years.  We continue to assess its impact in this post, which provides updates and some strategies for items discussed at the end of 2018 in these three posts:

As a quick summary of the posts, in the first post, we discussed the impact of the new law on personal taxes; in the second post, we discussed planning for small businesses; and in our third post, we provided a practical guide for year-end action.   

Itemized deduction strategies

As we noted in these tax planning posts, far fewer US Taxpayers will itemize because of the increased $24,000 standard deduction for married couples ($12,000 for individuals).  One estimate is that the number will be about 6% of all taxpayers for 2018, down from over 30% in prior years. 

Bunching your itemized deductions into a single year is one way to push your total above the standard deduction amount, and thus restore the tax deduction benefit for such items as charitable donations.  We discussed bunching and giving to donor advised funds in our third post.  As we noted then, charitable donations are the easiest Schedule A items to which to apply bunching.

Miscellaneous deductions are gone;
Or are they? 

Now that the miscellaneous itemized deductions are gone, can you do anything with tax prep and investment fees? 

Take tax prep fees on other schedules

For the tax preparation fees, you can deduct those amounts on Schedule C, Schedule E (page 1), or Schedule F.  And, if you have K-1s, input the fees as unreimbursed expenses so that the fees flow to Schedule E (page 2).

Capitalize investment fees

As for investment fees, there is support for capitalizing these costs, but the support is not dispositive.  This interpretation of the Treasury regulations is that you can capitalize the cost of evaluating the value of stocks purchased and sold.  You would need to elect to capitalize the related fee for each transaction, so this could be a great deal of work, depending on the amount of fees and number of stocks purchased or sold in a given year.  Taking this approach seems fair, as the treatment parallels treatment of fees in mutual fund, where the advisory fees are netted out before capital gain and dividend distributions to shareholders. 

Notes:  First, that there is a Treasury memorandum that says you cannot add carrying costs to basis.  Second, even if you could, capitalizing takes a great deal of work so it may not be worth the effort. 

Kiddie tax

The first $1,050 of unearned income for children who are dependents is not taxed in 2018.  Amounts above that level are taxed at the same rate as trusts and estates.  Those brackets are quite compressed compared to individual brackets.  Nonetheless, a child of a parent in the 37% tax bracket can still have $12,500 of income taxed at a lower rate.  That could save taxes on college funds (but compare to sheltering in a 529 plan).

Child tax credit

The $2,000 child credit phases out at much higher adjusted income levels for 2018:  over $400,000 for married couples, $200,000 for single taxpayers.  If your child is age 17 or over, you lose the $2,000 credit, but you may qualify for the $500 dependent credit.   This credit could not only applies to college students, it covers disabled children, elderly parents and other family that are your dependents.      

QBID for rental real estate

The IRS regulations provide a safe harbor for people who spend 250 or more hours a year on activities related to their rental properties.  You will need to keep records of your time and maintain separate bank accounts for the activities. 

Enterprise Zone rollovers  

You can roll over gain from stock or other capital assets to investments in an enterprise zone, delaying tax on the gain, and even eliminating tax on a portion.  We will post more on this at a future date.

Estate taxes

With the doubling of the federal gift and estate tax credit, few estates will be subject to federal estate tax.  This means that gifting is not nearly as important as retaining low basis assets for the step at death.  By this we mean that keeping assets in your name results in those assets are treated as having basis equal to the fair market value at death, so your heirs only pay tax on any gain that occurs after your death. 

Conclusion

There have been many changes to our tax law, so if you are not sure how you are affected, contact me for some planning. Maybe we can help you save on taxes!

Steven

Update on how to stay safe after the many data breaches

If someone manages to steal your social security number, they often try to file a tax return claiming refunds. To prevent this, you either have to file before them or obtain an identity PIN from the IRS on the IRS.gov website.

Here is the link for the ID PIN, and here is the IRS explanation:

An IP PIN is a six-digit number assigned to eligible taxpayers that helps prevent the misuse of their Social Security number on fraudulent federal income tax returns. Call the IRS at 800-908-4490 for specialized assistance,

Please see our prior post, How to stay safe after the Equifax data breach, to learn more about credit freezes and other protections. And let me know if we can help!

2018 year-end tax planning – Part III on using the new tax law to save you money

In our first part, we discussed the impact of the new law on personal taxes, and in our second part, we discussed planning for small businesses. In this part, we give you a guide for year-end moves to reduce total taxes between 2018 and 2019. Can you act at all? Review the changes in itemized deductions

Each year, we advise that you be practical, focusing on where you can actually make moves. For many, the new $24,000 standard deduction for married couples, $12,000 for single taxpayers, means you will not itemize (i.e., your total for itemized deductions is less than the standard amount). If you are not itemizing, you have fewer ways in which to affect change in the taxes due in either year (you can also stop collecting receipts for those deductions!).

Some possible deduction strategies

One technique for getting around the limit is to bunch deductions from two or more years into one year. The only deduction that you can really move is charitable donations, because your state, local and real estate taxes are limited to a $10,000 maximum and you cannot accelerate, or delay, significant amounts of mortgage interest.

If you do not want any one charity to receive the full amount in one year, then donate to a donor advised fund from which you may be able to designate donations to particular charities in future years.

If you are 70½ or older, you have the option of distributing up to $100,000 from your IRA or other qualified plan to an IRS- approved charity, and having none of the distribution taxed.

The deduction of unreimbursed business expenses was terminated by the new tax law. One possible strategy is to form an LLC or S Corp., report the business expenses on form 1065 or 1120S, and then take those on Schedule E to offset other income. You will need a valid business purpose to form the LLC or S Corp. and take expenses.

You may also be able to report business expenses on Schedule C as relating to self-employment. Again, you must have a valid business purpose. Also, the IRS could apply the hobby loss rule to disallow the deductions, if you do not show a profit for the business in two out of five years. Thus, it is best to consult with an attorney before trying any of these ideas.

The tax planning steps

If you are able to itemize, determine what income and deductions you can move from 2018 to 2019 or vice versa. You want to minimize total taxes for both years. Make sure your planning includes the 3.8% Medicare tax on high income and review Roth conversions. And review our post on planning under 199A for QBID.

Next, review the impact of moving income and expense to see what happens if you shift any of these amounts from one year to the other year.

Finally, watch for the Alternative Minimum Tax (“AMT”):

  • The exemption for the AMT and the threshold above which that exemption gets phased out both rise for 2018, so fewer taxpayers will owe the AMT.

Capital gains

Review your unrealized losses to see if you can shelter gains, reducing your total taxable income. If you have more losses than gains, you can take up to $3,000 of capital losses against other income. If you sell an asset that would prefer to retain, in order to realize gains in 2018, make sure you do not run afoul of the wash-sale rule (any loss on an asset that you repurchase in 30 days will be disallowed, so you have to either wait or buy a similar asset that fits your asset allocation while not counting as a wash sale).

If you have net gains, consider using appreciated stock for charitable donations – that way you avoid the tax on the gain while still getting the full fair market value for your charitable donation.

  • One note of caution: many mutual funds will make capital gains distributions to shareholders in December. Shareholders may be surprised on the amount of taxable gain, even for funds that had little net appreciation.

More on itemized deductions 

Mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase your primary residence. Interest on home equity loans will not be deductible, except when the home equity indebtedness is used to purchase or improve your primary residence.

As you may recall, all miscellaneous deductions were eliminated. This includes investment and tax preparation fees, safe deposit box charges and unreimbursed employee business expenses. And moving expenses are no longer allowed (except for military personnel in certain cases).

Under the new law, medical expenses are subject to a 7.5% threshold before becoming deductible.

More year-end planning

While you review your taxes, consider reviewing your estate plan and beneficiary designations. The federal exemption doubled to just over $11 million in 2018, so fewer people will owe any federal estate tax. However, many states still impose estate taxes on smaller estates. If you have “excess wealth” and want to reduce your taxable estate by gifting assets to children or others, you can give $15,000 per person, per year now. If your spouse joins you, that is $30,000 per person.

If you do review your estate plan documents, also review beneficiary designations to make sure everything is current. And review your medical directive and durable power of attorney.

If you have not maxed-out your 401(k) plan, IRA,Health Savings Account or flex plan account, consider doing so before the end of the year.

Summary

Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2018 and 2019.

Good luck and best wishes for the holidays!