Posted by: Andrew Whitehair, CPA
The IRS recently announced 2014 inflation adjustments for several key tax provisions including the following:
- Standard Deduction - $12,400 for married filing joint returns, $6,200 for single individuals and married filing separate, and $9,100 for head of household.
- Limitations on Itemized Deductions –itemized deductions are limited for taxpayers with incomes above $305,050 for married filing joint, $254,200 for single individuals, and $152,525 for married filing separate.
- Personal Exemption Phase-out – The phase-out reduces a taxpayer’s personal exemptions beginning with adjusted gross incomes (AGI) above $305,050 for married filing joint returns and $254,200 for individual returns. The exemption is completely phased out for AGI’s exceeding $427,550 for married filing joint and $376,700 for single individuals.
- Alternative Minimum Tax (AMT) Exemption – $82,100 for married filing joint returns, $52,800 for single individuals, and $41,050 for married filing separate.
- Kiddie Tax – The exemption for dependents unearned income will be $1,000. Under this amount a child’s unearned income will not be taxed. Additionally, a parent can elect to include a child’s gross income in the parent’s return if the child’s gross income is less than $10,000 in 2014.
- The 401(k) contribution limit will remain at $17,500 with an additional $5,500 catch-up contribution for those aged 50 and older.
- The IRA contribution limitation, including Roth contributions, remains unchanged at $5,500 plus an additional $1,000 catch-up contribution for those aged 50 and older.
- The contribution limitation for defined contribution plans, including SEP plans, will increase to $52,000 in 2014.
Estate and Gift Tax
- The unified credit against estate tax available for the estate of any decedent dying during calendar year 2014 (or available when contemplating lifetime gifts) increases to $5,340,000.
- The annual gift exclusion, which allows donors to shield gifts of a present interest from gift taxation, remains at $14,000.
These are only some of the inflation adjustments for 2014. Please consult your Zinner & Co tax advisor to learn how the above adjustments impact your situation.
Tax Partner Howard Kass is newly certified as an Accredited Estate Planner® by the National Association of Estate Planners & Councils, an organization focused on establishing and monitoring the highest professional and educational standards in the estate planning industry.
The AEP® designation is awarded to recognized professionals within the various disciplines of estate planning who meet stringent requirements of experience, knowledge, education, professional reputation, and character.
Howard has over thirty years of experience in estate, gift and trust taxes, as well as business income taxes, tax aspects of real estate investment and tax exempt organizations. He is a member of the American Institute of CPAs, the Ohio Society of CPAs, the Estate Planning Council of Cleveland, and currently serves on the board of the Society of Financial Service Professionals.
As a leading expert in the taxation industry, Howard has also published numerous articles and spoken before local and national organizations. He has held the title of Tax Partner at Zinner & Co. for more than twelve years, serving industries that include real estate, manufacturing, retail, hospitality, insurance agencies, distributors and service companies.
All of us at Zinner & Co. would like to congratulate Howard on his success and well-deserved recognition!
Posted by: Barbara Theofilos, CPA
The 3.8% Medicare tax on net investment income, or NIIT took effect for individuals, trusts and estates for tax years beginning on or after January 1, 2013.
Individual taxpayers will be affected by this new tax if their modified adjusted gross income (MAGI) exceeds one of the following thresholds:
- $200,000 for an unmarried taxpayer
- $250,000 for a married couple filing jointly or a qualifying widow or widower
- $125,000 for those married individuals filing separately
MAGI is regular adjusted gross income adjusted for certain excluded foreign-source income of U.S. citizens as well as residents living abroad. This particular add-back is very narrowly targeted and will not affect many taxpayers. Unfortunately, the above MAGI thresholds are not slated to increase with inflation after the 2013 tax year, so this additional tax will begin to affect even more taxpayers in future years.
If this isn’t complicated enough, the amount of income actually subject to NIIT is a bit convoluted; it is the lesser of (1) net investment income or (2) the amount by which MAGI exceeds the thresholds listed above.
Individuals aren’t the only taxpayers affected by this new tax. Trusts and estates will also be subject to it on the lesser of the following:
- The trust’s or estate’s undistributed net investment income, or
- The portion of its adjusted gross income (AGI) that exceeds the threshold for the top trust federal income tax bracket. (This threshold is only $11,950 for tax year 2013.)
The following trust types are exempt from NIIT:
- Charitable trusts
- Retirement plan trusts
- Grantor trusts that are disregarded for federal income tax purposes
- Real estate investment trusts
Those taxpayers and trustees planning for their 2013 tax obligations need to be aware that this tax will have an effect on their estimated taxes, because it needs to be considered when calculating quarterly estimated tax payments. Failure to do so could result in interest and penalty charges on underpayments of tax.
Examples of income that are considered net investment income include the following:
- Gross income from interest (excludes tax-free interest)
- Gross income from dividends
- Capital gains from the sale of stocks, bonds and mutual funds
- Capital gain distributions from mutual funds
- Gains from selling investment real estate
- Gains from selling personal residences to the extent that the gain is taxable
- Gains from selling interests in partnerships and S corporations if the taxpayer is a passive owner
- Gross income from rents
- Gross income from royalties
- Gross income from annuities
- Gross income and gains from passive business activities
- Gross income and gains from the business of trading in financial institutions or commodities
The above items may be reduced by appropriately allocated deductions including investment interest expense, brokerage fees, investment advisory fees, and expenses related to rent and royalty income.
Capital gains may be offset by capital losses within the guidelines for regular federal income tax purposes. Net capital losses are only permitted to offset other income to a maximum of $3,000. Any remaining capital loss for regular tax purposes is permitted to be carried forward to offset gains in future years.
Examples of items exempt from NIIT include the following:
- Wages and self-employment income
- Operating income from nonpassive business activities
- Distributions from retirement accounts (401(k) plans, pension plans, stock bonus plans, traditional and Roth IRAs)
- Social security benefits
- Tax-exempt interest, unemployment compensation and alimony
The NIIT has the potential to affect many individuals as well as trusts and estates, especially since the 2013 reporting threshold for trusts and estates is so low. The rules and exceptions can be complicated but it is important to be knowledgeable about this tax and the rules associated with it. Please contact a Zinner professional if you have any questions and to find out how this new tax may affect you.
You've received an e-mail from a foreign lawyer telling you that a long-lost relative has died and that you are the only heir. You are entitled to millions from the deceased's estate. Can this be possible?
While it is possible that your initial contact regarding an estate inheritance could come through your e-mail inbox, it is extremely unlikely! I have even received these e-mails with a subject line "Beneficiary Notice" stating that I am a beneficiary of an estate and, as such, am entitled to a hefty sum of money from an overseas bank. The e-mail goes on to request additional contact information from me, so that they can file the necessary Probate documents and release the money to me. When they throw the word "probate" in there, it all sounds pretty legitimate! But, this is just another one of those e-mail scams that could lead to lots of headaches if you follow through and provide the requested information.
E-mails, like the one I just described, are nothing more than scams from people who are just after your money or your personal information. Once you send them a response, they will usually ask for even more personal information. They will use a lot of tricks to try to make the process seem legitimate. However, once they have your personal information, they will go after your money. One technique they use is claiming you will need to pay them a free before they can release the "inheritance" to you (and they say they can't deduct that fee from the money you are about to receive, due to legal restrictions). You can be pretty certain that after you send them the money they've asked for, you will never hear from them again.
Here's my advice: DELETE any email like this immediately! Do NOT click on any links contained in the e-mail. Do NOT provide personal information. If you are victim of such a scam, you can contact the Attorney General's office in your state. You can also file a complaint with the Federal Trade Commission and the Internet Crime Complaint Center.
Just as your mother no doubt told you, if something seems too good to be true, it probably isn't!
The IRS issued temporary and proposed regulations providing guidance on the requirements for electing portability of a deceased spouse's unused exclusion (DSUE) and the surviving spouse's use of the DSUE amount.
One of the points clarified deals with those estates that are below the filing threshold and for the sole purpose of making the portability election. Under the temporary regulations, an executor does not have to report the value of certain property that qualifies for the marital or charitable deducation. The executor would have to provide the best estimate of the total gross estate and sign the return under penalties of perjury.
Also, another of the important points made is that if no estate tax return is required to be filed, failing to file a timely return will be considered an affirmative statement signifying the decsion not to make a portability election.
Answer: The reporting of Trustee fees by a trust on a Form 1099-Misc is not required. The 1099-Misc is for payment of services performed in a trade or business by people not treated as employees.
Trusts and estates are generally not treated as a “trade or business” and non-professional trustees are serving in a capacity that does not rise to the level of a “trade or business” activity for that individual. Therefore, we generally do not issue 1099s for executor or trustee fees.
By: Deanna DeWitt
As a trusted advisor, one’s CPA is often one of the first people notified when a client dies. As a CPA, it is critical to know and understand both the legal and moral steps involved in helping a family cope with a death. It is important to note that family members and friends are likely to be distraught immediately following the death of a loved one, even those who typically understand business and financial matters. Therefore, it is the CPA's job to step in and provide the executor, family members, and friends with comfort, support, and financial advice.
Many times, when a client dies, the CPA will need to begin working with new people to help them settle all of the issues at hand. Often, a family member is the one appointed to conduct all of the financial affairs. Regardless of who will be involved in settling a decedent’s estate, it is important to start building relationships with those people as soon as possible.
One way to do this is to attend the wake or other observance, as the family’s customs and practices dictate, as well as to send a condolence letter to the family. This lets them know that you are thinking of them during this difficult time and will help you to gain their respect and trust. The second step that should be immediately taken is to let the appropriate members of your office know that the individual has passed away. This will ensure that firm mailings or solicitations to the deceased will stop.
The next step that should be taken is to assess the executor's knowledge of their responsibilities and duties. The CPA should inform the executor of all that will be expected of them. Although being appointed as executor can be an honor, it is a difficult task for a variety of reasons.
A couple of those difficulties include dealing with beneficiaries who second guess every decision made along with being subject to personal liability for errors in administering the estate that may be made.
Following is a list of some of the most important duties a CPA should make an executor aware of:
- The executor must locate the will and take it to the local probate court to file a petition to probate. Once this is done, the executor will be granted the right to collect and distribute assets.
- The executor should take an inventory of all of the assets and secure them. For example, if the decedent had multiple brokerage accounts, the executor may want to transfer them into a single account. The executor should also keep track of any personal property still in the estate.
- The next step is to pay off the debts of the deceased. Some or all of the decedent’s assets may need to be liquidated if there aren't sufficient funds to satisfy all the outstanding debts.
- After all debts have been paid by the estate, the executor can then determine which assets are to be liquidated and distributed to the heirs in the form of cash and which assets are to be distributed directly to them.
- It is also the responsibility of the executor to make sure that all required tax returns are filed and that any tax payments associated with those returns are remitted in a timely manner.
- Throughout the implementation of all of the above steps, the executor has a fiduciary duty to keep all of the beneficiaries reasonably informed. Many states have laws on the books that require this.
- Finally, the executor must distribute the remaining estate assets according to the decedent’s Last Will, or state law if there is no will.
The ultimate goal of the CPA should be to compassionately guide the executor through the above process as easily as possible. Encourage the executor to seek your professional guidance and the advice of legal counsel immediately after the passing of the decedent, as well as at any time they have questions or concerns. This will ensure that all steps are executed properly and will help the client avoid unwanted and unnecessary complications in the future.
By Barb Theofilos, CPA
We have all been to the doctor for a check-up. Preventive measures can ward off unintended consequences or detect deficiencies early on. We go because we know it's the best thing for us and it will ultimately benefit us in the future.
So, when was the last time you had a beneficiary check-up? Just as your doctor wants you to get a regular medical check-up, your accountant wants you to have a beneficiary check-up. When you update your Will, which governs the administration of your estate, this does not automatically update your beneficiary designations. There are certain assets that pass on to your beneficiaries as a matter of law and are governed by beneficiary designations and are generally not governed by the provisions of your will. This detail is often overlooked by clients because it's the last thing on their mind. With so many things competing for our time and attention, it's easy to lose track of financial details such as this one.
There are key events that take place in our lives that require updates to beneficiary designations. A few of these include a death in the family, a birth, divorce, marriage, or even remarriage. Updating our financial records is sometimes the last thing on our mind in these instances but it is still extremely important. Missing an opportunity to update these records can have unintended consequences.
Take William for instance... his situation involved a $400,000 employer-sponsored retirement account. He named his wife, Sarah, as his beneficiary back in 1975, shortly after they were married. The couple divorced 20 years later in 1995. Sarah waived her rights to the benefits of William's employer sponsored retirement plan as a part of the divorce decree; however, William never got around to updating the beneficiary designation with his employer. He died in 2000 without making these changes. So, what happens now?
The employer-sponsored retirement plan documents stated that beneficiaries had to be formally updated on a beneficiary form and an outside beneficiary change was not sufficient. This means that Sarah’s waiving of her rights to the retirement plan funds pursuant to the divorce decree had no effect and she still received the funds, even though this was not William's intention.
If William had updated the beneficiary designation before he died, his retirement account would have been paid to the person of his choice, rather than his ex-wife, Sarah. The beneficiary designation could not be changed once William passed away.
When updating one’s beneficiary designations it is important to use the plan's official beneficiary form to ensure that the change is being made in the manner that you intended. This important point is evidenced in William's story above. Keep copies of your beneficiary designation forms and verification's received from your account providers.
Also keep in mind that you can designate contingent beneficiaries as well. This is especially important, should your primary beneficiary die before you or at the same time as you.
Examples of plans with beneficiary designations that would need to be updated include, but are not limited to the following:
- Employer sponsored benefit plans
- ESOP or other stock purchase plan
- Retirement accounts such as IRAs, SEPs
The example above demonstrates the importance of keeping beneficiary designations up to date, especially after life altering events such as death, birth, divorce or remarriage. It's easy to overlook this financial detail, but its oversight can have outcomes that were never intended.
Ohio S.B. 117 signed by Governor Kasich will take effect in March 2012. One of the more interesting changes made by this bill is in regards to trustee duties with respect to life insurance as a trust asset.
Notwithstanding the provisions of the Ohio Uniform Prudent Investor Act, it does not hold the trustee, attorney or any person consulted with regard to the creation of the trust liable for any loss arising from the absence of certain specified duties regarding acquiring, retaining or owning a life insurance policy as a trust asset.
It applies to trusts established before, on or after the effective date and to life insurance policies acquired before, on or after the effective date.
The annual exclusion gift amount will be $13,000 (there is no inflation adjustment for the 2012 amount).
IRS Posts Publication 4895, Tax Treatment of Property Acquired from a Decedent Dying in 2010
IRS posted on October 19, 2011, Publication 4895. If you have an estate filing Form 8939 (Basis allocation form) or a 2010 estate that is filing a Form 706 (and extended un March 17, 2012), then this is a must read!
Final Form 706 for 2011 decedents released
The one major change on this Form 706 is the change in the applicable exclusion amount to incorporate a predeceased spouses unused exemption amount (for predeceased spouse’s dying after December 31, 2010).