Jan 11

Not quite, but close to it for many taxpayers.

As part of the American Taxpayer Relief Act (ATRA) of 2012, a benefit you may appreciate has been slipped in, a ‘permanent’ fix to the estate tax issue. First, here ‘permanent’ simply means a provision that has no sunset date, no automatic falling off the tax forms. That said, let’s look at the estate tax, before and after, and why you should be concerned about this even if you are not a ‘one percenter.’

In 1998, the year our daughter was born, we bought life insurance. Since we both worked, and had similar incomes, we each bought a million dollar policy. This may sound like a lot of money, but we had a house with a mortgage, and college tuition 18 years hence, both of which would whittle this windfall down pretty fast. But. As I learned in 1999, estate tax would kick in for an estate over $650,000. So even if we had no other assets, our insurance of $2M would see $700K taxed as high as 50% if my wife and I should perish together. It gets worse from there. If I passed first, I could leave an unlimited inheritance to my wife, but then if she would die soon after, $1.35 (everything over $650K) is subject to estate tax. Off to see an estate attorney. Time to set up trusts. With a bit of financial smoke and mirrors, the insurance is purchased from small gifts given to my daughter through the trust. In other words, the insurance itself is not part of our estate. Back then, I’d have casual conversations on death and dying (I know, real ‘life of the party’ discussions) and I realized most people had no idea that if you own the insurance policy, it’s part of your estate when you die. So even a couple with a $500K policy each could be heading for an estate tax issue. Maybe not when the first person passes, but when the surviving spouse also passes and still owned all the assets from when they were both alive.

Enough history. ATRA (Bonus points – what does this acronym stand for?) provides some excellent estate tax details:

  • A $5 million per person exemption (indexed so 2013 should be $5.25M)
  • A top rate of 40% (kicking in on amounts over $1M taxable)
  • ‘Permanent’ portability. i.e. the surviving spouse adds on the exemption to her own estate, so a couple truly has a $10.5M exemption
  • The annual gift exclusion is $14K per person for the year, but the full estate tax exclusion may be tapped for lifetime giving as well.

If you are blessed with wealth over $10.5M, the $14K annual gift may not seem like much, but keep in mind it’s per giver/recipient combination. So, you and your spouse can give $56K per year to your child and spouse. You can also gift each of the grandchildren $28K. With a large enough family, the total can easily exceed $250K if you are looking to be that generous.

On a final note, you can see how, in 1998, with no clear understanding that the estate tax would take such a generous turn, it seemed the right thing to do a bit of extra planning. Today, we’d save the expense of a trust, and only have a will in place.

written by Joe \\ tags: , ,

Oct 22

My friends at the IRS have announced…. wait a second, did I just call the IRS folk ‘my friends’? Well, yes. I don’t like taxes any more than the next guy, but I hpe that by now my readers know that it’s congress that has created our incomprehensible tax code. The IRS just enforces it. From where these guys (and gals) sit it’s “don’t shoot me, I’m just the messenger.” The IRS is actually doing a fine job, making information readily available on their web site and keeping us up to date in real time by offering different newsletters. As I was saying, they announced some numbers for 2013!

Gifting – If you are giving money to friends or family each year, the annual exclusion for gifts has risen from $13,000 to $14,000 per year. If you are a couple giving your partnered child a gift, this multiplies up to $56,000 from 2012’s $52,000. The 529 College Savings account permits gifting ahead up to 5 years worth of deposits, meaning you and your spouse can each gift $70,000 into the 529 account. This requires a Form 709 to declare your transaction, and then no gifts are permitted over the next 4 years (unless the gift exemption rises beyond $14,000.)

Kiddie Tax – This is the tax that uses the parents’ tax rate on a child’s unearned income. The reduction of this income has been raised to $1000 from $950. Simply put, your child can receive $1000 in unearned income with no tax due, and an additional $1000 taxed at their rate, most often, 10%, based on online tax calculators and estimators. A topic worthy of more detailed discussion.

Retirement – The 401(k), 403(b), and 457 account deposit limit has been raised to $17,500 with the same $5,500 catch-up deposit for those 50 and older. We’ve discussed whether the 401(k) decision is the right one for most investors, and it’s safe to say, grab the match. Many employers will match the first 4-6% of your income dollar for dollar, so if you earn $60,000, a 5% contribution to your account is worth 10% on day one. $6,000 deposited pretty painlessly. The IRA limit has also been increased from $5,000 to $5,500, up to $6,500 if 50 or older. Great to take advantage of the IRA especially if the fees in your 401(k) are pretty high.

Flexible Spending Account – This is the money you can have withheld pre-tax to pay for unreimbursed medical costs, including doctor copays, prescription drugs, and a number of items your insurance doesn’t cover. In 2012, there was no limit, although employers most often limited the amount you can put aside at $5,000. In 2013, Federal regulations put the limit at $2,500.

More details and comments on these changes to follow.

written by Joe \\ tags: , , ,