Estate and Gift Tax

For 2011 and 2012 there is a $5,000,000 exemption for estate and gift tax and a maximum tax rate of 35%.  In 2013 the exemption for estate and gift tax is scheduled to decrease to $1,000,000 with a return to a maximum tax rate of 55%, the same as in effect in the year 2000. An overlooked portion of the law now allows a surviving spouse to claim any unused exemption of the deceased spouse and either make larger lifetime gifts or use it as an estate tax exemption. For example, if one spouse dies in 2011 and has only used $2,000,000 of the $5,000,000 exemption for estate and gift tax, the surviving spouse can claim the unused $3,000,000 and add it to their $5,000,000 exemption. A note of caution – the excess must be claimed in a timely fashion by the executor or trustee of the estate or it will expire.

Congressional Action

To date, Congress has not made an attempt to make the 2011/2012 tax tare and exemption permanent and while it is expected that Congress will eventually do something that is not likely to occur before the 2012 Presidential election.

Estate/Gift Planning

What has received little attention from tax planners is the potential one time opportunity to take advantage of the $5,000,000 exemption or $10,000,000 exemption for couples by gifting assets to heirs today. Making a $10,000,000 gift today will remove these assets, as well as future appreciation and income from your estate today. And if you decide to do so gift assets that have the greatest chance of future appreciation.

2010 Estate Tax

There was no estate tax in 2010. But the IRS decided to play “let’s make a deal”.  If you follow the law and pay no estate tax your basis in the assets received from an estate is the same as it was in the hands of the deceased. Heirs could add $1,300,000 to their basis and surviving spouse $4,300,000. Or you could accept the IRS deal of paying a flat 35% on all assets over $5,000,000 and having a step up in basis to fair market value on date of death.  Executors must choose what to do by reporting the basis on Form 8939 by November 15, 2011. The glitch, the IRS has yet to release Form 8939.

Obama Health Care Under Attack

The provision requiring all individuals to obtain medical insurance by 2014 has been upheld in one appeals court and declared invalid by another appeals court. This and other provisions of the law will likely end up in the Supreme Court in the distant future.

2013 Medicare 3.8% Surtax

In 2013 if a single filer has adjusted gross income over $200,000 and joint filers adjusted gross income over $250,000 and the capital gain on the sale of their principal residence exceeds the $250,000 or $500,000 exclusion, a 3.8% Medicare surtax will likely be applied to the taxable gain as well as to all other investment income.

Be aware that the profits on the sale of rental property and vacation homes do not qualify for the aforementioned $250,000 or $500,000 exclusion.

2009 Average Itemized Deductions

The IRS recently released average itemized deductions claimed on 2009 individual tax returns for the following brackets and categories:

                                                Interest                        Taxes               Charity

$100,000 to $200,000             13,456             11,069               3,888

$200,000 to $250,000             17,572             18,524               5,947

Over $250,000                        25,527             48,317             18,488

The above are averages and will differ by the State in which a taxpayer lives.

IRS Response Time

The IRS is compartmentalized. So if one unit issues a deficiency unit you will receive a letter asking for a response. In the interim the alleged tax due is sent to collections whose computers churn out a notice of tax, penalty and interest due monthly. If you respond to the notice your reply goes to the unit who issued the deficiency notice. Their response time could take 45 to 60 days. In the interim the collection computers continue to churn out the past due notices. Unfortunately, you cannot stop these notices. They will not stop until the original unit resolves the issue and tells collections that no tax is due.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.