| | Happy 100th birthday to the United States Federal
income tax which was signed into law on October 3, 1913.
The Good Old Days
The initial income tax rate in 1913 was 1% with a 1% surcharge
on income over $20,000 rising to a 6% surtax for income over $500,000. The
standard deduction was $3,000 for single and $4,000 for married filing joint
with allowable itemized deductions for state and local taxes and interest
expense. Form 1040 was 3 pages long and only 1% of the populace actually paid
the income tax. A few years later with World War I ending the top tax rate
increased to 77% on income over $1,000,000. Even in the good old days Congress
taxed the rich.
October 15 Filing Deadline
Even though the Internal Revenue Service had been closed in
the days leading up to the October 15, 2013 filing deadline for individual tax
payers no announcement has been made after the Internal Revenue Service
re-opened that would give relief to taxpayer’s who had questions, no one to
speak to prior to the filing deadline and who have not filed. While tax
payments are now being processed all refunds are being held in abeyance and no
paper tax returns will be processed until funding is resumed. The Internal
Revenue Service computers will continue to send out notices of tax due but
correspondence in response to these notices is also not being processed.
Year End Gift Tax Planning
During 2013 an individual can make a gift of up to $14,000
without incurring a gift tax or using their lifetime $5,250,000 gift/estate tax
exemption. If you are married your spouse can also gift $14,000 so each donee
can receive $28,000 without your paying any gift tax. Once the gift is made,
the assets are no longer in your taxable estate. If your estate is projected to
be under $10,500,000 ($5,250,000 for each spouse with the unused exemption
passing to the surviving spouse) why should you consider making gifts? One need
only to look at the history of the exemption over the last 12 years when it
went from $600,000 to $3,500,000 to no estate tax in 2010 to its current
$5,250,000 to realize that change is the norm and that one should take
advantage of what is available today as it could be gone tomorrow. The annual
gift tax exclusion can be used to assist a child who is between jobs, assist
with re-decoration, give fractional shares of a vacation home to your children or
simply to start reducing your taxable estate.
Qualified Personal Residence Trust
A qualified personal residence trust (QPRT) is usually used
in connection with the last residence you intend to own. As an example, suppose
you retire at age 60 sell your residence in Maine and buy a smaller retirement
home for $1,000,000 in Florida where all your children live. With a life expectancy
of 20+ years it is likely that the value of your Florida residence will
appreciate over this 20 year period by 150% or $1,500,000. Is there a way to
keep this future appreciation, as well as the current $1,000,000 out of your
estate? The answer is “yes” and you can do so by setting up a QPRT. Under a
QPRT you make an unequivocal transfer of the residence to the trust and you
pick a period of time when you will continue to live in the residence, usually
half your life expectancy. You then look to IRS tables to determine the value
of the gift to the trust taking into account your continued presence. This
usually works out to about 40% of the current value or $400,000. If you did not
set up the QPRT you would have a residence worth $2,500,000 in your taxable
estate. By setting up a QPRT you would only use about $400,000 of your lifetime
exemption. Are there any negatives? Yes. At the 10 year mark ownership of the
residence then passes from the trust to your beneficiaries. Once the property
passes to your beneficiaries you need to start paying them rent if you want to
continue to live in the residence and if you die before the 10 year mark the
residence reverts to your estate.
3.8% Medicare Surtax
Even though the 3.8% Medicare surtax on net investment income
for singles with adjusted gross income in excess of $200,000 and married filing
joint $250,000 (prior to deducting the foreign earned income and housing
exclusion) has been widely reported many individual taxpayers have not adjusted
their estimated tax payment to account for this addition tax plus the 0.9%
surtax on wages and self employed income. The Internal Revenue Service recently
released new Form 8959 and Form 8960 that will be used to make the computation
of these additional taxes.
2013 Year End Income Tax Planning
November is a good time to take stock of your 2013 income,
deductions and taxes. You should be able to closely project what your salary,
bonus and allowances are, dividends and interest for 2013 will likely have been
fully paid and your itemized deductions should be known. With this information
in hand your tax advisor will be able to provide you with a projection of your
2013 income tax and you can then adjust your 2013 January 15, 2014 estimated
tax payment or your withholdings. With a combination 4.6% tax increase for
individuals earning over $450,000, the 3.8% and 0.9% surtax coupled with a 3%
reduction in itemized deductions and a phase-out of personal exemptions
individuals in the upper brackets can generally expect a 10% increase in their
2013 taxes.
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.
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