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Highlights of the 2010 Tax Relief Act

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, signed into law December 2010, finally brought some certainty to estate tax, gift and generation skipping tax, at least temporarily. Although estate planning attorneys now have a better idea as to advising clients in wealth management opportunities, the new law only applies through December 31, 2012. Thus, we may find ourselves back in this position of uncertainty in two years. Some of the major aspects of the Act are summarized below:

Estate tax exemptions and estate tax rates: Under President Bush’s Tax Relief Act of 2001, the federal estate tax exemption had increased to $3.5 million dollars in 2009, was unlimited in 2010, and was set to fall all the way back down to $1.0 million dollars in 2011. This problem was solved for the short term by setting the exemption at $5.0 million dollars for 2011 and 2012. Thus the first $5.0 million dollars of any estate is exempt from federal estate taxes. The maximum federal estate tax rate on those estates over $5.0 million dollars was capped at 35%. This will greatly decrease the number of estates subject to federal estate taxes. However, once again, this

The Nuts and Bolts of Real Estate “Short Sales”

Recent estimates indicate that possibly more than twenty-five percent of all homeowners are upside-down on their home mortgages, meaning that they owe more on their home loan or loans than the fair market value of the residence. This makes it virtually impossible to sell at a private sale. When a couple goes through a divorce or dissolution and needs to divide the assets including such a home, what are they to do? One answer is to walk away from the house, which will lead to foreclosure litigation and a crippled credit rating. Another possible answer is to complete a “short sale”.

A “short sale” is when a lender agrees to the sale of a property by the owner for less than the amount owed to the lender. It means that the lender is willing to accept less than the amount owed. Except for those lenders who are participants in the Home Affordable Foreclosure Alternatives Program (HAFA), the lender may or may not pursue the difference against the borrower. If the lender does forgive the difference, it likely will not be considered as income by the IRS as long as it complies under the Mortgage Forgiveness Debt Relief Act of 2007(which … Read More... “The Nuts and Bolts of Real Estate “Short Sales””

Marital Consequences of the Repeal of Federal Estate Tax

To the surprise of everyone in the estate planning community, Congress failed to address a critical estate and generation-skipping tax matter before the end of 2009, resulting in the repeal of the federal estate tax. However, this repeal is for 2010 only. In 2011, the exclusion for federal estate tax reverts back to $1,000,000. How is this possible, and what effect does it have on couples’ estate plans, particularly second marriages?

Since 2001, the federal estate tax has been gradually phasing out, with an increasing exclusion from federal estate tax each year. In 2009, the exclusion increased to $3,500,000. In 2010 however, the federal estate tax disappears, only to return in 2011 with only a $1,000,000 exclusion. To further complicate things, although the federal estate tax disappears in 2010, the unlimited step-up in basis for inherited assets also disappears; and a decedent’s estate is permitted to increase the basis of assets by only up to a total of $1.3 million with an additional $3 million if there is a surviving spouse. How does this affect estate planning?

Many couples’ estate plans were written to shelter the exclusion at the death of the first spouse by using a “by-pass” or “shelter … Read More... “Marital Consequences of the Repeal of Federal Estate Tax”

Simple Year End Tax Tips

As the end of the year approaches, the following simple tax tips can keep taxes as low as possible.

1. Charitable gifting. Charitable donations may be used as deductions against your taxable income. However, all charitable donations must be supported with written receipts unless under $250 in which case a bank record is sufficient. Also, donations of services or your time are not tax deductible.
2. Gifting in general. Each individual may gift up to $13,000 per year to an unlimited number of individuals without filing a gift tax return. Any gifts over $13,000 per year reduce the lifetime gift tax exclusion of $1,000,000. Once the lifetime exclusion is exhausted, gift taxes must be paid.
3. Pay property taxes early. Real estate taxes are deductible. For taxes due early next year, if you pay them this year, you can use them as a deduction.
4. Sell poor performing securities. Losses can be offset against gains reducing any capital gains. Excess losses can be deducted, but only up to $3,000 per year.
5. Increase retirement plan contributions. Retirement plan contributions reduce taxable income.
6. Increase business expense purchases. Purchases of business equipment, supplies, etc., can be used as taxable deductions.
7. Maximize necessary medical expenses. The purchase of

The Dependency Tax Exemption Requirements Have Changed For 2009!

In 2008, the IRS amended Code Section 152(e), the section which addresses the subject of the child dependency exemptions for divorced or separated parents. The old rule and procedures have been changed dramatically.

Here is a summary of the dependency exemption requirements:

The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.
The child must be (a) under age 19 at the end of the year, (b) under age 24 at the end of the year and a full-time student, or (c) any age if permanently and totally disabled.
The child must have lived with you for more than half of the year.
The child must not have provided more than half of his or her own support for the year.

If the child meets the rules to be a qualifying child of more than one person, you must be the person entitled to claim the child as a qualifying child. (To read the special test for a qualifying child of more than one person, click here.

In most cases, but not always, a child of divorced or separated parents will qualify as a … Read More... “The Dependency Tax Exemption Requirements Have Changed For 2009!”

If You Owe Back Support, Don’t Expect Your Stimulus Check

The IRS is treating the stimulus checks as if they were tax refunds. On their website, the IRS indicates that the amount of the stimulus check will be reduced or seized if :

You are single and your net income tax liability is less than $600. If you file Form 1040 net income tax liability is the amount shown on Line 57, plus the amount on Line 52.
You are married and your net income tax liability is less than $1,200.
You are single and your adjusted gross income (AGI) is more than $75,000. On Form 1040, AGI is the amount on Line 37.
You are married filing a joint return and your AGI is more than $150,000.
You owe back taxes that reduced your payment.
You have non-tax federal debts such as unpaid student loans or child-support obligations that reduced your payment.

If the IRS is reducing or seizing your stimulus check, they are supposed to mail you a letter of explanation.

So what do you do if you and your spouse have filed a joint return and your spouse owes back child support if you want to avoid having the IRS seize your share? Well, you may fall … Read More... “If You Owe Back Support, Don’t Expect Your Stimulus Check”

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