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Making Large Gifts Now Won’t Harm Estates After 2025

On November 20th, the IRS announced individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to levels before 2018.

The Treasury Department and the IRS issued proposed regulations which implement changes made by the 2017 Tax Cuts and Jobs Act (TCJA).  As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.

In general, gift and estate taxes are calculated, using a unified rate schedule, on taxable transfers of money, property and other assets. Any tax due is determined after applying a credit – formerly known as the unified credit – based on an applicable exclusion amount.

The applicable exclusion amount is the sum of the basic exclusion amount (BEA) established in the statute, and other elements (if applicable) described in the proposed regulations. The credit is first used during life to offset gift tax and any remaining credit is available to reduce or eliminate estate tax.

The TCJA temporarily increased the BEA from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2018, the inflation-adjusted BEA is $11.18 million. In 2026, the BEA will revert to the 2017 level of $5 million as adjusted for inflation.

To address concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the proposed regulations provide a special rule that allows the estate to compute its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.

To discuss more about your gift and estate tax situation, contact WFY’s Estates and Trusts Partners, Marisa Alvarado and Kevin Wiest, at info@cpa-wfy.com or (949) 910-2727.

© Copyright 2018. All rights reserved.

Tax Saving Moves to Improve Your Tax Situation

Since 2018 is coming to a close now is the time to take action to proactively reduce your tax liability before the new year.  Included are a few strategies that may help with your tax situation:

  1. Harvest stock losses while substantially preserving one’s investment position. This can be accomplished by selling the shares and buying other shares in the same company or another company in the same industry to replace them, or by selling the original shares, then buying back the same securities at least 31 days later.
  2. Apply a bunching strategy to deductible contributions and/or payments of medical expenses. Beginning in 2018 the standard deduction has been increased and the itemized deduction of state and local taxes limited to $10,000 which will cause many taxpayers to lose the benefit of their itemized deductions. By bunching multiple years of charitable contributions and medical expenses into one year a taxpayer may create a taxable benefit that would not otherwise exist.  For example, a taxpayer who expects to itemize deductions in 2018 and usually contributes a total of $10,000 to charities each year, should consider refunding 2019 and 2020 charitable contributions by contributing a total of $30,000 into a donor advised charitable fund and then distribute the funds to the charities over the following two years.
  3. Take required minimum distributions (RMDs). Taxpayers who have reached age 70-½ should be sure to take their 2018 RMD from their IRAs or 401(k) plans (or other employer-sponsored retired plans). Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Those who turned age 70-½ in 2018 can delay the first required distribution to 2019, however, this can result in taking a double distribution in 2019 (the required amount for 2018 and 2019).
  4. Use IRAs to make charitable gifts. Taxpayers who have reached age 70-½, own IRAs, and are thinking of making a charitable gift should consider arranging for the gift to be made by way of a qualified charitable contribution, or QCD—a direct transfer from the IRA trustee to the charitable organization. Such a transfer (not to exceed $100,000) will neither be included in gross income nor allowed as a deduction on the taxpayer’s return. A qualified charitable contribution before year end is a particularly good idea for retired taxpayers who don’t need all of their as-yet undistributed RMD for living expenses.
  5. Make year-end gifts. A person can give any other person up to $15,000 for 2018 without incurring any gift tax. The annual exclusion amount increases to $30,000 per donee if the donor’s spouse consents to gift-splitting. Anyone who expects eventually to have estate tax liability and who can afford to make gifts to family members should do so.

These are broad suggestions that will benefit some but not all taxpayers.  To discuss and create a personalized tax strategy be sure to contact a WFY tax specialist at info@cpa-wfy.com or (949) 910-2727.

© Copyright 2018. All rights reserved.

Landmark SCOTUS Decision on Sales Tax Collection Requirements

The U.S. Supreme Court recently issued a ruling that could have a dramatic impact on American retailers, and not only those who primarily operate on the Internet.  In what has been called the Wayfair sales tax case, the court on June 21, 2 018 said that states can impose sales taxes on businesses even if they do not have a physical presence in the state.

The ruling effectively overturns Quill Corp. v. North Dakota, which was a Supreme Court decision handed down in 1992.  In that case, the court said that the Commerce Clause in the U.S. Constitution forbids states from imposing sales tax on companies without a physical presence.  The court said that states could only impose sales tax on a company if it had an actual location in the state, or if it had another bright-line physical presence, such as in-state employees, inventory, or sales representative in the state.

South Dakota, in the Wayfair sales tax case, bypassed interstate commerce restrictions in a law that it enacted back in 2016, called S. B. 106. Justice Anthony Kennedy, who wrote the majority decision for the court in this case, said that the South Dakota law was constitutional because of the following reasons:

  • The law allows out-of-state companies to be exempt from sales taxes if they only do limited business in the state. That is, if they have less than $100,000 in sales revenue and less than 200 transactions in a calendar year;
  • The law does not try to collect sales tax retroactively; and
  • South Dakota abides by the Streamlined Sales and Use Tax Agreement, which reduces compliance and administrative costs associated with collecting sales tax.

Essentially, the court allowed South Dakota to collect sales taxes from Internet retailers because its law did not place a significant burden on interstate commerce.  Currently, 31 states have laws that impose sales taxes based on economic, as opposed to physical presence nexus standards. While it is possible that not all these laws pass the standard set by Wayfair, the court has now given them guidance toward making their laws constitutional.  Furthermore, it can be expected that other states will impose similar laws in the future.

On the federal level, there are two bills currently making their way through congress that will let states impose sales taxes on out-of-state entities.  Both the Marketplace Fairness Act (MFA) and the Remote Transactions Parity Act (RTPA) allow states to collect sales taxes if they keep the process of paying the taxes simple.

Because of the court’s decision, it is important for retailers selling into multiple states to understand in which states it has sales tax obligations, which will require it to both register and file taxes in these states.  Fortunately, if your business operates in multiple states, you do not have to figure all this out by yourself.

If you have questions regarding your sales tax filing requirements, please call 949-910-2727 or email info@cpa-wfy.com.

© Copyright 2018. All rights reserved.