The decision to rent your home instead of selling it is both a financial and emotional decision. After all, this isn’t just an asset; it’s a place where your life has been centered. So think carefully before you become a landlord. [Read more...]
Charitable giving is worthwhile for many intangible reasons. But why not give in a manner that also brings tangible benefits to you and your family? An outright gift usually yields an income-tax deduction and nothing more. But planned gifts can offer tax advantages while letting you continue to benefit from the donation.
The year you turn 70½, you reach a milestone in your retirement. At that age, Required Minimum Distributions (RMDs) kick in, which is when you must begin making mandatory withdrawals, or distributions, from your IRA accounts (and employer-sponsored plans). These distributions are required even if you don’t need the money to pay your expenses.
Regardless of one’s age, most people I talk to are concerned about the cost of health care. The rising cost of health care has contributed to the growing popularity of health savings accounts (HSAs). An HSA is a tax-favored account you can use to pay out-of-pocket medical expenses.
We all know that there’s a huge imbalance between what the government takes in and what it spends, but how did we get in this mess? On this subject the public has been bombarded with misinformation. Let’s look at some facts.
It’s human nature for investors to focus on potential returns rather than consider taxes. Tax planning isn’t fun. But some prudent tax planning throughout the year, rather than a rush in December to try to lower your taxes, could prove lucrative–and a lot less risky—than trying to improve your investments’ pre-tax performance.
Tax-Free Family Gifts
Do you have someone in your family who could use some financial help? Are you able and willing to provide it? Don’t get out your checkbook without first considering the most tax-advantaged way to help. Without research and planning, your generosity could cause you unnecessary taxation. While estate taxes govern taxation on assets after your death, gift taxes govern what you can give away during your lifetime. Let’s examine ways you can help your family without hurting your own finances.
Exclusions and Exemptions
Within current guidelines, you can still give to your family and friends without facing gift taxes—as long as you keep an eye on exclusions and exemptions.
Gift Tax Annual Exclusion – The federal tax law allows you to give up to $13,000 annually (per recipient in 2011) to an unlimited number of individuals—with no tax or reporting obligations.
Gift Splitting – Married couples can gift up to $26,000 (per recipient in 2011) each year using their gift tax annual exclusions.
Lifetime Exemption – The tax law also provides a lifetime gift tax exemption ($5 million in 2011). This allows you to give away as much as a total of $5 million to family and friends over your lifetime without owing any federal gift tax. If you are married, you and your spouse each are entitled to a separate credit. You can use any or all of the credit to offset taxes on gifts, and the amount you have used will not be available to offset taxes on your estate.
This means that gifts made under the $13,000 exclusion will not use up any of your lifetime gift tax exemption. However, any gifts you make over the $13,000 limit per individual, per year, will reduce your lifetime exemption.
Beyond those exclusions and exemptions, there are other tax-free ways to help:
Another possibility might be to make tax-free contributions to the 529 college savings plan of a beneficiary. In one year, you may invest as much as $65,000 ($130,000 if you split the gift with your spouse) in a 529 plan. However, that $65,000 will be treated as if it were a series of $13,000 gifts made over five years. As a result, you won’t be able to make any other tax-free gifts to that person during that five-year period.
College Tuition and Medical Expenses
There are no limits on the amount of these expenses you can pay, as long as you give the money directly to the medical provider or the educational institution where the expenses were incurred.
You can loan money to family members at a lower interest rate than they would have to pay a bank. To avoid gift taxes, it’s important that you follow the required processes and impose the stated interest rate.
It’s unclear whether letting someone live rent-free in a home you own is considered a “gift” by the IRS, and therefore subject to gift taxes. You could avoid the issue by making them a part-owner in the home.
When to File a Gift Tax Return
A return is generally needed only when you make a gift of more than $13,000 to any person (other than your spouse) in one year. Your gifts can be cash, securities or other property, but as long as their combined value is $13,000 or less per year, per recipient, no federal gift tax applies and you don’t have to file a gift tax return.
Under current law, you won’t have to pay federal gift tax until all taxable gifts made during your lifetime exceed $5 million. You may want to file a gift tax return for a hard-to-value gift, even when a return is not required. Why? If the transfer is adequately disclosed, the IRS has only three years to challenge the valuation. Without the gift tax return, the IRS could dispute the valuation later when your estate tax return is filed (and justification is much more difficult), potentially forcing your family to pay substantial back taxes.
Generous and Smart
Making gifts while you’re still alive can help your family when they need it most—and if you plan wisely it can also help you avoid or minimize future estate taxes. Your financial advisor can help you make smart decisions to benefit your family and friends, while also keeping your own financial goals and taxes in mind.
The sun is shining and the beach is beckoning. Why think about taxes in the summer? The answer is that a little fine-tuning at the halfway mark could mean extra savings when next April rolls around. Let’s look at some ways you might be able to reduce your 2011 tax burden.
Cut taxes on what you earn. Contributions to your employer’s retirement savings plan could significantly lower your tax bill. If you can afford it, contribute the maximum amount. Even if you’re self-employed you can make contributions to a retirement plan, such as a SEP-IRA or SIMPLE IRA.
Maximize your adjustments. The IRS allows you to subtract “above-the-line” deductions from your gross income. The result is your adjusted gross income (AGI). Examples include qualified student loan interest and deductible IRA or health savings account contributions. Look for ways to maximize these deductions.
Seek itemized deductions and tax credits. Check the second page of your 2010 tax return. There you’ll see the itemized deductions and tax credits you claimed. Even if you took the standard deduction in 2010, a careful review of potentially deductible and credit-eligible expenses could uncover some strategies for 2011.
Examine gains and losses. While the year is only half over, it’s not too early to examine your capital gains or losses. In general capital losses can offset capital gains, which are taxed at a maximum rate of 15%. If you have excess losses, you may shelter up to $3,000 of ordinary income. You have until December to lock in capital gains and losses that will affect your 2011 tax return.
How to Handle Life Events
If you experience any of the life events listed below in 2011, they could have major tax consequences for you.
Sale of home: You may exclude the profit (within limits) on the sale of your principal residence from your taxable income if you meet the tax law’s requirements.
Marriage or divorce: File a new W-4 withholding allowance certificate with your employer. If you pay quarterly estimated taxes, review the amount you are paying.
New child: You may be eligible for various tax breaks.
A New Job Means a New Boss and New Tax Implications
A new job is a life event that requires more explanation. If you change jobs this year or return to the workforce after a layoff, it would be a smart move to add “tax planning” to your to-do list.
Your former employer: Consider rolling the money from your former employer’s retirement savings plan into another tax-favored plan or an individual retirement account (IRA). This would be preferable to facing the tax consequences of a distribution.
Additionally, remember that severance pay and unemployment benefits are generally considered to be taxable.
Job-hunting expenses: If you’re job-hunting in the same line of work as your last job, you can deduct eligible expenses. Even if you don’t find a job, you can still take these deductions. These expenses are classified as miscellaneous itemized deductions. As such, they are deductible only if, when combined with your other miscellaneous expenses, they exceed 2% of your AGI.
Relocating for a new job: Your moving and traveling expenses may be deductible if you meet certain distance and time requirements.
Call me at any time of the year if you want to discuss your tax outlook.
If it’s true that nothing is certain but death and taxes, someone neglected to tell the U.S. government. Last year, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Among other things, this act will have a major, three-part impact on all “transfer taxes” (estate, gift, and generation-skipping taxes):
- The gift-tax exemption has jumped from $1 million to $5 million for individuals and from $2 million to $10 million for couples.
- The top tax rate for assets above the exemption has fallen from 55 percent to 35 percent.
- Married couples can take advantage of new portability rights. A surviving spouse can add the deceased spouse’s unused exemption amount to his or her own.
This means transfer taxes have been unified. The tax burden has been considerably lessened. You can shield a $5 million gift from federal gift and estate taxes. And you don’t need complicated wills in the era of portability, do you? Sounds like a bonanza!
The Clock Is Ticking
The new tax regime only applies to the years 2011 and 2012 (with options for 2010 estates). Congress must act before December 31, 2012 or the tax code will revert to the previous, higher rates. As the law is currently written, the exemption might fall to $1 million with a top tax rate of 55 percent. Additionally, portability is scheduled to disappear when this act does, as discussed below.
All About Portability
Portability seems simple at first. For example, if a husband dies with $4 million in assets, his wife can add his unused $1 million to her $5 million exemption. At her death she can exclude $6 million of her own assets.
But the dollar value of the estate in this example is just one factor. There are also the couple’s circumstances to consider. If they are in their 50s, the wife might easily outlive her husband by decades. Their estate will continue to appreciate, making portability an attractive option. But if they are in their 80s and their total estate is less than $5 million, portability might be unnecessary.
In addition, portability only applies to surviving spouses. Remarriage complicates the picture. And though the new law unifies transfer taxes, portability cannot be used with the generation-skipping tax exemption. So don’t simplify those wills just yet.
The States Step In, the Feds Claw Back
States impose their own estate taxes, with exemptions lower than the federal government’s. Sheltering your exemption or exemptions in an estate in 2011 or 2012 might lead to serious state tax consequences.
Finally, if Congress doesn’t grandfather in gifts made now, after 2013 the revised law might “claw back” gifts greater than whatever the next exemption will be.
Nothing Takes the Place of Thoughtful Planning
That’s the one thing we can be sure of under any tax regime. Here’s how I see things:
- Update your existing estate plan. You have more assets than you think: for example, your IRA, 401(k), pension and life insurance.
- Look at your specific assets. Consider which might be the best to gift and the best to retain, given your comfort level and what you can afford.
- No plan? Make one! If you die without a will in 2011 or 2012, and if you don’t hold your assets jointly with your spouse, your state’s intestacy laws will control the distribution of your assets. Portions of your assets might not transfer to your surviving spouse.
- Update your beneficiary designations in your life insurance and retirement plans. If you haven’t already done so, make contingency designations. Don’t rely on your employer to hold this information, keep a copy yourself. Companies can be bought and sold and records can go astray.
There’s no point in jumping just because the law has changed. Nor should you assume that you’re safe because your estate fits within the $5 million exemption. I’d be happy to talk to you about the best course of action under current tax laws for you and your family.
As you prepare for tax season, do you know if you are one of the estimated 3.9 million taxpayers affected by the Alternative Minimum Tax (AMT)? If your household income exceeds $100,000, I encourage you to run a projection to see if you are subject to the AMT.