Estate tax exclusion 2014

The IRS has released their inflation adjusted numbers for 2014. The estate tax exclusion has gone up to $5.34m for 2014.  The annual gift exclusion remains at $14,000. Below is the text straight from the IRS website:

2014 Inflation Adjustments

IR-2013-87, Oct. 31, 2013

WASHINGTON — For tax year 2014, the Internal Revenue Service announced today annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2013-35 provides details about these annual adjustments.

The tax items for tax year 2014 of greatest interest to most taxpayers include the following dollar amounts.

  • The tax rate of 39.6 percent affects singles whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return), up from $400,000 and $450,000, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds are described in the revenue procedure.
  • The standard deduction rises to $6,200 for singles and married persons filing separate returns and $12,400 for married couples filing jointly, up from $6,100 and $12,200, respectively, for tax year 2013. The standard deduction for heads of household rises to $9,100, up from $8,950.
  • The limitation for itemized deductions claimed on tax year 2014 returns of individuals begins with incomes of $254,200 or more ($305,050 for married couples filing jointly).
  • The personal exemption rises to $3,950, up from the 2013 exemption of $3,900. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly.)
  • The Alternative Minimum Tax exemption amount for tax year 2014 is $52,800 ($82,100, for married couples filing jointly). The 2013 exemption amount was $51,900 ($80,800 for married couples filing jointly).
  • The maximum Earned Income Credit amount is $6,143 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,044 for tax year 2013. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.
  • Estates of decedents who die during 2014 have a basic exclusion amount of $5,340,000, up from a total of $5,250,000 for estates of decedents who died in 2013.
  • The annual exclusion for gifts remains at $14,000 for 2014.
  • The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) remains unchanged at $2,500.
  • The foreign earned income exclusion rises to $99,200 for tax year 2014, up from $97,600, for 2013.
  • The small employer health insurance credit provides that the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of $25,400 for tax year 2014, up from $25,000 for 2013.

Details on these inflation adjustments and others not listed in this release can be found in Revenue Procedure 2013-35, which will be published in Internal Revenue Bulletin 2013-47 on Nov. 18, 2013.

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Federal AFRs October 2013

Here is the latest from the IRS for the AFR (applicable federal rates) for October 2013.

REV. RUL. 2013-21 TABLE 2
Adjusted AFR for October 2013
Period for Compounding
Annual Semiannual Quarterly Monthly
Short-term
adjusted AFR .32% .32% .32% .32%
Mid-term
adjusted AFR 1.78% 1.77% 1.77% 1.76%
Long-term
adjusted AFR 3.50% 3.47% 3.46% 3.45%

How permanent are the 2013 estate tax laws?

If President Obama’s 2014 budget is any prediction of the future the 2013 “permanent” estate tax law changes are not very permanent. Or, put another way, only politicians would call them permanent!  I have read, in recent days, that President Obama is proposing going back to 2013 estate tax levels. That would mean a $3.5m exemption and a 45% tax rate. Read more on this web site HERE.

Step-up in basis – The Basics

A person asked me the other day to explain the step-up in basis rules. This can be very complicated so I will digest down to the very basic elements. Let’s say dad buys a house for $25,000 in 1966.  Let’s say that house is now worth $300,000.  If dad sells the house while he is alive he can likely qualify for the $250,000 exemption upon sale. That is, if he sells the house for $300,000 with a basis of $25,000 (let’s assume no adjustments to basis) he has a $275,000 gain on sale. However, he has the $250,000 exemption if he has lived in the personal residence for two of the last five years. That leaves only $25,000 subject to tax upon sale. Between federal and state capital gains tax you are probably talking 25-30% in California so $5k-$10k in tax to be paid.

The problem that some people create is they try to outsmart the law and avoid attorney fees. They come up with a master plan to avoid probate and avoid attorney fees. They will simply transfer the house from dad to son now, before death.  Ok, there is a $5,240,000 gift tax exemption so the transfer is without gift tax as the house is only worth $300,000. However, what happens when son sells?  Son receives dad’s basis of $25,000 and thus he is facing a $275,000 gain on sale. You can do the math… BIG TAX BILL!

The best answer, in most cases, is to let the house transfer from dad to kids at his death. By doing this the kids will receive a STEP-UP IN BASIS!  A step-up in basis happens when a property transfers at death. It gives the inheritors the decedent’s date of death value as their basis. Thus $300,000 is the new basis. If the property is then sold for $300,000 there is ZERO TAX upon sale!

-John

Federal AFR Rates – November 2012

Right from the horse’s mouth, so to speak, here are the November 2012 AFR rates straight from the IRS website:

 
Section 1274.–Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)    Rev. Rul. 2012-30
This revenue ruling provides various prescribed rates for federal
income tax purposes for November 2012 (the current month). Table 1
contains the short-term, mid-term, and long-term applicable federal rates
(AFR) for the current month for purposes of section 1274(d) of the Internal
Revenue Code. Table 2 contains the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted AFR) for the current month for
purposes of section 1288(b). Table 3 sets forth the adjusted federal longterm rate and the long-term tax-exempt rate described in section 382(f).
Table 4 contains the appropriate percentages for determining the low income housing credit described in section 42(b)(1) for buildings placed in  service during the current month. However, under section 42(b)(2), the
applicable percentage for non-federally subsidized new buildings placed in
service after July 30, 2008, and before December 31, 2013, shall not be
less than 9%. Finally, Table 5 contains the federal rate for determining the
present value of an annuity, an interest for life or for a term of years, or a
remainder or a reversionary interest for purposes of section 7520.

 

REV. RUL. 2012-30 TABLE 1
Applicable Federal Rates (AFR) for November 2012
Period for Compounding
Annual Semiannual Quarterly Monthly
Short-term

AFR .22% .22% .22% .22%
110% AFR .24% .24% .24% .24%
120% AFR .26% .26% .26% .26%
130% AFR .29% .29% .29% .29%

Mid-term

AFR .89% .89% .89% .89%
110% AFR .98% .98% .98% .98%
120% AFR 1.07% 1.07% 1.07% 1.07%
130% AFR 1.16% 1.16% 1.16% 1.16%
150% AFR 1.34% 1.34% 1.34% 1.34%
175% AFR 1.57% 1.56% 1.56% 1.55%

Long-term

AFR 2.40% 2.39% 2.38% 2.38%
110% AFR 2.65% 2.63% 2.62% 2.62%
120% AFR 2.89% 2.87% 2.86% 2.85%
130% AFR 3.13% 3.11% 3.10% 3.09%

 

REV. RUL. 2012-30 TABLE 2
Adjusted AFR for November 2012
Period for Compounding
Annual Semiannual Quarterly Monthly
Short-term
adjusted AFR .24% .24% .24% .24%
Mid-term
adjusted AFR .98% .98% .98% .98%
Long-term
adjusted AFR 2.84% 2.82% 2.81% 2.80%
REV. RUL. 2012-30 TABLE 3
Rates Under Section 382 for November 2012
Adjusted federal long-term rate for the current month 2.84%
Long-term tax-exempt rate for ownership changes during the
current month (the highest of the adjusted federal long-term
rates for the current month and the prior two months.) 2.87%

 

 

REV. RUL. 2012-30 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for November 2012
Note: Under Section 42(b)(2), the applicable percentage for non-federally
subsidized new buildings placed in service after July 30, 2008, and before
December 31, 2013, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income
housing credit 7.38%
Appropriate percentage for the 30% present value low-income
housing credit 3.16%
REV. RUL. 2012-30 TABLE 5
Rate Under Section 7520 for November 2012
Applicable federal rate for determining the present value of an
annuity, an interest for life or a term of years, or a remainder or
reversionary interest 1.0%

Estate Planning Window Closing….

As the year progresses toward December 31st one of the biggest estate planning opportunities in modern history is getting set to expire.  The Bush era tax cuts, as modified in December 2010, created an unprecedented FIVE MILLION DOLLAR GIFT TAX EXEMPTION.  This exemption, now $5,120,000, is set to expire at year end.

The estate tax can quickly eat 50% of your assets of death… even if you have a living trust. Yes, a living trust does not, in and of itself, avoid estate tax! You need to do more if you have a potentially taxable estate. As of today you would need to have more than $5,120,000 to be estate taxable but that number is set to shift to $1,000,000 on January 1, 2013. Yes, just one million and that includes life insurance and retirement accounts!

If your total estate may be worth more than $1,000,000 on January 1, 2013 then you need to look at your estate plan NOW!  THIS YEAR. Do not wait!

3.8% Medicare Tax

Bob Keebler, the well known CPA, recently posted about the new 3.8% Medicare tax. Rather than getting your tax news from Facebook or while standing by the water cooler at work how about letting me give you the basics about this hotly discussed tax.

Bob posted,

For tax years beginning after 2012, new Internal Revenue Code (IRC) section 1411 imposes a 3.8 percent surtax on certain passive investment income of individuals and of trusts and estates based on a mathematical formula. For taxpayers to be able to plan around the tax they must first understand what income it applies to and how the tax is calculated.”  

The applicable threshold amounts for individuals vary depending on filing status and are shown below:

Here are the thresholds before which you need not worry about it:

Married Taxpayers, Filing Jointly                       $250,000

Married Taxpayers, Filing Separately                 $125,000

All other individual taxpayers                             $200,000

For more information you should visit Bob’s website.

IRS Portability – Bulletin 2011-42 – Estate Tax

This is a very useful bulletin issued by the IRS for anybody with taxable estates having one spouse die. The issue of portability is of keen importance to those people where one spouse has died.  Read up and ask your attorney for clarification!  -John
Internal Revenue Bulletin: 2011-42

October 17, 2011

Notice 2011-82

Guidance on Electing Portability of Deceased Spousal Unused Exclusion Amount

Table of Contents

PURPOSE
BACKGROUND
DISCUSSION
GUIDANCE
REQUEST FOR COMMENTS
EFFECTIVE DATE
DRAFTING INFORMATION
PURPOSE

This notice alerts executors of the estates of decedents dying after December 31, 2010, of the need to file a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, within the time prescribed by law (including extensions) in order to elect to allow the decedent’s surviving spouse to take advantage of the deceased spouse’s unused exclusion amount, if any, pursuant to section 303(a) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312 (124 Stat. 3302) (TRUIRJCA) and section 2010(c)(5)(A) of the Internal Revenue Code (Code). In particular, for the executor of the estate of a decedent to elect under section 2010(c)(5)(A) (a “portability election”) to allow the decedent’s surviving spouse to use the decedent’s unused exclusion amount, the executor is required to file a Form 706 for the decedent’s estate, even if the executor is not otherwise obligated to file a Form 706. This notice also alerts executors of the estates of decedents dying after December 31, 2010, that the estate of such a decedent will be considered to have made a portability election if a Form 706 is timely filed in accordance with the instructions for that form. For those estates filing a Form 706 that choose not to make a portability election, this notice addresses how to avoid making the election. This notice also reminds taxpayers that a portability election can be made only on a Form 706 timely filed by the estate of a decedent dying after December 31, 2010, and any attempt to make a portability election on a Form 706 filed for the estate of a decedent dying on or before December 31, 2010, will be ineffective. Finally, this notice alerts taxpayers that the Treasury Department and the Internal Revenue Service (Service) intend to issue regulations under section 2010(c) of the Code to address issues arising with respect to the portability election, and anticipate that those regulations will be consistent with the provisions of this notice.

BACKGROUND

Sections 302(a)(1) and 303(a) of TRUIRJCA, enacted on December 17, 2010, amended section 2010(c) of the Code. Section 2010(c), as amended, generally allows the surviving spouse of a decedent dying after December 31, 2010, to use the decedent’s unused exclusion amount in addition to the surviving spouse’s own basic exclusion amount. Thus, sections 302(a)(1) and 303(a) of TRUIRJCA eliminate the need for spouses to retitle property and create trusts solely to take full advantage of each spouse’s basic exclusion amount.

Section 2010(c)(1) of the Code provides that the applicable credit amount is the amount of the tentative tax that would be determined under section 2001(c) if the amount with respect to which the tentative tax is to be computed were equal to the applicable exclusion amount. Thus, generally, the applicable credit amount effectively exempts from federal estate and gift tax a person’s taxable transfers with a cumulative value not exceeding the applicable exclusion amount.

Under section 2010(c)(2), a person’s applicable exclusion amount is the sum of (A) the basic exclusion amount and (B) in the case of a surviving spouse, the deceased spousal unused exclusion amount, if any.

Section 2010(c)(3) sets the basic exclusion amount at $5,000,000 in 2011, to be adjusted annually for inflation after 2011.

Section 2010(c)(4) defines the term “deceased spousal unused exclusion amount” to mean, with respect to the surviving spouse of a decedent dying after December 31, 2010, the lesser of (A) the basic exclusion amount, or (B) the excess of (i) the basic exclusion amount of the last such deceased spouse of such surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under section 2001(b)(1) on the estate of such deceased spouse. The unused exclusion amount of a deceased spouse who died before January 1, 2011, cannot be used by the surviving spouse, regardless of the date of the surviving spouse’s death.

Under section 2010(c)(5)(A), a deceased spousal unused exclusion amount may be taken into account by a surviving spouse in determining the surviving spouse’s applicable exclusion amount only if the executor of the deceased spouse timely files a Form 706 for the deceased spouse’s estate, on which the executor computes the deceased spousal unused exclusion amount and makes a portability election. An election, once made, is irrevocable. However, no election may be made if the Form 706 is filed after the time prescribed by law (including extensions) for filing a Form 706.

Section 6075(a) requires the executor of a decedent’s estate filing a tax return to file the Form 706 within 9 months after the date of the decedent’s death. Section 6081(a) provides that the Secretary may grant a reasonable extension of time for filing any return; however, generally, no such extension may be for more than 6 months. Section 20.6081-1(b) of the Estate Tax Regulations grants executors of decedents’ estates an automatic 6-month extension of time to file the Form 706. Executors currently may request the automatic extension of time to file Form 706 by timely filing Form 4768, “Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes.”

Section 2010(c)(5)(B) allows the Secretary to examine a return of the predeceased spouse, even after the time has expired under section 6501 for assessing tax under chapter 11 or 12, to make determinations with respect to the deceased spousal unused exclusion amount, notwithstanding any period of limitation in section 6501.

Section 2010(c)(6) provides that the Secretary shall prescribe regulations as may be necessary or appropriate to implement section 2010(c).

DISCUSSION

The Treasury Department and the Service anticipate that, as a general rule, married couples will want to ensure that the unused basic exclusion amount of the first spouse to die will be available to the surviving spouse and, thus, that the estates of most (if not all) married decedents dying after December 31, 2010, will want to make the portability election. As indicated above, because the election is to be made on a timely-filed Form 706, the Treasury Department and the Service anticipate a significant increase in the number of Forms 706 that will be filed by the estates of decedents dying after December 31, 2010, and that many of those returns will be filed by the estates of decedents whose gross estates have a value below the applicable exclusion amount.

As a result, the Treasury Department and the Service believe that the procedure for making the portability election on the Form 706 should be as straightforward and uncomplicated as possible to reduce the risk of inadvertently missed elections. To that end, the Treasury Department and the Service have determined that the timely filing of a Form 706, prepared in accordance with the instructions for that form, will constitute the making of a portability election by the estate of a decedent dying after December 31, 2010. Thus, by timely filing a properly-prepared and complete Form 706, an estate will be considered to have made the portability election without the need to make an affirmative statement, check a box, or otherwise affirmatively elect, on the Form 706. Until such time as the IRS revises the Form 706 to expressly contain the computation of the deceased spousal unused exclusion amount, a timely-filed and complete Form 706 that is prepared in accordance with the instructions for that form will be deemed to contain the computation of the deceased spousal unused exclusion amount, thereby satisfying the requirements in section 2010(c)(5)(A) for making an effective election.

The Treasury Department and the Service acknowledge that an estate may not want to make the portability election. Not filing a timely Form 706 will prevent the making of that election. However, if such an estate is obligated to file a Form 706 because the value of the gross estate exceeds the applicable exclusion amount, or files a Form 706 for another reason, the executor must follow the instructions for Form 706 that will describe the necessary steps to avoid making the election.

The Treasury Department and the Service recognize that the due date for filing Form 706 for those decedents dying in the first quarter of 2011 is fast approaching and remind executors of the ability to request an automatic 6-month extension by filing Form 4768 before the due date for filing Form 706. See § 20.6081-1(a) and (b) of the Estate Tax Regulations.

The Treasury Department and the Service intend to issue regulations, pursuant to the specific authority provided in section 2010(c)(6), to address various issues arising with respect to implementation of the provisions of section 2010(c).

GUIDANCE

1. If the executor of the estate of a decedent dying after December 31, 2010, intends to make the portability election to allow the decedent’s surviving spouse to use the deceased spousal unused exclusion amount, the executor must file a complete Form 706 within the time prescribed by law (including extensions), regardless of whether or not the gross estate has a value in excess of the exclusion amount or otherwise is obligated to file a Form 706.

2. The estate of a decedent dying after December 31, 2010, will be deemed to make the portability election to allow the decedent’s surviving spouse to use the deceased spousal unused exclusion amount by the timely filing of a complete and properly-prepared Form 706. To ensure the correct exclusion amount and tax rates, executors should use the Form 706 issued for the year of the decedent’s death. Until such time as the IRS revises the Form 706 to expressly contain the computation of the deceased spousal unused exclusion amount, a complete and properly-prepared Form 706 will be deemed to contain the computation of the deceased spousal unused exclusion amount.

3. The executor of the estate of a decedent dying after December 31, 2010, that timely files a complete Form 706, but that chooses not to make the portability election to allow the decedent’s surviving spouse to use the deceased spousal unused exclusion amount, must follow the instructions for Form 706 that will describe the steps the executor must take to notify the Service that the decedent’s estate is not making the portability election. If the executor of such an estate chooses not to make the portability election and is not otherwise obligated to file a Form 706, not timely filing a Form 706 will effectively prevent the making of that election.

4. The estate of a decedent dying on or before December 31, 2010, is not entitled to make a portability election. Any attempt to make a portability election on a Form 706 filed for the estate of such a decedent will be ineffective.

5. The Treasury Department and the Service intend to issue regulations to implement the provisions of section 2010(c).

REQUEST FOR COMMENTS

Comments are invited on the following specific issues, which have been identified for consideration in proposed regulations to be issued under section 2010(c):

1. The determination in various circumstances of the deceased spousal unused exclusion amount and the applicable exclusion amount;

2. The order in which exclusions are deemed to be used;

3. The effect of the last predeceasing spouse limitation described in section 2010(c)(4)(B)(i);

4. The scope of the Service’s right to examine a return of the first spouse to die without regard to any period of limitation in section 6501; and

5. Any additional issues that should be considered for inclusion in the proposed regulations.

Comments will be considered if submitted in writing by October 31, 2011. All comments will be available for public inspection and copying. Comments may be submitted in one of three ways:

By mail to CC:PA:LPD:PR (Notice 2011-82), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

Electronically to Notice.Comments@irscounsel.treas.gov. Please include “Notice 2011-82” in the subject line of any electronic communications.

By hand-delivery Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2011-82), Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave., NW, Washington, DC 20224.

EFFECTIVE DATE

This notice is applicable with respect to the estates of decedents dying after December 31, 2010.

DRAFTING INFORMATION

The principal author of this notice is Karlene M. Lesho of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Karlene M. Lesho at (202) 622-3090 (not a toll-free call).