Estate Taxes Eased

By now you may have heard that the Estate Tax has been lowered for 2011 and 2012. Taxpayers no longer have to pay federal estate tax unless they own more than $5 million in assets.  Let’s look at how these changes can affect you.

What does it mean to "own more than $5 million?" What possessions count as "your estate?" All investments, cash, vehicles, real estate, furniture, clothing, artwork and other collections, retirement assets and business interests are included in this calculation.   In some cases, life insurance counts, too.

What is the tax rate?  Every US taxpayer is entitled to bequeath up to $5 million to their heirs with zero tax.  Once you leave over $5 million in assets, there is a flat 35% rate.  Note that certain costs, such as funeral expenses, are allowable deductions against the total estate.

Another change in the new Estate Tax rules is that if the first-to-die spouse leaves less than $5 million, the surviving spouse can bequeath their own $5 million plus whatever amount the deceased spouse did not leave. For example, if a spouse has only $2 million in assets, she bequeaths $2 million upon her death. That leaves $3 million of her total $5 million allowance unused. If her surviving spouse has $10 million in assets, he can use his own $5 million plus the $3 million remaining from his wife – leaving only $2 million of his estate as being subject to the tax.

An important point to remember is that you don't have to wait until death to leave possessions to your loved ones.  You can give up to $13,000 of cash or other property to any individual each year – this applies to multiple individuals as well.  Beyond that, you can make lifetime gifts of up to the same $5 million level without paying any tax – the Estate and Gift Taxes have the same tax-free limits and rates.  By gifting now, you avoid any increase in value of that property between now and your death from your estate.

Does this mean you can forget about estate planning?  No, you should continue to work with competent legal resources to make sure your assets pass as you intend without any complications.  Furthermore, this summary applies to federal tax only – your state may assess an estate or inheritance tax as well.  Also, these rules may (and they probably will) change before their December 31, 2012 expiration and your attorney can help you be prepared no matter what happens in the future.

If you have any questions or would like more information, please contact:
Diane Burke, CPA, MBA, AEP
Cover & Rossiter
302-656-6632
DBurke@CoverRossiter.com

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Taming Tax Season

Sending your tax materials in each year can be a daunting process.  "Where did I put that Form 1099? Did it come in yet?” I have three copies of the same document what do I do?"  Listed below are seven tips to help insure a smooth tax season:

Designate a central location to store all incoming tax materials such as a box or large envelope.  If you get duplicates feel free to send us both. We can determine which document is most recent and use that document.
Complete and sign the Tax Organizer form as legibly as possible- We know that the organizer is quite lengthy for some of our clients.  You do not need to complete the entire organizer.  Instead complete the first 8-10 pages and provide us with your original tax documents.  This will save you some time and we can refer to the tax documents for the details.

We also ask that you complete certain organizer pages if you own a small business or have rental real estate instead of providing a shoe box of receipts.  Also please list the nature of the expense vs. the name of the party that you paid, i.e. "electrical repair" instead of "Joe Smith"

Be sure to include cost basis information if you sold stock.  You may be able to obtain this on line or by calling your broker.

Improperly listing estimated tax payments is the number one cause of tax notices.  Include the amount paid, date paid, tax year and quarter, check number, and payee.  Please be sure to list the details for the period 1/1/10 through 1/15/11 to properly identify all tax payments.

Provide totals of charitable contributions instead of providing a stack of receipts.  Please be sure to indicate if the contributions were cash, check or donated property.

Deliver your tax information to us as soon as possible and ideally no later than March 10th.   Some data may arrive later but send in the bulk of your information prior to March 10th, accumulate the second wave of information into one stack, and send it in at the end of March

If you have any questions or would like more information, please contact:
Loretta Manning, CPA
302-656-6632
LManning@CoverRossiter.com

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Million Dollar Mortgages

The IRS announced in Revenue Ruling 2010-25 that indebtedness in excess of $1 million incurred by a taxpayer to acquire, construct, or substantially improve a qualified residence may constitute home equity indebtedness.  Prior to this ruling, the qualified personal residence interest deduction was limited to interest paid on $1 million of indebtedness incurred to acquire a personal residence.  A deduction was also allowed for another $100,000 of home equity indebtedness; however home equity indebtedness could not be debt incurred to acquire, construct or substantially improve a personal residence.      

Revenue Ruling 2010-25 clarifies that acquisition indebtedness over $1 million can now be treated as home equity indebtedness.  The amount of deductible home equity indebtedness must be secured by a qualified personal residence, cannot exceed the property’s fair market value and is generally deductible regardless of what the homeowner does with the proceeds of the loan.  

So if you have been planning those renovations and were concerned by the tax deductibility you can now plan based on the new interpretation.  This ruling by the IRS seems only fair.  It now evens the field with taxpayers who were able to deduct interest on an additional $100,000 of home equity debt on top of the $1 million mortgage.  

If you have any questions or would like more information, please contact:

Rachael Leberstien, CPA
302-656-6632
RLeberstien@CoverRossiter.com

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