Mandatory Internet Sales Taxes? Marketplace Fairness Act Wending Way Through Legislature
Reply
Tax Traps and Land Mines Lurking in Inherited IRA’s
1278 Glenneyre Street Suite 304
Laguna Beach, CA 92651
(949) 209-8936
dkopman@kopmanlaw.com
www.kopmanlaw.com
Inherited IRA’s – Tax traps
A beneficiary who inherits the of IRA of an individual who has a required distribution for the year must take any remaining required minimum distribution (RMD). Below is just one permutation in which, by not following the RMD law, significant tax penalties will almost surely follow.
Both Dave and Sue were 75 years old last year when each took their RMDs for the year. Dave died early in December having designated Sue as beneficiary of his IRA. Sue rolled the proceeds of Dave’s IRA into her IRA in January. So, the issue arose – “What is Sue’s RMD for the year?”
An IRA owner’s RMD is typically calculated based on their prior year-end account balance. Sue’s prior year-end balance did not include the amount which she had inherited from Dave. It was still in the IRA in Dave’s name at year end. Two key questions: (1) Should Sue base her current year RMD on her account balance only?; and (2) While it is too late for Dave to enjoy the balance of his IRA, what happens to the RMD on Dave’s account?
Under most states’ laws, assets that pass through a beneficiary form become the property of the beneficiary at the instant they inherit it and, in that regard, it matters not whether the beneficiary’s name is in the account title. It belongs to the beneficiary from that moment on. Therefore, Sue must calculate her RMD for the year on both balances.
Beneficiaries must be made aware of the above rule by their advisers and for too many that knowledge comes only after it is too late and the damage cannot be undone, because any required RMD not taken is subject to a 50% penalty on the amount not taken. If Sue takes only the RMD based solely on her IRA balance, and not the combined balance of her IRA and Dave’s account balance, Sue is surely going to owe a significant penalty on the RMD she did not take.
Also, unless the estate (as opposed to Sue) is the beneficiary, Sue cannot avoid the penalty by simply leaving the IRA in Dave’s (the Decedent’s) name and have the estate take the RMD before transferring the account to the beneficiary. IRA rules for beneficiaries can get very complicated. We recommend you consult us should you have further questions on this or related IRA distribution topics.
The above information is provided for general information purposes only, and does not constitute legal advice. Successful implementation of the above-described techniques requires careful consideration of facts particular and unique to each situation and, therefore, should only be considered after a detailed consultation with an attorney. The above information is not intended to create an attorney-client relationship between the Law Offices of Daniel D. Kopman/Kopman Law and the reader. Such relationship would only arise, if at all, upon negotiation and execution of a written fee agreement.
Annuityville Horror
1278 Glenneyre Street Suite 304
Laguna Beach, CA 92651
(949) 209-8936
dkopman@kopmanlaw.com
www.kopmanlaw.com
Annuityville horror stories
Stephen King would be terrified by some of frightening annuity happenings that unfortunately are now commonplace.
Annuities can be great transfer of risk strategies when properly positioned in a portfolio and there are many good agents out there trying to match up annuity guarantees with specific portfolio goals.
That said, we all continue to learn of nightmarish stories of unsuitably sold annuities that you need to know about to avoid these potential sales traps.
Annuityville horror story No. 1
“$53,000 in annual fees.”
Recently, a nice man (let’s call him Herman Muenster) called his financial adviser to take an objective look at a load variable annuity he purchased a few years ago. For the right client, sales of certain no-load variable annuities that are 100% liquid day one and provide efficient tax-deferred growth.
Herman had worked hard for 35 years in a factory, has been married for over three decades, and has two grown children. Over that 35 years he had accumulated over $1.5 million in his 401(k), and that was all the money that he had for retirement.
As he was driving home one day, he was listening to a radio show that he trusted so he called and was referred to a local adviser to discuss his upcoming retirement. Herman told the adviser that he wanted to turn on a lifetime income stream in five years because he was going to take another job in the interim. He also wanted to set the payments up to cover both his and his wife’s life, and he didn’t want to lose any money to market volatility. Certainly, clear requests.
Unfortunately, what he was sold was a fully-loaded variable annuity with 3.9% in annual fees, consisting of a Mortality and Expense fee of 1.25%, an Income Rider fee of 0.85%, a Death Benefit Rider fee of 0.85%, and Mutual Fund Expense of 0.95%. Herman was not aware of any of these fees until his adviser went through his prospectus and showed the specific breakdown of annual charges. In addition, the adviser put 100% of the money into just one mutual fund, even though there were hundreds of choices — and charged an additional 1.10% management fee to oversee it.
The average annual fee on a load variable annuity (including riders) is typically around 3%. But with the “oversight” fee added to the 3.9% policy charge, Herman’s annual fees on the total asset amount was 5%, which adds up to a whopping $53,000 per year.
The income rider, which is an attached benefit used for future income, was added for lifetime income guarantees. That would have been OK except that the income rider was not set up to pay a joint lifetime income stream with his wife and couldn’t be turned on for 10 years (remember that Herman needed income to start in five years).
To surrender the policy in full would cost Herman over $80,000. Because of the high surrender charges, there is really nothing he can do except take out 10% of his money via the penalty free withdrawal clause, not the happiest of options. You can’t make this kind of horror up.
Annuityville horror story No. 2
“Paying surrender charges because the bonus covers it.”
Advisers hear this one on a weekly basis, so the story is the same every time and only the names change. Agents love to transfer one annuity to another annuity, and sometimes inappropriately use the “upfront bonus” as an excuse to “cover” for any surrender charges. This is called twisting or churning in the annuity regulatory world, and in some states it can be a third-degree felony.
Most carriers try to prevent these types of transfers within the application paperwork by requiring a side-by-side comparison of the old annuity and the annuity that it is going to. The bottom line is that the math has to work in the client’s favor, not the agent’s. Make sure you get a copy of the application comparison page from the agent.
Annuityville lesson: In most cases, it doesn’t make sense to take surrender charges from one annuity and have an upfront bonus “cover” for that amount to move to another annuity. Do the math because it normally doesn’t work in your favor.
Unfortunately, millions of dollars of annuity nightmares are being sold on the Web every day. Normally, you sign up after watching a video and magically … you have a bright eyed agent in your home usually talking about the best indexed annuity ever. The agent typically can’t stop saying the word “hybrid” or using the phrase “reasonable rate of return” (whatever that means).
Unless the regulatory bodies step in and stop these annuity Web promoters, there will soon be many new horror stories to be shared.
The above information is provided for general information purposes only, and does not constitute legal advice. Successful implementation of the above-described techniques requires careful consideration of facts particular and unique to each situation and, therefore, should only be considered after a detailed consultation with an attorney. The above information is not intended to create an attorney-client relationship between the Law Offices of Daniel D. Kopman/Kopman Law and the reader. Such relationship would only arise, if at all, upon negotiation and execution of a written fee agreement.
A Whole Lot of Wailing Going On – Among Bob Marley’s Heirs
1278 Glenneyre Street Suite 304
Laguna Beach, CA 92651
(949) 209-8936
dkopman@kopmanlaw.com
www.kopmanlaw.com
The Bob Marley Lagacy
Even the ravages of cancer could not convince reggae czar Bob Marley to write a will. His Rastafarian faith prohibited a belief in death. Creating a last will and testament wasn’t an option. Marley’s concern for his wife and children drove him to ask his attorney about the consequences of dying without a will. He was told, essentially, that “everything’s gonna be all right.”
Not so. Bitter legal battles and family feuds erupted after the reggae star’s death on May 11, 1981. Under Jamaican law, Marley’s widow, Rita, was entitled to 10% of her husband’s $30 million estate and held a life estate in another 45%. Marley’s 11 children (4 by his wife and 8 by other women) were entitled to equal shares in the other 45% as well as a remainder interest in Rita’s life estate.
Simple, right? Predictably, this clear cut law was muddled by personal relationships, attorneys, and accountants.
The family was immediately concerned after learning the absence of a will meant they had no rights to Bob’s name or likeness. In response, Rita borrowed money and sued the estate. Millions of dollars later, she was rewarded with the decision that the family was entitled to Marley’s name and likeness.
On a related note, Marley’s widow and his mother, Cedella Booker, went their separate ways. The two have since reconciled, but at one point, Booker asserted Rita’s heart was black. Outside of the family, Marley’s long-term bandmate, Aston “Family Man” Barrett, sought royalties from his time with Marley’s Wailers.
The estate’s most famous brush with the courts came in 1986. The estate administrator, Mutual Security Merchant Bank and Trust Company, sued Marley’s attorney and accountant. Mutual Security accused Marley’s advisors (and Rita) of diverting estate assets and royalties into their own bank accounts via international corporations. Rita was accused of forging Marley’s signature on documents that supposedly transferred some of his interests to her before he died, which excluded them from estate property.
All of the legal wrangling hasn’t tainted the mystique surrounding Bob Marley. As his first greatest hits album proves, he is a legend. His popularity grows as each new generation meets him through his music. Clothing and accessories abound on the market. His songs are continually featured in films and commercials. Forbes Magazine estimated Marley’s posthumous earnings at $9 million just between September 2002 and September 2003. That’s not bad for someone who has been dead for over twenty years. His music catalog alone is worth about $100 million.
Certainly a lot of clams and Red Stripe, but imagine what the Marley fortune would be if it hadn’t been for all the legal fees.
No will, no cry? I think Not.
The above information is provided for general information purposes only, and does not constitute legal advice. Successful implementation of the above-described techniques requires careful consideration of facts particular and unique to each situation and, therefore, should only be considered after a detailed consultation with an attorney. The above information is not intended to create an attorney-client relationship between the Law Offices of Daniel D. Kopman/Kopman Law and the reader. Such relationship would only arise, if at all, upon negotiation and execution of a written fee agreement.
Significant Tax Benefits – Estate Planning with Split Dollar Universal Life Insurance
1278 Glenneyre Street Suite 304
Laguna Beach, CA 92651
(949) 209-8936
dkopman@kopmanlaw.com
www.kopmanlaw.com
By Daniel D. Kopman, J.D., C.P.A., R.I.A.
-
Permanent Life Insurance – High Octane Non-Taxable Investment
In an era of higher marginal income tax rates on individuals, permanent life insurance policies such as universal life (U/L) policies are even more attractive. Unlike investing solely in marketable securities which incur a heavy on-going tax burden, the growth in value of a U/L policy (amount by which the death benefit exceeds the premiums paid) is received income tax free. That is one reason why life insurance is one of the few remaining tax planning/tax sheltered investment bastions available in the United States. Additionally, because growth in value of permanent policies – except in the case of certain variable life policies – is neither positively nor negatively correlated with movement in the stock market, it is an excellent choice as a high ROI alternative investment within an investor’s asset allocation model.
The tax benefits of properly structured life insurance planning in the estate planning context are significant. Because of its tax favored status, life insurance when integrated with other estate planning tools is unsurpassed for creating highly desired estate tax leverage. Strategies frequently utilize what are referred to as ILIT and SLAT forms of irrevocable trusts in which gifts qualifying for the estate tax annual exclusion and even those that do not, are used to procure insurance on the grantor, usually the parents or grandparents of the beneficiaries of the trust.
-
Additional Leverage Using Split Dollar Arrangements
In the most simplistic cases, the trustee of the above-described trusts purchases an insurance policy with the grantor as the insured and pays the premiums either in an up-front (single premium) payment or is commonly the case or, instead, pays annualized premiums. However, in a split-dollar arrangement, the grantor makes a portion of the premium payment(s), which allows the trust to acquire a policy with an even larger death benefit than it would otherwise be able to do in the absence of the financial leverage under a split dollar arrangement.
Recall that because the policy proceeds will be received by the trust and, ultimately, will be distributed to the beneficiaries on an income and estate tax-free basis, the tax leverage afforded by split dollar arrangements can be significant. Without getting overly technical, in some arrangements the grantor’s estate will include the reimbursement from the death benefits to the extent of the greater the policy premiums paid by the grantor or the cash value which has accumulated in the policy. In most instances, the economic impact of such inclusion will be significantly less costly than the benefit inuring to beneficiaries in the form of a tax-free inheritance. With proper planning, such benefit can be levered even further to avoid the federal generation skipping transfer (GST) tax which might otherwise be incurred in devolving an inheritance across more than one generation.
-
Exit or Rollout Plan may be Necessary
In some but not all instances of split dollar planning, the grantor may be saddled with paying taxes on the economic benefit associated with the arrangement, roughly equal to what would be annual renewal term premium on the life insurance policy, even after no further premium payments are due under the insurance contract. In circumstances where this occurs, the benefit of such on-going split dollar agreement is diminished or, worse, eliminated by the phantom term premium imputed to the grantor, which may grow exponentially with the grantor’s increasing age.
When that occurs, a rollout (also known as an exit plan) should be considered and, if appropriate, constructed to eliminate the adverse tax consequences. While there are many avenues to accomplish the roll out, one which I have used involves using the value of the remainder interest in a separate Grantor Retained Annuity Trust (GRAT) to pay prospective policy premiums, thereby eliminating the obligation of grantor to make them. Although truly understanding the mechanics GRATs requires an investment of time, in its most simplistic sense, the grantor has established a separate irrevocable trust into which he or she retains the right to receive an annuitized income stream from the trust usually for a specified term after which, assuming the grantor survives the term, the remainder passes on an after-estate tax basis to grantor’s beneficiaries, who are also the beneficiaries of the above-described insurance trust. With historically low IRS interest rates mandated for discounting the retained annuity stream, the taxable value of the gift of the remainder interest in the GRAT will be significantly minimized.
Under the GRAT exit strategy, the trustee of the ILIT or SLAT trust uses the funds received from the GRAT remainder interest to pay life insurance premiums which otherwise would have been the on-going obligation of grantor, and the rollout has been accomplished with policy death benefits remaining attractively tax free.
The above information is provided for general information purposes only, and does not constitute legal advice. Successful implementation of the above-described techniques requires careful consideration of facts particular and unique to each situation and, therefore, should only be considered after a detailed consultation with an attorney. The above information is not intended to create an attorney-client relationship between the Law Offices of Daniel D. Kopman/Kopman Law and the reader. Such relationship would only arise, if at all, upon negotiation and execution of a written fee agreement.
Consider Real Estate Investment Trusts
1278 Glenneyre Street Suite 304
Laguna Beach, CA 92651
(949) 209-8936
dkopman@kopmanlaw.com
www.kopmanlaw.com
Daniel D. Kopman, J.D., C.P.A., R.I.A.
Investors ran to real estate investment trusts in 2012, attracted by evidence of a housing rebound combined with historically low yields on other traditional investment products. REIT’s, many of which trade like stocks on major exchanges and invest in commercial or residential property, mortgages or a combination thereof, delivered in spades.
A BANNER YEAR
Through mid-October 2012, US Equity REITs returned 19.4%, exceeding the 17.9% gain in the S&P 500 Index, according to the National Association of Real Estate Investment Trusts. Global real estate funds also rose in 2012, up 25.6% through early November making them the best-performing sector according to Morningstar. REITs also provided results for investors thirsting for yield. On average, US equity REIT dividend yields were 3.2% through the first three quarters of 2012, well above the 1.8% and 2% respective yields for 10-year Treasury notes and the S&P 500. With returns like that, it’s not surprising that REIT exchange-traded funds (ETFs) had net inflows of almost $7 billion through October, according to Morningstar.
NO GUARANTEES
It’s important to remember that past performance is never an indicator of future results (i.e., past is not prologue). Just because REITs had a strong showing through most of 2012, they won’t necessarily continue to outpace broader indexes. Also, there’s no certainty that housing will continue to rebound, despite several promising signs. Mortgage rates, however, remain near historic lows and there’s an imbalance of supply and demand emerging in a growing number of local markets, auguring well for a continued housing recovery. There are likely to be bumps in the housing recovery road. But it appears that rates will stay near their historic lows, allowing more time for buyers who may have been delaying a purchase to act.
NOT ALL REITs ARE ALIKE
REITs come in many flavors. While some are concentrated in specific local markets, others are widely diversified across regions or even countries. Some specialize in certain property types, such as office buildings, shopping malls, apartments, warehouses or hotels, while others invest in a combination of properties. And each category of REIT performs differently. In 2012, REITs based on retail properties did particularly well. The group posted average total returns of more than 23.6% through the first 11 months of the year, according to NAREIT. Timber REITs, which have more than 50% of their asset value in property involved in forestry products, also shined, gaining more than 33% during that time period. REITs that specialize in lodging and resorts lagged, with a total return of 5.5%; residential REITs trailed the group with a total return of 2.7% through the end of November. Mortgage REITs, which invest in pools of mortgages, also known as “mortgage-backed securities,” were among the stronger performers through most of 2012, rising 18.9% and 39.2%, respectively, for home and commercial mortgages; according to NAREIT. But these REITs also were among the most volatile-they tumbled 6% in one week in October alone. Mortgage REITs can be challenged by declines in interest rates, which spur mortgage refinancing. When a mortgage refinances, the REIT usually needs to reinvest assets, typically at a lower rate.
DIVERSIFY, DIVERSIFY, DIVERSIFY
Because all REITs are not created equal and perform differently, investors need to be especially mindful of diversification. If you are interested in managing a portfolio of individual REITs, diversification is crucial and should be part of a broader investment strategy. Holding at least five to 10 individual names may be necessary in order to achieve adequate diversification. Investors should diversify across several different property types and also by geographic region within the REIT portion of a more broadly diversified portfolio. Investors can visit company websites to learn more about REIT property investments. The bottom line for investors is that while REITs on the whole have performed well during the prior three years, there’s no certainty that outperformance will continue. If you want to invest in property via publicly traded companies, remember to spread your investments over several REITs. It is also important to keep in mind the tax consequences of REITs. These investments must distribute 90% of their income to shareholders as dividends and those dividends are taxed at the shareholder’s marginal income tax rate. Investors should consult a tax advisor before investing.
The above information is provided for general information purposes only, and does not constitute legal advice. Successful implementation of the above-described techniques requires careful consideration of facts particular and unique to each situation and, therefore, should only be considered after a detailed consultation with an attorney. The above information is not intended to create an attorney-client relationship between the Law Offices of Daniel D. Kopman/Kopman Law and the reader. Such relationship would only arise, if at all, upon negotiation and execution of a written fee agreement.
View Disputes Involving Multi-Million Dollar Luxury Ocean View Properties on the Rise
1278 Glenneyre Street Suite 304
Laguna Beach, CA 92651
(949) 209-8936
dkopman@kopmanlaw.com
www.kopmanlaw.com
Daniel D. Kopman, J.D. CPA
As a law and financial concern working with high net worth clients, Kopman Law Advisors is often called upon to advise clients on matters which are unique to such demographic, not the least of which involves disputes over view obstruction.
View disputes among neighbors along the Southern California coastline are a rapidly growing phenomenon. There are several reasons for the prevalence of disputes, the most prolific among them being that coastal view property is a scarce resource. To avail themselves of spectacular ocean and white water vistas, people are paying enormous sums and, in the course of doing so are becoming more clustered into existing neighborhoods while already over-built hillsides are spawning even more construction, as modern construction techniques make it possible to build where no one has dared build before.
Moreover, peoples’ willingness to pay multi-millions of dollars for ocean view homes makes them all the more aggressive and vigilant when they perceive a vista transgression has occurred, to wit, they are willing to commit big bucks to prosecuting or defending the cause. New construction, structural modification, boundary fencing, satellite dishes, solar panels and landscaping are causes of growing tension among many homeowners. Most coastal cities and common community development associations do provide guidance and authoritative promulgations for restrictions on new construction and architectural enhancements.
Many architectural rules, while principally aesthetic in governance, purport to spill over into view regulation viz-a-viz building set back restrictions and the like. At some point structural restrictions meld into the arena of landscaping and, ultimately, become de facto view restrictions. More spurious are guidelines for trees, hedges, awnings and other appurtenances which may intrude upon another homeowner’s space and view and clearly do not fall under the ambit of community aesthetics.
Perhaps the area where the least guidance and authority exist is in regard to trees, hedges and similar hardscape components. Any analysis starts with the premise that California affords property owners no inherent legal right to light, air or view. Some beach cities, Laguna Beach for example, have imposed ordinances seeking to impose some order and control over plants and trees which may block neighboring views. The City has a formalized grievance procedure which ferrets out many disputes. Such procedure is consistent with experience which suggests that a majority of view disputes are resolved informally without resort to government intervention. Some argue that the rules do not go far enough and thereby undercut the effectiveness of pre-litigation dispute resolution.
Municipalities in some instances, while providing no express authority over trees and shrubs, allows homeowners to argue that a hedge-row or similar line of trees is the functional equivalency of a fence. Such argument allows disputing owners to avail themselves of the same arguments over plants and trees as could be made in the case of an offending wall or fence. Single trees present a more difficult challenge.
Homeowner associations in many instances provide the best control and remedies in the case of view disputes. The covenants, codes and restrictions, or “CC&R’s,” are contractual agreements among founding homeowners and an association providing stipulated restrictions on construction, views, paint color, architectural themes and really any other lawful subject matter. Restrictions on views, like all restrictions, must be reasonable and are said to “touch and concern” the land and therefore run with the land making them binding on successors who purchase property within a particular association. Under state law, rules which seek to impose restrictions on views must be articulated with sufficient clarity. Clarity in rule promulgation ensures that standards are not vague so as to allow for arbitrary and capricious enforcement.
I recently successfully handled an egregious case involving capricious enforcement of view restrictions. An individual recently purchased a Newport Beach residence immediately adjacent to my client and began bullying neighbors on all sides of her with nonsensical view complaints. The Bully began to write threatening letters to my client demanding that my client remove her awnings which had been in place for more than 10 years prior to the new homeowner moving into the neighborhood. The Bully then demanded that the board of directors of the neighborhood’s homeowners association mandate that my client remove the long-standing awnings or pay financial penalties for as long as they remained in place.
By way of background, some years prior the Board mandated – without any apparent authority – that my client remove the awnings. Notwithstanding, non-enforceability of the prior order on its face, enforcement was separately time-barred under the applicable five-year statute of limitations as the Board had not timely taken action to enforce any right it may have had.
More significantly, the Board has continuously asserted authority over view restrictions, leaning upon rule promulgated by a sub-committee it called the “view preservation committee” made up of several members of the Association’s Board at Large. Importantly, neither the view preservation committee, nor the rules it had promulgated and sought to enforce were authorized by association members under the Association’s CC&R’s. When I raised such defense, which was backed by my client’s wiliness to litigate the matter if necessary, the Board reversed its position and a prospective hearing was summarily canceled.
As the above case illustrates, people seeking to preserve views should familiarize themselves with city and county ordinances and rules of any governing community association. Separately negotiated private written agreements, including easements, good neighborly relations and common courtesy can go a long way toward preventing and resolving view issues. Written agreements, like tall fences, as the saying goes, makes for good neighbors. Bear in mind that the California Coastal Commission may also have a say in what trees may be planted or destroyed along the coastal areas within its jurisdiction. Caution is advised.
Should you have any questions about view disputes or an existing view dispute we invite you to contact our office for a consultation.
The above information is provided for general information purposes only, and does not constitute legal advice. Successful implementation of the above-described techniques requires careful consideration of facts particular and unique to each situation and, therefore, should only be considered after a detailed consultation with an attorney. The above information is not intended to create an attorney-client relationship between the Law Offices of Daniel D. Kopman/Kopman Law and the reader. Such relationship would only arise, if at all, upon negotiation and execution of a written fee agreement.
2012 American Taxpayer Relief Act – Transfer Tax Considerations
1278 Glenneyre Street Suite 304
Laguna Beach, CA 92651
(949) 209-8936
dkopman@kopmanlaw.com
www.kopmanlaw.com
Daniel D. Kopman, J.D. CPA
The American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act) permanently extends and modifies changes made to the law by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act). The 2012 Taxpayer Relief Act permanently provides for a maximum federal estate tax rate of 40 percent with an annually inflation-adjusted $5 million exclusion for estates of decedents dying after December 31, 2012; and a 40-percent tax rate and a unified estate and gift tax exclusion of $5 million, also adjusted for inflation, for gifts made after 2012. The generation-skipping transfer (GST) tax rate, which is tied to the maximum estate tax rate, is also 40 percent.
In addition, the 2012 Taxpayer Relief Act extends the deduction for state death taxes, and a number of provisions affecting qualified conservation easements, qualified family-owned business interests, the installment payment of estate tax for closely-held businesses, and repeal of the five-percent surtax on estates larger than $10 million. Also, the portability between spouses is made permanent.
Summary of Major Changes to Transfer Taxes in 2013 Resulting from the Extension and Modification of EGTRRA and the 2010 Tax Relief Act:
• Maximum estate, gift, and GST tax rate is 40 percent.
• Five-percent surtax on large estates and gifts in excess of $10 million up to $17,184,000 will not be imposed on the estates of decedents dying or gifts made in 2013 or later.
• Applicable exclusion amount for estate and gift taxes is $5 million (adjusted for inflation to $5,120,000 in 2012).
• Exemption amount for CST tax is $5 million (adjusted for inflation to $5,120,000 in 2012).
• State death tax credit is permanently repealed and the state death tax deduction is extended.
• Qualified family-owned business interest deduction is permanently repealed.
• Modifications to the exclusion for qualified conservation easements are permanently extended.
• Portability of the deceased spousal unused exclusion amount for estate and gift tax purposes is made permanent. Portability allows the estate of a decedent who is survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent’s unused exclusion to the surviving spouse’s own transfers during life and at death.
If Congress had not acted on the sunset provisions, effective January 1, 2013, the maximum federal estate tax rate was scheduled to revert to 55 percent with an applicable exclusion amount of $1 million (not indexed for inflation). The 2012 Taxpayer Relief Act brings some certainty to the Tax Code related to transfer taxes that has been controversial over the last few years. If you have any questions related to the 2012 Taxpayer Relief Act or how the new law affects your estate planning needs, please call our office. We will be happy to assist you.
The above information is provided for general information purposes only, and does not constitute legal advice. Successful implementation of the above-described techniques requires careful consideration of facts particular and unique to each situation and, therefore, should only be considered after a detailed consultation with an attorney. The above information is not intended to create an attorney-client relationship between the Law Offices of Daniel D. Kopman/Kopman Law and the reader. Such relationship would only arise, if at all, upon negotiation and execution of a written fee agreement.
2012 American Taxpayer Relief Act – Considerations for Businesses
1278 Glenneyre Street Suite 304
Laguna Beach, CA 92651
(949) 209-8936
dkopman@kopmanlaw.com
www.kopmanlaw.com
Daniel D. Kopman, J.D. CPA
As 2012 ended, the national debate focused on the expiration of the Bush-era tax cuts and the so-called fiscal cliff. On January 1, 2013, Congress passed, and President Obama signed the next day, the American Taxpayer Relief Act. The new law includes some valuable business tax incentives. Many of these business tax incentives are temporary so taxpayers have a limited window in which to maximize their potential tax savings.
Tax Rates
Depending on how a business activity is structured, it may be taxed as corporation or its owners may pay taxes at the individual rates. The American Taxpayer Relief Act permanently extends the Bush-era income tax cuts except for single individuals with taxable income above $400,000; married couples filing Joint returns with taxable income above $450,000; and heads of household with taxable income above $425,000. Income above these thresholds will be taxed at a 39.6- percent rate, effective January 1, 2013. The $400,000/$450,000/$425,000 thresholds, which will be adjusted for inflation after 2013, are also used to determine the point at which the maximum tax rate on capital gains and dividends for an individual rises from 15 percent to 20 percent.
Bonus Depreciation
Bonus depreciation is one of the most important tax benefits available to businesses, large or small. In recent years, bonus depreciation has reached 100 percent, which gave taxpayers the opportunity to write off 100 percent of qualifying asset purchases immediately. For 2012, bonus depreciation remained available, but was reduced to 50 percent. The American Taxpayer Relief Act extends 50- percent bonus depreciation through 2013 (through 2014, in the case of certain period production property and transportation property). The American Taxpayer Relief Act also provides that a taxpayer otherwise eligible for additional first-year depreciation may elect to claim additional research or minimum tax credits in lieu of claiming depreciation for qualified property.
While not quite as attractive as 100-percent bonus depreciation, 50-percent bonus depreciation is valuable. For example, a $100,000 piece of equipment with a five-year MACRS life would qualify for a $60,000 write-off: $50,000 in bonus depreciation plus 20 percent of the remaining $50,000 in basis as “regular” depreciation for the first year.
Bonus depreciation also relates to the vehicle depreciation dollar limits under, Code Sec. 280F. This provision imposes dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile/truck in service within a business and for each succeeding year. Because of the new law, the first-year depreciation cap for passenger automobile/truck placed in service in 2013 is increased by $8,000.
Bonus depreciation, unlike Code Sec. 179 expensing (discussed below), is not capped at a dollar threshold. However, only new property qualifies for bonus depreciation. Code Sec. 179 expensing, in contrast, can be claimed for both new and used property and qualifying property may be expensed at 100 percent.
Expensing
The American Taxpayer Relief Act enhances or extends several expensing provisions. These include Code Sec. 179 small business expensing, 15-year recovery period for qualified leasehold and retail improvements and restaurant property, special expensing rules for film and television productions, and a seven-year recovery for motorsports complexes.
Code Sec. 179 expensing.
In recent years, Congress has repeatedly increased dollar and investment limits under Code Sec. 179 to encourage spending by businesses. For tax years beginning in 2010 and 2011, the Code Sec. 179 dollar and investment limits were $500,000 and $2 million, respectively. The American Taxpayer Relief Act boosts the dollar and investment limits for 2012 and 2013 to their 2011 amounts ($500,000 and $2 million) and adjusts those amounts for inflation. Keep in mind that the increase is temporary. The Code Sec. 179 dollar and investment limits are scheduled, unless changed by Congress, to decrease to $25,000 and $200,000, respectively, after 2013. The new law also provides that off-the-shelf computer software qualifies as eligible property for Code Sec. 179 expensing. The software must be placed in service in a tax year beginning before 2014. Additionally, the American Taxpayer Relief Act allows taxpayers to treat up to $250,000 of qualified leasehold and retail improvement property, as well as qualified restaurant property, as eligible for Code Sec. 179 expensing.
Leasehold, retail and restaurant property.
The American Taxpayer Relief Act extends, for 2012 and 2013, the special treatment of qualified leasehold and retail improvement property and qualified restaurant property as eligible for a 15-year recovery period. Otherwise, this property generally is depreciated over a 39-year recovery period. To take advantage of this enhanced expensing, the qualified property must be placed in service before January 1, 2014.
Film and television.
A special expensing rule allows taxpayers to elect to deduct certain costs of a qualified film or television production in the year the costs are paid or incurred. The American Taxpayer Relief Act extends this rule through 2013.
Motorsports property.
Qualified motorsports complexes may be eligible for a seven-year straight line cost recovery period. The American Taxpayer Relief Act extends this treatment through 2013.
Work Opportunity Tax Credit
The WOTC expired after 2011 with an exception for employers that hire qualified veterans. The American Taxpayer Relief Act extends the WOTC (including the special rules for veterans) through 2013. Each new employee hired from a targeted group generally entitles an employer to a credit equal to 40 percent of first-year wages, up to $6,000.
Research Tax Credit and Other Incentives
The American Taxpayer Relief Act extends the Code Sec. 41 research tax credit through 2013. The credit had expired after 2011. The new law, however, does not make the credit permanent, as had been proposed by President Obama and some lawmakers.
Along with the research tax credit, the American Taxpayer Relief Act also revives through 2013 many other expired incentives, including:
• Employer wage credit for activated military reservists
• Reduced recognition period for S corporation built-in gains tax
• Indian employment credit and accelerated depreciation for business property on Indian reservations
• Code Sec. 45 production tax credit for renewable energy
• Credits for biodiesel and ethanol
• Incentives for manufacturers of energy-efficient new homes and appliances
• Railroad track maintenance credit
• Mine rescue team training credit
Planning Opportunities
Unlike many of the individual incentives in the American Taxpayer Relief Act, many of the business tax benefits are not made permanent. As a result, planning to maximize tax savings under these extended incentives takes on a new urgency. Please contact our office and we can discuss how the American Taxpayer Relief Act can help maximize your tax savings.
The above information is provided for general information purposes only, and does not constitute legal advice. Successful implementation of the above-described techniques requires careful consideration of facts particular and unique to each situation and, therefore, should only be considered after a detailed consultation with an attorney. The above information is not intended to create an attorney-client relationship between the Law Offices of Daniel D. Kopman/Kopman Law and the reader. Such relationship would only arise, if at all, upon negotiation and execution of a written fee agreement.
2012 American Taxpayer Relief Act – Considerations for Individuals
1278 Glenneyre Street Suite 304
Laguna Beach, CA 92651
(949) 209-8936
dkopman@kopmanlaw.com
www.kopmanlaw.com
Daniel D. Kopman, J.D. CPA
On New Year’s Day 2013, Congress passed a far-reaching new law intended to avert the so-called fiscal cliff. The American Taxpayer Relief Act, signed into law by President Obama on January 2, 2013, impacts every taxpayer. Not only does the new law make permanent reduced income tax rates for most taxpayers, it extends either permanently or temporarily a host of other tax incentives. At the same time, the new law creates valuable tax planning opportunities. Not all provisions, however, are good for all taxpayers. Those individuals with income above $400,000 ($450,000 for families) are now subject to a new top income tax rate of 39.6 percent and a new capital gains maximum rate of 20 percent and, all taxpayers will be taxed two percent more in 2013 than in 2012 on wages and self-employment income up to the Social Security employment tax wage base ($113,700). Our office can help you plan a tax strategy that reflects the important changes in the American Taxpayer Relief Act.
Tax Rates
Unless Congress acted, taxpayers in all incomes groups were looking at a tax hike in 2013 because of the expiration of the Bush-era tax cuts and the 2012 payroll tax holiday. The long-time bracket structure of 10, 15, 25, 28, 33, and 35 percent was scheduled to revert to 15, 28, 31, 36 and 39.6 percent after 2012. On top of that, the payroll tax holiday reduced the employee-share of Social Security taxes (with a comparable benefit for self-employed individuals) for two years: 2011 and 2012. The American Taxpayer Relief Act preserves and permanently extends the Bush era income tax cuts except for single individuals with taxable income above $400,000; married couples filing joint returns with taxable income above $450,000; and heads of household with taxable income above $425,000. Income above these thresholds will be taxed at a 39.6 percent rate, effective January 1, 2013. The $400,000/$450,000/$425,000 thresholds will be adjusted for inflation after 2013.
The new law, however, does not extend the payroll tax holiday. Effective January 1, 2013, the employee-share of Social Security increased from 4.2 percent to 6.2 percent (its rate before enactment of the payroll tax holiday). The net result is that all individuals who receive wages (and self-employed individuals) will see less take home pay in 2013.
Capital Gains
Effective January 1, 2013, the maximum tax rate on qualified capital gains and dividends rises from 15 to 20 percent for taxpayers whose incomes exceed the thresholds set for the 39.6 percent rate (the $400,000/$450,000/$425,000 thresholds discussed above). The maximum tax rate for all other taxpayers remains at 15 percent; and moreover, a zero-percent rate will continue to apply to qualified capital gains and dividends to the extent income falls below the top of the 15- percent tax bracket.
Alternative Minimum Tax
The alternative minimum tax (AMT) was put in place more than 40 years ago to ensure that very wealthy individuals did not escape taxation. Due to many factors, including the fact that the AMT was not indexed for inflation, the AMT has encroached on middle-income taxpayers. In recent years, Congress routinely “patched” the AMT by increasing the exemption amounts and making other relief available. These patches were just that: temporary measures. The American Taxpayer Relief Act permanently patches the AMT by increasing the exemption amounts and indexing them for inflation.
Retirement Savings
The American Taxpayer Relief Act makes a valuable change to the treatment of retirement savings and opens up an important planning opportunity. Generally, participants with 40l(k) plans and similar plans have been allowed to roll over fund to designated Roth accounts in the same plan subject to certain qualifying events or age restrictions. The American Taxpayer Relief Act lifts most restrictions, and now allows participants in 401(k) plans with in-plan Roth conversion features to make transfers to a Roth account at anytime. Congress made this change because conversion is a taxable event and will raise revenue.
Estate Tax
Federal transfer taxes (estate, gift and generation-skipping transfer (GST) taxes) seem to have been in a constant state of flux in recent years. The American Tax Relief Act aims to provide some certainty. Effective January 1, 2013, the maximum estate, gift and GST tax rate is generally 40 percent, which reflects an increase from 35 percent for 2012. The exclusion amount for estate and gift taxes is unchanged for 2013 and subsequent years at $5 million (adjusted for inflation). The GST exemption amount for 2013 and beyond is also $5 million (adjusted for inflation). The new law also makes permanent portability and some enhancements made in previous tax laws.
Tax Credits and Deductions
Like the Bush-era income tax cuts, many popular tax credits and deductions were scheduled to expire after 2012 (in some cases, they expired after 2011). The American Taxpayer Relief Act makes some of these incentives permanent and extends others. One of the most widely used tax credits, the $1,000 child tax credit, is made permanent. If Congress had not acted, the $1,000 child tax credit would have decreased to $500 per qualifying child for 2013 and beyond. The $1,000 amount is not, however, indexed for inflation. Other popular tax credits and deductions for individuals made permanent or extended by the new law include:
• Enhanced adoption credit/exclusion (permanent)
• Enhanced child and dependent care credit (permanent)
• Enhanced student loan interest deduction (permanent)
• American Opportunity Tax Credit (through 2017)
• Higher education tuition deduction (through 2013)
• IRA distributions to charitable organizations (through 2013)
• Transit benefits parity (through 2013)
• Cancellation of indebtedness on principal residence (through 2013)
• Code Sec. 25C residential energy efficient property credit (through 2013)
• Teachers’ classroom expense deduction (through 2013)
The American Taxpayer Relief Act also revives the Pease limitation and personal exemption phase out (PEP) for higher-income taxpayers after 2012, but not at their former levels. Generally, individuals with incomes over $250,000 and married couples with incomes over $300,000 will be affected.
Planning Opportunities
The American Taxpayer Relief Act opens tax planning opportunities because it impacts so many tax rules, everything from income rates to retirement planning. Congress intended to make permanent many of the changes, which creates a climate for tax planning unlike the recent past where uncertainty was the rule and not the exception. Please contact our office and we can make an appointment to discuss how the American Taxpayer Relief Act can help maximize your tax savings.
The above information is provided for general information purposes only, and does not constitute legal advice. Successful implementation of the above-described techniques requires careful consideration of facts particular and unique to each situation and, therefore, should only be considered after a detailed consultation with an attorney. The above information is not intended to create an attorney-client relationship between the Law Offices of Daniel D. Kopman/Kopman Law and the reader. Such relationship would only arise, if at all, upon negotiation and execution of a written fee agreement.