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Feb 11

Well, as of this writing, there is no estate tax. There is also no generation-skipping tax (GST). There is, however, a gift tax for 2010.

Yippee right? Not so quick. Let’s take a look at the basis carryover rules in place for 2010.

If one passed way in 2009, there was usually no need to file an estate tax return unless the estate exceeded $3.5 million. The basis in assets (as an example: P&G stock) was “stepped-up” to its value on the date of death. If something wasn’t as easy to value (say a second home in Clearwater, Florida), one would obtain an appraisal or equivalent. This meant that any appreciation in the asset went untaxed for income tax purposes.  OK, there were exceptions, the principal one being income in respect of a decedent, but we are talking in general here.

It’s a different game in 2010. For deaths after 12/31/09, property is transferred at the lower of its adjusted basis or its fair market value. This means that the property cannot be stepped-up but it can be stepped-down.  There are two exceptions:

(1)    Everybody gets to increase basis to fair market value by (up to) $1.3 million. If assets have appreciated by $700,000, then the step-up is limited to $700,000. If assets have appreciated by $2.3 million, then the executor has decisions to make, as the maximum step-up is $1.3 million.

(2)    An additional $3 million gets stepped-up if the property is passing to the surviving spouse.

Key thing here is that $1.3 million refers to the appreciation, not the total value of the property. One could have an estate of $2.2 million that has appreciation over $1.3 million. Likewise one could have an estate of $10.8 million that does not have appreciation of $1.3 million.

Note that an estate of $1.4 million now has to file a return in 2010. The House estimated that 6,000 estates would have filed under the old $(3.5 million, 45% rate) rules. More than 70,000 estates will have to file under the new (carryover basis) rules.

The generation-skipping tax goes away also. This guy (the “skip”) is the special forces of federal taxes. You do not want to meet him in the field. The skip applies when you try to pass wealth from one generation to another but skip at least one generation in doing so. The common example is a trust for the grandkids. This is a not a tax to laugh at, as it equals the estate tax and is payable in addition to the estate tax. Think about that for a second. This is one expensive tax.

Does anyone believe that these rules will continue indefinitely? Frankly, no. But they are the law as it stands right now. What if one dies now but Congress changes the law in July? Will the law be retroactive to January 1? It is not clear. The Supreme Court has allowed retroactive increases in tax rates, but this is different. There is no estate or skip tax as of this writing. This would be a retroactive imposition of a tax not just a tax rate.

If you are affected, you really should meet with an attorney who practices in this area. There truly are many things that can go wrong, depending on your situation. An example is the marital/bypass trust combination that is very common in wills. You may have heard this referred to as the A/B trusts. The idea is to fund the bypass trust to its maximum, as the estate tax credit offsets the bypass trust and voila – no estate tax. Any excess estate goes to the marital trust, as assets passing to a spouse (or to a QTIP trust) also trigger no estate tax. Problem? The bypass trust doesn’t know when to shutoff in 2010, as there is no estate tax and no estate tax credit. It therefore sucks up all the assets and leaves nothing left for the marital trust. If the bypass trust is going to the children of a first marriage and the marital trust is going to a second spouse, this could be bad.

One last note. What about the gift tax in 2010? It is still there. The rate has been reduced though. It is now 35%. It was 45% last year. You can still give way $13,000 to anyone you wish without it counting as a gift, though.

Feb 10

We know that windows and doors do – if they meet the energy ratings.

Siding won’t, though. The IRS has privately ruled that – even though the siding is insulated and probably meets the energy ratings – it doesn’t qualify because it provides structural support to the house.

Feb 09

That credit existed in 2008 and applied to home purchases between April 9 and December 31, 2008.

The $7,500 credit has to be repaid over 15 years. You are to add $500 to your 2009 return using Form 5405. If you sell the house before the credit is fully repaid, you are to pay the lesser of your profit or the remaining unpaid credit.

The IRS has said it cannot waive the repayment, even though later versions of the credit do not require repayment unless the house is sold within three years.

Feb 09

On October 26, 2009, IRS Commissioner Douglas Shulman announced the creation of a new group to target high-wealth individuals. This group (the Global High Wealth Industry Group) will be housed within the Large and Mid-Size Business (LMSB) Division.

The idea is to centralize IRS compliance efforts.  The IRS will take a unified approach to look at sophisticated financial, business, and investment arrangements across multiple entities with complicated legal structures and tax consequences.

Shulman seemed to indicate that current IRS efforts typically involve identifying single returns for audit based on the usual scoring systems for audit selection. The new program would instead look at everything that may be connected to a single taxpayer, including trusts, private foundations, partnerships, equity-sharing arrangements, royalty and licensing agreements, and privately held and related entities where the taxpayer may have actual or beneficial ownership.

Shulman said the IRS will initially focus on individuals with “tens of millions of dollars” in assets or income.

Feb 08

The required minimums resume this year because Congress did not extend the waiver into 2010.

If you were 70 1/2 going into 2009, your required distributions are resuming.

If you turned 70 1/2 last year, you do not have take a distribution for 2009 by April 1,2010. You do however have to take a 2010 distribution by December 31, 2010. 

Distributions are calculated on the previous year-end balance. The 2010 distributions would therefore be calculated on your 12/31/2009 balance.

Feb 08

Remember that donations to Haiti relief made in January and February, 2010 can deducted on your 2009 tax return. Donations must be made, however, to U.S. charities.

Feb 08

The IRS has announced that it will start intensive employment tax audits under its National Research Program (NRP) with random audits to begin in February 2010. The IRS said it will audit approximately 6,000 U.S. companies

The NRP project will help the IRS update its noncompliance estimates and its audit selection programs. The IRS does not believe that its traditional audits yield compliance data as accurate as the NRP. NRP audits are random and allow the IRS to statistically measure noncompliance in a specific area.

The goal of this program is to gather information in five categories: worker classification, fringe benefits, nonfilers, reimbursed expenses, and officer compensation.

Feb 04

Quotes are solicited under Request For Quotation (RFQ) number TIRWR-10-Q-00023. This announcement constitutes the only solicitation; a written RFQ will not be issued. If your company can provide the product listed in the RFQ and comply with all of the RFQ instructions, please respond to this notice.

The Internal Revenue Service (IRS) intends to purchase sixty Remington Model 870 Police RAMAC #24587 12 gauge pump-action shotguns for the Criminal Investigation Division. The Remington parkerized shotguns, with fourteen inch barrel, modified choke, Wilson Combat Ghost Ring rear sight and XS4 Contour Bead front sight, Knoxx Reduced Recoil Adjustable Stock, and Speedfeed ribbed black forend, are designated as the only shotguns authorized for IRS duty based on compatibility with IRS existing shotgun inventory, certified armorer and combat training and protocol, maintenance, and parts.

Submit quotes including 11% Firearms and Ammunition Excise Tax (FAET) and shipping to Washington DC.

Feb 03

On February 3, 1913 the 16th amendment was ratified, giving Congress the power to lay and collect taxes on all incomes.

Feb 02

My favorite is “reform the U.S. international tax system.”

US multinationals operate on a worldwide tax regime. This is quite unusual; most countries do not tax their multinationals in this manner. In most countries, the corporation pays tax on income generated within the borders of that country. The US disregards borders – for the most part. 

Granted the US scheme is somewhat offset by the foreign tax credit, but in turn that is offset by the CFC scheme, on and on…

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