Maine Voices: Playing Both Sides of the Street When It Comes to Residency Can Lead to Tax Problems
With the passage of Question 2, imposing a 3 percent tax surcharge on taxable incomes over $200,000 effective for 2017, the number of people seeking to leave Maine will likely climb. Frequently, the go-to state is Florida, which has no personal income tax, no estate tax and much warmer winters. Other low- or no-income tax states, such as nearby New Hampshire, are also a strong draw. While people have the right to move from one state to another, it is extremely important that the change be made correctly and honestly. Failure to do so can lead to intrusive tax audits and large assessments of back taxes, including interest and penalties. Read the full article at www.pressherald.com.
Read moreEven Math Teachers Are at a Loss to Understand Annuities
Annuities can be hard to fully grasp even in their simplest configuration, where you hand a pile of money to an insurance company, then receive a guaranteed stream of annual income for life. But schoolteachers and other people doing good works are often left to trudge through a morass of contracts tied to some of the most arcane investments, sold by representatives who may not fully understand the inner workings themselves. Read the full article at NYTimes.com.
Read moreIRS Will Now Require Executors to Report Cost Basis to Beneficiaries For Inherited Assets
When a beneficiary inherits property from a decedent, the asset receives a step-up in basis to its value on the date of death – which is both a tax perk for inheritors, and a form of tax simplification (as beneficiaries otherwise may not know what the decedent’s original cost basis was anyway). However, with hard-to-value assets, there may be a disagreement between the valuation for estate tax purposes, and the value used by the beneficiary for cost basis reporting. After all, the estate prefers a small value (to minimize estate taxes) while the beneficiary ideally wants the highest possible value reported (to get a higher basis step up). And in the past, it was even possible for the executor and beneficiary to report different amounts, each to their own benefit (and the detriment of the IRS!). To close this perceived “loophole”, in 2015 Congress created the new IRC Section 1014(f) that requires beneficiaries to use a date-of-death valuation for cost basis purposes that is no larger than the amount reported on the estate tax return, curbing the abuse. In addition, Congress also established the new IRC Section 6035, which requires executors to file a new Form 8971 to notify the IRS who the beneficiaries are, along with a Schedule A that informs both the IRS and the beneficiaries what their inherited cost basis will be. Read the full article at kitces.com.
Read morePhone Scams Continue to be a Serious Threat, Remain on IRS “Dirty Dozen” List of Tax Scams for the 2016 Filing Season
The IRS will never: Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe. Require you to use a specific payment method for your taxes, such as a prepaid debit card. Ask for credit or debit card numbers over the phone. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying. If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what you should do: If you don’t owe taxes, or have no reason to think that you do: Do not give out any information. Hang up immediately. Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484. Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes. Read the full article at irs.gov.
Read moreLast summer at the lake? How to pass your camp or cottage into new hands
All across Maine, from the wooded mountains on the western border to the open ledges of the islands off the coast, families love their seasonal homes. Large or small, elegant showplaces or rustic hideaways, these places are steeped in history and shared memories. There are many ways to plan for the management and inheritance of even a modest seasonal home, including trusts and family business entities. Read the full article at bangordailynews.com.
Read moreFinding Out Your Power of Attorney Is Powerless
Financial institutions may refuse to accept traditional legal forms long after older clients are capable of filling out alternatives. Read the full article at NYTimes.com.
Read moreEstate Tax Changes
Maine has recently approved changes to its estate tax laws that will exempt significantly more of a decedent’s estate from Maine estate taxes. Under the previous federal law, individuals dying in 2015 may transfer property during life and at death in an amount equal to $5,430,000.00 (as indexed for inflation) free from the federal estate tax. The amount of the federal estate tax exemption has been increased to $5,450,000.00 beginning January 1, 2016 for individuals dying after the first of the year. Those same individuals will also be subject to the new Maine estate tax regime—which is now tied to the federal estate tax exemption (i.e. $5,450,000.00). Over the past 15 years, the exemptions for Maine and federal estate taxes have crept upward so that many of our clients no longer have estate tax concerns. If your estate plan includes an exemption trust upon the first spouse’s death (a.k.a. “credit shelter trust” or “bypass trust”) to take advantage of the decedent spouse’s applicable state and/or federal exemption, it is time to review and perhaps revise your estate plan. These trusts were utilized in order to double the amount of exemptions available to spouses. Given the recent change in the law, that purpose is no longer appropriate for many estates under the new exemption levels. Over the years, many of our clients have worked towards reducing their estates by making gifts in order to take advantage of the annual exclusion amount ($14,000.00 per year). These gifts remove the value of the gifted property from their taxable estates. With the increased exemptions, gifting property to the next generation is less advantageous from a tax planning perspective. Indeed, sometimes holding on to the property and passing it to the next generation upon death will make the most sense from a tax planning perspective. If your beneficiaries receive property transferred upon death as opposed to during your lifetime, they receive a new basis (referred to as a “stepped up basis”) equal to the fair market value of the property at date of death. In effect, this eliminates all of the capital gain built up during the decedent’s lifetime. In contrast, gifting the property during your lifetime will not provide the next generation with any elimination of built up capital gain (i.e. no stepped up basis). Although Maine now tracks the federal estate tax exemption, it does not allow for “portability” of exemptions between spouses. Whereas federal law allows any unused exemption of the first spouse to die to be carried over to the surviving spouse, Maine law does not allow for portability of this unused Maine exemption. It therefore necessitates ongoing planning (including spousal trusts as referred to above) in estates that exceed the $5,450,000 exemption so that the first-spouse-to-die’s Maine exemption is utilized. There are many reasons to review an estate plan including change of circumstances, death in the family, and fiduciary changes. When tax laws change significantly as is the current case, a review of your estate plan is warranted. In many cases, a provision in your current will which mandates the establishment of a trust upon your […]
Read moreMaine Estate Tax Exemption to Track Federal Amount
s of January 1, 2016, Maine’s estate tax exemption will track the federal exclusion, currently set at $5.43M and indexed for inflation. In other words, for a Maine resident dying on or after January 1, 2016, Maine Revenue will impose an estate tax on all taxable estates exceeding the federal exemption amount. Only the value of the estate above the exemption amount is taxed, at rates varying between 8% and 12%. This legislation is a significant increase from the current state exemption amount of $2M and effectively eliminates estate tax planning concerns for all but the wealthiest Mainers (unless and until we see an equally large reduction in exemption levels down the road). Unlike the federal estate tax, the Maine estate tax is not “portable”. This means that the first-to-die’s unused exemption cannot be utilized by the second-to-die unless a trust is established. In contrast under federal law, both exemptions with proper planning can be utilized without the establishment of a trust so that the exclusion amount is effectively doubled. In general we recommend our clients revisit their estate plans after the tax laws undergo such sweeping change. Under the current circumstances many clients may indeed benefit by simplifying things. Some estate plans contain disclaimer provisions and other terms that are crafted to achieve maximum estate tax savings irrespective of the invariably shifting state and federal exemption amounts. Whether you have these in place depends upon the particulars of your estate plan. We therefore recommend that you contact the office to review and evaluate the effect of this new legislation on your estate plan. One of the indirect effects of the increasing estate tax exemptions at both the federal and state levels is that capital gains considerations become more relevant than estate taxes. Even with state estate tax rates of 8 to 12%, the combined federal and state capital gains rates will typically exceed those rates (depending upon the client’s individual income and circumstances). As a result, we now tend to focus more on ensuring our clients’ capital assets receive a “step up” in basis upon death. Under current tax law, real estate and other capital assets receive an increased basis upon death equal to the fair market value of the asset as of the date of death (or the alternative valuation date – six months after death). This effectively wipes out all the built up capital gain that has occurred during your lifetime. This can result in enormous tax savings for your children. Without the step up in basis, the children would be left with selling the asset and paying capital gains tax on the difference between the sale price and the original basis. As expected, whether basis planning is available to you depends on your particular circumstances. In some cases, we may advise removing property out of trusts that would otherwise not be subject to estate tax (since this is often no longer a concern) and transferring that property into the client’s name (or a grantor trust for the client) so that the assets will achieve a step up in basis upon death. As part of an estate […]
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