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“Taxing” is a word synonymous with “onerous” and “wearing.” Bond Beebe, Accountants & Advisors, have created a user friendly blog called “It’s Taxing” to inform and educate our clients and business associates on timely topics related to tax, estates, accounting and finance. We hope our blog answers your questions and alleviates the heavy burden and anxiety related to understanding complicated tax laws and related matters.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
DC passed emergency legislation last Friday, February 24, 2012, mostly repealing the new-for-2011 withholding requirements on retirement distributions to DC residents. Previously, DC required top-rate (8.95%) withholding on all retirement distributions to DC residents. Effective immediately, the withholidng requirement is repealed for periodic and non-lump-sum retirement plan distributions. The withholding requirement now only applies to lump-sum distributions, but excludes:
(1) any portion of a lump-sum payment that was previously subject to tax;
(2) an eligible rollover distribution that is done as a trustee-to-trustee transfer; and
(3) a rollover from an IRA to a traditional or Roth IRA that is done as a trustee-to-trustee transfer.
See the DC notice here.
Early last week, President Obama released the General Expectations of the Administration’s Fiscal Year 2013 Revenue Proposals, which outlines potential tax changes and is otherwise known as the ‘Green Book.’ This year many estate and transfer tax provisions were specifically mentioned. As you may be aware, the current estate tax laws are set to revert back to tax year 2001 rates on December 31, 2012. Current laws provide an estate tax exemption of $5.12 million and a top tax rate of 35%. In 2013, the law would permit an estate tax exemption of only $1 million and a tax rate of 55% for transfers above the exemption unless Congress takes action before the end of this year. Clearly, this is a significant change and it is not surprising the Green Book incorporates a revision to the estate and transfer tax rules.
However, some of the other modified estate and gift tax provisions outlined in the Green Book are a little more surprising. Below is a quick summary of those provisions along with the suggested change to the 2013 estate tax exemption and top tax rates.
• Restoration of the Estate, gift, and generation-skipping transfer tax parameters in effect in 2009
o The estate tax exemption would therefore be $3.5 million with a top tax rate of 45%
o The lifetime gift tax exemption would be $1 million
o These provisions would be made permanent.
o Also, there is a provision to make the portability of unused estate exemption permanent.
• Requirement for consistency in value and basis figures reported for transfer tax purposes to the IRS and those inheriting property
• Modification of rules by increasing restrictions on valuation discounts
• Requirement for a minimum term of 10 years for grantor retained annuity trusts (GRATs)
• Limited duration of generation-skipping transfer (GST) tax exemption to a trust’s 90th anniversary (limitation on dynasty trusts)
• Coordination between certain income and transfer tax rules applicable to grantor trusts providing potential for inclusion in the grantor’s estate
• Extension of the lien on estate tax deferrals for certain closely held businesses
Congress has come to an agreement on extending the payroll tax cut, and the deal is expected to be approved by the end of this week. The agreement would leave in place the 2% reduction (from 6.2% to 4.2%) in Social Security tax paid by workers for the remainder of 2012. It had previously been reduced only for the first two months of 2012. Social Security tax is paid by US workers on up to $110,100 of their wages this year, so the reduction can save a taxpayer up to $2,200 this year.
Co-authors: Dan Bottner and William Thomas
Picking up right where we left off, remember the Foreign Account Tax Compliance Act (FATCA) was part of the Hiring Incentives to Restore Employment (HIRE) Act from 2010. One of the goals of this Act was to develop a framework for the IRS to ensure disclosure of foreign (or off-shore) assets held by individuals and companies. Not to mention, off-shore asset disclosure has become a theme within our own blog.
There are many guidelines outlined in the Act set to take effect over the next few years. As a step towards the implementation of these disclosure requirements, the IRS has released a *new* tax form due with your 2011 individual income tax return. Other U.S. entities will most likely be required to file this particular form in future years, among various other foreign disclosure forms as more FATCA guidelines are put into practice.
The Internal Revenue Service is going back to the well one more time as it released the Offshore Voluntary Disclosure Program (OVDP) for a third time in as many years. For Uncle Sam, this program has been very successful in raising approximately $4.4 Billion.
Little has changed from the previous Offshore Voluntary Disclosure Program published earlier in our blog. The IRS intends for this program to function similarly by offering an opportunity for taxpayers to report offshore accounts and get current with their taxes.
The benefit of this program is the IRS has established no end date to “OVDP version 3”. The IRS has issued one large caveat to the third installment of the OVDP by stating the program can be changed or ended entirely at any point.
Obviously, the incentive is to come forward as soon as possible because those who do will not face the substantial penalties for fraud and foreign information returns along with the increased likelihood of criminal prosecution.
To put this in perspective, the current OVDP leaves taxpayers with a 27.5 percent penalty on the highest balance of the foreign asset, not to mention all the back taxes and interest for all years the assets were unreported. Accuracy-related and/or delinquent penalties will be tacked on for those back years, as well.
Congress opted to extend the 2% reduction in Social Security withholding from employees and the similar reduction in self employment tax thru February 29th, setting up another legislative showdown on the subject 2 months from now.
IRS recently released 2011’s form 1040 and its corresponding schedules C, E and F. These schedules are used by sole proprietors to report different kinds of business income. IRS has added questions dealing with 1099 reporting to all three schedules for tax year 2011. The first question asks if the taxpayer has made any payments in 2011 that would require him/her to file Form(s) 1099. If the answer is yes, then the next item asks whether the taxpayer did or will file all required Forms 1099.
Generally, a taxpayer must file Form 1099-MISC if he/she paid at least $600 in rents, services, prizes, medical and health care payments and other income payments. There are a few exceptions to this rule, for instance, payments made to corporations. Additional exceptions and other instructions (including due dates) can be found on IRS’ “General Instructions for certain information returns,” available online at www.irs.gov.
As the on-going battle over the extension of the payroll tax cuts continues in Congress, those of us in the tax professional community are left scratching our heads and trying to advise our clients on what will happen with respect to income and estate taxes over the next few years. The only thing I can say to my clients with any confidence is that anyone who tries to predict what tax changes may emerge from this Congress is talking through his or her hat. Uncertainty continues to be the theme with respect to tax and fiscal policy in the current political environment of Washington.
To that end, I strongly advise that my clients follow the time honored adage, “Make hay while the sun shines.” In some respects, the current income and estate tax law provide really great opportunities and anyone concerned about higher income tax rates or fundamental changes to our estate tax system would be well served to seize on these opportunities while they still exist.
You can look to prior entries in this blog to highlight many of the taxpayer friendly provisions of the code that are set to expire after 2011 and 2012, but below I am highlighting what I consider to be the big three opportunities.