Estate Planning and Tax Lawyer Blog

Many individuals fail to realize that the tax laws, besides being over our heads and confusing, offer basic tools to reduce taxes. Most businesses do not realize that by keeping a mileage log that properly tracks business-related mileage, a deduction of a few hundred to thousands of dollars may result at year’s end for small businesses. As a business owner, it is important to be knowledgeable about the tax laws that are in effect. If there is ever a free or low cost “what you need to know about taxes” class in your area, take advantage and sign up.

To read more on this article, visit Advice from the Field: Study up on tax laws.

Continue reading "Study up on Tax Laws" »

This year homebuyers who took the $7,500 federal tax credit to buy their first homes in 2008 have to begin paying it back. This credit was intended to be like an interest-free loan and those who took the maximum credit of $7,500 in 2008 must add $500 each year for the next fifteen years to their income tax liability. Reminders are also being sent out by the IRS to those who have to start paying back their credit this year. However, due to a change by the government, those who waited until 2009 or 2010 to buy a home that qualified for the credit do not have to pay it back if the buyer remains in the house for at least three years. The stimulus bill enacted in February 2009 included the $8,000, no pay-back tax credit to help jump-start the wavering housing market. The program in 2009 and 2010 was also extended to repeat home-buyers that met other program criteria and was limited to a maximum of $6,500.

To read more on this article, visit Housing tax credit payback to begin.

Continue reading "Homeowner Tax Credit" »

The popular research tax credit expired in 2009. The 2010 Tax Relief Act retroactively reinstates this credit to January 1, 2010 and will extend throughout 2011. The Joint Committee of Taxation estimates the cost will be $13.3 billion. The Work Opportunity Tax Credit was set to expire August 31, 2011. This provision, which is now set to expire at the end of 2011, gives employers credits up to $2,400 per qualified employee.

Continue reading "Other Business Credits and Extenders" »

Due to the 2010 Tax Relief Act, there has been an extension on several energy incentive credits for businesses. Credits for biodiesel and renewable diesel fuel, credit for refined coal facilities, and the new energy efficient home credit have all been extended. Excise tax credits/outlay payments for alternative fuels and fuel mixtures, the sales of electric transmission property, and the percentage depletion for oil and gas from marginal wells have been extended. Grants for certain energy property in lieu of tax credits, tax credits and outlay payments for ethanol and tariff on imported ethanol, along with energy efficient appliance credit have also been extended.

Continue reading "Energy Incentive Credits for Businesses " »

By this time of the year, most individuals have received their W-2s and are ready to file their taxes to receive their tax refunds. However, the change in the tax laws may mean that many individuals will have to wait a few more weeks before the IRS gets its system up to speed. Because of the changes, the IRS will not be able to process many returns until February 14th, at the earliest. Although the IRS may not be able to process the returns as quickly, that does not mean that you can’t start getting organized. Some software vendors are up to date, able to accept and ready to process returns. Filing electronically is faster and by choosing to receive your refund by direct deposit, receiving your refund may be even quicker. Even though it may take more time to receive your tax refund, it does not mean that you should waste any time getting your paperwork to the IRS.

To read more on this article, visit Tax law changes mean delays in processing refunds.

Continue reading "Possible Delay in Tax Refunds" »

To determine the income tax form needed to file for your business depends on the business entity established at the onset of the business. Review your business records to determine the type of entity formed and follow the IRS’s guidelines on how to report business income. Each type of entity has a different tax filing requirement. The different types of businesses are sole proprietorship, general or limited partnership, C corporation, S corporation, limited liability company (LLC), and limited liability partnership (LLP).

Sole Proprietorships do not file a separate tax return for their business. The business activities should be reported on Schedule C or Schedule C-EZ of the owner’s personal income tax return. For partnerships and LLC, income is passed through to the individual partners and taxed at the individual level. While an income tax return is not needed for partnerships or most LLCs, these entities must file an annual information return supplying the IRS with information on the payments made to their individual partners and members. Separate income tax returns are required for corporation and their owners/shareholders. Income from a C corporation is taxed at both the corporate level and individual level. Income generated by an S corporation is passed to the individual shareholders of the corporation and subject to taxation at the individual level. A separate tax return is required to be filed by an S corporation.

To read more on this article, visit Filing business tax returns.

Continue reading "What to file for your business? " »

Inflation was minimal last year, so most numbers that are required by tax law to change remain unchanged or slightly changed for 2011. For business driving, the standard rate went from 50 cents per mile to 51 cents per mile. For medical and moving, the standard rate increased from 16.5 cents to 19 cents per mile. The general mileage rate for charitable driving stayed at 14 cents per mile.

The limit for earnings that are subject to social security tax remains at $106,800. For those under full retirement age, the earnings limit is $14, 160, while those at full retirement age have no earnings limit. The threshold for the “nanny tax” continues at the same rate for 2011. You are responsible for payroll taxes if your household worker is paid more than $1,700. The threshold for the “kiddie tax” remains at $1,900. If your child under age 19, or under 24 for students, receives more than $1,900 unearned income, the excess may be taxed at the parents’ highest rate.

For an individual retirement account (IRA), the maximum contribution allowed in 2011 remains at $5,000 for those under the age of 50 and $6,000 for those 50 or older. The maximum amount of wages employees may put into a 401(k) plan continues to be $16,500 for 2011. For SIMPLE plans, the maximum allowed is $11,500. If 50 or older, a contribution of up to $22,000 to a 401(k) and $14,000 to a SIMPLE plan is allowed. For a health savings account (HAS), the contribution allowed continues to be $3,050 for individuals and $6,150 for families.

To read more on this article, visit IRS adjusts 2011 tax numbers.

Continue reading "Tax Numbers Adjusted with Inflation" »

Prior to the 2010 Tax Relief Act, various tax deductions and incentives were set to expire at the end of 2010, or had already expired at the end of 2009. Due to the 2010 Tax Relief Act, employees can continue to exclude up to $5,250 of education assistance provided by an employer through the end of 2012. Deductions for student loan interest and Coverdell Education Savings Accounts are extended through the end of 2012. State and local sales tax deduction, higher education tuition deduction, and teacher’s classroom expense deduction are all extended for two years and will expire at the end of 2011. The Joint Committee on Taxation estimates that the cost for the state and local sales tax deduction will total $5.5 billion. There is no individual projection for the other deductions and extenders.

Continue reading "Individual Tax Deductions and Extenders" »

Prior to the 2010 Tax Relief Act, 50% bonus depreciation was extended for qualifying assets placed in service in 2010. Due to the 2010 Tax Relief Act, bonus depreciation increased to 100% for qualifying assets placed in service between September 9, 2010 and December 31, 2011. Fifty percent bonus will apply for any assets placed in 2012. The Tax Policy Center estimates the cost of this provision will be $20.9 billion. This will allow businesses to take considerable federal deductions on qualified capital purchases. Many states may continue to “decouple” from the bonus and Section 179 provisions at the federal levels. While the 100% bonus depreciation may make Section 179 expensing less valuable, there may still be a benefit to maximizing a Section 179 expense that is allowable in a certain state if they do not recognize the full amount of bonus depreciation.

Continue reading "Bonus Depreciation" »

The IRS’ marital deduction allows a spouse to pass on his or her assets to a surviving spouse without those assets being taxed.

A marital deduction trust is created to protect the assets of both spouses from federal estate taxes when they die.  So how does a marital trust work?

When the first spouse dies – let’s say the husband – his assets pass not to his surviving wife but to the marital deduction trust and no federal estate taxes are due.  While the wife is still living, the trust generates income for her.  When she dies, the assets in the marital deduction trust are not part of her estate, so are therefore not subject to federal estate taxes.

To qualify for a marital deduction trust:

• The surviving spouse must be the only beneficiary of the trust during his or her lifetime


• The surviving spouse must have unrestricted power over how the trust assets are bestowed upon his or her death


• All trust income must be given to the surviving spouse on an annual basis during his or her lifetime


• The trust must specify who will receive the trust assets upon the death of the surviving spouse

A trustee must also be appointed, and all the assets in the trust must be specified in the trust document.

For more information on marital deduction trusts and Florida estate planning, contact our Jacksonville Florida estate planning law firm.

Prior to the 2010 Tax Relief Act, various tax credits were about to expire or return to reduced levels on December 31, 2010. Due to the 2010 Tax Relief Act, the child tax credit at the current $1,000 level per child will be extended two years. The refundable part of the credit is also extended through the end of 2012. At higher levels, the child and dependent care credit is extended through 2012. The maximum amount of eligible expenses remains at $3,000 for an individual and $6,000 for two or more individuals. The American Opportunity Tax Credit (AOTC), which replaced the Hope education credit in 2009, will also be extended through the end of 2012. Other credits, like the enhanced earned income credit and adoption credit, are also extended at the 2010 levels through the end of 2012.

The Joint Committee on Taxation estimates that the cost of the child tax credit at higher levels will total $71.7 billion, with the refundable portion adding another $19.7 billion. The extension of the child and dependent care tax credit and AOTC’s estimated cost will total $600 million and $17.6 billion, respectively.

Continue reading "Other Individual Tax Credits " »

In 2009, individuals over the age of 70.5 were allowed to make tax-free charitable contributions of up to $100,000 per year, per taxpayer, from their retirement accounts. The contribution would not be subject to income tax and would count towards the individual’s required minimum distribution. This incentive had expired in 2010. Due to the 2010 Tax Relief Act, this provision was extended for two years through the end of 2011. Because the provision was enacted in the latter part of 2010, taxpayers are allowed to make charitable transfers during January 2011 as if they were made December 31, 2010. The Joint Committee on Taxation has not disclosed the separate cost of this provision.

This provision can be useful for those individuals who have charitable intentions and large IRAs. One thing not quite clear, however, is the impact that having a January 2011 distribution be treated as a December 2010 distribution. Watch for more assistance and discussion on the topic.

Continue reading "Individual Charitable Contribution Incentives " »

Prior to the 2010 Tax Relief Act, the credit for nonbusiness energy efficient property was at a credit amount of 30% of the expenditure for authorized property and the maximum lifetime credit was limited to $1,500. Some examples of qualified property include furnaces, water heaters, insulation material, and other items. Due to the 2010 Tax Relief Act, the energy credit will extend through the end of 2011, reducing the maximum lifetime credit of $500 and lowering the value of the credit to 10%. The Joint Committee on Taxation has not disclosed the separate cost of this provision. Individuals have been given an extra year to make energy efficient improvements, but now the lifetime credit has decreased to $500. Any individuals who have previously received a credit of $500 or more in 2006-2010 will not be qualified to receive any additional credit.

Continue reading "Energy Efficient Improvement Credit" »

Prior to the 2010 Tax Relief Act, individuals would have had to pay Social Security tax of 6.2% in 2011 on wages up to $106,800, with the employer paying the same amount. Self-employed persons are subject to taxes of 12.4% for social security. Due to the 2010 Tax Relief Act, the employee, not employer, portion of the tax is reduced from 6.2% to 4.2% for 2011, with the maximum amount of wages subject remaining at $106,800. This could result in savings of up to $2,136 per individual. Those individuals who are self-employed will also receive the 2% tax reduction. The Joint Committee on Taxation estimates that the cost will total $111.7 billion. The “Payroll Tax Holiday” has no income limitation, meaning all workers who are subject to social security taxes will receive a benefit. Although this benefit is not for businesses, tax incentives were enacted in March 2010 for potential payroll tax savings.

Continue reading "Payroll Tax Holiday" »

Most estate plans include a variety of assets: investment accounts, bank accounts, property, life insurance and IRAs or other retirement accounts. Many people may consider IRAs to be among the least of those assets because they intend to deplete their IRAs during their lifetime. But if someone dies with a substantial amount still in an IRA, it can become a major inheritable asset if the right steps are taken to protect it.

And the most important step is to designate beneficiaries for your IRAs. Because if you don’t name a beneficiary – or if you name your estate as the beneficiary – you may have made a big mistake that could cost your heirs a huge tax saving.

Here are the rules on inherited IRAs:

A spouse can roll over an inherited IRA as he or she wishes.

Any other heir must separate an inherited IRA from their own retirement funds and must start taking withdrawals right away, no matter what age they are at the time they inherit. These distributions do not suffer a 10% withdrawal penalty, but they do count as taxable income.

Here’s the important part about naming a beneficiary: if your heir is named, they can spread the withdrawals over their lifetime. If not, they have to take it all within five years. Which can put them in a higher tax bracket and cut the growth of the inherited IRA.

Taking a few minutes to fill out a beneficiary designation form for each of your IRAs is a small price to pay so your heirs don’t have a big price to pay later.

Prior to the 2010 Tax Relief Act, the marriage penalty would return at the beginning of 2011, due to the virtue of the difference between the value of the standard deduction and the size of the 15% income tax bracket between joint and single filers. Due to the 2010 Tax Relief Act, the marriage penalty relief will be extended through 2012. The Joint Committee on Taxation estimated the cost to be $26.9 billion. The marriage penalty continues to pop up in proposals being made and some parts of laws that were enacted.

Continue reading "Marriage Relief Penalty" »

Prior to the 2010 Tax Relief Act, long-term capital gains and qualified dividends have been taxed at a maximum rate of 15%, with taxpayers in the 10 and 15% brackets having a zero person tax rate on this income. With the expiration of the Bush tax cuts, the long-term capital gains would return to a maximum rate of 20% and qualified dividends would vanish and be treated as income subject to a normal tax rate. The 2010 Tax Relief Act extends the 15% maximum tax rate for long-term capital gains and qualified dividends until the end of 2012. The lower capital gains rate will cost $25.9 billion and the lower qualified dividend tax rate will costs $27.3 billion to put in effect.

Due to the 2010 Tax Relief Act, the lower capital gains rate will cause fewer individuals to close deals or sell assets to lock in their rate. There will also be an extension of the 100% gain exclusion for the sale of qualified small business stock acquired at the original issuance between September 27, 2010 and January 1, 2012 and held for more than five years.

Continue reading "Capital Gains/Qualified Dividends" »

The lowest individual income tax bracket of 10% would vanish after the scheduled expiration of the Bush tax cuts. Due to the 2010 Tax Relief Act, the individual tax rates will remain in effect at the current levels for 2011 and 2012. The final act that was passed includes an extension of the lower tax rates for all taxpayers, not just individuals making less than $200,000 or those couples making less than $250,000. The Joint Committee on Taxation estimates that the cost will total $89.3 billion. For the next two years, there is certainty for individual tax rates. However, the tax cuts will be on the agenda again shortly after the 2012 election.

One area of tax planning that has seen a spark of interest is the Roth IRA conversion. Due to the tax rate remaining the same for the next two years, a retirement plan participant has more options available.

Continue reading "Individual Income Tax Rates" »

A “compromise” package has been signed by President Obama. The estimation of the 10-year cost of the Act is to be about $858 billion with most of the provisions of the bill sunsetting at the end of 2012. This means there is fuel for the fire already for the 2012 Presidential election.

With the background information provided, we will be posting a closer look at key provisions of the 2010 Tax Relief Act as it pertains to your income taxes.

Continue reading "Income Tax Provisions in the 2010 Tax Relief" »

The Alternative Minimum Tax (AMT) is being hotly debated right now by Democrats and Republicans. Whether the AMT a/k/a the "wealth" tax will be enforced on 2010 tax returns is still up in the air.

If the AMT is not enforced, it will leave a huge hole in the federal government's budget and the lost revenue will need to be "patched" up or found through alternative methods. Although the tax has been categorized as only being paid by the wealthy, tax rates have never been adjusted for inflation and nonwealthy citizens have been affected. The good news is both parties believe they can reach a decision by the end of the year.

To learn more about this article, please visit Bipartisan vow: We'll fix AMT.

Continue reading "Will the AMT be enforced on 2010 tax returns?" »

Deloitte Tax LLP released come figures last week that delineate what could happen if the Bush tax cuts expire at the end of 2010:

Tax increase of $2,900 a year for a family of four with a household income of $50,000;

Tax increase of $4,500 annually for a family of four with a household income of $100,000;

Tax increase of $10,800 a year for a family of four with a household income of $500,000;

Tax increase of $53,200 annually for a family of four with a household income of $1 million.

In addition, long-term capital gains taxes would go from 15 percent to 20 percent and the child tax credit would drop to $500 from $1,000.

The White House wants to extend the cuts -- but only for family households making less than $250,000 a year and individual households making less than $200,000. Obama administration economists say only two percent of the population will be affected – and those are the richest two percent in the U.S.

Republicans wants to extend the tax cuts and have introduced what they call a “Pledge to America” to cut taxes and control government spending. And, as a surprise to no one, the Senate has delayed its vote on extending the tax cuts until after the November election.

Whichever way the votes go, you should elect to consult with our Jacksonville estate planning law firm about asset protection and wealth preservation.

With the uncertainty of 2011-2012 income tax rates, many Americans are paying close attention to their tax plans and are making preparations. The current tax rates are set to expire in 2010 and the proposed brackets could range anywhere from 10-39.6 percent beginning in 2011. Only single filers earning more than $200,000 and married couples earning more than $250,000 will be affected. If Congress does nothing, all rates will revert back and range from 15-39.6 percent. This will more than likely affect all taxpayers, even those in the lower brackets, and more of their income will be taxed at a higher rate.

Capital gains taxes are expected to increase in 2011. Currently, those in the 10-15 percent income tax brackets are not taxed on capital gains. Those that fall in the higher tax brackets are taxed at 15 percent. It has been contemplated that taxpayers who earn higher incomes will be taxed at an additional 20 percent on capital gains beginning in 2011. Therefore, taxpayers may want to consider taking any investment gains in 2010 at the lower capital gains tax rate.

In 2010, taxpayers can convert traditional IRAs or other qualified plans into Roth IRAs. Taxpayers have the option of either paying all of the income tax on the converted amount in 2010 or splitting the tax bill over the next two years. However, if the tax rates are higher in 2011-2012, then it may not be wise to spread the payments over the next two years. Also, many taxpayers are contemplating whether to maximize their retirement plan contributions in 2010. Currently, pre-tax dollar contribution limits are set at $16,500 for 401(k) plans and $5,000 for IRA or Roth IRA plans. There are catch up contributions available for each plan as well.

Finally, there is not currently an estate tax in 2010. It was repealed this year but is expected to be brought back in 2011. The 2009 rate was 45% for estates over $3.5 million. Next year, the proposed rate is 55% but will apply to estates of $1 million dollars or more unless Congress steps in and dictates otherwise. If Congress fails to act, many more taxpayers will need estate tax planning.

Continue reading "2010 Brings Difficult Tax Decisions to the Forefront " »

According to the Kauffman Index of Entrepreneurial Activity, new business start-ups reached a 14-year high in 2009 – which is not surprising considering high unemployment rates across the U.S. The Index found that over 550,000 new firms were started every month in 2009 – but how many will succeed?

Of course, in business –as in life – there are no guarantees. According to the U.S. Small Business Association, about half of small businesses fail within the first five years. And while there is no way to eliminate every risk associated with starting up a new business venture, you can improve your chances of success by careful advance planning and getting good advice from professionals who help people start new businesses every day.

Studies have shown that entrepreneurs who engage in business planning early in the company development process are much more likely to create a successful venture. While having a carefully researched and well thought out business plan is essential, careful business planning can also mean seeking the advice of an estate planning and business tax attorney for the development of:

• Articles of Incorporation


• Bylaws


• Partnership Agreements


• Operating Agreements

If you are thinking of starting your own business, one of your first steps should be to seek legal advice from our Jacksonville attorney about the structure of your business – sole proprietorship, partnership, corporation or LLC (Limited Liability Company) – including the tax implications for different ownership structures, protecting your personal assets from business liabilities and more.

On June 30th, the Senate passed a bill to extend the homebuyer’s credit which was passed by the House of Representatives the day before. On July 2nd, the bill received the President’s signature making it law.
The bill titled the “Homebuyer Assistance and Improvement Act of 2010” extended the timeline for the bill. Previously, the bill stated that the contract had to be entered into by the end of April 30th with the closing to take place by June 30, 2010. The bill extends the closing date to be prior to October 1, 2010.
The contract still has to have been entered into by the end of April 30, 2010, it just extends the closing date to any date prior to October 1, 2010. To learn more about other tax credits available to you, please consult a tax attorney.

Houston billionaire Dan L. Duncan became the unwitting poster child for the 2010 estate tax lapse when he died in March, allowing his $9 billion fortune to pass to his children and grandchildren tax-free.

Had he died three months earlier, his estate would have been poorer by 45 percent – in other words, that’s $4 billion the U.S. Treasury did not collect because of no estate tax in 2010.

This year is the first since 1916 when there has been no estate tax. The estate of America’s first billionaire, John D. Rockefeller, was taxed at a rate of 70 percent upon his death in 1937.

The history of estate taxes in the U.S. goes back to the Stamp Act of 1797, which required a federal stamp on wills in probate. Revenues were used to pay off war debts. The Stamp Act was repealed in 1802, but several more sporadic estate tax laws were enacted over the next century to help finance wars. When the wars ended, the acts were repealed.

The Senate Finance Committee is currently working on a compromise to reinstate the federal estate tax, and it still remains clear whether or not it will be made retroactive and applied to estates like Duncan’s.

One thing most estate planning attorneys agree on: the Duncan family has a vast war chest to fund a constitutional challenge to any retroactive tax.

If you need more information about business exit strategy planning, contact our Jacksonville Florida estate planning law firm.

The Section 7520 rate, a minimum interest rate that the IRS makes you use, is at 2.8% for July. This rate is published on a monthly basis. An example of when this rate is used is when you create a note. Recently, I prepared a short term note, less than three years, using an interest rate of .76%.

With rates being this low, it is a great time to do some advanced estate planning. A few great planning ideas include:

1) Grantor Retained Annuity Trusts (GRATs). A GRAT is a trust where the grantor retains the annuity interest for a period of years with the remainder going to the beneficiaries. The annuity payment is calculated using the 7520 rate. With a low rate, the assets should be able to increase faster than the interest rate. Therefore, the investment returns above and beyond the interest rate is passed on to the beneficiaries of the GRAT.

2) Charitable Lead Annuity Trust (CLAT). The same reasoning for doing a GRAT applies to a CLAT. The difference is that a charity has the annuity interest instead of the grantor.

3) Gift of a remainder in personal residence or farm. A lot of clients give a piece of real estate to charity upon their death. With low interest rates, the life estate retained by the property owner is worth less and the remainder to the charity is valued higher. The higher the gift to a charity, the bigger the tax deduction.

4) Notes to family members. With banks still being reluctant to give loans to new businesses, some clients are giving intrafamily loans. The interest rate will be low on the note, very low if the note is for less than 3 years.

The above are just a few great advanced planning opportunities available now while the 7520 rates are low. However, Congress and the IRS have recognized some of these and are discussing how to increase the taxes being paid. So plan now while the planning is good.

To discuss planning opportunities while the 7520 rate is low, please consult with an estate planning attorney.

State estate taxes, like federal estate taxes, are constantly changing. The federal estate tax expired on January 1, 2010. Since the federal tax expiration, its restoration has been uncertain and federal lawmakers have been putting off action in some cases. Some of the states fluctuation instability stems from the federal mess. In the interim, 19 states and the District of Columbia have imposed their own estate and/or inheritance tax on estates not left to a spouse or charity. Some of these individual state taxes are even taxing modest estates. Hopefully the federal lawmakers will make some decisions, because largely what happens in the states will depend on what happens federally.

Summary of the 19 states plus Washington D.C.:

• 11 States and Washing D.C. – levy an estate tax only
• 6 states – levy an inheritance tax only w/ a rate dependent upon the relationship of the heir to the deceased
• New Jersey and Maryland – levy both an estate and inheritance tax

To read more about this topic see 19 States impose tax on estates not left to a spouse or charity or Disappearance of the federal estate tax creates confusion.

To discuss the current and future estate tax situation, please consult with an estate planning attorney.

Saving too much for retirement is such a contrary notion – especially today, when it has been estimated that Baby Boomers have lost 45% of their net worth in the last five years.

However, it is possible to save too much.  We have been taught to spend our pre-retirement years maxing out contributions to 401(k)s and IRAs in order to save on taxes.  However, much of the tax breaks we enjoy while we are employed no longer are available to us upon retirement.  And if we find ourselves needing less money than we saved, Uncle Sam requires us to start taking the money out and – surprise – gets a nice big chunk of it.

Thus, the taxes we spent so many years deferring now come back to haunt us in our golden years.  Not what most of us planned on!

Which is why retirement planning is essential, and the sooner the better in terms of years left before you retire.  Getting a handle on how much you will really need to retire comfortably is key to managing your retirement funds.  Because you may not need as much as you think.

Once you retire, you will no longer be paying Social Security taxes.  You won’t be making contributions to a retirement account.  And you should rethink paying off that mortgage, since mortgage interest is one of the biggest deductions available for personal income taxes.

And even if you are able to live off other income while your tax-deferred income languishes in your retirement accounts, your heirs may have to pay a hefty price once you’re gone.

Need to learn more about protecting your family through careful estate planning?  Contact our Jacksonville Florida estate planning law firm.

It is estimated that 15 million Americans have left a 401(k) behind with a former employer.  Which means there are 15 million opportunities for Americans to save on their taxes by reclaiming that orphan 401(k) and rolling it over into a Roth IRA.

In addition, if your current employer’s 401(k) plan allows you to make in-service rollovers, you can do the same.  And if you are over the age of 59 ½, you can roll all your money over from your current employer’s 401(k) to a Roth IRA without penalty.

Rolling a 401(k) over to a Roth IRA is the same as rolling over a traditional IRA: the old account is declared taxable with taxes paid on pretax contributions and earnings; the rest goes into the Roth IRA, where future growth is tax-free.

But here’s where converting 401(k)s provides a better tax break than converting traditional IRAs: when converting your 401(k) into a Roth IRA, you can disregard your other IRAs and 401(k)s when determining what percentage of the conversion is taxable.  IRS rules say that if you own several IRAs and want to convert just a portion of the total, that amount must be drawn proportionately from pretax and after-tax dollars in all the IRAs.

If you earn more than $250,000 annually and are thinking about converting a 401(k) to a Roth IRA, better do it this year.  Taxes are likely to go up next year for your income bracket.

For more information on retirement and estate planning, contact our Jacksonville Florida estate planning law firm.

For those of you who are CPAs, there will be an informative CPE event at Wood, Atter & Wolf, P.A. on June 17, 2010 in our Ponte Vedra Beach office.  Seating is very limited and only a few more spots are available.  The event begins at 8:30am and runs through 12:30pm.  The topics that will be covered are IRA beneficiary designaitons, Benefits of being a Florida resident and Hot topics in businesses today that are affecting your clients.  The event includes free CPE and lunch to be provided afterwards.  If you are interested in attending, please call (904) 355-8888 and ask for Randy Kurland.

Contingency planning for estate taxes has never been more critical than it is this year.  Why?

The federal estate tax expired on Jan. 1, 2010.  In addition, a long-standing provision that "stepped up" the basis of someone's assets to their market value at his or her death (which allowed them to be sold immediately with no capital gains taxes), also lapsed in 2010.  The federal estate tax will come back to life on Jan. 1, 2011.  

Do you know how this will end?  If so, forget about the contingency planning.  If not, then you need to consult with your estate planning attorney to ensure your estate plan has taken into consideration a year with no estate tax as well as the minimum $1 million exemption for 2011.

If you are married, chances are your estate plan has been designed to use each spouse’s estate tax exemption; when one spouse dies, the amount of the exemption goes to a “bypass trust” for other heirs and the rest goes to the surviving spouse.  But with no estate tax in place, this plan doesn’t work.

Some states have passed laws addressing this, but Florida decided to require the heirs to go to court to sort it out.  Consulting with a Florida estate planning attorney can help you bypass this requirement.

For more information on retirement and estate planning, contact our Jacksonville Florida estate planning law firm.

 

My last blog on gifting between spouses discussed an irrevocable trust that allows spouses to gift into irrevocable trusts while still maintaining control and allowing the assets to grow income tax free and pass estate and gift tax free to the beneficiaries.  However, doing so is not as easy as it sounds. 

The type of assets that may hold are cash, stocks, bonds, insurance, real property and business interests to name a few.  The amount that may be transferred into the trusts though is the tricky part.  The IRS has a rule, called the 5 and 5 rule, which states that when an annual exclusion gift is placed into an irrevocable trust for a spouse, a portion of the transfer will be included in the spouse's estate if the transfer is greater than $5,000 or 5% of the value of the trust property. 

Taking the 5 and 5 rule into account, if the trust has no asset in it, then $5,000 will be the limit for transferring assets into the trust until such a time arises that 5% of the value of the trust becomes greater than $5,000.  At that point, then the amount that may be transferred per year will be 5% of the trust assets until you reach the annual gift exclusion amount (currently $13,000 per year in 2010).  You can transfer $260,000 in year one into the trust tax free by filing a gift tax return and borrowing against your lifetime gift exemption ($1,000,000).  By doing this, 5% of $260,000 is $13,000 and you may then transfer the maximum amount per year.  This second technique is super charging the trust and dramatically increases the amount that passes to your beneficiaries completely tax free.  By creating these trusts, you are creating a second estate tax exemption above and beyond the exemption that the IRS currently allows. 

To discuss the benefits of these trusts, please contact an estate planning attorney.

Generally, when clients make gifts, they make them to their children and grandchildren in an amount that is completely free from the gift tax (currently in an amount equal to $13,000 per year).  However, you may use the same logic to make gifts between spouses.  The best part...you do not lose control of the money and it passes to your beneficiaries free from the estate tax.  It must be done correctly though.

First, set up an irrevocable trust, where the donor spouse is the trustmaker and the other spouse, the donee, is the beneficiary.  The donee spouse may also be the Trustee so you do not lose any control over the assets.  The Trustee then may pay out of the trust for the beneficiary’s health, education and maintenance.  By limiting the distributions to this standard, the assets held in the irrevocable trust are asset protected for the beneficiary.Further, the trust is generally structured as a grantor trust, meaning that the income taxes that would be owed by the trust are actually paid by the trustmaker.  By structuring it as a grantor trust, then the assets in the trust will grow income tax free as well!  In my next blog, I will discuss the rules that apply to transfers to the trust as there are specific requirements for gifts between spouses to ensure that they are free from gift taxes.

To learn more about spousal gifitng, please consult with an estate planning attorney.

It is officially dead....for now.  On April 30th, the bill died in the Committee on Finance and Tax.  So for now, nonresdients with property in Florida upon their death do not have to worry about having to pay a Florida estate tax.  As stated before, there are still PLENTY of other reasons though to become a Florida resident.

To learn more on becoming a Florida resident, please consult a Florida estate planning attorney.

A charitable trust is truly the gift that keeps giving since it allows you to generously donate assets to charity and provides you and your heirs with tax breaks.

Establishing a charitable trust is fairly easy.  First, the charity you choose must have tax-exempt status from the IRS.  With the help of an estate planning attorney, you can then set up the trust and transfer the assets you wish to donate to that trust.  The charity serves as the trustee, and manages or invests the property to provide income for you or your beneficiaries.  Then, upon your death, the property reverts to the charity.

Usually, the income you receive from a charitable trust is through a fixed annuity or a percentage of the trust assets (at least 5% of the value of the trust per IRS rules).

By setting up a charitable trust, you receive significant tax advantages.  You can take an income tax deduction over five years for the entire value of your gift, minus the income you are likely to receive from it.

If you donate property, stocks or bonds, the charity will sell these to acquire property that will produce income for you – and since charities are not subject to pay capital gains tax, all the proceeds remain in the trust.

When you die and the trust property reverts to the charity, it is no longer a part of your estate, so it is exempt from any federal estate tax.

For more information on establishing a charitable trust, consult a Florida estate and tax planning attorney.

A buy-sell agreement is an agreement between business owners that states what is to happen upon one of the owners becoming disabled or upon their death.  The surviving owner usually does not want to go into business with the surviving spouse or children of their deceased owner.  However, buy-sell agreements can be very tricky as they usually attempt to set a price for the value of the ownership interests and getting the IRS to accept that valuation is the key.  Below are several things to keep in mind when drafting a buy-sell agreement.

• The buy-sell shall have a reasonable and determinable price stated in the agreement at the time of signing of the agreement.  The specific price need not be in the agreement but if you are using a formula to determine the price, the formula should be clearly stated.
• The estate of the deceased owner should be bound to sell the ownership interests and not given the option to do so.
• The buy-sell agreement is a device used to sell the ownership interests and not a testamentary device used to pass the business to the next generation at a lower price.
• The agreement should be a bona fide business agreement with each side having their own attorney.  However, there is usually only one attorney involved in drafting the agreement.
• The price to sell the ownership interest during life should not be higher than the price to sell at death.
• If it is a family business, the buy-sell agreement should be comparable to that of a similar business owned by non-related parties.  Ask yourself "would non-related parties do the same?"

Again, buy-sell agreements are very important but also very tricky to draft and require an attorney to be involved.  This is not a do-it-yourself type of deal.  There are plenty of cases out there where DIY buy-sell agreements came back to haunt the deceased's estate along with the surviving business owner(s).  To learn more about buy-sell agreements, consult a business, tax or estate planning attorney.

Our income taxes fund the U.S. Treasury, and those of us who earn more than $100,000 annually contribute more than 60% – so it is no surprise that this is the group scrutinized the most by the IRS.

The IRS has refocused its priorities to target the wealthy (those earning more than $1 million), the self-employed, small businesses and tip-income workers, so if you fall into any of these categories, you need to ensure your return doesn’t attract unwanted attention from IRS auditors.

Some red flags:

Offshore accounts – bank accounts and credit cards issued by offshore banks virtually shout to the IRS: “Audit me!”  If you bank outside the U.S., be prepared to show good reason why.

Shady trust accounts – attempting to shelter income or assets in a family or business trust generally does not fly with the IRS.  Any trust accounts you set up should be done so with the input and advice of an estate planning and tax attorney.

Illegitimate business expenses – there are strict rules on what constitutes a legitimate business expense; one cannot convert personal expenses into business expenses simply by reclassifying them as such.

Tax protest schemes – many have been tried and failed; there is no “secret” way to shield your income from taxes.

To ensure you are not vulnerable to an IRS audit, consult an estate and tax planning attorney.

What happens to your property located in the United States upon your death if you are a Canadian citizen?  That is the situation with quite a few Canadians who have homes here in Florida that they live in during the winter months.  Prior to this year, a non-resident had an estate tax exemption of only $60,000.  Meaning upon their death, all they could pass tax free to a beneficiary was $60,000.  After that, they were subject to a tax rate of 45% (for 2009).

If your surviving spouse is a non-resident, then you can defer the estate tax with the use of a qualified domestic trust, also known as a QDOT.  However, the trustee for a QDOT must be a U.S. trustee with the power to withhold taxes as withdrawals are made for the benefit of the surviving spouse.  The purpose of thise requirement is to ensure the non-resident spouse pays the taxes on the assets and does not just leave the U.S. without paying the tax.

However, this year specifically, there is no estate tax...even for a non-resident.  That being said, there are specific basis rules in play this year since the full step-up in basis is not available.  The basis rule specifically relating to non-residents is that they may only step-up $60,000 worth of assets this year.  If Congress does nothing to change the estate tax in its current form, the pre-2010 rules will again be in place on January 1, 2011 with a limited amount of $60,000 available to be passed tax-free to your beneficiaries.

For more information on estate planning for non-residents, please consult with an estate planning attorney.

Most of us have submitted our 2009 taxes and breathed a sigh of relief that we don’t have to pay attention to another tax return until 2011 rolls around.  Not so fast.  New laws enacted over the past year have made figuring taxes a challenge, and that trend will continue with 2010 returns due to the passage of the new health care legislation.

Do you have a healthcare savings account (HSA)?  In 2010, the penalty for non-qualified distributions double, from 10 to 20 percent.  In 2011, over-the-counter drugs will no longer qualify as a HSA expense – only prescription drugs and eyeglasses and insulin qualify.  And if you do not use all the money you have set aside in your HSA during the year, you will likely lose any remaining balance.  Beginning in 2013, there will be a $2,500 cap on how much you can put into your healthcare savings account.

Also taking effect in 2013 is a 3.8 percent tax on net investment income for those single taxpayers earning $200,000 or more, or joint filers with gross income of more than $250,000.  This is in addition to capital gains and other required taxes.  This tax does not apply to qualified pension plans, IRAs, 401(k) plans, municipal bonds or tax-exempt interest.  A higher Medicare tax will also go into effect in 2013 for higher-income households.  See my blog posts from April 19th, April 21st ad April 23rd.

On the horizon:  the Obama administration’s proposal to increase the top 15 percent capital gains tax to 20 percent in 2011 for those with household incomes exceeding $250,000.  And if the 2001 and 2003 federal tax cuts are allowed to expire, tax rates for high-income households can go even higher.

If you have questions about how new legislation may affect your estate and tax planning, consult an estate planning attorney.

The average income tax refund in 2009 will be over $3,000 and if you are like many Americans, you may be tempted to spend it all on a vacation or shopping spree.  However, there are wiser ways to spend that refund check that will pay dividends for a more secure financial future:

Pay off debt – by paying off credit card debt that may be costing you 15% or more in interest, you can save yourself a significant amount of money over time.

Save – for retirement, for college, or for an emergency.  Keep emergency funds in an interest-bearing account that is accessible at any time; invest retirement money in a traditional or Roth IRA.  Start or contribute to a 529 college savings account.

Buy energy-efficient appliances – beginning April 16, 2010, Florida will implement a program that pays you a 20% rebate for replacing an old appliance with ENERGY STAR® qualified appliances.  Eligible products include refrigerators, freezers, dishwashers, clothing washers, room air conditioners and gas tankless water heaters.  You can also receive an additional $75 rebate with proof that you recycled the old appliance.

To determine the best ways to provide a secure financial future for you and your family, consult an estate and tax planning attorney.

With the uncertainty still there as far as what Congress will do with the estate tax, many are waiting to see where it all ends up.  However, there are many non-tax related reasons to plan your estate that have nothing to do with Congress lack of clarity.

Disability planning is a very important part of estate planning.  Most insurance plans and Medicare do not cover long-term care, meaning the money will come from your own pockets.  You should always consider using long-term care insurance for protect your assets.  Statistics says that almost half of Americans 65 or older will end up in a nursing home at some point.

A living trust can also include disability provisions to make sure you are taken care of according to your wishes.  It is best to plan now just in case something happens to you tomorrow and you are no longer competent to sign your estate planning documents.

Special needs planning is also an important reason to do your estate planning now.  A special needs trust ensures that your special needs beneficiary (usually your child) is taken care of financially without being disqualified for government benefits.  Usually this type of planning is done with life insurance to ensure that money is there to care for the beneficiary after your death.

You also can provide asset protection for the assets left to your surviving spouse and beneficiaries.  This is really important to ensure that they assets go to your ultimate beneficiaries instead of anyone else, including a surviving spouse's new spouse should they get remarried.  Speaking of getting remarried, estate planning should be done in a blended marriage situation.  A lot of blended marriages have children from previous marriages and the one spouse usually wants their assets to go to their children only.  To prevent any legal disputes upon death, an estate plan must be completed.

To speak with someone on why you should still do your estate plan in 2010, please consult with an estate planning attorney.

Last week Senator Max Baucus (D-Mont) stated that action on a small business tax cut bill should be coming forth and then shortly thereafter, a bill on the estate tax.  He stated that discussions will begin with the estate tax exemption from 2009 which was $3.5M per person with a tax rate of 45% for anything above and behond $3.5M.

Having read the above in an article, this is what it really means.  It is very unlikely that anything will be up for a vote or passed until after the November election.  If they made good time on the small business bill, that means they would not get to the estate tax bill until June or July, making it likely a vote would not take place on it until late September or October.  Due to the mid-term elections in November, there will not be anyone available to vote on the bill.  This subject will show up in the November elections and will be politicized.  Stay tuned to further updates...

To learn more about the estate tax, please consult with an estate planning attorney or other estate planning professional.

The Wisconsin Supreme Court ruled last week that personal estates -- not those who inherit from them --are responsible for paying state and federal estate taxes.

From the Associated Press article on the ruling:

Writing for a unanimous court, Chief Justice Shirley Abrahamson said state and federal law is clear in making estates responsible for tax liabilities that can be up to 50 percent on the accounts and not the recipients.

The court declined to adopt a so-called apportionment rule that would divide tax liabilities among beneficiaries of an estate when the deceased does not specify who is responsible. Abrahamson said state lawmakers, not the court, should decide whether that is the policy in Wisconsin.

The decision was a victory for Jessica Schleis, who was 17 when she inherited more than $3.7 million in two accounts from her deceased godfather, James Sheppard.

Sheppard, a co-founder of the Menomonee Falls, Wis.-based Cousins Subs sandwich chain who died in 2007, had an estate worth $12 million and other heirs scattered across the country.

Her parents signed an agreement with the estate to keep 50 percent of the money in the accounts to cover any "required" state and federal taxes on them.

Attorneys for Jessica Schleis and her parents later said the agreement was not binding since they were not required to cover the tax bill under Wisconsin law.

The estate filed a lawsuit to require Schleis to pay all the taxes generated by the two accounts she received. Its attorneys argued she would receive a windfall at the expense of other heirs if she wasn't required to pay the taxes as originally envisioned.

A Washington County judge dismissed the case, saying the estate was responsible for the inheritance taxes.

Are you up to speed on the latest developments concerning estate taxes?  If not, contact our Jacksonville Florida estate planning law firm.

On April 28, 2010, Indiana Democrat, Brad Ellsworth, introduced a bill, H.R. 5168, to extend the first-time homebuyer credit through December 31, 2010.  The orignal credit ran out on April 30, 2010.  The tax credit for first-time home buyers is $8000 while the tax credit for repeat home buyers is $6500.  To qualify as a repeat buyer, you must have owned your home for five consecutive years out of the prior eight years.

Further, if you are a single taxpayer, your income must be lower than $125,000.  The limit is $225,000 for married couples filing jointly.  The home being purchased must be valued at $800,000 or less to qualify.  If the home is purchased from a relative or your spouse, it also will not qualify for the tax credit.

If you purchased your home in 2010, you may amend your 2009 return to include the tax credit.  The IRS requires a copy of the HUD statement along with form 5405 to be filed along with the tax return.

To speak more about the first-time homebuyer credit, please contact a tax professional to answer all your questions.

There are many couples in the Jacksonville, Florida and throughout the State of Florida who face the problem of setting up an estate plan for their partner when they choose not to be married or are not legally allowed to be married.  Married couples may take advantage of the unlimited marital deduction when creating their estate plan both to balance their estates (gifting while alive) and deferring estate taxes (upon the death of the first).  This is deduction is not available to partners who are not married.  However, Florida specifically has additional hurdles to overcome for those of you who are in this specific situation. 

Florida homestead laws state that the homestead must pass to the surviving spouse and then lineal descendants free of the creditors of the first spouse to die.  Since surviving partners are specifically not given the protection under Florida’s homestead laws, it is very important that the first partner to die does not have any unexpected medical bills or large creditors.  The creditors may cause the home to be sold in order to satisfy the outstanding debt, leaving your partner without your home.

The Florida Health Care Surrogate and Durable Power of Attorney statutes do not include partners as next of kin in determining who you may serve as your surrogate/power of attorney.  If you do not have any documentation in place for this, your partner will be left out of the decision making process for you.

Finally, if you have no estate plan in place at all, a partner will receive nothing under the will that the State of Florida has set up for you.  So if it is your intent to pass assets onto your partner, you will want to have a valid estate plan set up.

If you would like to discuss the estate planning issues relating to same sex or unwed couples in the Jacksonville, Florida and throughout the State of Florida, please consult with an estate planning attorney who is knowledgeable with the issues being raised by your specific situations.

Previously, I’ve discuss how the new Medicare Surtax works and provided a few examples on how to calculate the amount to be taxed.  This new tax is easily avoidable though with just a little planning.  Again, it does not come into effect until January of 2013!  Below are two examples which illustrate a quick way to avoid the tax:

1)      Keith, a single man, has NII of $200,000 and a required minimum distribtion from his traditional IRA of $125,000.  He will owe tax on $125,000 of income (lesser of 1) NII of $200,000 or 2) excess of $325,000 of MAGI over $200,000 threshold).

2)      Kim, a single woman, has NII of $200,000 a distribution of $125,000 from her Roth IRA.  She will not be subject to the tax (lesser of 1) NII of $200,000 or 2) excess of $200,000 of MAGI over $200,000 threshold).  The key to this example is the fact that the distribution from the Roth IRA is NOT includible in MAGI.  This may be something to contemplate in whether or not to convert to a Roth IRA.

While the new tax does not come into effect until January 1, 2013, it is never too late to start planning.  You have some options – you can either convert to a Roth IRA to reduce your future MAGI or decrease your NII by changing your investment portfolio.  If you are interested in learning more about the new Medicare surtax, please consult with a tax professional.

A few days ago, I blogged about a new Medicare Surtax that was included in the recently signed Health Care Bill.  For purposes of review, the taxable amount is equal to the lesser of 1) net investment income or 2) the excess of modified adjusted gross income over a threshold amount. 

Investment income includes income sources such as interest, dividends, capital gains, annuities, rents, royalties and other passive activity income.   Net investment income simply equals investment income minus investment expenses, lets call that NII.Modified adjusted gross income is your adjusted gross income plus the net foreign income exclusion amount, lets call that MAGI. Finally, the threshold amount is $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately and $200,000 for single taxpayers.  Here are a few examples on how to determine the amount that is taxable:

1)      Matt, a single man, has $100,000 of salary and $75,000 of net investment income.  His MAGI would be $175,000.  Matt would not owe the additional tax because his MAGI is below the $200,000 threshold.

2)      Lora, a single woman, has $250,000 of net investment income and no other income.  She would owe the tax on $50,000 of income (lesser of 1) NII of $250,000 or 2) the excess of $250,000 of MAGI over $200,000 threshold).

3)      Mark and Danielle, married filing jointly, have $500,000 of salaries and no NII.  They will owe no tax because they have no NII.

4)      Mike and Barb, married filing jointly, have $450,000 of salaries and $50,000 of NII.  They will owe tax on $50,000 (lesser of 1) NII of $50,000 or 2) excess of $450,000 of MAGI over $250,000 threshold).

5)      Doug and Darlene, married filing jointly, have $300,000 of salaries and $150,000 of NII.  They will be taxed on $150,000 of income (lesser of 1) NII of $150,000 or 2) excess of $450,000 of MAGI over $250,000 threshold).

My next blog will show a few examples in which you can further avoid the new surtax and discuss some planning that cna be done to avoid the tax.  Planning should start now!To answer any questions in regards to the new surtax, please consult with a tax professional.

Do you see yourself fitting into any of the following: having a traditional IRA that is or will require you to take a large required minimum distribution upon you obtaining the age of 70 ½ years of age; owning rental properties that pay you rent that is greater than the expenses related to the property; or having an investment portfolio that is full of annuities and investments that pay large dividends.  If so, beginning on January 1, 2013, there will be a new Medicare surtax, meaning that you could pay additional Medicare taxes above what you already pay.  The new tax rate is 3.8%.  The taxable amount is equal to the lesser of 1) net investment income or 2) the excess of modified adjusted gross income over a threshold amount.  First, let me try to simply define the terms above.

Investment income includes income sources such as interest, dividends, capital gains, annuities, rents, royalties and other passive activity income.   Net investment income simply equals investment income minus investment expenses, lets call that NII.

Modified adjusted gross income is your adjusted gross income plus the net foreign income exclusion amount, lets call that MAGI.  Don’t worry about the foreign income exclusion amount for now. 

Finally, the threshold amount is $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately and $200,000 for single taxpayers.  Over the next few days, I will be giving a series of examples to further explain how this new surtax will work.

To further discuss this new surtax, please conult with a tax professional to answer all of your questions.

I was given a plan to review for a potential client who is a physician with significant wealth.  The plan was drafted about two months ago and the initial concern from the financial advisor was that funding was not discussed with the client.   So I began reviewing the plan and noticed that the attorney who drafted it did no tax planning at all.  The plan gave everything to the surviving spouse in a trust that qualified for the marital deduction.

Although the plan works great for this year, as of January 1, 2011, the estate tax returns.  So unless both spouses passed away this year, the plan would cause more taxes to be owed upon the second of them to pass away than they would had they done some VERY simple tax planning.

Just because there is no estate tax for this year does not mean that there is no longer a need to do tax planning.  In fact, the tax rules this year require even more tax planning to take place to make sure you effectively pass assets that will increase the basis in the assets to their maximum amount permitted under this years basis rules.  This will all change of course in 2011.

Unfortunately there is no crystal ball that I can look into to give anyone a clear answer to where things will be a year from now.  However, your plan should be reviewed, no matter how new, to ensure that the plan is still tax efficient.  To have your plan reviewed, please consult an estate planning attorney to set up an appointment.

As I blogged about last week, the Florida House and Senate has introduced a set of companion bills that will introduce an estate tax on the estates of nonresidents who have property in the state of Florida.  The bills, having read them, are quite confusing. 

My interpretation of them is that they will tax any property of a nonresident that is located in Florida when the nonresidents estate will also be taxed in their home state.  The tax rate in Florida would be the exact same tax rate that is used in the nonresident’s home state.

The tax returns would be due either at the same time as the nonresident’s home state requires it be due or twelve months after death, depending on which bill you read.

Again, the bills are quite confusing and need some work by both the Senate and House to reconcile their differences.   I will update the status of the bills as updates come available.  Again, this may be a great time for snowbirds to begin thinking about becoming a Florida resident.  To consult with an attorney in regards to whether or not you should make Florida your residence, please consult with an estate planning attorney to discuss whether or not to become a Florida resident.

I have written several blogs in the past on the benefits of being a Florida resident (see my blogs on February 12, 2010).  However, the Florida legislature has added yet another.  On February 22^nd the House and on February 26^th the Senate introduced companion bills that, if passed, would introduce an estate tax in Florida for non-residents.  The Senate's version cites the bill as the Florida Taxpayers Protection Act.  If passed, the bill will go into effect on July 1, 2010.

The bill states that a non-resident, who owns property in the state of Florida and whose state of domicile has an estate tax, will be subject to a separate Florida estate tax on the assets owned in Florida.  This means that those of you who are snowbirds who have a secondary home down in Florida, will be subject to an estate tax here in Florida if your home state has their own estate tax.  There are currently sixteen states have their own separate estate tax.  Now may be a good time to think about becoming a Florida resident.

If you spend your winter months in Florida but claim another state as your residence, you may be much better off by making Florida your state of residence.  To consult with an attorney in regards to whether or not you should make Florida your residence, please consult with an estate planning attorney to discuss whether or not to become a Florida resident.

Although Florida has no income tax, intangibles tax, gift tax, estate tax or generation skipping tax, Florida still has a few taxes that new residents need to be aware of.

Sales Tax:  Florida has a state sales tax that is 6%.  Each county then may impose an additional sales tax from .25% to 2.5% which is computed on the first $5,000 of the purchase price.  The $5,000 limit, however, does not apply to certain rentals or services.  The sales tax is paid directly to the seller at the time of the purchase.

Use Tax:  Florida has a “use” tax which is a tax on certain purchases made outside of the state within 6 months of bringing it into Florida.  The tax rate is 6%.  Examples of purchases subject to this tax are items bought online or furniture bought in another state.  Items that are bought in another state and used there for over 6 months are exempt from the use tax.  Further, you do not owe the tax if you paid at least 6% in tax when you purchased the item.  However, if you paid less than 6% tax on the item, you will owe the difference to equal 6 percent.  Finally, if the tax, once computed, is less than $1.00, you do not have to pay the tax.

Ad Valorem Tax:  Also known as property tax.  This tax is assessed by the county’s property appraiser and collected on an annual basis.  If your property is homesteaded property, you get a $25,000 exemption plus a cap on the assessed value and the amount it can be increased per year.  There are additional exemptions for disabled individuals.

Doc stamp tax: When you purchase a piece of real property, you pay a doc stamp tax based either upon the amount paid for the property or the mortgage on the property.  Most documents that are recorded with the Clerk of the Court require the doc stamp tax to be paid.  This tax is paid usually to the Clerk of Courts office.

There are other taxes such as the registration fees you pay for your motor vehicle, fuel taxes, hotel taxes and the list goes on and on.  To find out more information about the taxes that Florida residents must pay, please contact a tax professional with knowledge of the Florida tax system.

Although Florida is a great state for individuals to move to from a tax standpoint, Florida still has a tax system, both for individuals and business entities.  Unless they are exempt, a business that earns and receives income in the State of Florida must file a corporate income tax return.   Sole proprietorships, individuals, estates and certain trusts do not have to file an income tax return since they are exempt.  An LLC (unless it is a single member LLC owned by an individual), partnership, joint venture and C corporation must file a state income tax return.  An S corporation usually will not have to file a return unless they have federal taxable income, in that case they must also file a state income tax return.

The amount of money taxed in Florida is based upon the federal taxable income modified by certain Florida adjustments to come up with your Florida net income.  The tax rate is 5.5%.  If your business owes more than $2,500 in Florida income tax annually, then it must make estimated payments.

There are many other rules involved in dealing with your business taxes in Florida.  To discuss Florida’s business tax rules as they relate to you, please contact a tax professional to set up a meeting to discuss your situation.

One of the most popular charitable contributions here in Florida is to donate your car or boat to a charity and get a nice charitable deduction.  Prior to 2006, most folks would just use the blue book to determine the value of the contribution.  However, the Pension Protection Act of 2006 made significant changes to the definition of a “qualified appraiser” and “qualified appraisal” when it comes to donations of any non-cash contribution deduction that exceeds $5,000.  The IRS, through tax regualtions and recent case law, now mandates the donor to 1) obtain a qualified appraisal for the contributed property; 2) attach a fully completed appraisal summary (form 8283) to the income tax return on which the deduction is claimed; and 3) maintain records pertaining to the claimed deduction.

A “qualified appraisal” must include (among other things) 1) a description of the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property appraised is the property that was contributed; 2) description of the property’s physical condition; 3) valuation method used to determine the fair market value; and 4) the specific basis for the valuation.

The scary part is that if you take the deduction, are audited and then lose your argument for the deduction, you may be subject to a penalty of 20%.  However, below is a checklist of steps to take if you plan on taking a charitable deduction for non-cash property donated in excess of $5,000:

1. Obtain a qualified and timely appraisal for the property  contributed– no earlier than 60 days before the date of the contribution and no later than the due date of the return, including extensions.
2. Be sure the appraisal describes a) the property in sufficient detail for a person who is not generally familiar with the type of property to ascertain that the property appraised is the property that was contributed; b) the property’s physical condition at the date of the donation; c) how fair market value was determined, and d) the specific basis for the valuation.
3. Attach a fully completed appraisal summary (form 8283) to the tax return on which the deduction is claimed and stating the property’s cost and how it was acquired.
4. Maintain meticulous records pertaining to the claimed deduction, and
5. Obtain a contemporaneous written acknowledgment from the done that gives a) a description of the property received, b) a statement as to whether the done was provided any goods or services in exchange, and c) a description and good faith estimate of the value of such goods or services.

If you use the above as a guideline when making non-cash charitable deductions in excess of $5,000, then you will be properly prepared in case of an audit.  To make sure you have properly documented your charitable donation, consult with a tax advisor or legal counsel.

Although there currently is no estate tax in place, it is scheduled to rear its ugly head once January 1^st rolls around again.  This time though, it comes back with a vengeance at a $1,000,000 exemption and a 55% tax rate for anything over the exemption.  However, if you plan now, there are ways to effectively pay or reduce your estate taxes.

First, you can just pay the taxes.  It is a very rare sight to see, but some folks like to pay taxes.  They feel it is their civic duty.  Again, this is VERY rare.  Second, you can spend all your money.  Clients have told me that they hope to spend every last penny before they die.  Although very admirable and probably the most enjoyable of all the alternatives, it most likely will not happen.  If you have an estate that is taxable, the estate grew to become a taxable estate due to saving and not spending.

Third, you can make charitable donations.  You can make them during your life or at death.  Fourth, you can start a family gifting program.  You may currently give $13,000 per year per person to anyone you want.  So you may give a $13,000 to everyone in your family this year and then on January 1^st, do it again.  The earlier you do this, the more money you will be able to get out of your estate.  Further, you may give an unlimited amount to anyone for education and medical expenses, as long as the money goes directly to the education or medical provider.

Fifth, you may create an irrevocable life insurance trust, also known as an ILIT.  An ILIT is a special type of trust that will own your life insurance and be the beneficiary of it upon your death.  Since you no longer own the life insurance at death, it cannot be included in your estate.  There are a lot of pitfalls though which much be avoided for this to work correctly.

Finally, you can do other advanced planning techniques to shrink your estate.  One technique removes your primary or secondary home from your taxable estate.  Another technique deals with setting up a business and gifting a percentage of the business away on an annual basis.  There are well over 60 different techniques that can be used and each offers a different level of complexity.

If you would like to further discuss ways of reducing your estate taxes, please consult an estate planning attorney.

A very popular estate planning technique is to transfer assets into a Family Limited Partnership (FLP) and then claim a valuation discount on the interests that the estate still owns upon a person’s death.  The IRS has questioned this technique and is starting to litigate cases that fall within certain parameters.  In fact last year, the IRS hired 14 new estate tax attorneys and plans on hiring 10 more this month.  In doing so, the IRS is looking at estate tax returns that claim reduced values of the estate based upon FLP interests.  The IRS has hinted as to what “red flags” they look at when determining whether or not to litigate a case where an estate valuation discount is taken.  The following is a list of some, but not all, of those “red flags”:

• Near death creation of the FLP
• Decedent retained no assets for living expenses
• No contributions by other partners
• Nature of assets (person use assets)
• Failure to observe partnership formalities
• Commingling of personal and partnership  assets
• Post-death distributions or borrowing from the FLP (ex. Loan taken out by estate to pay taxes)
• Non pro rata distributions if the decedent is the only person receiving distributions
• No real business or investment purpose or creditor protection purpose
• Achieving discounts seems to be the real reason for creating the FLP

If you have created a FLP or are thinking about creating a FLP, please consult with an estate planning or tax attorney for advice or to review how you have been conducting business through the FLP.

The IRS has several free tax programs to help prepare tax returns for those who are eligible for the programs.  The Volunteer Income Tax Assistance Program (VITA) offers free tax help to low to moderate income people who cannot prepare their own tax returns.  The income cut-off is generally around $49,000.  The Tax Counseling for the Elderly Program (TCE) provides free tax help to people 60 years of age or older.  Both programs are run by trained volunteers.  I was a coordinator for the VITA program years ago and we were able to help out those who were in need and were able to get extra money for those who qualified for the Earned Income Tax Credit.

Items that you need to bring with you to have your taxes prepared are the following: 1) proof of identification; 2) Social Security Cards for you, your spouse (if any) and dependents (if any); 3) birth dates for you, your spouse (if any) and dependents (if any); 4) current years tax forms sent to you in the mail (if any); 5) all wage and earnings statements such as W-2s and 1099s; 6) interest and dividend statements on a 1099; 7) copies of last years tax returns; 8 ) your check book if you want your refund directly deposited; 9) total paid for daycare provider and their tax ID number (if applicable) and 10) if filing jointly, both spouses must be present.

It is very important that you bring your social security cards or a letter from the Social Security Administration verifying your social security number.  The IRS, in training the volunteers, stresses the importance of making sure the social security number matches the proof of identification.  I know this from personal experience.  Without a social security card and proof of identity, the volunteers are told to not prepare the return and have you come back later when you have the social security information and proof of identification with you.

To find the nearest VITA site, please call 1-800-829-1040.  To find the nearest TCE site, please call 1-888-227-7669.

For further questions in regards to these tax programs, contact Wood, Atter & Wolf, P.A. for further information.

More than eighty percent of American households use either a paid tax preparer or tax preparation software to help them file their taxes. The Internal Revenue Service (IRS) recently announced that they are proposing new registration, testing, and continuing education of tax preparers for the 2010 tax year.

The IRS believes that higher standards will serve to protect taxpayers and increase compliance with tax laws. The goal of the new program is to ensure that taxpayers receive competent, ethical service from qualified professionals.

The requirements will include:

• All paid tax return preparers will have to register with the IRS to obtain a preparer tax identification number (PTIN). They will be subject to a limited tax compliance check to qualify.

• Competency tests for all paid tax return preparers who are not attorneys, certified public accountants (CPAs) or enrolled agents.

• Continuing education for all paid tax return preparers who are not attorneys, CPAs, or enrolled agents.

• The ethical rules which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS will now be required of all paid preparers.

Read more about the new requirements for paid tax preparers at IRS Proposes New Registration, Testing and Continuing Education Requirements for Tax Return Preparers Not Already Subject to Oversight.

If you require assistance with tax planning, please contact a tax professional for tax planning and legal counsel.

Although there is currently no estate tax (which could change any day), there are eight basic estate planning steps that everyone should take, no matter what your net worth is. 

The first step is to have a financial power of attorney.  The financial power of attorney appoints someone to handle your financial affairs if you are unable to do so yourself.  This document ensures that all of your assets are taken care of and your bills are being paid.  The person appointed can be appointed immediately or only upon your disability.  Without a financial power of attorney, your family will have to go to court to have permission to deal with your assets.  State laws change frequently, make sure your financial power of attorney is valid under your state’s law.

Step two is to make sure you have a valid health care power of attorney and living will.  The health care power of attorney allows someone to make health care decisions for you if you are unable to make them for yourself.  A living will states what your intent is if you are in a persistent, vegetative state.  More commonly stated as “whether or not to pull the plug”.  Your health care power of attorney needs to have the HIPAA authorizations within it, otherwise it is not a valid document.

Step three is to calculate your net worth.  You may be surprised where you stand financially.  This is important from a tax standpoint but you will also get a hold of everything you own.  Sometimes assets fall through the cracks and are not properly planned for because they were not brought up during the estate planning discussion.

Step four is to review your beneficiary designations.  Upon your death, your beneficiary designations control how that specific asset will pass.  A will or trust has no say.  If your ex-spouse is named accidently, the ex-spouse will receive that asset.  Beware, it happens everyday!

Step five is to create or update your will.  A will allows you to determine how your assets pass to your loved ones.  If you do not have a will, the state where you live has graciously set one up for you but it probably does not pass your assets according to your wishes.  This is especially true when you are remarried and have children from your current and/or previous marriage. 

Step six is to plan for your state’s estate tax.  The District of Columbia and23 other states have their own estate or inheritance taxes.   If you don’t plan for them, you could inadvertently cause a state estate tax upon your death.

Step seven is to check how your assets are currently titled.  Do you have everything titled jointly?  If you have a trust, does your trust own your assets?  If you are unsure how your assets are titled, please review the title of your assets as it makes a big difference upon your death.

Finally, the last step is to gift while you are alive.  Currently, you can give $13,000 per year to anyone you wish.  You can stand outside of your church and write a $13,000 check to everyone who passes by.  Additionally, you can pay anyone’s college or private school tuition or medical bills so long as they money goes directly to the educational facility or medical provider.

If you need help with any of the above estate planning steps, please consult an estate planning attorney for estate planning legal counsel.

Did you know you can deduct some or all of the sales tax you paid when you bought your car last year?  If you bought your car between February 16, 2009 and December 31, 2009, you can deduct the sale tax, limited up to $49,500 of the purchase price, you paid for your vehicle.  For example, if your car cost $20,000, you could deduct all the sales tax paid for that vehicle.  However, if your vehicle cost $60,000, you could only deduct 83% of your sales tax because you are limited to the amount of the tax you paid on $49,500.

This deduction is available for individuals with incomes of $125,000 or less or married couples filing jointly with incomes of $250,000 or less.  The deduction phases out and is not available for individuals with incomes greater than $135,000 or $260,000 for married couples filing jointly.

Remember, this is a deduction and not a tax credit.  A deduction reduces the amount of taxable income you have whereas a credit reduces the amount of tax you owe.  For example, if you have a $1000 deduction and you made $50,000 in taxable income last year, you would report only $49,000 of income.  Whereas if you had a $1000 tax credit and after all the calculations, the IRS said you owed them taxes of $1001, you would only owe them $1 since the credit reduced the actual tax bill.

If you think this deduction is applicable to you or you want to know more about other possible deductions, please consult with a tax professional in regards to your tax needs.

Currently, the basis of property acquired from a decedent generally is the fair market value of the property on the decedent’s     date of death.  Property included in the decedent’s gross estate for estate tax purposes must be valued at its fair market value on the date of death.

A donee’s basis in property received by gift generally is the donor’s adjusted basis in the property, increase by the gift tax, if any, paid on the transfer.  If the donor’s basis exceeds the fair market value of the property on the date of the gift, the donee’s basis is limited to that fair market value for purposes of determining any subsequent loss.

President Obama recently proposed a consistency and reporting requirement to the above basis in his proposed budget rules.  He is proposing that the basis of inherited property equal the value of that property determined for estate tax purposes.  He is also proposing that the basis of property received by gift must equal the donor’s basis.  The reporting of the basis would be imposed on the executor of the estate and on the donor of a lifetime gift to both the recipient of the property and the IRS.

This may mean that every estate may have to file an estate tax return or any gift may require a gift tax return to report the basis of the property transferred.

If you require assistance with tax planning, please contact a tax attorney for tax planning legal counsel.

There are many reasons why the State of Florida is a great state to declare your residency in besides the year round golfing.  I meet with clients and prospective clients all the time who are residents of another state and talk to them about why they should consider becoming a Florida resident.

The first reason to become a Florida resident is that there is no Florida income, estate, inheritance, gift, intangibles or generation-skipping tax.  Most states impose at least one of the above taxes on its residents.  Real property and tangible personal property are generally subject to estate tax by the state in which the property is located.  All other property such as bank and investment accounts are generally subject to the estate tax laws in place in the state the decedent resided in prior to their death.

An example that demonstrates this is Bob.  Bob has a checking account in a Florida bank, has him home in Florida homesteaded, a car, an IRA and a vacation home in New York.  Upon Bob’s death, his vacation home in New York would be subject to New York estate taxes but the rest of his property would pass estate tax free under Florida law.  I won’t discuss the federal estate tax as that is a completely different animal.

Florida residents and others should consult with an estate planning and tax attorney to review the various documents and strategies to take full advantage of the tax benefits under Florida law.