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Estate and Gift Tax Update: No Clawback After Increased Transfer Limit Expires

Estate and Gift Tax Update: No Clawback After Increased Transfer Limit ExpiresThe Tax Cuts and Jobs Act of 2017 (“TCJA”) increased the lifetime estate and gift tax amount that may be transferred free from $5 million to $10 million per taxpayer, indexed for inflation.  This increased exemption applies to transfers made between January 1, 2018 and December 31, 2025.  On January 1, 2026, the lifetime exemption reverts to $5 million.

The IRS recently announced that the 2019 inflation adjusted exemption amount is $11.4 million, which allows a married couple to shield $22.8 million from transfer tax.

Because the increased tax exemption was temporary, there was uncertainty whether gifts exceeding $5 million made under these provisions would be clawed back into the estates of decedents dying after the 2025 expiration of the increased exemption amount.   In other words, if you made a $10 million gift in 2025 and died in 2027 when the exemption is $5 million, would your estate owe tax on the $5 million excess?

On November 25, 2018, the IRS answered this question with the issuance of proposed regulations, which indicate that gifts made before January 1, 2026, will not be clawed back to the estates of decedents dying after December 31, 2025.  The issuance of these proposed regulations strengthens a tremendous opportunity for the tax-free transfer of wealth, including ownership interests in closely held businesses.

Gifting closely held business interests

For those considering gifting closely held business interests, the process is more complicated than gifting assets such as marketable securities, the fair market value of which is readily determinable.  To gift a business ownership interest, a valuation of the business and the gifted interest must be performed by a qualified business appraiser.  Although 2025 is distant, those who wait until the last minute may encounter problems obtaining the required business valuation.  You may recall 2016, when the IRS proposed rules eliminating valuation discounts in estate and gift valuations.  There was a mad rush to get valuation reports completed, with limited capacity to complete this work.

We’ve got your back

If you have a large estate, this is a tremendous opportunity to save transfer taxes, which get to a 40% tax rate very quickly.  If your estate includes a closely held business, you would benefit by starting the process sooner rather than later. Once this opportunity is gone, it will be gone for good.  Contact your advisors today to get the process going.

2018 Pension Plan Limitations Not Affected by Tax Cuts and Jobs Act

2018 Pension Plan Limitations Not Affected by Tax Cuts and Jobs Act

The Internal Revenue Service announced that the Tax Cuts and Jobs Act of 2017 does not affect the tax year 2018 dollar limitations for retirement plans announced in IR 2017-177 and detailed in Notice 2017-64.

The tax law provides dollar limitations on benefits and contributions under qualified retirement plans, and it requires the Treasury Department to annually adjust these limits for cost of living increases. Those adjustments are to be made using procedures that are similar to those used to adjust benefit amounts under the Social Security Act.

As the recently enacted tax legislation made no changes to the section of the tax law limiting benefits and contributions for retirement plans, the qualified retirement plan limitations for tax year 2018 previously announced in the news release and detailed in guidance remain unchanged. This is good news for individuals contributing to their qualified retirement plans.

Cost of living adjustments

The tax law also specifies that contribution limits for IRAs, as well as the income thresholds related to IRAs and the saver’s credit, are to be adjusted for changes in the cost of living using procedures that are used to make cost-of-living adjustments that apply to many of the basic income tax parameters.

Although the new law made changes to how these cost of living adjustments are made, after taking the applicable rounding rules into account, the amounts for 2018 in the news release and the guidance remain unchanged.

We’ve got your back on the new tax code

The new tax code is complex and every taxpayer’s situation is different – so don’t go it alone! Check out the New Tax Law Explained! For Individuals page, then contact KRS managing partner Maria Rollins at [email protected] or 201.655.7411 to discuss your situation.

New Rules for Deducting Business Meals and Entertainment Under Tax Reform

New Rules for Deducting Business Meals and Entertainment Under Tax Reform

Prior to the Tax Cuts and Job Acts, a business owner generally could deduct 50% of business related meals and entertainment expenses. Meals provided to an employee on the business premises for the convenience of the employer were generally 100% deductible.

These expenses are treated differently under the new tax law.

How will meals and entertainment expenses be affected?

Entertainment expenses are now completely nondeductible, regardless of whether they are directly related to, or associated with, the taxpayer’s business, unless an exception applies. One of those exceptions is for “expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees.”

Under the new tax law:

  • Office holiday parties remains fully deductible.
  • Expenses for entertaining clients (including tickets for sporting, concert, and other events) were 50% deductible. The 50% deduction included the event tickets up to face value. Beginning January 1, 2018, these expenses are nondeductible.
  • Business meals and employee travel meal expenses remain 50% deductible.
  • Expenses for meals provided for the convenience of the employer generally were 100% deductible. Beginning 1/1/2018, they are 50% deductible. After 2025, they are nondeductible.

What should a business owner do to prepare for this change?

Update your general ledger to segregate expenses into accounts earmarked as 100%, 50%, or nondeductible. Having the expenses categorized at the time they are incurred will save a lot of effort come tax time. This practice will also allow your tax preparer to clearly identify which expenses are deductible and avoid errors in your tax filing.

We’ve got your back

At KRS, we’ve been tracking tax reform legislation closely and are ready to assist you in your tax planning and preparation so that you’re in compliance under the reformed tax law. Don’t lose sleep wondering what impact the new tax rules will have on you, your family, or your business. Contact me at 201.655.7411 or [email protected].

Don’t Be Surprised by a Tax Liability on the Sale of Your Residence

Tax liability on the sale of your residenceRegularly, clients contact me to discuss the tax consequences of selling their primary residence. It seems there is a lot of misinformation floating around that I aim to clarify below.

Rollover proceeds from a sale

It is common for sellers who have been in their homes for quite some time to cite the “old” rollover rule. Before May 7, 1997, taxpayers could avoid paying taxes on profits from the sale of their principal residence by using the proceeds to purchase another home within two years. Sellers over age 55 had the option of a once-in-a-lifetime tax exemption of up to $125,000 of profits.

Home sale gain exclusion

Internal Revenue Code Section 121 replaced the old rollover rule and allowed taxpayers to exclude gains from the disposition of their home if certain requirements are met.

In order to qualify for the gain exclusion, a taxpayer must own and occupy the property as a principal residence for two of the five years immediately preceding the sale. If a taxpayer has more than one home, the gain can only be excluded from the sale of their main home. In cases where there are two homes that are lived in, the main home is generally the one that is lived in the most.

If the requirements are met, taxpayers may be able to exclude up to $250,000 of gain from their income ($500,000 on a joint return) and are not obligated to reinvest the proceeds.

Sale of a multi-family home

I was recently able to provide guidance to married taxpayers who sold their property. This particular property was a side-by-side duplex where the taxpayers occupied one side as their principal residence for approximately 10 years and rented the other. The taxpayer was familiar with the $500,000 exclusion and the gross proceeds were slightly below that amount. During sales negotiations, they were incorrectly advised that the proposed sale of their principal residence with a gain under $500,000 would result in no income taxes owed after the sale. Needless to say, there was an unexpected surprise when I discussed the true income tax consequences with them.

Selling a duplex is conceptually akin to selling two separate properties. The side the taxpayers occupied is afforded the same tax treatment as any other principal residence, which includes the Section 121 gain exclusion up to $500,000 for married taxpayers. However, the investment side of the duplex is subject to capital gains tax and depreciation recapture taxes. In this particular instance, there was approximately $30,000 of combined federal and state income taxes owed as a result of the sale.

Under current law, taxpayers can sell their principal residence and exclude $250,000 of taxable gain ($500,000 for those married filing jointly). The requirements to reinvest the proceeds or to roll them into a new property have been inapplicable for some time. Taxpayers are free to use the proceeds from the sale in any manner without tainting the exclusion.

We’ve got your back

If you have additional questions about the income tax consequences of a residential sale, especially when a portion of the property has been rented out, we’re here to help. Contact me at [email protected] or 201.655.7411.

You can also download my free Tax Tip Sheet for more ways to save taxes when buying or selling a residential property.

Key Features of the Proposed Trump Tax Plan

KEY FEATURES OF THE PROPOSED TRUMP TAX PLANPresident Trump has proposed a detailed tax plan that will revise and update both the individual and corporate tax codes.

Here are some of the key plan elements that could affect individuals and small business owners, if enacted into law.

Top tax rates decrease

Currently the 2017 top tax rate on ordinary income is 39.6%. Under the Trump Tax Plan, the top rate on ordinary income will drop to 33%. He has also proposed lower rates throughout all tax brackets.

More taxpayers will pay the 20% tax capital gains. This 20% rate will kick in for all taxpayers in the top bracket ($127,500 if single and $255,000 if married filing jointly). Currently this rate doesn’t kick in until you earn more than $425,400 if single and $487,650, if married filing jointly.

One tax rate for businesses

Trump plans a single 15% tax rate for business income, whether the business is an S-corporation, partnership or Schedule C. Because sole proprietorships qualify, we may see more wage earners become self-employed business owners.

Under the Trump plan we would also see a 100% expensing of all asset acquisitions, with no limitation.

Capped deductions

For individual taxpayers, Trump is planning an overall limit on itemized deductions of $100,000 if single, and $200,000 if married filing jointly. Currently, itemized deductions are reduced by 3% for every dollar the taxpayer’s income exceeds $250,000 if single, and $300,000 if married filing jointly.

Elimination of the estate tax

Trump has proposed eliminating the estate tax. Still up for discussion is the gift tax or whether the estate tax will be eliminated all at once or phased out over time. Also, there would be no step-up in basis. It is unclear if under Trump’s plan the heirs would take the assets at the decedent’s basis or if appreciation on the assets is taxable at death.

Other key plan features for individuals

The Trump Tax Plan also eliminates:

  • Head of household filing status for single parents
  • Net investment income tax
  • Alternative minimum tax (AMT) for individuals

The plan increases the standard deduction from $6,300 to $15,000 for singles and from $12,600 to $30,000 for married couples filing jointly. It also taxes carried interest as ordinary income.

Other changes impacting businesses

Businesses will need to pay attention to these proposed changes as well:

  • Reduction in the corporate income tax rate from 35% to 15%.
  • Elimination of the corporate AMT.
  • Elimination of the domestic production activities deduction (Section 199) and all other business credits, except for the research and development credit.
  • Implementation of a deemed repatriation of currently deferred foreign profits, at a tax rate of 10%.

We’ve got your back

Of course, these were campaign proposals and we don’t know if they will become law. KRS CPAs will keep you updated on important revisions to the tax code via email radar and blog posts. If you aren’t already registered for our email radars and newsletter, sign up here.