The Tax Cuts and Jobs Act suspends miscellaneous itemized deductions (i.e., those deductions subject to a 2% floor) from 2018 through 2025, creating an incentive for taxpayers to try and characterize their expenses as giving rise to itemized deductions rather than miscellaneous itemized deductions. General discussion of the new tax law has overlooked this repeal’s impact on estates and non-grantor trusts (i.e., most irrevocable trusts), including a time-sensitive planning opportunity.
Prior to the new legislation, an individual could claim miscellaneous itemized deductions for certain types of expenses that were not specifically enumerated in Internal Revenue Code Section 67. These expenses were not deductible until they exceeded 2% of an individual’s adjusted gross income. Expenses specifically enumerated in Section 67 were itemized deductions not subject to the same 2% floor, making them more attractive to taxpayers than miscellaneous itemized deductions. The new legislation suspends miscellaneous itemized deductions but keeps itemized deductions (subject to certain other restrictions not relevant here). (more…)
If an employer settles a claim made by an employee (or former employee), the employer may generally claim a deduction for the amount that is paid to the employee to resolve his/her claims. The expense is treated as an ordinary and necessary business expense and a deduction may be claimed pursuant to Section 162(a) of the Internal Revenue Code.
For example, if an employer pays an employee $25,000 to settle the employee’s claims for back wages, emotional distress, and age discrimination, the employer may deduct the $25,000 on its tax return (the employer’s tax reporting obligations with respect to the $25,000 payment and how the payment should be allocated among the claims made by the employee are topics for a different article). (more…)
The new partnership audit rules substantially change the audit procedures for partnerships (including multi-member LLCs) and may require that you update certain provisions within your partnership or LLC agreement to maintain compliance.
In partnership audits, the IRS has historically adjusted the returns of partners, rather than the partnership, because partnerships do not actually pay an entity level tax but pass through their income and losses to the partners. The Bipartisan Budget Act of 2015 (the “Act”) substantially changed these rules for partnerships with tax years beginning after December 31, 2017.
Under the Act, the IRS will examine partnerships and make any adjustments at the partnership level in the year that the audit is completed rather than the year under review. The partnership will pay the tax, interest and penalties on any underpayments at the highest statutory rate for each partner’s distributive share of the underpayment (i.e., the highest corporate rate for corporate partners and the highest individual rate for individuals). This change in the rule shifts the cost of the adjustment to the partners holding a partnership interest at the time of the audit rather than those partners who held a partnership interest in the year of underpayment. (more…)
The Tax Cuts and Jobs Act released by the Conference Committee, that resolved differences in the versions of the Act passed by the Senate and the House of Representatives, is almost certain to be signed into law by the President. You can read our preliminary summary of this far-reaching tax legislation here, but these are the highlights:
Tax brackets are adjusted, with the maximum rate reduced from 39.6% to 37%.
The mortgage interest deduction on a principal residence is limited to debt of $750,000 (down from $1 million).
Several itemized deductions are reduced or eliminated, including state and local taxes (“SALT”) in excess of $10,000.
Fans of college athletics may have heard something about tax legislation barreling through Congress this month, and didn’t pay much attention since it sounded like boring stuff that only meant something to big tech companies stashing their billions overseas. But buried in the 500 pages of the legislation that has now passed both chambers is a year-end tax planning opportunity for sports fans. Or, more precisely, a tax break that has been available to sports fans for over thirty years will be eliminated starting in 2018. (more…)
On October 19, IRS issued Revenue Procedure 2017-58, announcing inflation adjustments for 2018 for dozens of important figures across the Internal Revenue Code, including the following two key numbers regarding the estate tax, gift tax and generation-skipping transfer (GST) tax:
1. Gift Tax Annual Exclusion Increases to $15,000. For gifts made in 2018, the gift tax annual exclusion will be $15,000. This is the amount an individual can give to as many donees as desired in one year without using any of the donor’s estate and gift tax exemption. The best way to think about this is that a person can stand on the street corner and give $15,000 to every person who passes by, and the donor will not use any of his or her estate and gift tax exemption.
This also means that a married couple can give each donee up to $30,000 in 2018 without using either spouse’s estate and gift tax exemption amount.
The annual exclusion had been stuck at $14,000 since 2013. Even though the annual exclusion is indexed for inflation, under the Congressional version of rounding (not the one you learned in elementary school), the annual exclusion does not get rounded up to the nearest $1,000, it only gets rounded down. Thus, the inflation adjustment must actually push the annual exclusion past the next $1,000, which explains how it can take five years for the annual exclusion to increase. (more…)
On September 27, the White House released a document called the “Unified Framework for Fixing Our Broken Tax Code,” containing an outline prepared by the administration plus the senior Republican members of the tax-writing committees of Congress. The Framework is far less detailed than previous proposals for structural tax reform, but is instead described as a “template” which the authors intend for Congress to use to prepare actual legislation. This template calls for new tax rates for individuals and businesses and would create a territorial international tax system. Some key headlines:
Estate Tax. The Framework calls for a repeal of the estate tax. In announcing the tax plan, the President said that repeal would overwhelmingly help farmers and small business owners. However, most farm families are not actually affected by the estate tax, which only applies to estates valued at over $5.49 million. The nonpartisan Tax Policy Center projects that estate tax of $19.95 billion will arise from Americans dying in 2017, of which about $30 million, or 00.15%, will be paid by the estates of farmers and small business owners.
The Framework would also repeal the generation skipping transfer tax. The proposal is silent on the gift tax. (more…)
Congress has changed the way partnership audits will be conducted in the future. Beginning with tax years starting on or after January 1, 2018, audits will still be done at the partnership level; however unlike current practice where adjustments and additional tax payments are made at the partner level, under the new rules the adjustments and additional tax payments will in many cases now be done at the partnership level with the payments made in the year the tax audit is finalized. The changes were made to make it easier for the IRS to audit partnerships.
The new rules raise a number of unanswered questions in the M&A arena all of which require a significant rethinking of the way partnership M&A transactions are structured and documented. There are likely to be significant differences in the responses to the Open Issues set out below between a transaction involving a LLC, which would survive as a separate legal entity after the acquisition, and a limited partnership which would terminate and not exist as a separate legal entity after the acquisition as it would only have one member. (more…)
Tired of bossy blogs telling you to get an estate plan? Good advice is boring. Your life is exciting and should have a dramatic ending. And you can have it. All you have to do is nothing. So the next time someone tells you that you need an estate plan, tell them:
Annie is your favorite musical. When your children misbehave you daydream about the day when they will be forced to live in a grubby orphanage and be abused by a cruel, alcoholic supervisor. And, when your children act like angels, you are comforted by the certainty that in time a billionaire will rescue them from the orphanage, and they will live happily ever after.
You’ve slaved away at a job that you hate for decades to amass great wealth, and no lawyer is going to swindle you out of ten grand (or less) to protect it. If you spent that kind of money on something as practical as an estate plan, you might have to spend a little less on designer handbags or forego a mid-life crisis Maserati in favor of a mid-life crisis Corvette.
Your favorite uncle is Sam. You’re thrilled that he could inherit your assets when you die and use them to fund a manned mission to Mars.
Two words: Terri Schiavo. Your parents and spouse always hated each other, and being in a persistent vegetative state without an advance health care directive will give them an opportunity to work out their differences with the assistance of all three branches of government.
It’s important that your children be wild and carefree. If they inherit your wealth when they turn 18 and blow it all on sports cars, parties, and rehab, you have done your job as a parent.
You are obsessed with Law and Order. Death is your only chance to star in a courtroom drama (unless, of course, you end up in a coma first). You’re hoping your loved ones will fight over family heirlooms, your secret child will come forward, and a family feud will ensue, lasting hundreds of years – all because of you!
“Portability” is the ability of a surviving spouse to use not only his or her own estate tax exemption, but also some or all of the exemption of the first spouse to die, as long as the first spouse died in 2011 or later. With the estate tax exemption for 2017 at $5,490,000, this can allow estates of nearly $11,000,000 to escape estate tax. While a full discussion of portability is beyond the scope of this post, suffice it to say that portability can save the day in one or more of these situations: if proper estate planning has not been done, if life insurance, IRAs or retirement plans left to the surviving spouse constitute a very large portion of a couple’s assets, or if a couple’s assets of any type are worth near the value of one exemption but less than both (e.g., $4,500,000 to $10,500,000).
The catch is that if the deceased spouse’s assets are worth less than his or her exemption amount, the deceased spouse’s executor has to file a federal estate tax return (Form 706) for the deceased spouse to “claim” the deceased spouse’s unused exemption and thus invoke “portability.” This is the direct opposite of the normal rule that if a decedent’s estate is worth less than the estate tax exemption amount (after taking lifetime gifts into account), no estate tax return filing is necessary. But if the deceased spouse’s executor does not file a timely estate tax return for the deceased spouse (nine months after the date of death, or an additional six months thereafter if a request for an extension was properly filed by the nine month deadline), the ability to use portability is permanently lost. (more…)