Orlando Estate & Elder Law

When the IRS Speaks, Retirees Need to Listen

The IRS embarked on a big awareness campaign since the summer, telling taxpayers they should review and update their withholding numbers at work to ensure that they are paying enough federal income tax. But they’re not the only ones who should be checking their numbers, reports CNBC in the article “The IRS is warning retirees of this impending surprise tax.” Retirees who fail to update withholding from pensions or annuities may be in for a surprise, and it won’t be a good one.

It’s easier to say people should do this, than for them to do it, however.

Once people leave the workplace, they start drawing down income from several different sources. That usually means Social Security, IRAs, pensions and annuities.

While they were working, they didn’t have to think about income taxes, unless they were self-employed. Their payroll company or HR department took care of that.

Now, they must pay estimated taxes every quarter to the IRS.

There are two issues: making sure you remember to pay the tax on a timely basis and making sure that you pay the correct account. Some accounting firms send their clients reminders.  However, that doesn’t always do the job.

How can you make this easier?

There are new withholding tables from the IRS. Speak with your accountant. Make sure you have enough money set aside for quarterly tax payments.

If you’re single and your AGI (Adjusted Gross Income) plus nontaxable interest and half of your Social Security benefits are more than $34,000 (or $44,000, if you’re married), as much as 85% of your Social Security benefits could be taxed. If that seems like a lot, you’re right.

One alternative: use the IRS Form W-4V to withhold a flat rate from each check. Depending on your situation, you can withhold 7%, 10%, 12% or 22%.

If pension or annuity payments are an income source, you can also have taxes withheld from your income, using IRS Form W-4P, and chose the number of allowances you want to claim.

Work with your accountant to get a clear picture of your tax liability and do that now. If you want to avoid a nasty tax surprise in the spring, get it all done well before the end of 2018. You must know what you will need to pay. Especially for new retirees, it’s not easy to figure it out.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: CNBC (Sep. 12, 2018) “The IRS is warning retirees of this impending surprise tax”

Larger Pension Payments May Deliver a Tax Hit

“Millions of Americans receiving pensions could be in for a bad tax surprise next year.”

One item that may have escaped your attention about last year’s tax reform is that many pension payments are bigger, because of the new lower tax rates for 2018.  However, that nice surprise may be followed by the risk that you’ll have under-withheld at tax time come spring and be faced with a penalty, says The Wall Street Journal in “Are You Retired or Semi-Retired? Check Your Tax Withholding Now.”

This is similar to what is happening to paychecks for working people. Earlier this year, Treasury officials adjusted the withholding tables to reflect changes for 2018 made by last year’s tax overhaul, so these changes are taking place in both pensions and paychecks.  However, the adjustments didn’t include other changes. The current withholding tables include tax-rate changes but not the impact of the $10,000 cap on state and local taxes. The IRS says the tables never included this information.

The result is some pension recipients could end up being under-withheld, because the automatic adjustments to their pension payments set them too high. Most people must pay at least 90% of the taxes they’ll owe during the year or by the next mid-January, if they are paying quarterly estimated taxes in order to avoid paying a penalty. That penalty is based on an annual interest now at 5%.

Pension payments and tax filer’s circumstances vary widely, so knowing who’s at risk is tricky. A typical married pension recipient with a $50,000 pension has a reduction in withholding of about $818 per year. That cuts withholding by 20%: this is no small amount.

A pension payer who follows the government’s tables isn’t responsible if they are under withheld.

Another challenge: most retiree’s income fluctuates. They may have part-time work some of the time or take retirement account withdrawals. Medical expenses may become big, or shrink, or may become deductible for the first time. Additional standard deductions kick in at age 65. It’s not a straightforward equation.

One expert notes that the responsibility is on the taxpayer to make sure the withholding is correct, not the employer.

To help, the IRS has posted a new withholding calculator. To use it, you’ll need a copy of your 2017 tax return and estimates of your income for this year. You may want to submit a revised Form W-4P if you find there are changes warranted.

There are a few different scenarios if you underpay. If income is less than $150,000 and you’ve paid in an amount equal to 100% of last year’s tax, often there is no penalty. If you’re earning more than $150,000, then the threshold rises to 110% of the previous year’s tax. Another is that the IRS sometimes will waive the tax penalties, if this is the year you retired or became disabled. Sometimes the IRS will cut you a little slack. You’ll need to send in Form 2210 with proof and an explanation that the mistake was just that—a mistake.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: The Wall Street Journal (June 22, 2018) “Are You Retired or Semi-Retired? Check Your Tax Withholding Now”

Your Will Plan Should Adapt To Tax Changes

Whenever relevant tax laws change, it is important to update your will to reflect those changes, instead of relying on a court to make the changes for you.

Wills are not necessarily set in stone after someone passes away. Under some circumstances, probate courts are able to change a deceased person's will. This is called "reforming the will."

The use of the word "reform" gives a clue as to the purpose and limited scope of the changes a court can make. If the provisions of the will as written make it impossible to fulfill the clear intent of the deceased, then the court can change those provisions to fulfill the intent.

Reformation is rarely used, because it is difficult to divine the intent of someone who has passed away.

Some states do allow it for tax purposes, as Wealth Management discussed in "Reforming a Will for Tax Savings."

The idea is this: if the intent is clear that the deceased wished to minimize the tax burden on the estate and the tax laws have changed since the will was drafted, then a will can be reformed to fulfill that intent.

However, people should not rely on the possibility that a court will use reformation for this purpose.

Instead when tax laws change, people should go back to their estate planning attorneys and update their wills to reflect the new laws. That ensures that their wills do fulfill their intent, which is better than relying on a court to decide whether the wills do or do not.

Changes to federal tax laws are expected soon.

Therefore, people should begin planning to update their wills in the near future, if the changes to the tax laws will have an impact on their estates.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Wealth Management (May 19, 2017) "Reforming a Will for Tax Savings."

Stretch IRAs Stretched to a Limit?

The Senate Finance Committee unanimously voted to eliminate stretch IRAs. Some experts believe that it is likely to become law.

Stretch IRAs are an important tax and estate planning tool for many wealthy people. They allow a non-spousal beneficiary to inherit an IRA account and stretch any taxes owed on it throughout their lifetimes. This allows for more funds in the account to be used to grow wealth than would be possible if taxes were due immediately.

Many members of Congress have long sought to eliminate this possibility, but their attempts have failed.

The Senate Finance Committee has now voted to eliminate stretch IRAs by making all taxes due within five years of inheritance, as Financial Advisor reports in "Stretch IRA: Are Its Days Numbered?"

The legislation is unlikely to pass on its own, but it still stands a good chance of becoming law as part of a larger tax overhaul that Republicans in Congress are expected to propose. For that overhaul to work, the Republicans hope it can be presented as revenue neutral overall.

They want to have any tax cuts paid for by raising other revenue, cutting spending or covered through expected financial growth. Although the revenue consequences of eliminating stretch IRAs are disputed, some believe it could bring in billions more per year. As a result, it is likely to be included as a way to help pay for other tax cuts.

If this does become law, many people with hefty retirement accounts will want to revisit and update their estate plans as soon as possible.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

 

Reference: Financial Advisor (Dec. 23, 2016) "Stretch IRA: Are Its Days Numbered?"

IRS Versus Family Businesses - Again

For a long time the IRS has been seeking legislative changes to the rules for transferring stakes in family businesses between members of the family. The agency appears to have abandoned that effort and proposed new regulations instead.

One of the key benefits to family held businesses is that transferring ownership shares can often come with a tax benefit. Because many of these businesses have restrictions about when and to whom any shares can be sold, it would be very difficult to find any outside buyer for them willing to pay a fair market price.

It is assumed that any purchaser would want a discount. This could be taken into account when transferring between family members as well. For gift and estate tax purposes the shares can be valued at less than market value.

This is known as a “discounted” value.

For the last decade the IRS has wanted to do away with this discounted value or to at least lower the discount amount. Previously, the agency has asked Congress to act, but now the agency is proposing new regulations to take care of it without congressional action.

This was the subject of a recent Bloomberg article titled “IRS PROPOSES NEW REGULATIONS FOR §2704 — A BETTER MOUSE TRAP?”

Experts are divided about the effectiveness of the new regulations.

What the IRS has proposed is extraordinarily complex, even for an agency known for its complex regulations. The courts will also eventually have to decide whether the regulations are appropriate.

For now, people with family businesses need to be aware of these regulations. No changes to any plans should be made until after consulting with an expert estate planning attorney about the regulations and specifically how they affect your plans.

Please see my website for more information and this and other estate planning topics. And don't forget to sign up for my informational newsletter.

Reference: Bloomberg (Aug. 19, 2016) “IRS PROPOSES NEW REGULATIONS FOR §2704 — A BETTER MOUSE TRAP?”

Taxes on Social Security Benefits! Yes Indeedy.

Many people are surprised to learn that their Social Security retirement benefits might be subject to federal income taxes.

Many Americans are surprised to learn that they can be taxed on their Social Security retirement benefits as explained in My San Antonio's article: "Will I Pay Taxes on My Social Security Benefits?" People believe the money they receive was already taxed when they paid into the system.

As a result, to tax it again amounts to double taxation.

However, the federal government views it differently.

The total amount most people pay into the system equals 15% of the total value of lifetime benefits. As a result, up to 85% of Social Security benefits can be taxed and it will not be double taxation.

But not everyone is required to pay federal income taxes on their benefits. It depends on the other income a person makes.

The basic rules are as follows:

• Single people whose total incomes are between $25,000 and $34,000 may have 50% of their Social Security benefits taxed. A total of 85% of benefits may be taxed for people making more than $34,000.
• Married people filing jointly may have up to 50% of their benefits taxed if their combined income is between $32,000 and $44,000. Up to 85% of benefits could be taxed for couples with higher incomes.
• The government is direct when it comes to married people who file separately. They are almost certain to pay taxes on their Social Security benefits.

 

Reference: My San Antonio (March 20, 2016) "Will I Pay Taxes on My Social Security Benefits?"

Are Americans Confused about Taxing the Rich?

A new poll reveals that the majority of Americans agree with eliminating the estate tax, which suggests that they want to lower taxes on the wealthy. The same poll also suggests, however, that the majority of Americans want to increase taxes on the rich in a different way.

The remaining Republican Presidential candidates have offered several proposals to reform the American tax system.

Gallup recently conducted a survey of Americans' support for some of the proposals and released the results in "Americans React to Presidential Candidates' Tax Proposals."

Both Donald Trump and Ted Cruz have proposed eliminating the federal estate tax. According to the survey, the majority of Americans agree.

A total of 54% of respondents said that they agree with the proposal. Only 19% disagreed. The remainder responded that they did not know enough about the issue to have an opinion. As the estate tax only applies to a very small percentage of Americans this could be taken as an indication that the majority of Americans want to lower taxes on the wealthy.

However, only one other tax reform proposal also received support from a majority of those surveyed. A total of 63% agreed with Donald Trump's proposal to close most tax loopholes and deductions available to the very rich.

What this means about attitudes toward taxes on the wealthy in the U.S. is unclear.

A future survey is planned to survey opinions about the Democratic candidates' positions that could clear things up. However, it does appear to be good news for opponents of the estate tax. Republicans have wanted to do so for a long time and all of their candidates are in agreement on the issue. Both remaining Democrats want to increase the estate tax.

Unfortunately for the opponents of the estate tax, tax reform does not appear to be a major concern for the general public at this time.

We are always ready to talk about tax savings that concern most of us such as income tax and capital gains.  Schedule a consultation if you have concerns about taxes or finance; we will be happy to assist.

Reference: Gallup (March 17, 2016) "Americans React to Presidential Candidates' Tax Proposals."

Good Tax News - Charitable IRA Giving Here for Good

The 2006 IRA charitable rollover exclusion was a popular tax break for wealthy elderly people and the charities to which they donate. It has been made permanent.

Seniors trying to spend down the size of an estate for estate tax purposes often find it helpful to donate to charities. Other seniors donate for philanthropic reasons.

In 2006, Congress made it much easier for many people over 70½ to make donations. They could donate up to $100,000 directly from their traditional IRAs to charity without facing income tax penalties. However, as Congress so often does this charitable rollover exclusion was not made a permanent part of the tax code. It required periodic reauthorization.

It has recently been made permanent retroactive to Jan. 1, 2015 as reported by the Wills, Trusts & Estates Prof Blog in an article entitled "Congress Makes Permanent IRA Charitable Rollover Exclusion." Of course, this does not mean the exclusion cannot be taken out of the tax code by Congress later. It just means that it does not need reauthorization to stay in the code.

While this is a great benefit for elderly people trying to spend down their estates, it is important to remember not to start the spend down process without first consulting an estate planning attorney. Dealing with the estate tax and reducing the size of an estate should be handled as part of a larger estate plan.

Using the charitable rollover exclusion might not be the best idea for everyone, so talk to me  about other options that might be better for you and your estate.

Reference: Wills, Trusts & Estates Prof Blog (Dec. 20, 2015) "Congress Makes Permanent IRA Charitable Rollover Exclusion."

New IRS Policy Helps Identity Theft Victims

Identity thieves do not content themselves with just taking out credit cards in their victims' names. They also often file fraudulent tax returns for refund checks. A new IRS policy should help victims figure out what happened.

Imagine receiving a letter from the IRS that the tax return you filed could not be processed because one had already been filed under your name and Social Security number. This is an increasing problem for many people.

Identity thieves who are able to get some basic information about a person will rush to file a fraudulent tax return before the victim does in the hopes that the IRS will send a refund to the thief. The victim then has a mess to sort out and needs to figure out what happened. This can be exceedingly difficult for the victim and even more difficult for those filing returns on the behalf of others, such as executors and guardians.

In the past, the IRS has not helped matters too much as the victim was not able to get a copy of the fraudulent tax return. However, as reported by the Wills, Trusts & Estates Prof Blog in "IRS Will Now Offer A Copy Of Fraudulently Filed Tax Returns To Identity Theft Victims," the IRS has changed its policy.

Now victims and their authorized representatives can get a copy of the return, which should help in figuring out what happened. The fraudulent return will be redacted pursuant to federal privacy laws, but not to an extent that would make viewing the return worthless.

Of course, if you are a victim of this tax scam, you should not attempt to handle it on your own, especially if you are an executor or guardian. Seek the services of a professional to make sure that you are doing things correctly.

Reference: Wills, Trusts & Estates Prof Blog (Nov. 30, 2015) "IRS Will Now Offer A Copy Of Fraudulently Filed Tax Returns To Identity Theft Victims"

Florida Trusts Need to Stay Ahead of Other State Tax Laws

Keeping on top of federal tax laws concerning trusts is relatively simple. However, when it comes to state tax laws on trusts, staying on top of them can be an entirely different matter, especially since many trusts might be subject to taxation in several states.

If things were simple, then a trust could be created under the laws of a given state and would only be subject to taxation in that state. Everyone knows, however, that nothing is that simple when it comes to taxes.

Trusts are sometimes subject to taxation in the state in which they were formed, the state where the trust creator lives, the state where the trustee lives, the state where a beneficiary lives and the state where trust property is held.

In a recent article titled "Can Another State Tax Your Trust?," Barron's points out how confusing and difficult it can be to navigate the tax laws of many different states that might want to claim the right to tax a trust.

The problem is that there are no standard, nationwide rules about which states can tax a trust.

If the trust is deemed to have a close enough connection to a state, a "nexus" in legalese, then a state can tax the trust.

What constitutes a close enough connection to any given state depends on the laws and court rulings of the state that wishes to impose a tax on a trust.

Nevertheless, with states often facing revenue shortfalls, it is no surprise that legislatures are continuously passing laws in an attempt to mandate that more and more trusts can be taxed by their states.

Because of these state tax issues, it is very important that you have your trust created/reviewed with an eye toward navigating these and other tax issues.  If you are considering an estate plan including a trust or if it's been a few years since your estate plan has been a review, please consider scheduling a consultation.

When it comes to any government and taxes, you need to stay involved to minimize the tax burdens on your trust.

Reference: Barron's (May 16, 2015) "Can Another State Tax Your Trust?"