By Erika Hoppe, CPA, JD firstname.lastname@example.org
Each year, the Statistics of Income Division of the IRS compiles data and produces a wide range of statistics measuring various components of the U.S. tax system. With the federal estate tax exemption increasing from $5,490,000 ($10,980,000 for married couples) in 2017 to $11,200,000 ($22,400,000 for married couples) in 2018 under the Tax Cuts and Jobs Act, fewer estate tax returns are expected to be filed in the future. While it is true that fewer taxpayers will be subject to the estate tax, there are many other reasons why estate planning remains important. One example is charitable giving.
The most recent statistics published by the IRS regarding charitable giving are from 2016. For tax purposes, there were 12,411 estates worth $192,218,976,000 gross across the country with 2,718 charitable bequests totaling $19,296,922,000 gross. California had the highest number of estates, specifically, 2,419 estates worth $38,300,167,000 gross with 454 charitable bequests totaling $4,599,647,000 gross. Florida came in second with 1,451 estates worth $32,881,907,000 gross with 334 charitable bequests totaling $1,662,045,000 gross. The state with the fewest number of estates was Alaska, which had 18 estates worth $236,663,000 gross. Since there were so few estates, the IRS did not release information on charitable bequests to protect individual taxpayer data. Vermont had the highest ratio of charitable bequests to gross estates with 17 charitable bequests totaling $92,387,000 gross and 41 gross estates worth $378,858,000.
To see these statistics as well as prior year statistics on charitable bequests by state of residence, click here. To find additional statistics relating to other areas of the tax system, visit the IRS website.
California can be a great market for selling goods with its large and diverse population. However, entering this market is fraught with additional tax requirements and fees. For instance, Corporations are taxed at 8.84% in additional to their minimum $800 yearly minimum franchise tax. Additionally, pass-through entities such as S Corporations are taxed at 1.5% plus an $800 yearly fee and Limited Liability Companies (LLCs) must pay taxes ranging from $800 to $6,800 each year. If you’re an individual residing in California this pass-through income is then taxed again at up to 13.3%, the highest state income tax rate in the country!
It can come as a surprise to some businesses with no sales or business assets in California that there could still be a filing requirement and of course tax due. For instance if a business is headquartered in any state such as Nevada or Arizona, performs all work in their home state, but makes the mistake of hiring some employees that reside in California, then they are considered “doing business” in California. If California considers that you are doing business in their state then tax filings and minimum fees are required. Another example is if you’re a Nevada LLC that has a small ownership in a California company that could also be considered doing business in California.
Most of the time selling goods profitably in California are worth the extra expense and headaches. An individual can easily avoid having all their income, including social security, pensions, business income from outside California, or investment income being taxed by California by becoming a nonresident. There are many tests that California uses to determine if a person is a resident of California. The main qualifiers to be classified as a nonresident and avoid California’s onerous taxes, are to spend less than six months in California, keep your main home outside of California and moving various business contacts, bank accounts, automobile registrations, and professional services such as your CPA outside of the State.
On December 20, the House approved H.R. 1, the Tax Cuts and Jobs Act, a sweeping tax reform measure. While much still needs to be determined for tax planning opportunities, we can look at the new income tax rates and how they compare to the pre-Act law.
It isn’t until we get to $387,000 where we see the 2018 tax surpass that of the 2017 tax rates. From this point on there is a window of taxpayers (Single filers) who make between $387,000 and $417,000 who, with no other changes, will see their taxes go up for 2018. For the remaining filers, it appears that for the next 8 years you should see a tax rate decrease.
Having just lost my mother this year, there were many lessons I learned.
My mother did not have much in assets when she passed away but she did get a will prepared several years ago. I would strongly encourage that you make sure your parents have a will or trust in place and that you are informed as to their intentions. This can sometimes be a difficult conversation. My mother was 95 years old when she passed away and I was still struggling to get her to even bring up the subject of the eventuality of her death. Not until she was under the care of Hospice did she start informing me of what she wanted done with some of her personal effects.
My mother was a hoarder and had lived in her home for 46 years. One of the things she told me a few weeks before her death was that she felt bad for my husband who would have to deal with all of her things. As it turns out I am the one dealing with all of her things. Note to self – Do not do this to your kids. After this experience I am determined not to leave a mess for my children. My sister shared a Facebook post with me – ‘Death Cleaning’ is the newest way to declutter. Many are decluttering to save their loved ones stress down the road. Highly recommended.
In connection with my going through her things, I have found there is much that I wished we had talked about. Photos found that look precious and old that I don’t know anything about. I always wanted to make time to go through memories with her but never did. This is one of my deepest regrets. Find the time to spend with your parents to document these memories.
And finally, make sure you don’t make any tough decisions until you have had time to get through the grieving process. I was surprised at how hard her death hit me, even though as I said she was 95, and I knew it was eventually going to happen. Make sure you have a support team to help you through any immediate decisions you have to make. I was fortunate to have my daughter and husband with me that first week when I was making arrangements. It was difficult to make even what you would think are easy decisions.
When you lose a loved one, reach out to your Trusted Advisor when you are looking to make any financial decisions. This could be your attorney, financial advisor, or your CPA. I am now a firm believer that you should also have a family or friend support member of your team. Decisions are hard when you are grieving. Take the time to heal. And reach for support.
It’s only November but there’s still time to make the filing of your 2017 tax return less taxing in 2018.
Withholding and Estimated Taxes. Make sure enough taxes are withheld to avoid surprises at tax time. Generally taxes are withheld from wages and other income such as pensions, bonuses, commissions and gambling winnings. Taxpayers with interest, dividends, capital gains, rents and royalties will usually make additional tax payments by making estimated tax payments. Self-employed individuals who do not pay tax through withholding will also pay estimated taxes.
Name changes. Taxpayers with name changes due to a marital status change should notify the Social Security Administration. SSA should also be notified if there’s a name change for a dependent. Notifying the SSA with name changes will ensure that the new name on the tax return matches the SSA records to avoid any delay in the processing.
Individual Taxpayer Identification Numbers. Taxpayers who use Individual Taxpayer Identification Numbers which have expired or are due to expire should apply to renew their ITIN to avoid processing delays next year. A Form W-7 must be completed as well as submission of original or certified copies of identity documents to renew an ITIN.
With the passing of another tax deadline, I thought it would be helpful to go over the consequences of not filing your tax return on time. If you have not filed your 2016 tax return, file it as soon as possible to minimize the penalties that you may owe.
There are three types of payments that could be assessed if you do not pay the tax owed on time. These are late filing penalties, late payment penalties, and interest.
If you owe taxes and don’t file your tax return or extension by the original due date, or if you filed an extension but fail to file your return by the extension due date you will be subject to late filing penalties.
The late filing penalty is 5% of the tax owed for every month your return is late, up to a maximum of 25%. If you fail to file your return for over 60 days after the due date or extended due date, the minimum penalty is the lesser of $205 (for 2016) or 100% of the unpaid tax due.
Late payment penalties could be assessed if you do not pay all of the taxes you owe. These apply if you do not pay all of the taxes owed by the original due date, regardless of whether or not you filed an extension. The late filing penalty is 0.5% of the tax owed for each month the tax remains unpaid, up to a maximum of 25%.
If both penalties apply to you the monthly penalty would be 5%, up to maximum penalty of 25%.
You will also be charged interest on any unpaid taxes starting the day after the return’s due date.
If you correctly expect to get a refund there is no penalty. You have three years to file from the due date or you will no longer be eligible for your refund.
Between Hurricane Harvey, the fast-approaching Hurricane Irma and the various wildfires ravaging the west, unfortunately natural disasters have been all too common this summer.
The last thing on anyone’s mind living in those areas is taxes, but nonetheless, there are various tax aspects of a disaster that people should be aware of. Fortunately, this is one area that the IRS makes rapid decisions to help those in need. Below is a sampling of the latest relief for victims of Hurricane Harvey from the IRS. Those impacted by disasters should check the IRS’s page frequently as other disasters may get similar relief from the IRS in the near future.
Finally, for those who want to help and support those victims of any natural disaster, be cautious of who you make donations to. In order for donations to be tax deductible, they must be made to recognized charitable organizations under the IRS. For instance, Go Fund Me donations are typically not deductible as they go to a person and not a charitable organization. If you are donating online, make sure you are on the legitimate website for the charity. Unfortunately, it is all too common for charity scams to pop up during disasters with fake websites that are very similar to legitimate ones. You should ensure that the organization clearly has their Employee Identification Number (EIN) posted and you can use that and their name to check their exempt status on the IRS website. If you are donating a significant sum, that little bit of homework on your part is well worth it.
Recently I had the delight to visit Graceland, Elvis Presley’s former home and now an excellent place to reflect on Elvis’ life and get taken back in time to the 1970s. There I viewed many of Elvis’ cars including his pink Cadillac, a couple Rolls Royce’s and Mercedes, Lincolns and his Ferrari. His home was just how he left it back in 1977 with his dozen TVs scattered throughout the home, shag carpeting and roof, the colorful kitchen, his dad’s old office, and many other furnishings that were a flashback to the 70s.
As a CPA and tax guy, I was also fascinated with the financial documents that were displayed detailing many of Elvis’ large purchases and even his dad’s tax return after he was born showing he paid 1% tax on his income . Elvis must have trusted his dad immensely as there were dozens of checks signed by Elvis’ father Vernon as Vernon took care of all of his son’s finances. This is surprising given that Vernon spent a year in jail during Elvis’s childhood for check forgery and only had an eighth grade education.
Elvis would have benefited immensely if he would have utilized a CPA to assist his dad in tax planning and financial management. Even though Elvis was the largest U.S. taxpayer in 1973 and the highest paid entertainer for many years, he died with an estate worth “only” $10.2 million dollars. Apparently Elvis didn’t like to utilize pertinent tax deductions and had a horrible deal with his manager Colonel Tom Parker, who received over 50% of Elvis’ earnings . Parker even convinced Vernon to pay him 50% of the income from the Elvis’ estate after he died! With this mismanagement, Elvis’ estate lost $9 million in value over two years, and was only worth $1 million in 1979.
Many lessons can be learned with Elvis, but one financially is the importance of trusts for estate planning in which attorneys can be invaluable and utilizing competent and qualified CPAs to assist with tax, estate and financial planning.
In September of 2016, the IRS announced that it would start using private debt collectors to recover certain overdue federal tax debts in the spring of 2017. To implement this new program, the IRS contracted with four private collection agencies: CBE Group, Conserve, Performant, and Pioneer. In carrying out their collection efforts, these four companies are required to respect taxpayer rights and obey the consumer protection regulations established in the Fair Debt Collection Practices Act.
How does this new program work?
Considering the continual mail and phone scams that keep emerging, the IRS Commissioner warned taxpayers to be alert for new scams related to this program. When a taxpayer’s account is transferred to a private debt collection agency, the IRS will give the taxpayer written notice of the transfer. In addition, the private collection agency will then send a second, separate letter to the taxpayer verifying this transfer. The private collection agency will not ask for payments to be made on a prepaid debit card or for checks to be made out to the collection agency. All checks should be made payable to the U.S. Treasury. The IRS emphasized that even with private debt collection, taxpayers should not be receiving phone calls from the IRS insisting on immediate payment. The IRS always mails multiple collection notices before making phone calls.
There are several types of accounts that the IRS will not transfer to private collection agencies. Some of these accounts include taxpayers who are deceased, in designated combat zones, victims of identity theft, or in presidentially declared disaster areas and requesting relief from collection. If a taxpayer does not want to work with a private collection agency appointed to his or her account, he or she must notify the private collection agency in writing. Also, the IRS urges taxpayers who are unsure if they have unpaid taxes due from a previous year to check their account balances on www.irs.gov/balancedue.
For more information on private debt collection visit the Private Debt Collection page on the IRS website.
On May 11, 2017, the Tax Court issued a Memorandum Decision (TC Memo 2017-79) that addressed, among other things, the Taxpayer arguing that the software “lured” him into claiming too many deductions on his tax return.
There were a number of issues on this return that caught the eye of the IRS: alimony paid deduction, interest deduction, and deduction for other expenses. When examined by the IRS, the Taxpayer did not have much in the way of paperwork to support his positon for the deductions reported.
In addition to disallowing the majority of the deductions taken, the Taxpayer was assessed an accuracy related penalty for substantial understatement of income tax. For this penalty, the burden shifts to the Taxpayer to show that his mistakes were reasonable and in good faith. “He admitted during trial that he deducted items he shouldn’t have, and that he overstated certain losses. He tried to blame TurboTax for his mistakes, but tax preparation software is only as good as the information one inputs into it,” the Court concluded.
Tax preparation software must be used correctly to be useful for purposes of showing reasonable cause and good faith as a defense to accuracy related penalties. The majority of court cases have rejected this defense.
When preparing your return, ensure you are reviewing the return before filing it. I just received a phone call this week from someone that was asking if his tax software was properly calculating the tax on rental property he had sold. A first for him. I commend him for wanting to understand what he was filing.
Remember: You can’t blame the software!