The new estate tax top rate is 35% on anything above $5 million. Also, a person who dies and leaves everything to his or her spouse, and does not use up the $5M exemption, can also pass on the unused portion of the exemption to the spouse. Formerly this was done by setting up trusts, but the new law may make such trusts less necessary.
For executors and family of a person who died in 2010, the option exists to apply the new law as outlined above, or the law that existed during most of 2010, which was quite different. Under that law there was no estate tax, and the basis of inherited assets was treated differently.
Under the new law, the gift tax also has a $5M exclusion, as opposed to $1 million before.
Unfortunately the new estate tax law expires in 2013, unless Congress acts.
Wednesday, January 5, 2011
New law same as old
Many of the tax provisions that were scheduled to expire in 2010 or 2011 were revived by Congress in the recently passed tax bill. The specifics of the bill are still hard to come by. If you are viewing this from my web site, you can e-mail me with a question that applies to your tax situation.
Saturday, November 6, 2010
Estate Tax, part 8
Now that 2010 is almost over, it seems that there is virtually no chance that the Estate Tax will be changed for this year. (Nothing is impossible, but it does not seem likely.)
There is no estate tax for 2010, but if heirs sell assets they inherit, they could incur a capital gains tax. This is because inherited assets will be valued at their original cost (or other basis) value rather than at the fair market value as of the date of death. However, for most people this will be offset by a $1.3 million step-up in value (up to fair market value) available per estate. Assets inherited by a spouse get an additional $3 million step-up in valuation.
The estate tax for 2011 is yet to be determined. It is scheduled to revert back to 2001 law, but Congress will most likely change that, as no one wants 2001 to come back.
There is no estate tax for 2010, but if heirs sell assets they inherit, they could incur a capital gains tax. This is because inherited assets will be valued at their original cost (or other basis) value rather than at the fair market value as of the date of death. However, for most people this will be offset by a $1.3 million step-up in value (up to fair market value) available per estate. Assets inherited by a spouse get an additional $3 million step-up in valuation.
The estate tax for 2011 is yet to be determined. It is scheduled to revert back to 2001 law, but Congress will most likely change that, as no one wants 2001 to come back.
Friday, November 5, 2010
Year-end Planning
Tax planning for the end of 2010 is a bit more difficult this year, because Congress has still not decided what the tax rates will be for 2011. This could be important for some people who can choose to accelerate income or deductions into 2010, or defer them until 2011. Kiplinger is still predicting that the 2010 tax rates will be carried over to 2011. That may be a workable assupmtion for many people, but nothing is certain until it actually happens.
Some of the current tax provisions may be worth reminders. One particularly nice one for those who can benefit from it is that long term capital gains for people in the 10% and 15% brackets are not taxed at all. That's right, 0% tax. The 0% rate applies up to $34,000 of taxable income for single people and $68,000 for married filing jointly.
Just to recap the Standard Deductions for 2010, they are:
$5,700 for Single
$8,400 for Head of Household
$11,400 for Married Filing Jointly
For people 65 and over:
$7,100 for Single
$9,800 for Head of Household
$12,500 for Mariied Filing Jointly
For year-end planning for your individaul situation, contact your tax professional!
Some of the current tax provisions may be worth reminders. One particularly nice one for those who can benefit from it is that long term capital gains for people in the 10% and 15% brackets are not taxed at all. That's right, 0% tax. The 0% rate applies up to $34,000 of taxable income for single people and $68,000 for married filing jointly.
Just to recap the Standard Deductions for 2010, they are:
$5,700 for Single
$8,400 for Head of Household
$11,400 for Married Filing Jointly
For people 65 and over:
$7,100 for Single
$9,800 for Head of Household
$12,500 for Mariied Filing Jointly
For year-end planning for your individaul situation, contact your tax professional!
Tuesday, October 5, 2010
Whack your self-employment tax
For businesses in Hyannis, Centerville, Provincetown or anywhere on Cape Cod, one of the most deadly killers of small sole-proprietorships that I have seen is the Self-Employment tax. It is the equivalent of the FICA (AKA Social Security) tax that is deducted on an employee’s paycheck. But the rate for the Self-Employment tax is twice that of FICA. And since a sole proprietor does not receive a regular paycheck, the pain is not spread out in easy to digest small time periods. Sole Proprietors must send quarterly checks directly to the IRS, often in very large amounts. If they get behind—something that often happens—they can find themselves facing crippling tax bills at tax preparation time in April.
There are some strategies available to (a) provide for paying the tax by carefully setting aside funds, or (b) reduce the tax through the use of special tax breaks.
One tax provision that often works well for the reduction of Self-Employment tax (depending on the type of business and its own particular circumstances) is known as the Section 179 expense option. This allows a business that purchases a large item of machinery or equipment to write off, in many cases, the entire purchase price of the equipment in the year of purchase. This can be done even if the equipment is financed with a multi-year loan. The result can be that the business’s profit is partly or completely eliminated for tax purposes, the sole proprietor pays little or no tax, and he still has cash he needs to operate and to live.
This strategy can be a trap in itself if it is not done carefully. You can’t buy a big piece of equipment with a big loan attached unless you actually need it and it will actually enable you to make more profits in the future. Over-use of this strategy can get you into a situation in which you are over-expanded, have equipment you can’t use and you can’t make the loan payments.
However, there are many cases in which this strategy makes sense, and for 2010 and 2011, this tax break has been expanded to help stimulate the economy.
For the many construction and landscaping contractors on the Cape, medium-duty or heavy vehicles are often much needed, and they can often qualify for some of these tax write-offs. Be sure to consult your tax professional before acting!
There are some strategies available to (a) provide for paying the tax by carefully setting aside funds, or (b) reduce the tax through the use of special tax breaks.
One tax provision that often works well for the reduction of Self-Employment tax (depending on the type of business and its own particular circumstances) is known as the Section 179 expense option. This allows a business that purchases a large item of machinery or equipment to write off, in many cases, the entire purchase price of the equipment in the year of purchase. This can be done even if the equipment is financed with a multi-year loan. The result can be that the business’s profit is partly or completely eliminated for tax purposes, the sole proprietor pays little or no tax, and he still has cash he needs to operate and to live.
This strategy can be a trap in itself if it is not done carefully. You can’t buy a big piece of equipment with a big loan attached unless you actually need it and it will actually enable you to make more profits in the future. Over-use of this strategy can get you into a situation in which you are over-expanded, have equipment you can’t use and you can’t make the loan payments.
However, there are many cases in which this strategy makes sense, and for 2010 and 2011, this tax break has been expanded to help stimulate the economy.
For the many construction and landscaping contractors on the Cape, medium-duty or heavy vehicles are often much needed, and they can often qualify for some of these tax write-offs. Be sure to consult your tax professional before acting!
Monday, September 20, 2010
Small Business Tax Breaks
Almost all of the biggest businesses on Cape Cod are small enough to fit into the "small business" category for tax purposes.
The limit on expensing machinery and equipment (instead of depreciating it) will be raised to $500,000 for 2010 and 2011. (The limit for vehicles over 6,000 pounds Gross Vehicle Weight is a $25,000 expense write-off, plus additional "bonus" and regular depreciation.) Any business that buys $2 million or less in such assets will be able to get the full benefit of this break. It will be phased out for businesses that buy more than $2 million worth of equipment.
Similarly, $250,000 in renovations for restaurants and retail stores can be written off, including improvements landlords make for retail tenants.
A welcome tax break for self-employed people: This year they will be able to deduct health insurance premiums on schedule C. Thus they will reduce self-employment tax (the deadliest killer of sole proprietorships).
The limit on expensing machinery and equipment (instead of depreciating it) will be raised to $500,000 for 2010 and 2011. (The limit for vehicles over 6,000 pounds Gross Vehicle Weight is a $25,000 expense write-off, plus additional "bonus" and regular depreciation.) Any business that buys $2 million or less in such assets will be able to get the full benefit of this break. It will be phased out for businesses that buy more than $2 million worth of equipment.
Similarly, $250,000 in renovations for restaurants and retail stores can be written off, including improvements landlords make for retail tenants.
A welcome tax break for self-employed people: This year they will be able to deduct health insurance premiums on schedule C. Thus they will reduce self-employment tax (the deadliest killer of sole proprietorships).
Wednesday, August 4, 2010
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