Estate tax, more

The Federal estate tax is still in danger of reverting after 2012 to a $1,000,000 exemption and a 55% tax rate. Congress has not made the current law permanent. The odds are they will do something before 2012 is over, but it would be nice is they would commit to something for the long term.

Foreign Accounts

The IRS's amnesty program for people with undeclared foreign accounts ends Aug 31. It allows affected taxpayers to pay taxes owed plus a penalty and avoid criminal prosecution for tax evasion. Meanwhile their investigation of foreign banks continues with Credit Suisse, a large Swiss bank.

Gift tax basics

The gift tax exemption for 2011 and 2012 is $5,000,000. This is a lifetime exclusion. That means that a person can give up to that amount in his/her lifetime and not owe any gift tax.

A person can also give up to $13,000 each per year to any number of persons without having to count it towards the $5,000,000 and without the need to report it in any way.

If a person gives over $13,000 in a year to any one person, the giver must file a gift tax return. Though no tax is due as long as the lifetime total is under $5M, it officially reduces that $5M, which runs like a declining balance during the person's lifetime of giving.

When the person dies, the remaining balance is used to calculate the person's estate tax exemption.

Because Congress can't make up its mind about these things, the $5,000,000 exemption is scheduled to be reduced to $1,000,000 in 2013. (However, the estate tax exemption will still be $5M.) If that happens, anyone who has gone over $1,000,000 in reportable gifts by then, or who goes over it in 2013 or thereafter, will have to pay a gift tax on any subsequent gifts.

Congress may or may not act to preserve the $5,000,000 exemption. Everyone thought they would do something to avert the expiration of the estate tax for 2010, but the year was virtually over before they did anything.

You should also know that there are certain situations in which the gift tax exemption does not apply.

The top gift tax rate is currently the same as the top estate tax rate: 35%.

AMT Reform

A group called ReformAMT is campaigning to eliminate the Alternative Minimum Tax on Incentive Stock Options. There is generally no regular tax when a person exercises ISO's, but the AMT on it can sometimes be substantial. People who are whacked with this tax don't like it, especially since it often comes as quite a surprise. Also, the transaction on which they are being taxed did not put any money in their pocket. (So how are they supposed to pay the tax??) Go to www.reformamt.org to find out what they are up to.

Mileage rates

The standard mileage rate for business vehicle use is 55.5 cents for the July-Dec, 2011 period. For Jan-June, 2011, the rate was 51 cents per mile.

Other rate changes:
Medical miles: Jan-June = 19 cents; July-Dec = 23.5 cents
Moving expense miles: same as Medical miles

The rate for Charity miles remains 14 cent per mile.

Earned Income Credit

The IRS has been concerned for some time with abuse of the Earned Income Credit. They have adopted a number of rules and requirements to combat that abuse. Tax preparers will probably have more hoops to jump through in coming years to substantiate the validity of the credit claimed. Some checklists exist which have been used voluntarily, but they may become required forms. No exact timetable has been given for such changes.

Gift tax crackdown

As we reported in February, the IRS is trying to track down people who have failed to file gift tax returns. Recently they tried to get the state of California to give them records on people who transfer real estate to family members for no money or very little money. State attorneys argued in court that the records exist at the county level, not the state level, and that therefore the state could not do it. The court agreed. The IRS was directed to seek the records at the county level. There are 58 counties in California. The IRS has not said yet what it intends to do. A couple of possibilities are: (a) Proceed in contacting the counties, or (b) Move on to another state that might be easier to deal with. Massachusetts in recent years has moved many county functions to the state level, so we should not rule out the IRS snooping around here.