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Taxes

Thursday, October 5, 2017

Will the 1031 “Like-Kind” Exchange be now eliminated?


Section 1031 of the tax code allows those who sell a real estate property and invest the proceeds in a different real estate property to postpone capital gains taxes. It is a great strategy for investors: with a 1031 exchange, after a sale of a property you can use 100% of the proceeds to buy a new building; without 1031, if you had to pay capital gains taxes, you would only be able to reinvest approximately 65% of the proceeds.

This provision dates back to the 1920s. Yet both Democrats and recently Republicans have talked about eliminating it. The provision is viewed as a loophole, and all loopholes are currently getting reviewed, as part of the overall package of decrease in tax rates.


Read more . . .


Friday, September 29, 2017

Trump just proposed to eliminate the Estate Tax completely. Will it affect you?


Currently, the gift and estate tax threshold is $5.5MM per person ($11MM per married couple). Assets passing at death that are above  that threshold are taxed at 40%. Gifts made during lifetime that are above this threshold are also taxed at 40%. 

Less than 1 out of 550 of people who die have taxable estates.
Read more . . .


Tuesday, November 1, 2016

Buy / Sell Agreements


What are these agreements? These are absolutely crucial both to start ups and to existing businesses where there is more than one owner involved. This document outlines the relationship between the owners, assigns roles and responsibilities, shows the ownership percentage of the business and outlines what happens when the owners need to part ways.

There are many reasons why owners may need to leave the business. Some are voluntary (sale of ownership ). Others are not voluntary: death, disability, personal bankruptcy, divorce, forced termination of owner's employment by the company and irreconcilable differences between the owners.

Read more . . .


Wednesday, April 13, 2016

Estate and Income Tax Planning for non-US citizens. Part II – income and estate taxation of non-U.S. residents

Income Tax Planning: In general, non-U.S. residents are taxed only on U.S. sourced income.  If the income is considered to be effectively connected with a U.S. trade or business (“effectively connected income” or “ECI”) then that income is taxed at graduated rates on a net income basis. If, instead, the income is “fixed, determinable, annual or periodic” (“FDAP”) then it is subject to a flat 30% tax on gross income (or lower if there is an income tax treaty). FDAP income usually consists of interest, dividends, rents and royalties. Interest on U.S. bank deposit is exempt from U.S. tax for non-U.S. residents.

Estate and Gift Tax Planning.

Assets subject to gift and estate tax:  For U.S. residents the tax applies to property and assets situated everywhere in the world.   In contrast, non-U.S. residents are subject to a gift and estate tax only on U.S. real and tangible personal property.

Gift Tax Exclusions: Similar to a U.S. resident, a non-U.S. resident can make a tax-free annual gift up to $14,000, can make unlimited charitable gifts, and can make unlimited gifts on behalf of donees directly to educational or medical institutions.

Gifts to spouse. The amount of gift tax exclusion  depends on the citizenship of the donee spouse. A citizen spouse may receive unlimited gifts of U.S. assets from his spouse.  A non-citizen spouse can only receive $148,000 per year prior to a tax being imposed.

Estate Tax. U.S. citizens and residents have a $5.45MM estate tax exemption from federal taxes.  In contrast, a non-U.S. resident is permitted only a $60,000 exemption. All property situated in the United States and owned at the death of a non-U.S. resident is included in the U.S. taxable estate, including retirement assets and stocks. Some assets, such as bank accounts and life insurance proceeds, are excluded.

 

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship. ATTORNEY ADVERTISING


Monday, April 4, 2016

Estate and Income Tax Planning for non-US citizens. Part I – determining U.S. residency

The very first question to determine during planning is whether a non-citizen individual is considered a U.S. resident for income tax purposes and for estate tax purposes.

For income tax purposes, a non-citizen is considered a U.S. resident if the individual meets any one of these tests: (1) green card test or (2) the substantial presence test (present in US for at least 31 days during the current year and at least 183 days for three prior years using a weighted average calculation). If an individual is considered a U.S. resident for income tax purposes, he will be taxed on the worldwide income.

For estate and gift taxes, a non-citizen is considered a U.S. resident if the individual intends to establish a domicile in the United States. A domicile is a person’s permanent place of abode in which the person intends to remain indefinitely or to which the person intends to return. One can have multiple residences, but only one domicile.  This question is a subjective inquiry where many factors are considered, including income tax filing status, jurisdiction of the driver’s license, visa status, and location of person’s family and friends. The burden of proof is on the taxpayer to establish his domicile.

The difference in the outcome between U.S. residents and non-U.S. residents is huge: U.S. residents have an estate and gift tax exemption of $5.45MM, while non-U.S. residents have an estate tax exemption of only $60,000.

 

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship. ATTORNEY ADVERTISING


Wednesday, March 23, 2016

How to monetize an investment real estate property while minimizing taxes

There are many reasons why one would want to withdraw money from an investment real estate. Some of these reasons include: no longer willing to manage the property, no longer needing the income tax benefit, desiring liquidity or desiring diversification in one’s investments.

1. The easiest way of monetizing a real estate property is selling it. However, with a sale come a host of costs. These costs include brokerage fees and income taxes (both federal and state). Depending on the level of appreciation and on prior depreciation deductions, the gain can be quite substantial and may result in a net amount received that is significantly less than the sale price.

2. There are methods of minimizing the income taxes on the sale of the property. These methods include:

           a.    An installment sale. This is a method of sale where at least one payment occurs after the year in which the disposition took place. Under this method, gain is not taxed when the disposition occurs, gain is recognized gradually as the payments are received.

           b. Borrowing against the property. If one wants to create liquidity while retaining ownership of the property, one can borrow against it. There are no tax consequences to this method. Cash can be used for other purposes.

            c. Like-kind exchange under 1031. This method provides a tax-deferral mechanism. No federal gain or loss is recognized where a real estate property held for use in a trade or business or for investment is exchanged for another “like-kind” property. There are several specific steps that must be taken to qualify for the exemption under section 1031. 

            d. Contributing property to a Charitable Remainder Trust (“CRT”). If one is at least somewhat charitably inclined, one can contribute property to this trust, where specified payments are made to a non-charitable beneficiary for a number of years and the remainder goes to charity. There are many tax advantages to this transaction, the main one being that upon a sale of the property by the CRT, no federal income taxes are due.

 

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship. ATTORNEY ADVERTISING


Wednesday, February 24, 2016

The Biggest Focus of Estate Planning is Now Basis (or Why You Should Not Make a Simple Gift of Assets to Your Children).

Basis is the cost of purchasing the asset. For real estate, it is the cost, plus any closing costs and improvements made later. Basis is important, because upon the sale of the property, capital gains liability is calculated based on the difference between the sale price and the basis.

Carry Over Basis: If the asset is gifted from the donor to the donee during the donor’s life, the donee inherits the basis of the donor. Imagine a house that was purchased for $100,000 40 years ago, and is now worth $1.5MM. If the owner gifts the house outright to her son, the son will inherit the mother’s basis of $100,000, and when he later sells it, he will have to pay capital gains taxes on $1.4MM.

Step Up Basis: property that transfers at death is stepped up to the fair market value of the property on the date of death. If the house above was transferred at death to the son, the son can later sell it for $1.5MM without paying any capital gains taxes.

Flexibility is Crucial: there are multiple methods of giving up outright possession of the asset, while retaining some powers that enable the asset to “step up” at death. One method is a life estate (in a real estate property). Another method is keeping a testamentary power of appointment in a trust. Yet another method is retaining the right to income from the asset.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship. ATTORNEY ADVERTISING


Thursday, January 7, 2016

What are Gifts and how much can you gift and receive without paying taxes?

What is a gift: In general, a gift is the value of the property transferred in excess of the value of any consideration received therefore.

What is the current gift tax rate: The current federal gift tax rate (similar to the current federal top estate rate) is 40%. However, this rate is only applied after the applicable exclusion amount.

Who is responsible for paying the taxes: The donor who makes the gift is responsible to pay the tax. If the donor fails to pay the tax when due, then the donee is also liable for the tax.

What are the current exclusions:

Federal: In 2015, the federal exclusion amount is $5,430,000. This means that one can gift during one’s lifetime up to $5,430,000 and no federal gift taxes will be due.

Annual: But it gets even better! In addition to the federal exclusion amount, there is also an annual gift tax exclusion of $14,000 per donee per year. This means that if a husband and wife have 3 children, they can gift to them $14,000 x 3 x 2 = $84,000 per year, without filing a federal tax return or paying any gift taxes.

Other: Payments of tuition to a qualifying educational institution (but not for books, room or board), payments for medical care directly to a provider or for medical insurance, or gifts made to political organizations also qualify for an exclusion. No gift tax return needs to be filed for these types of gifts.

Spousal: There is an unlimited marital spousal deduction for all gifts between US citizen or resident spouses. As an alternative to an outright gift, the donor spouse can make a gift to a living trust which meets the Qualified Terminable Interest Property (QTIP) requirements to that the gift qualifies for the marital deduction.

 

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship. ATTORNEY ADVERTISING


Wednesday, October 28, 2015

What are the Current Gift and Estate Tax Laws?

 

Current Tax Rates: The top federal estate tax return is 40%. The top New York State estate tax return is 16%.

Federal Estate and Gift Tax Exclusion: In 2015, the federal estate and gift tax exclusion is $5,430,000. That means that no federal taxes will be due for gifts made during one’s lifetime that in total did not exceed this amount. Similarly, no federal taxes will be due for estates whose assets do not exceed this amount, even where assets are passed to children or other non-spouse beneficiaries.  

The New York State has an exclusion of $3,000,000. This number is set to increase annually, until it reaches the federal exclusion in 2019. The New Jersey State has the smallest estate tax exclusion in the country of $675,000.

Portability of Spousal Estate Tax Exemption: if a predeceased spouse did not fully utilize his or her $5,430,000 estate tax exemption, the surviving spouse can utilize the unused exemption of her predeceased spouse.  This benefit, however, is only available for federal returns, and not for New York State returns.

Marital Deduction: No estate tax is due on any property which passes from the decedent to his or her surviving spouse. However, this deduction is only available as long as the surviving spouse is a United States citizen. If the spouse is not a US citizen, then, to take advantage of this deduction, property should pass to a “Qualified Domestic Trust” for the benefit of the surviving spouse, at which point it becomes fully deductible. However, there are a lot of requirements that need to be fulfilled for the QDT.

Step Up in Basis: the basis of a property acquired from a decedent is its fair market value (FMV) at the time of death. The income tax benefit is always a consideration when planning for estate taxes. When the beneficiary sells the property, his capital gains tax will be calculated on the difference between the market value at the time of sale and the FMV at the time of sale. If these are close in time, little or no capital gains taxes may be due.

  • When a husband and wife own property as tenants by the entirety, one half of the property is included in the deceased spouse’s estate, resulting in a step up in basis as to one-half of the property.

  • Where there is a joint tenant other than a husband and wife, there is a full inclusion in the estate of the first to die and a corresponding 100% income tax step up, unless the survivor can prove that she supplied part or all of the consideration.

  • When an owner reserves a life estate in real property and transfers the remainder to another party, there is a 100% tax step up in basis upon the life tenant’s demise.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.


Monday, October 12, 2015

Estate Tax Implications for Fractional Art Ownership

In the past, the IRS has denied valuation discounts for fractional undivided interests in the work of art. As a result, shared ownership in a painting was not entitled to a tax discount during estate value calculation.

In a recent case, Estate of Elkins v. C.I.R. 140 TC 86 (2013), 764 F.3d 443 (5th Cir. 2014), a Tax Court and a Fifth Circuit Court of Appeals appear to consider express restrictions on sale and use. Unfortunately, no decision on the ultimate discount value was given. However, the law is likely to develop on this issue further.

As a result, art owners who are willing to relinquish a part of their ownership to children, grandchildren or other family members, may now use this discount method to achieve substantial estate tax savings.

The information in this blog was adopted from the following article

 https://news.artnet.com/market/estate-tax-on-inherited-art-collections-323840

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.


Wednesday, September 9, 2015

Estate Tax Planning Considerations for Foreign Nationals

In 2015, a US citizen may gift during life or bequeath at death as much as $5.43MM without paying federal estate taxes. A foreign national, however, has an estate tax exemption of only $60,000. If a foreign national owns a $2MM house in US that they want to pass upon their death to heirs, the heirs will end up paying federal estate tax of $740,000 (plus additional state estate taxes).

To reduce the taxes, a foreign national can utilize the annual gift tax exemption of $14,000. This number is similar to the US citizens and the gift can be given to an unlimited number of beneficiaries, therefore Crummey trusts are very appropriate.

In addition, a foreign national can make gifts to a spouse. However, unlike a US citizen who can gift or bequeath an unlimited amount of money to a spouse without triggering an estate tax, a foreign national is limited to $147,000 of lifetime gifts to a spouse. Any amount greater will trigger a gift or an estate tax.

Canadians, however, benefit from a treaty that allows them the same exemption as US citizens.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.


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