The taxable estate is an estate tax concept. It includes the decedent’s interest in every type of property owned at death, plus property over which the decedent had control at death, even if he or she did not actually own the property. The decedent’s taxable estate includes his or her probate assets AND non-probate assets. Just because the distribution of certain assets at death, such as life insurance proceeds, a retirement account, or a jointly owned house, are not controlled by a will (and are not probate assets) does not mean that those assets are not subject to the estate tax.
The probate estate includes only those assets that are subject to the decedent’s will (or subject to intestate succession, discussed earlier in this book). The taxable estate includes all of the decedent’s assets, even if the assets do not go through probate.
The Difference Between The Taxable Estate vs. The Probate Estate is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here:
Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
The gift tax is also a component of the federal transfer tax system and is a tax imposed on transfers (i.e., gifts) of property during life, either given outright or to a trust. Like the estate tax, the gift tax is a transfer tax distinct from the familiar income tax.
Generally, the gift tax is determined by applying the transfer tax rate (the same rate that applies to the estate tax) to the value of property above the exemption amount (the same exemption amount that applies to the estate tax) that is gifted by one person to another during their lifetime, but not including property transferred to a spouse.
Thus, the gift tax covers transfers of property during life, while the estate tax covers transfers of property at death. The two taxes work together, and are said to be unified.
So from a transfer tax perspective, is it better to give away property as a gift during life (subject to the gift tax), or to leave assets to heirs in a will at death (subject to the estate tax)? Generally, if you give assets away while you are still alive, you are also ridding your estate of the future appreciation in the value of that asset. The assets you give away now will trigger a lower gift tax (if any) today than an estate tax years from now because of the assets’ appreciated value at death.
Gift Tax Annual Exclusion
Each year, a person can gift to any one or more other persons up to the annual exclusion amount (currently $14,000 per recipient in 2015) without triggering the gift tax. Married couples can combine their individual annual exclusion amounts and gift $28,000 each year to each person without triggering the gift tax.
Annual exclusion is meant to shield from tax the small common gifts made every year to friends and relatives, such as birthday presents, holiday gifts and small tokens of appreciation.
The Gift Tax is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
- Accelerate Deductions and Defer Income – It sometimes makes sense to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.
- Bunch Itemized Deductions – Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older as of the end of 2016). This may mean moving a procedure into this year or postponing it until next year. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.
- Make Up a Tax Shortfall with Increased Withholding – Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.
- Leverage Retirement Account Tax Savings – It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement accounts (IRAs) still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement. The 2016 contribution limits are $18,000 for a 401(k), 12,000 for a SIMPLE IRA and $5,500 for a traditional/Roth IRA (not including catch-up contributions for those 50 years of age and older).
- Reconsider a Roth IRA Rollover – It has become very popular in recent years to convert a traditional IRA into a Roth IRA. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). If you converted your account this year, re-examine the rollover. If the value went down, you have until your extended filing deadline to reverse the conversion. That way, you may be able to perform a conversion later and pay less tax.
- Get Your Charitable House in Order – If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgement from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.
- Give Directly from an IRA – Congress finally made permanent a provision that allows taxpayers 70½ and older to make tax-free charitable distributions from IRAs. Using your IRA distributions for charitable giving could save you more than taking a charitable deduction on a normal gift. That’s because these IRA distributions for charitable giving won’t be included in income at all, lowering your AGI. You’ll see the difference in many AGI-based computations where the below-the-line deduction for charitable giving doesn’t have any effect. Even better, the distribution to charity will still count toward the satisfaction of your minimum required distribution for the year.
- Zero out AMT – Some high-income taxpayers must pay the alternative minimum tax (AMT) because the AMT removes key deductions. The silver lining is that the top AMT tax rate is only 28 percent. So you can “zero out” the AMT by accelerating income into the AMT year until the tax you calculate for regular tax and AMT are the same. Although you will have paid tax sooner, you will have paid at an effective tax rate less than the top regular tax rate of 39.6 percent. But be careful, this can backfire if you are in the AMT phase-out range or the additional income affects other tax benefits.
- Use Your Gift Tax Exclusion – You can give up to $14,000 to as many people as you wish in 2016, free of gift or estate tax. You get a new annual gift tax exclusion every year, so don’t let it go to waste. You and your spouse can use your exemptions together to give up to $28,000 per beneficiary.
- Leverage Historically Low Interest Rates – Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. An appreciating market and historically low rates create the perfect atmosphere for estate planning. The past several years presented a historically favorable time, and the low rates won’t last forever.
The estate tax is one component of the federal transfer tax system, which also includes the gift tax and the generation-skipping transfer tax. The estate tax is a tax imposed on the transfer of property at death. It is a transfer tax, which is a different tax than the familiar income tax.
Generally, the estate tax is determined by applying the transfer tax rate to the value of property on the date of death owned by the decedent in excess of a threshold amount (currently $5.43 million per person in 2015). The tax is technically imposed on the transfer of the decedent’s property either outright or in trust to the decedent’s heirs, but not including property transferred to the surviving spouse.
Most people will not be subject to the estate tax because most people will never own property with a total value in excess of the threshold amount. The threshold amount is referred to as the exemption amount, and is $5.43 million if you die in 2015. The exemption amount increases every year at the rate of inflation.
Estate Tax is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
Probate assets consist only of assets owned by the decedent at death that do not pass automatically (i.e., by operation of law) to the intended beneficiaries. A person’s will deals only with probate assets – it does not control the transfer of non-probate assets.
Examples of non-probate assets include life insurance policies (because the insurance proceeds are paid to the beneficiaries of the policy according to the terms of the policy contract, not according to a will), retirement accounts (because upon the death of the owner of a retirement account such as an IRA or 401(k), the monies are paid to the person or persons listed on the decedent’s beneficiary designation form) , and jointly owned property (such as a house or apartment owned jointly by a husband and wife). But keep in mind that a person’s taxable estate for estate tax purposes includes both probate and non-probate assets. The estate tax is discussed in more detail later in this book.
Creating A Trust Can Help Avoid Probate
Property that is owned by a trust is non-probate property, because at the creator’s death the terms of the trust agreement determine what happens to the property, not the creator’s will. Unlike a will, a trust does not have to go through probate. Thus, property owned by a trust avoids probate and is managed without the hassles and expense of probate court proceedings.
“Probate?” is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”.Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
Probate is the legal process that takes place after someone dies of proving the validity of a will or establishing who is entitled to receive the decedent’s property under state intestate succession laws if there is no will. The probate process is handled by the local surrogate’s court and governed by state law. Probate involves paperwork and court appearances by lawyers, which costs money.
As a general rule, a will has no legal effect until it is probated. Probate includes proving in surrogate’s court that a decedent’s will is valid, identifying and collecting the decedent’s property (also referred to as the decedent’s estate), paying debts and taxes of the estate, and distributing the remaining property as the will (or state intestate law, if there is no will) directs. In effect, probate is the process that enables heirs to receive property that is rightfully theirs.
Advantages of Avoiding the Probate Process
Wills and probate proceedings are matters of public record. If you would like to keep your affairs private, and prefer that people don’t know how your estate was distributed, avoiding probate through a trust or other mechanism is the only way to do so.
The probate process can be complicated and time consuming, so it may take several years to completely resolve everything. Typically, assets are frozen and unavailable to beneficiaries (including the surviving spouse) for a period of time without prior court approval. Avoiding probate can speed up the process of settling your estate.
Probate costs, including attorney’s fees, can be expensive. This is especially true if you own real estate in a different state, because probate proceedings would be required in both states. A trust can help to correct this problem.
“What Is Probate?” is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
A Personal Financial Specialist, or PFS, is an individual who is highly qualified to offer advice on a variety of financial issues and has earned the PFS credential from the American Institute of Certified Public Accountants. He or she can help you establish and build an investment portfolio, minimize your taxes, assist with estate planning, recommend insurance, and help you plan for retirement. It is possible for you to do all of these things on your own or to work with separate advisers in each wealth management area, but a PFS is a one-stop shop who can organize the process and focus your efforts. A PFS provides personalized attention and advice based on your specific circumstances.
Setting Goals and Creating a Financial Plan
There are three things you and your PFS will do initially and on an ongoing basis to determine how best to manage your wealth:
- First, you will assess your current situation.
- Then, you will set financial goals and choose the means to achieve them.
- As time passes, you will evaluate your progress toward your goals, determine if those goals still apply, and make adjustments to your plan when necessary.
Putting Things in Perspective
Statistics on financial planning can be frightening when you think about how quickly the years pass and retirement arrives. According to BusinessInsider.com, only 50% of Americans have more than a single month’s income saved. Many people are also unaware of what they are spending and how their current spending habits affect their long-term savings goals. A PFS will evaluate your current financial position, analyze your finances from a uniquely professional viewpoint different from your own, and help you determine what changes must be made now to help achieve your long-term goals.
Empowering You Financially
Working with a PFS helps you put your current earnings, your projected earnings, and your long-term outlook into proper perspective. He or she does not make decisions for you or take control of your money. Instead, the two of you work together to determine the appropriate financial path you should be following. It is entirely up to you whether or not you want to act on the advice of a PFS.
The world of finance and wealth planning can feel overwhelming, especially if you are just beginning to consider your financial future. A PFS can provide information, education, and guidance to help you get a solid grip on your financial situation.
Everyone has been talking about it, but it still seems some are unaware of the stipulations of the Affordable Care Act. The ACA mandates that all Americans have qualifying health insurance coverage or pay a penalty to the IRS. The penalty in 2014 was 1% of your household income or $95 per person. But in 2015, the penalty increases to 2% of your total household income or $325 per person.
There are also a few 2015 changes regarding flexible spending accounts for healthcare costs that relate to rollover savings. If you carried over the allowed $500 into 2015, you are ineligible to save in a general purpose FSA this year. Unfortunately, it’s too late to spend what was left in your 2014 account to qualify, but now is a great time to discuss your health savings situation with your employer and/or your tax advisor.
As of the first of this year, you can only make one rollover from an IRA to another IRA within a 12 month period. A rollover counts as withdrawing funds from one IRA, holding them for fewer than 60 days, and then depositing them into another IRA.
There are also changes to 401(k) limits this year. The limit on employee contributions increases to $18,000, so you are eligible to deposit $500 more than last year into retirement savings. In order to do this, you must let your employer know you want to increase your contribution. If you haven’t already, make the change now to take advantage of the most savings available.
Other increases are also available this year, including:
• Employees over the age of 50 are now allowed an additional $500 ($6,000 total in addition to the standard amount) for 401(k) “catch up” contributions
• Increases also apply to 403(b) and 457 retirement accounts
• Employees can now contribute $2,550 to their flexible spending accounts to put toward healthcare costs
There are a few additional changes to be aware of that relate to the amount of money you earn in 2015.
First, the AMT exemption has increased to $53,600 for individuals and $83,400 for joint filers, which is a 1.5% increase from last year.
Income tax thresholds have been adjusted for inflation, too. The highest tax rate (39.6%) applies to single filers earning at least $413,200 annually and joint filers earning $464,850. This is an increase of about 1.6%.
Finally, 2015’s standard deduction increases to $6,300 for single filers and $12,600 for joint filers. The standard deduction for heads of household rises to $9,250. Keep in mind that itemized deductions such as medical costs, taxes, interest expense and charity donations provide a tax benefit only if in total they surpass the amount of the standard deduction.
Every year changes are made to the tax law that affect the way you manage your money throughout the year and how you file your tax return in the new calendar year. As soon as you are comfortable with one aspect of tax law, changes are made and you must relearn everything you knew. Working with an experienced tax attorney makes it easier to deal with an ever-changing situation, but it is also important to have a general understanding of the current laws.
What do you need to know about the most recent changes to tax laws?
Effect of ACA (i.e.; Obamacare) on Your Taxes
The Affordable Care Act requires you to carry a minimum amount of health insurance. If your plan does not meet the requirements, you will be forced to pay a fine, which in 2014 equals 1% of your annual income or $95 for each person you claim as a dependent. Further changes could be enacted in the coming years, but most expect the fine to be higher in 2015. At this point, it is too late to apply for coverage to avoid the 2014 penalty, so speak with your tax attorney to determine the best way to handle the fee.
The ACA also included an additional 3.8% tax on investment income. The tax applies to those making more than $200,000 (or $250,000 as a married couple filing jointly), so try to realize capital gains during years you earn less than those limits. The use of income timing, installment sales, and other tax deferral strategies can be effective in managing this new tax.
Finally, the ACA requires a new 0.9% Medicare health insurance tax on wages for those earning more than $200,000. If you are self-employed, you should plan for this additional tax when calculating your estimated tax payments. If you are an employee, the tax will be added to your Medicare tax in your paycheck.
Energy tax credit
Energy tax credit opportunities have been extended to 2016, so you are still able to get a credit for certain energy efficient upgrades to your home. In most cases, the credit is 30% of the total cost of the product. If you were thinking of putting off utility or other upgrades until after the first of the year, you might want to reconsider so you are eligible to claim the credit on this year’s tax return.
In previous years, you were able to deduct medical expenses that surpassed 7.5% of your adjust gross income, but as of 2013, you can deduct them only if they surpass 10%. The 7.5% limit remains the same for those over 65 years of age. Despite the increase in the limitation, it is still important to plan for this opportunity when possible. For instance, paying a medical bill in one lump sum could qualify you for a tax break, whereas staggering the payments could result in a complete loss of tax benefits.
If you have questions about the most recent changes to the tax laws or you need assistance with tax planning, contact an experienced tax professional. Feel free to contact us to answer your questions at 516.537.4440