Maria Alejandra Arnold Joins T&C Family Office Group as Principal, Private Wealth Strategist

West Palm Beach, Fla., – June 1, 2015 – Maria Alejandra Arnold (Ale’) joins T&C Family Office Group as Principal, Private Wealth Strategist. Ale’ brings more than 18 years of experience managing the portfolios of high net worth families and providing them with comprehensive financial planning advice.

Prior to joining T&C Family Office Group, Ale’ worked as a Wealth Management and Financial Advisor for some of the nation’s largest financial services companies. Her multi-dimensional background includes the delivery of investment management, risk and insurance management, and trust services to clients. Ale’ supported client needs through oversight and advice on asset allocation, financial and estate planning.

“We are pleased to have someone of Ale’s caliber and experience join the T&C Family Office Group. She is a natural complement to our other tax and accounting professionals – helping our family office clients reach their goals,” said Pat McKay, Managing Director, T&C Family Office Group.

Ale’ received her Bachelor of Science degree from University of South Carolina; she is based in Templeton’s Fort Lauderdale office and can be reached at (954) 333-0001 or marnold@templetonco.com

About T&C Family Office Group

For more than 25 years Templeton & Company has provided accounting, tax and advisory services to many of the largest family-run businesses in the United States, including those in real estate and construction, sports franchises, manufacturing and distribution, retail companies and technology industries. The T&C Family Office Group is a natural complement to that suite of services. Our team is highly skilled and devoted to providing elite, personal and responsive family office services tailored to an individual’s or family’s needs. For more information, visit www.templetonwealth.com.

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Tax Development Highlights

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Developments concerning the Affordable Care Act (ACA). 

In the lead-up to the roll out of the health insurance exchanges on Oct. 1, 2013, the IRS issued the following guidance on the ACA:

Individuals:

  • The IRS released Questions and Answers (Q&As) on the health insurance premium tax credit on its website. This credit is designed to make health insurance affordable to individuals with modest incomes (i.e., between 100% and 400% of the federal poverty level, or FPL) who are not eligible for other qualifying coverage, such as Medicare, or “affordable” employer-sponsored health insurance plans that provide “minimum value.” To qualify for the credit, individuals must purchase insurance on a health exchange. The Q&As note that individuals can choose to have the credit paid in advance to their insurance company to lower what they pay for their monthly premiums, and then reconcile the amount paid in advance with the actual credit computed when they file their tax return. Alternately, individuals can claim all of the credit when they file their tax return for the year. The Q&As explain exactly who is eligible for the credit and address other important aspects of it.
  • The IRS issued final regulations on the “shared responsibility” payment under the ACA, which is the enforcement mechanism for the ACA’s mandate that most individuals maintain health insurance coverage. Starting in 2014, the individual shared responsibility provision calls for each individual to have basic health insurance coverage (known as minimum essential coverage), qualify for an exemption, or make a shared responsibility payment when filing a federal income tax return. Individuals will not have to make a payment if coverage is unaffordable, if they spend less than three consecutive months without coverage, or if they qualify for an exemption under one of several other reasons, including hardship and religious beliefs. The final regulations address these and other aspects of the shared responsibility payment.

Small Businesses:

  • The IRS issued proposed regulations on the tax credit available to certain small employers that offer health insurance coverage to their employees. This credit is available to an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000. The proposed regulations would become effective when they are formally adopted as final regulations. However, employers may rely on the proposed regulations for tax years beginning after Dec. 31, 2013, and before Dec. 31, 2014.

Tax treatment of same-sex spouses. 

The IRS and other Federal agencies issued guidance on the treatment of same-sex spouses and couples for tax and other purposes in light of the Supreme Court’s landmark Windsor  decision striking down section 3 of the Defense of Marriage Act (DOMA), which had required same-sex spouses to be treated as unmarried for purposes of federal law. The key developments are as follows:

  • Effective as of Sept. 16, 2013, the IRS adopted a “state of celebration” rule in recognizing same-sex marriages. This means that same-sex couples who were legally married in jurisdictions that recognize their marriages (i.e., “state of celebration”) will be treated as married for federal tax purposes, regardless of whether their state of residence recognizes same-sex marriage. Spouse may retroactively apply this rule to open years.
  • Same-sex spouses who were legally married in a state that recognizes same-sex marriages must file their 2013 federal income tax return using either “married filing jointly” or “married filing separately” status, even if they now reside in a state that does not recognize same-sex marriage. Same-sex spouses who file an original 2012 tax return on or after Sept. 16, 2013 also generally must file using a married filing separately or joint filing status. Same-sex spouses may file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations on refunds.

The IRS provided optional special administrative procedures for employers to use to correct overpayments of employment taxes for 2013 and prior years for certain benefits provided and remuneration paid to same-sex spouses.

The Department of Labor’s (DOL)’s Employee Benefits Security Administration (EBSA) announced that it is following the IRS in recognizing “spouses” and “marriages” based on the validity of the marriage in the state of celebration, rather than based on the married couple’s state of domicile, for purposes of interpreting the meaning of “spouse” and “marriage” as these terms appear in the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and in Internal Revenue Code provisions that EBSA interprets.

  • In Frequently Asked Questions (FAQs) posted on the IRS’s website, the IRS made clear that same-sex and opposite-sex individuals who are in registered domestic partnerships, civil unions, or other similar formal relationships that aren’t marriages under state law aren’t considered as married or spouses for federal tax purposes.

New rules for deducting or capitalizing tangible property costs. 

The IRS issued new regulations for determining whether amounts paid to acquire, produce, or improve tangible property may be currently deducted as business expenses or must be capitalized. Among other things, they provide detailed definitions of “materials and supplies” and “rotable and temporary spare parts” and prescribe rules and elective de minimis and optional methods for handling their cost. They also have rules for differentiating between deductible repairs and capitalizable improvements, among many other items. The regulations generally are effective for tax years beginning on or after Jan. 1, 2014, but taxpayers can elect to apply them to certain pre-2014 years.

New rules for dispositions of certain depreciable property. 

The IRS issued proposed regulations that change several of the rules for dispositions of Modified Accelerated Cost Recovery System (MACRS) property. While the regulations are not final but merely proposed, taxpayers may rely on them. Included among the changes are rules that no longer treat structural components of a building as separate from the building and rules providing that partial dispositions generally are treated as dispositions.

New simplified relief for late elections pertaining to S corporations. 

The IRS provided simplified methods for taxpayers to request relief for late elections pertaining to S corporations. The relief covers the S corporation election itself, the electing small business trust (ESBT) election, the qualified Subchapter S trust (QSST) election, the qualified Subchapter S subsidiary (QSub) election, and late corporate classification elections which the taxpayer intended to take effect on the same date that the taxpayer intended that an S corporation election for the entity should take effect.

Simplified per-diem increase for post-Sept. 30, 2013 travel.

An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal and incidental expenses (M&IE). If the rate paid doesn’t exceed IRS-approved maximums, and the employee provides simplified substantiation, the reimbursement isn’t subject to income- or payroll-tax withholding and isn’t reported on the employee’s Form W-2. In general, the IRS-approved per-diem maximum is the GSA per-diem rate paid by the federal government to its workers on travel status. This rate varies from locality to locality. Instead of using actual per-diems, employers may use a simplified “high-low” per-diem, under which there is one uniform per-diem rate for all “high-cost” areas within the continental U.S. (CONUS), and another per-diem rate for all other areas within CONUS. The IRS released the “high-low” simplified per-diem rates for post-Sept. 30, 2013 travel. The high-cost area per-diem increases $9 to $251, and the low-cost area per-diem increases $7 to $170.

Supreme Court to decide FICA tax treatment of severance pay. 

The Supreme Court agreed to review a decision of the Court of Appeals for the Sixth Circuit which held that severance payments aren’t wages for purposes of Federal Insurance Contributions Act (FICA) tax. Thus, the Supreme Court will resolve a circuit split that currently exists between the Sixth and Federal Circuit Courts on the issue.

Please don’t hesitate to contact us at info@templetonco.com or 561-798-9988 to begin discussing options specific to your tax situation.

New 3.8% Medicare Tax on “Unearned” Net Investment Income

High-income taxpayers will be hit with two big tax hikes under the recently enacted health overhaul legislation: a tax increase on wages and a new levy on investments.

To help offset the cost of providing health insurance to millions of Americans, the new law imposes an additional 0.9% Medicare tax on wages above $200,000 for individuals and $250,000 for married couples filing jointly. In addition, for higher-income households, the new law adds a 3.8% tax on unearned income, including interest, dividends, capital gains and other investment income.

It is the 3.8% surtax on “Unearned Income” that we write about today.

3.8% Tax on Unearned Income

Starting in 2013, high-income taxpayers will be subject to a new tax based on net investment income—a 3.8% Medicare contribution tax.  The Health Care and Reconciliation Act of 2010, which amends the Patient Protections and Affordable Care Act, outlines the new Medicare tax.  Here’s an overview of what the new tax will mean to you, and some methods to review to lessen the impact of this tax.

What is the Net Investment Income Tax (NIIT)?

Section 1411 of the Internal Revenue Code imposes The Net Investment Income Tax (NIIT). The NIIT is a tax of 3.8% on certain net investment income of individuals, estates and trusts that have income above certain threshold amounts.

Who is subject to the Net Investment Income Tax?

This new tax will only affect taxpayers whose modified adjusted gross income (MAGI) exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals filing separately. Estates and Trusts will be subject to the Net Investment Income Tax if they have undistributed Net Investment Income, and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year (for tax year 2012, this threshold amount is $11,650).

(For individuals, your AGI is the bottom line on Page 1 of your Form 1040. It consists of your gross income minus certain adjustments to income. If you claimed the foreign earned income exclusion, you must add back the excluded income for purposes of the 3.8% tax.)

If your AGI is above the threshold that applies to you ($250,000, $200,000 or 125,000), the 3.8% tax will apply to the lesser of (1) your net investment income for the tax year or (2) the excess of your AGI for the tax year over your threshold amount. This tax will be in addition to the income tax that applies to that same income.

Example 1: Taxpayer, a single filer, has wages of $180,000 and $15,000 of dividends and capital gains. Taxpayer’s modified adjusted gross income is $195,000, which is less than the $200,000 statutory threshold. Taxpayer is not subject to the Net Investment Income Tax.

Example 2: A married couple that has AGI of $270,000 for 2013, of which $100,000 is net investment income. They would pay a Medicare contribution tax on only the $20,000 amount by which their AGI exceeds their threshold amount of $250,000. That is because the $20,000 excess is less than their net investment income of $100,000. Thus, the couple’s Medicare contribution tax would be $760 ($20,000 × 3.8%).

What is net investment income (NII)?

The net investment income that is subject to the 3.8% tax consists of interest, dividends, annuities, royalties, rents, and net gains from property sales. Income from an active trade or business isn’t included in net investment income, nor is wage income.

Passive business income (within the meaning of IRC section 469) is subject to the Medicare contribution tax. Thus, rents from an active trade or business aren’t subject to the tax, but rents from a passive activity are subject to the tax (however, deductible expenses related to rental income will reduce the amount subject to this tax). Income from a business of trading financial instruments or commodities is also included in net investment income.

Income that is exempt from income tax, such as tax-exempt bond interest, is likewise exempt from the 3.8% Medicare contribution tax. Thus, switching some of your taxable investments into tax-exempt bonds can reduce your exposure to the 3.8% tax. Of course, this should be done with regard to your income needs and investment considerations.

Home sales.

Let’s review how the 3.8% tax applies to home sales. If you sell your main home, you may be able to exclude up to $250,000 of gain, or up to $500,000 for joint filers, when figuring your income tax. This excluded gain won’t be subject to the 3.8% Medicare contribution tax.

However, gain that exceeds the limit on the exclusion will be subject to the tax. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the income tax exclusion, will also be subject to the Medicare contribution tax.

For example, a married couple has AGI of $200,000 for 2013 and in addition sold their main home for a $540,000 gain. The couple qualified for the full $500,000 exclusion of gain on the sale, leaving only $40,000 of taxable gain. As a result, the couple won’t be subject to the 3.8% tax, because their total AGI ($200,000 + $40,000) will fall below the $250,000 threshold.

Using the aforementioned example, if the gain on the home sale was $680,000, of which $180,000 was taxable, the couple would be subject to the 3.8% tax on $130,000 of the gain. That is the amount by which their total AGI of $380,000 ($200,000 + $180,000) exceeds their $250,000 threshold.

Exceptions from Net Investment Income

Distributions from qualified retirement plans, such as pension plans and IRAs, aren’t subject to the Medicare contribution tax. However, those distributions may push your AGI over the threshold that would cause other types of investment income to be subject to the tax.

This makes Roth IRAs more attractive for higher-income individuals, because qualified Roth IRA distributions are neither subject to the Medicare contribution tax nor included in AGI.

The tax also does not apply to the gain related to the sale of an interest in an S Corporation or partnership, to the extent that the gain on assets held by the entity is from an active trade or business.

What investment expenses are deductible in computing NII?

To determine NII, Gross Investment Income (items described above) is reduced by deductions that are properly allocable. Examples of allocable deductions would include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes properly allocable to items included in Net Investment Income.

How the Net Investment Income Tax is Reported and Paid

For individuals, the tax will be reported on, and paid with, the Form 1040. For Estates and Trusts, the tax will be reported on, and paid with, the Form 1041.

The Medicare contribution tax must be included in the calculation of estimated tax that you owe. Thus, if you will be subject to the tax, you may have to make or increase your estimated tax payments to avoid a penalty.

Planning Strategies

Fortunately, there are a number of effective strategies that can be used to reduce MAGI and or NII and reduce the base on which the surtax is paid. Strategies may include (1) Roth IRA conversions, (2) tax exempt bonds, (3) tax-deferred annuities, (4) life insurance, (5) meet the “Material Participation” requirements for your S Corp and Partnership holdings, (6) become a “Real Estate Professional” for purposes of holding rental real property (7) oil and gas investments, (8) timing estate and trust distributions, (9) charitable remainder trusts, and (10) installment sales and maximizing above-the-line deductions.

We would be happy to explain how these and other strategies might minimize your exposure to the Internal Revenue Code Section 1411  surtax. 

Please don’t hesitate to contact us at info@templetonco.com or 561-798-9988 to begin discussing options specific to your tax situation. 

What you need to know about the tax provisions in the 2012 American Taxpayer Relief Act

The 2012 American Taxpayer Relief Act, signed into law on Jan. 2, 2013 by President Obama, is a sweeping tax package that addresses the permanent extension of the Bush-era tax cuts for most taxpayers, revises the tax rates on ordinary and capital gain income for high-income individuals, modifies the estate tax, offers permanent relief from the Alternative Minimum Tax [AMT] for individual taxpayers, limits the deductions and exemptions of high-income individuals, and provides a host of retroactively resuscitated and extended tax breaks for individual and businesses. Here’s a rundown of the package:

  • Tax rates. For tax years beginning after 2012, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets from the Bush tax cuts will remain in place and are made permanent. This means that, for most Americans, the tax rates will stay the same. However, there will be a new 39.6% rate, which will begin at the following thresholds: $400,000 (single), $425,000 (head of household), $450,000 (joint filers and qualifying widow(er)s), and $225,000 (married filing separately). These dollar amounts will be inflation-adjusted for tax years after 2013.
  • Estate tax. The new law prevents steep increases in estate, gift and generation-skipping transfer (GST) tax that were slated to occur for dying individuals and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). The new law, however, permanently increases the top estate, gift, and GST rate from 35% to 40% It also continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse. All changes are effective fore individuals dying and gifts made after 2012.
  • Capital gains and qualified dividends rates. The top rate for capital gains and dividends beginning in 2013 will be 23.8% if income falls in the 39.6% tax bracket. For lower income levels, the tax will be 0%, 15%, or 18.8%.
  • Personal exemption phase-out. Beginning in 2013, personal exemptions will be phased out (i.e., reduced) for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers). Taxpayers claim exemptions for themselves, their spouses and their dependents. Last year, each exemption was worth $3,800.
  • Itemized deduction limitation. Beginning in 2013, itemized deductions will be limited for adjusted gross income over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).
  • AMT relief. The new law provides permanent AMT relief. Prior to the Act, the individual AMT exemption amounts for 2012 were to have been $33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for married persons filing separately. Retroactively effective for tax years beginning after 2011, the new law permanently increases these exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, it indexes these exemption amounts for inflation.
  • Tax credits for low to middle wage earners. The new law extends for five years the following items that were originally enacted as part of the 2009 stimulus package and were slated to expire at the end of 2012: (1) the American Opportunity tax credit, which provides up to $2,500 in refundable tax credits for undergraduate college education; (2) eased rules for qualifying for the refundable child credit; and (3) various earned income tax credit (EITC) changes.
  • Cost recovery. The new law extends increased expensing limitations and treatment of certain real property as Code Section 179 property. It also extends and modifies the bonus depreciation provisions with respect to property placed in service after Dec. 31, 2012, in tax years ending after that date.
  • Tax break extenders. Many of the “traditional” tax extenders are extended for two years, retroactively to 2012 and through the end of 2013. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes, the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers, and the research credit.
  • Pension provision. For transfers after Dec. 31, 2012, in tax years ending after that date, plan provision in an applicable retirement plan (which includes a qualified Roth contribution program) can allow participants to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contribution.
  • Payroll tax cut is no more. The 2% payroll tax cut was allowed to expire at the end of 2012.

2013 Tax Planning

People get ready.

More individuals will be snared by the alternative minimum tax (AMT), and various deductions. Other tax breaks will be unavailable. As a result of expiring Bush-era tax cuts, individuals will face higher tax rates next year on their income, including capital gains and dividends, and estate tax rates will also be higher. AMT became problematic this year because exemptions have dropped and fewer personal credits can be used to offset them.

Additionally, a number of tax provisions expired at the end of 2011 or will expire at the end of 2012. For example, rules that expired at the end of 2011 include:

  • Research credit for businesses.
  • Election to take an itemized deduction for state and local general sales taxes instead of the itemized deduction permitted for state and local income taxes.
  • Above-the-line deduction for qualified tuition expenses.
  • Rules that expire at the end of 2012 include:
  • Generous bonus depreciation allowances and expensing allowances for business.
  • Expanded tax credits for higher education costs.


Remember, these adverse tax consequences are by no means a certainty as Congress and President Obama could extend the Bush-era tax cuts for some or all taxpayers and retroactively “patch” the AMT for 2012. This would increase exemptions and availability of credits, revive some favorable expired tax rules and extend those that are slated to expire at the end of this year. 

But – this is not the time for inaction. The prospect of higher taxes next year makes it even more important to engage in year-end planning now.

We’ve put together a list of considerations for individuals and businesses that will guide you through these challenges. While not all actions will apply to your particular situation, many of these moves may benefit you. For further explanation or clarification, please call us at 561-798-9988.

Year-End Tax Planning Moves for Individuals

• Increase your FSA. Set aside more for next year in your employer’s health flexible spending account (FSA). Next year, the maximum contribution to a health FSA is $2,500. Remember – you will no longer be able to set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids. 
• Make HSA contributions. If you became eligible to make health savings account (HSA) contributions late this year (even in December), you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year. 
• Realize losses on stock while preserving your investments. There are several ways this can be done. For example, you can sell the original holding then buy back the same securities at least 31 days later. It would be advisable for us to meet to discuss year-end trades you should consider making. 
• Sell assets before year-end. If you are thinking of selling assets that are likely to yield large gains, such as inherited, valuable stock, or a vacation home in a desirable resort area, make the sale before year-end while still paying attention to the market. 
• Sell and repurchase stock. You may own appreciated-in-value stock and want to lock in a 15% tax rate on the gain, but you think the stock still has plenty of room to grow. In this situation, consider selling the stock and then repurchasing it. You’ll pay a maximum tax of 15% on long-term gain from the stock you sell. You also will wind up with a higher basis (cost, for tax purposes) in the repurchased stock. 
• Make contributions to Roth IRAs. Roth IRA payouts are tax-free and immune from the threat of higher tax rates, as long as they are made after a five-year period, and on or attaining age 59-½, after death or disability, or for a first-time home purchase. 
• Convert traditional IRAs to Roth IRAs. This will help you avoid a possible hike in tax rates next year. Also, although a 2013 conversion won’t be hit by the 3.8% tax on unearned income, it could trigger that tax on your non-IRA gains, interest, and dividends. Conversions, however, should be approached with caution because they will increase your adjusted gross income [AGI] for 2012. 
• Take required minimum distributions from retirement plans. This is applicable if you have reached age 70-½. Failure to take a required withdrawal can result in a penalty equal to 50% of the amount of the RMD not withdrawn. If you turn age 70-½ this year, you can delay the first required distribution to 2013, but if you do, you will have to take a double distribution in 2013—the amount required for 2012 plus the amount required for 2013. Think twice before doing this. 
• Deduct your medical expenses. This year, unreimbursed medical expenses are deductible to the extent they exceed 7.5% of your AGI, but in 2013, for individuals under age 65, these expenses will be deductible only to the extent they exceed 10% of AGI. 
• Shelter gifts. Make gifts sheltered by the annual gift tax exclusion before the end of the year to save gift and estate taxes. You can give $13,000 in 2012 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. 

Year-End Tax Planning Moves for Business Owners

• Consider stock redemption. If your business is incorporated, consider taking money out of the business through a stock redemption. The buy-back of the stock may yield long-term capital gain or a dividend, depending on a variety of factors. But either way, you’ll be taxed at a maximum rate of only 15% if you act this year. Wait until next year and your long-term gains or dividends may be taxed at a higher rate if reform plans are instituted or the Bush-era tax cuts expire. Contact us for help on executing an effective pre-2013 corporate distribution. • Hire a veteran. If you are thinking of adding to payroll, consider hiring a qualifying veteran before year-end to qualify for a work opportunity tax credit (WOTC). Under current law, the WOTC for qualifying veterans won’t be available for post-2012 hires. The WOTC for hiring veterans ranges from $2,400 to $9,600, depending on a variety of factors (such as the veteran’s period of unemployment and whether he or she has a service-connected disability). 
• Put new business equipment and machinery in service. This will allow you to qualify for the 50% bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation allowance generally won’t be available for property placed in service after 2012. (Certain specialized assets may, however, be placed in service in 2013.) 
• Make expenses qualifying for the business property expensing option. The maximum amount you can expense for a tax year beginning in 2012 is $139,000 of the cost of qualifying property placed in service for that tax year. The $139,000 amount is reduced by which the cost of qualifying property placed in service during 2012 exceeds $560,000 (the investment ceiling). For tax years beginning in 2013, unless Congress makes a change, the expensing limit will be $25,000 and the investment ceiling will be $200,000. 
• Buy a SUV. If you are in the market for a business car, and your taste runs to large, consider buying heavy SUVs (those built on a truck chassis and rated at more than 6,000 pounds gross (loaded) vehicle weight). Due to a combination of favorable depreciation and expensing rules, you may be able to write off most of the cost this year. Next year, the write off rules may not be as generous. 

These considerations are just the beginning to creating a plan that will work for you. Whether you are planning for your family or business, contact us to discuss these options further.

Court Rules Gifts of Limited Partnerships Qualify for Annual Exclusion

At the beginning of June 2012, the Tax Court ruled that gifts of family limited partnership interests qualified for the gift tax annual exclusion, which is currently $13,000 per donee per year.

The Estate of George Wimmer involved a family limited partnership that was funded with marketable securities. Wimmer made gifts of limited partnership interests but the IRS disallowed annual exclusions for the gifts.

As many of you know, when you give a gift to a beneficiary, you are allowed a $13,000 exemption before you have to include that gift as being subject to gift tax. Many people are setting up limited liability companies, family limited partnerships and other vehicles to get discounts of those interests and then gift those interests to a family member. Understandably, when those people make that gift they want to take that $13,000 as a deduction from the value – many times even creating their gift to equal the $13,000.

Seems reasonable, right? The IRS, however, challenges this saying that the gift does not meet the definition of a present interest because there is no immediate benefit that is being given to the beneficiary to the gift. Many times to get the maximum discount on the values the partnership or LLC agreement will severely restrict the aspects of the interest that can be used by the beneficiary – they can’t sell it, they can’t transfer it, or cash may be restricted in terms of distributions.

The IRS successfully argues that as a result, the donor isn’t really giving the beneficiary anything – at least not in a current expectation of value. And because of this, the IRS has made it difficult for a taxpayer to use the $13,000 exemption.

As tax planners, this has been difficult, as many of our clients want that $13,000 exemption. So we’ve worked to find the answer as to what will qualify as a present interest when taxpayers are gifting these limited partnership and LLC interests.

The Wimmer case made it clear that you still have to confer a present value, but where the IRS will argue in this case that they did not qualify, the Court looked at the history and said, wait a second – there are securities in this company and they have been able to distribute interest and dividends every year – which makes this gift a present interest. You either confer a transferable value or you confer an income interest and in this case the beneficiaries were able to demonstrate they were able to have an income interest.

The result turned out favorably for taxpayers as now we can structure a gift that will reasonably expect them to get a $13,000 annual exclusion to every gift they make to their beneficiaries – whoever they are. It gives some certainty to taxpayers who want to make these gifts yet it’s important for people to realize they will still have to give something that is defined by a present interest.

Additionally, this $13,000 exemption is separate from the $5 million gift tax exemption that is expiring this year. And while the $13,000 may pale in comparison, it can be very useful and valuable especially if you are someone who has a lot of beneficiaries.

Estate tax relief is substantial, but temporary

New provisions in the 2010 Tax Relief Act are substantially reducing estate, gift and generation-skipping (GST) taxes through December 31, 2012.

The rundown

The 2010 Tax Relief Act brought the estate tax back to life in 2011 and 2012 and is imposed at the top rate of 35 percent of the estate’s value after the first $5 million per individual.

At these new levels, a vast majority of estates (all but an estimated 3,500 nationwide in 2011) will not be subject to any federal estate tax. A 55 percent tax with a $1 million exemption would have resulted in about 43,540 taxable estates in 2011.  Here’s a bit of history: except for the temporary repeal of the estate tax in 2010, the estate tax rate has not been less than 45 percent since 1931.

The GST tax is an additional tax on gifts and bequests to grandchildren when their parents are still alive. The 2010 Tax Relief Act lowers GST taxes for 2011 and 2012 by increasing the exemption amount from $1 million to $5 million and reducing the rate from 55 percent to 35 percent.

The new law also gave heirs of decedents who died in 2010 a choice of which estate tax rules to apply – 2010’s or 2011’s. This is important to note because although there was no estate tax in 2010, some inherited assets are subject to higher capital gains tax under the 2010 rules, which actually raises the tax burden for some heirs. Under the 2011 rules, heirs will be allowed to inherit assets with a $5 million exemption from both estate and GST and an unlimited step-up in the basis of assets to their current market value.  However, heirs of wealthy decedents may find it more beneficial to elect the 2010 law – limited step-up in the basis of assets and no estate tax.

A new portability feature has also been introduced. This means any exemption that remains unused as of the death of a spouse who dies after Dec. 31, 2010 and before Jan. 1, 2013 is generally available for use by the surviving spouse in addition to his or her own $5 million exemption for taxable transfers made during life or death. Previously, the exemption of the first spouse to die would be lost if not used.

These rules are temporary – ending on Dec. 31, 2012. In 2013, the top rate is slated to be 55 percent with the exemption at $1 million. Although it is possible, according to Trust & Estates, that current law will be changed and the baseline estate and gift tax assumptions outlined in the Obama Administration’s Budget Proposal, will prevail. Should this be the case, a $3.5 million estate tax exclusion amount beginning Jan. 1, 2013 would be applied.

At one point in time the gift and estate tax were unified, sharing a single exemption and were subject to the same rates. But it hasn’t been that way for a while. In 2010, the top gift tax rate was 35 percent and the exemption was $1 million. For gifts made after Dec. 31, 2010, the gift tax and estate tax are reunified and the overall $5 million exemption applies.

What do these changes mean to you?

This means there is a small window of opportunity to take advantage of these tax changes.

The time to assess your current estate plan is now.

We understand that estate and related gift planning is no small consideration and requires complete and thorough analysis. One important step in the estate and gift planning process is to determine the property you are willing to transfer out of your estate. This gift is not limited to cash or marketable securities and often will comprise little of each of these depending upon the composition of assets found in your estate. In addition to identifying the assets eligible for gifting, it is important to structure the transaction so the property or asset is protected from creditors.

It is also important to consider evaluating alternative transfers and their impact on your personal goals and tax savings. Keep in mind that you can take an asset and transfer it out into an entity – this could be an existing already-held company, a portfolio, or real estate.

Valuations play a major role during this process. Because of the $5 million extension, expiring portability and low values, the time to revamp your estate plan is now. When we are talking about transferring assets out of an estate, we are concerned about the value that we place on that asset. Low real estate values and interest rates are conducive to a low valuation. This fares well because we can ultimately transfer more asset for less value. All these factors benefit individuals looking to do estate planning.

For more information on these changes, contact H. Thomas Wagner, Jr., at 561-798-9988 or twagner@templetonco.com.