Estate Planning Bits

Capital expenditures – another potential tax-savings strategy

Many of you will have the opportunity to consider purchasing some sort of capital equipment or machinery that will be used in connection with your employment and/or trade or business. The decision to make such a purchase of equipment before the end of the year invokes the previously mentioned strategies of either manipulation of income and expenses and/or the bunching of deductions.

If you decide to purchase something at the end of the year, you can elect to claim a full year’s worth of depreciation, or in the alternative, elect to simply expense the item all together under IRS Code Section 179. An important consideration that should be taken into account in implementing one of these strategies is whether your income this year is going to be higher than next year and what the net benefit from such an expenditure will be at your highest marginal tax bracket.

By: Bruce M. Fogel, Esquire

Estimated tax payments – requirements and tax-savings strategies

It is important to be aware that some of you may are required to filing quarterly estimated taxes by virtue of the nature of your income and/or the relationship of your ultimate tax liability to your withholding. In those instances it is important to remember to pay your estimated tax payments timely and in an amount sufficient to avoid an unnecessary penalty known as the underpayment of estimated tax penalty.

This topic applies both to Federal and State income tax returns. In fact, those of you who do not face the Alternative Minimum Tax (AMT) should contemplate paying your 4th Quarter Massachusetts estimated tax, otherwise due on January 15th of the year after the tax year you are in, by December 31st of the current tax year, so as to be eligible to claim that payment on your current year’s tax return.

It is often strategic in calculating the amount applicable to your complying with your estimated tax obligations to only pay the minimum amount necessary to make sure that you avoid any penalties, while being able to retain the extra monies for your investment and/or current consumption.

By: Bruce M. Fogel, Esquire

Cash basis taxpayers

By and large most of us are Cash Basis Taxpayers, which means you are entitled to deduct expenses when you pay them and are required to report income when you receive it. One simple mechanism for affecting the timing of the payment of deductions is the use of a charge card. When the charge is put onto your card, it is treated as paid for the purposes of your income tax return even though you might not actually pay the amount itself for up to a month or six weeks later. Thus, if you are trying to bunch deductions into this tax year, you could use your charge card to make that payment before the end of December.

By: Bruce M. Fogel, Esquire

Bunching tax deductions

The strategy of bunching deductions involves consideration of the timing of your various expenditures and/or deductions including real estate and excise taxes, state income taxes, charitable contributions, certain interest payments, medical expenses and the like. The concept of this strategy is that your itemized deductions are typically compared against a Standard Deduction that varies depending upon your marital status and your age.

In some instances you may only be exceeding the otherwise available Standard Deduction by a small amount. In this case, a beneficial strategy might be to postpone some of those deductions until the next tax year and accelerate similar expenses from the next following year. This will bunch all of your deductions into the middle of three years and create an amount that will substantially exceed the otherwise available Standard Deduction. It will give you the best tax result when compared from year to year.

This strategy also has applications in the context of higher earners who will have a reduction in their otherwise available itemized deductions simply by virtue of the level of their income. Specific examples of this include the fact that medical expenses are deductible only to the extent that they exceed a 7.5% threshold of one’s Adjusted Gross Income; and miscellaneous itemized deductions, including the fee that you pay to your tax professional, employee business expenses and the like, are subject to a 2% threshold. It is possible that some taxpayers will find that they are able to benefit from higher amounts of itemized deductions by the applying this strategy of bunching.

By: Bruce M. Fogel, Esquire

Harvesting capital gains and losses

If you take a look at your investments and see that you have realized Capital Gains during the course of the year, it does become prudent to look at your portfolio to determine which items might generate a loss, so that you could either match your gains to your losses and/or exceed your gains by an amount of up to $3,000.00. That is the amount that would be available as a deduction on your income tax return to offset other ordinary income. While there are sound tax reasons for considering this strategy, it is also important to remember that you need to consider the underlying investment wisdom and considerations associated with your having purchased the investment in the first place.

By: Bruce M. Fogel, Esquire

Manipulating income for tax purposes

Are you in a position to affect the flow of income into your possession and the timing of the payment of expenses? This gives rise to your ability to impact the net tax result for the applicable tax year. As a general proposition, you may have the opportunity to accelerate or postpone income to or from a subsequent year concurrently with the ability to do the same thing for expenses. This may reduce the net amount of that taxable income and/or at a minimum, postpone the payment of the tax for a period of at least twelve months from April 15th (in this case) 2007 until 2008.

Think about it, and consult your financial advisor for advice regarding your particular situation.

By: Bruce M. Fogel, Esquire

Update on gifts & taxes

Much has been written about gifts to family, friends, and charities. Many are concerned about the gifts’ taxation and deductibility. Most gifts to charities are tax deductible so long as the person making the gift can itemize his tax return. If he does not itemize, then the gift will probably not be deductible, but gifts should be given for personal purposes first and economic purposes second.

There is no limit to how much you can gift, but the IRS does impose limits on the amount that you can write-off in any one year for charitable purposes, based on your income as well as the type of charity. Private charities have different limitations then public charities, although most people do not exceed their deduction limits in any one year. Any gift that exceeds the amount for deductibility in one year may be carried over into future years, again with limitations.

Gifts to family and friends are not tax deductible. They are merely given to a family member, and even if a family member needs the money and is a “charity case,” the gift is not deductible.

You may gift up to $12,000 to as many different people in any one year as desired without causing a gift tax return to be due. Once your gift or multiple gifts exceed $12,000, then the excess reduces your lifetime exclusion of $1,000,000, although there is no tax due until the annual gifts plus the $1,000,000 threshold have been met or exceeded.

A husband and wife may gift up to $24,000 to as many different individuals as they so desire in any one year, but if one of you makes a gift of $24,000, both of you may be required to file a gift tax return in order to “split” the gift for tax purposes. If each of you were to give $12,000 to each child, then there would not be a requirement to file a gift tax return. For instance, both of you may gift your three children a total of $72,000 without having to file a gift tax return if each of you gives each child $12,000 in the same year. Once this amount has been exceeded, a gift tax return will be due, but again, no tax will be due until $1,000,000 for each of you has been exceeded.

In addition to gifts to children, you may also make a tuition payment for the benefit of a grandchild or possibly pay medical expenses for your grandchild. These amounts are in addition to the $12,000 you could give to your grandchild, or you may establish a so-called 529 education plan for your grandchild. The amount paid for medical expenses or educational expenses must be paid directly to the medical provider or educational institution, or the amount will be construed to be a gift.

Your gift may be also be property, like a car, payment of a credit card bill, value of stock, life insurance, or merely a check. If a $12,000 gift is made as a lump sum, and then during the year there are subsequent gifts for birthdays, anniversaries, Christmas, etc., then the excess of the $12,000 must be reported.

It should be noted that the gift of $12,000 is only a gift for tax purposes and is not construed to be a protected gift for long-term care expenses. The Medicaid Department in each state overseeing the Medicaid program will review all gifts made within five years in order to determine your eligibility for long-term care assistance. This is without respect to the amount of the gift, and even if you keep the gift below $10,000, it is not protected until the five-year window has expired from the date of the gift.

Gifts to children are also non-taxable even if they exceed $12,000, but the income received on the principal of $12,000 will be taxable. Your child receiving the gift should consider the estimated taxes due on this additional income so that there will not be a penalty in April for the additional income earned on this gift in the prior year.

You should be mindful that the gift made is out of your estate totally for estate tax purposes, without consideration to timing, if it is a gift of cash or other assets. There are some gifts of real estate or life insurance that must be gifted more than three years prior to death to be considered as excluded amounts for estate tax purposes. Therefore, if you are ill and have significant assets, gifts of $12,000 to family and friends, and unlimited gifts to charities, may make significant economic sense, even if considered “death bed gifts.”

By: Hyman G. Darling, Esquire

Caring for your aging parent from a distance

Many children no longer live in the same community as their parents. And with career changes moving people across the country more often than in the past, it is important to understand the relationship between a caregiver child and a long-distance parent. When the parent was raising the child, the child was under the control and within shouting distance of the parent. Now, the child may be reversing the role and assuming control of the parent, or at least having to coordinate any necessary care from doctors, living arrangements, social services, etc.

Sometimes your parent may become less functioning on either a physical or mental level, and someone else needs to attend to his or her needs. Normally, you or a sibling will step up and assume the role of caregiver, but if distance prevents that, you may have to turn to other services available for appropriate care for your parent. It is often challenging to attend to your parent’s needs on a daily basis, and that may cause feelings of guilt, anxiety, sadness or even depression. Caregiving sometimes also causes stress among siblings, who may not agree about caregiving arrangements for their parent.

Following are some of the things that you may do when faced with a long distance care giving situation:

• Call your parent often to see if he or she recalls prior conversations, and have others, such as friends or grandchildren, call to determine whether they hear the same story.
• Have neighbors, clergy or other friends of your parent check in regularly to provide an assessment as to the mental or physical capacity of your parent, and what services may be needed.
• Engage a geriatric care manager, social service agency or a local senior service care provider to visit your parent and determine whether services are needed, or if things such as daycare or Meals on Wheels are available and would be beneficial.
• Make sure that a valid Health Proxy is completed that waves rights of privacy. Speak with your parent's physician directly to determine whether or not your parent is able to live independently and safely at home. If not, then move your parent to an assisted living facility or bring in home care.

If you unable to attend to your parent’s needs, it is important to delegate that authority rather than attempt to take on the responsibility alone and not do it well. Each situation is unique, and no two elders need exactly the same care. It is always best to obtain assistance from a professional such as a geriatric care manager or social worker skilled in geriatric services to be sure that your parent is properly cared for at all times, even you believe that you have the situation under control.

By: Hyman G. Darling, Esquire

Year End Tax Planning

So when is the best time to do year end tax planning? Certainly, not after January 1st unless you are planning for the following year! The time to do year end tax planning is right now so that all tax issues are reviewed properly in order to minimize tax liability or potentially gain a larger refund. Some of the options available are as follows:

Sell assets that are at a loss
It is important to consider selling a stock that may have a loss before the end of the year. Note that losses will offset gains, and to the extent that the losses are greater than gains, up to $3,000 may be written off against ordinary income on an annual basis. Losses in excess of that amount may be carried over to future years. If you are married filing separately, the maximum loss write-off amount is $1,500. Nevertheless, if you are holding a stock and you really don’t anticipate that it will go up in value, it should be sold with the loss taken to reduce taxable income.

Standard deduction
You may feel that if you borrow additional funds or make additional charitable contributions you will obtain an additional write-off. This is true only if you can write these expenses off as itemized deductions. The standard deduction for a single person is $5,150, and $10,300 for married couples. You will only be able to itemize deductions if you have amounts in excess of these stated amounts. If you are unsure, or if you had made pledges to a charity, it may make sense to review your taxable income before making the charitable deduction. That way, your contributions can all be grouped to take advantage of the deduction sooner rather than later. Similarly, if you are considering refinancing, and if you are paying points, consider whether you should close on December 31st or January 2nd in order to determine the most beneficial year for you to consider taking the itemized deduction of these points.

Gifts
The amount that may be gifted on an annual basis without the necessity of filing a gift tax return is currently $12,000 per donee per year. To the extent that you have significant highly appreciated assets that may be kept in the family, consider making gifts of these that will reduce the income earned on these gifts, thus saving both estate taxes and income taxes.

Capital gains
Keep in mind that the highest long-term capital gain rate is only 15% for qualifying assets. If one considers the potential taxation of other assets verses paying 15% only on the gain, not on the entire amount, it may be beneficial to pay this nominal amount as opposed to liquidating other assets in order to utilize funds if necessary. For instance, if a person is in a 28% bracket, additional withdrawals from the IRA or 401k plan will cause these amounts to be taxable at least at the 28% rate if not higher. The sale of a capital gain asset that is not in a qualified plan will trigger only a 15% capital gain rate on the gain. That is the amount over the basis.

Retirement contributions
By depositing funds in an IRA or contributing to your 401k through work, which may also be matched by your employer, you are reducing your taxable income, since the income on assets in the IRA or qualified plan are deferred until the withdrawal is made. These assets will continue to increase in value, with all gains, income and appreciation being deferred until a withdrawal is made from the account. If these funds are needed for ongoing expenses, and if you are still working, you should strongly consider depositing funds to an IRA as opposed to merely a CD or savings account. The limit for 2006 is $4,000 for a single person and $8,000 for a couple, or $5,000 for a single person if over 50 and $10,000 if both spouses are over 50 and married. Keep in mind that there are limitations on the contributions that may be made based on income and other specific data.

If you happen to be self-employed, you may wish to consider another type of a retirement plan called a SEP-IRA or a simple IRA. This type of account allows you to make considerable contributions if you have the funds to do so. There is currently a maximum contribution of $44,000 per year, and there are other amounts you may set aside in a separate account for employees if desired. If you have had a good year, and even if you think that the following year may not be as good, you should consider depositing into your SEP-IRA to reduce taxable income. If the following year does not yield the economic results desired or hoped for, there is no requirement to continue funding the account in future years.

As with all tax issues, competent assistance should be obtained from your CPA, who has the knowledge as well as the technical expertise to provide you with the planning before your tax return must be prepared. There is no time like the present to plan, and the old adage is true in that “if you fail to plan, you plan to fail.”

By: Hyman G. Darling, Esquire