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How My Client Saved $500K This Year on His Income Taxes

Posted on: March 8, 2017 at 1:09 am, in

With the Favorable IRS Determination Letter to Prove it

For those that have ever thought that they pay too much income taxes, this might be the most important post they ever read.

Mike was a doctor in Texas. He made a lot of money, but he worked his butt off to earn it; with 20 years of schooling, 3 years in residency, and sometimes working 90-100 hours a week, giving up half to a government that was going to waste it on a bridge to nowhere really irritated him. About 48% of the $1.1-1.4M 1099 income he made went to pay taxes and because of it, he practically had an anxiety attack when he had to write those $100,000+ checks to the IRS every quarter.
He lived in a gorgeous 7,000 square foot house, both him and his wife drove luxury cars on top of his Ferrari, Maserati, and Range Rover fun cars and his kids went to private schools, but he only spent about 150,000-175,000 per year on their lifestyle. That meant that he was paying taxes on about $1-1.2M of income that he didn’t really need.
His colleague, Chris, told Mike about us after helping him with a similar circumstance. After a 30-minute conversation to understand his situation, we presented Mike with a few income tax-saving options such as oil and gas exploration, the creation of a non-profit foundation, the charitable remainder trust, and a customized retirement planning cash balance strategy. He decided that the retirement planning cash balance option made the most sense for him and his family.
Our actuary put together a plan based on his goals. He contributed an average of about $1M to a Super 401k, Pension Cash account, 401h, and COLA retirement accounts. In about 3 years he had accumulated a bit more than $3.2M and saved $1.5M in taxes.
He told me “Rocco, I was either going to give the $500K to the IRS or I was going to give it to my myself into my retirement account – it was a bit of a no brainer.”
“I was practically getting a 100% return on my money immediately because I’m putting about double into my retirement account then I would have been able to. So now, I am not making 4-8% per year on the $500K retirement account that I would have had before, but now I am making 4-8% a year on the entire $1M. It means that the retirement account grows exponentially faster. It would have taken me 5-6 years to accumulate a retirement account of more than $3M before.”
To say that he appreciated our suggestions, was a bit of an understatement. But he was not alone:
Joe in New Jersey who ran a carpet installation business averaged net income of about $500-700K per year. We approached his situation in a similar fashion as Mike and he saved about $250K per year from his tax bill while amassing a $3.5M retirement fund in 5 years.
John on Long Island who had a real estate business netted about $500-600K a year. We were able to save him about $200K a year in taxes.
Ross lived in between New York City and Miami running a Herbalife distributorship and he averaged between 900K-1.1M net income and we used the same strategies to defer him and his wife about $350K in taxes as well.
Finally, Ron in Boston was a dentist as he was able to knock off $100K from the check that he wrote Uncle Sam as well.

Problems and Misconceptions

The problem is that when most people think about retirement planning, they are thinking about SEP account, Standard 401k, Standard IRA, or a Roth IRA.
For those making more than $250K a year, the maximum amount they can contribute with these plans is so tiny (typically a $18-59K contribution only results in tax savings if $9-25K) that it hardly helps them make a dent at all if their tax bill gets into the $200-400K range, so many don’t even bother.
The most frequent response I get when I talk to high earners about making small changes to their planning that save them up to $500,000 a year …is “….Is that legal? I have a CPA and he takes all the deductions possible. How come he hasn’t showed me something like this before?”
And one would think that your CPA would offer the best tax advice to save on taxes, right?
Yes, a CPA may know about the accelerated depreciation benefits of Section 179 or the intricate details of how to expense mileage on your car travel, but most CPA’s don’t know anything about many of these loopholes available to their business and 1099 clients, nor are they incentivized by the $5-10K they’re paid every year to find those special loopholes.
Are they really going to take a risk in making a mistake or the time to learn something new in the middle of tax season on something they are not experts in, in order to save you a few extra dollars. Not likely.
My name is Rocco Beatrice and I hold a CPA, MBA, MST (Master’s Degree in Taxes). I am the Managing Director at Estate Street Partners. In business for more than 30 years, we have an A+ with the BBB, are a member of the National Ethics Association, and have helped more than 4,100 families protect and save more than $4.3 Billion.
While I’ve been quoted on ABC, Fox, or CBS about how business owners and 1099 employees just don’t take advantage of their biggest tax loopholes, I don’t tell you that to impress you. I tell you that because I want you to know that these are not necessarily new ideas, but they work 100% of the time and are part of the IRS tax code… and I have several Favorable Determination Letter’s from the IRS to prove it!
A few years back congress passed the Pension Protection Act and your accountant may not be aware of how these changes can dramatically change your tax bill – most accountants are not.

The Secret

So what is the secret to increasing limits on cash balance retirement plans like this? The secret is that when you get a pension actuary to approve a customized plan, the limits can be as much as 20 times higher than the standard off-the-shelf plans. The IRS relies on the actuary’s number and if they bless the plan, you are golden. Our actuary has created more than 5,000 plans like these over his 46 year career so you can trust you’re getting the best experience in the business.

The Cherry On Top

And the cherry on top is that up to 33% of your contributions to a cash balance plan can be put into the ultimate in retirement accounts very few have even heard of…the 401h.
The 401h is better than the 401k, IRA, Roth IRA – really anything out there. Why? Because they offer a 100% tax-deduction on contributions, it grows capital gains free, and there is no tax on the money when it’s taken out … if used for medical “related” expenses.
And with couples over 55 expected to spend more than $460K on medical related expenses during the remainder of their life span according to AARP, not even including nursing home costs, tax-free “medical expenses” is a huge benefit. The 401h covers a huge variety of items including medical insurance, insurance deductibles, Lasik Eye Surgery, Personal Trainers, Spa Facilities, Usage Fees for Facilities, dentures, dental fees, nursing home care, and on and on and on…there is a list of literally hundreds of things it can be used for.
Believe it or not, the tax year is only weeks away from ending. If these strategies seem intriguing, then there’s not much time left because once the clock turns midnight on December 31, the carriage turns into a pumpkin and we will be forced to start planning for 2017. Since everyone procrastinates, imagine how impossible will be to get anything accomplished in December.

Getthing This Done

So how does one get this done? Just tell your CPA that you are interested these tax strategies. If they aren’t familiar, then we can help them get up to speed quickly. Yes, we’ll work with your CPA. Typically, we can review your situation in a 15-30 minute consultation. We then have our actuaries present a proposal. If it makes sense to you, your accountant with our guidance can help you execute the plan.

The Catch

So what’s the catch? The catch is that while one never pay taxes on the 401h money when used for medical expenses, with the Cash Balance plan or Super 401k accounts one will need to eventually pay taxes when they take the money out. But wait a second. Right now, we are paying 40-60% in taxes on money that we don’t immediately need. We are living on $100-200K per year.
By the time retirement comes around, there is likely going be a much lower tax bracket because you’re only going to take out what is needed to spend and we could avoid the FICA, state tax and Obama tax altogether. You might even live in a lower tax state like Florida or Texas with zero income tax.
Interested in these strategies? First ask your CPA about them. If he is not familiar, or does not want to go it alone, we can help. Contact Rocco Beatrice at rvbeatrice@ultratrust.com or (888) 938-5872.

Taking Advantage of the Gift Exemption in 2012

Posted on: February 21, 2017 at 4:01 am, in

How does the UltraTrust irrevocable trust protect your assets? The importance of creating a solid irrevocable trust versus other irrevocable trusts.

You cringe every time that you give your child the keys to the car because you know they don’t always make the best decisions, so what makes your financial advisor think that you could trust them with $5.12 million dollars? You’ve heard about the Lifetime Gift Tax Exemption (GTE) of $5,120,000 ($10,240,000 for a couple) that turns into a pumpkin at midnight on December 31st, 2012; exemption moves to $1,000,000 in 2013 ($2,000,000 for a couple). You have read articles about giving away your money this year or the gift tax and estate tax will eat up a significant portion that you wanted to be there for your children and grandchildren.
Calculate if you need you need to do planning
Lifetime gift tax exemption from 1982 to 2013.
You would gladly take advantage of this situation, but images of your son in a Ferrari and your daughter living in a 4 bedroom loft in Paris are running through your head. Really, “these tax accountants and attorneys should look up from their spreadsheets once in a while and realize that these are real families out there, not just numbers,” you think to yourself. Of course, transferring all those assets tax free makes sense on paper, but could you trust your child to resist the temptation to spend it while struggling through college and entry level character building positions? Even great kids can get themselves in a world of trouble with that kind of access to money.
Thankfully, there is another option. “You can transfer your assets for the benefit of your children, control how they spend it and still qualify for the Lifetime Gift Tax Exemption,” states Rocco Beatrice, Sr. of Estate Street Partners, LLC, “If there is one thing you should do this year, take advantage of the Lifetime Gift Tax Exemption, because this level of exemption will not come around again, and if it does, by that time $5 million dollars won’t be worth $5 million dollars anymore.”

Transfer Assets with all the Tax Benefits and Asset Protection but Still Keep Control

How can you transfer your assets and still keep control? The UltraTrust irrevocable trust will do just that. Irrevocable sounds a little scary, but irrevocable is where the advantages exist. Think of the UltraTrust irrevocable trust as a vault and the trustee as a teller behind bulletproof glass. You put your assets in the vault and write specific instructions to the teller as to whom, when and for what reason to give those assets out. Here are some examples of how it works. One of your beneficiaries (persons who benefit from the trust) goes to the teller and says that they need money for college. The teller looks at his instructions and sees that he can give money for college, but only directly to the college and cuts a check to the university for the amount of tuition. The same beneficiary returns and says, I need money for a Ferrari. The teller looks at his instructions and sees that he can give money for moderately priced transportation and offers to purchase a Honda Accord owned by the trust for the child’s benefit to use.
This trust can also protect the assets even if things go badly. For example, your daughter comes to the teller and says that she invested in Ostrich’s, that they all passed away because of the unusually long winter and now the bank is foreclosing on the farm wanting $40,000. The teller looks at his instructions, sees a “spendthrift clause” that says he cannot pay debts under duress. He says no to your daughter and when the bank comes knocking on the window, he says no to them too. Here is another example. Your son gets married and several years later, his wife decides she wants to “find herself” and files for divorce. She asks the court to force the teller to give her half of the trust. The teller gives the judge his instructions which say that spouses are entitled to nothing from the vault and the judge rules that the teller not only doesn’t have to give her anything, but can’t give her anything even if he wanted to. You just saved over 2 million dollars that might have gone to the daughter-in-law you never wanted.

The UltraTrust Irrevocable Trust Compared to Other Irrevocable Trusts

Understand how it works now? Now you need to find someone who has experience setting up these irrevocable trusts. “Not every trust is the same. Some trusts say they are irrevocable, but creditors can still get into them. Some leave out spendthrift clauses. If you are going put a million dollars in a trust, you want to make sure it is done right,” urges Mr. Beatrice, “Trusts such as the UltraTrust® irrevocable trust are very sophisticated instruments designed to make sure your assets are safe and used the way you want them to be used. Good trusts have various levels of protection such as spendthrift clauses, trust protectors and precise instructions.”
So, take advantage of the current $5.12M dollar gift tax exemption without worrying about what your kids are going to do with all that money. You get to control your money even if something happens to you. A will doesn’t offer that kind of control and safety. You can only get that kind of bulletproof protection and control with a solid Ultra Trust irrevocable trust. So, instead of thinking you can’t transfer anything without risking disaster, you should be thinking the UltraTrust irrevocable trust will not only give you that tax relief, but will also take care of your children if something should happen to you.

Why am I Audited by the IRS

Posted on: February 21, 2017 at 3:58 am, in

Many business owners do not even consider the possibility of being audited. You should always prepare for this to happen. There are some red flags that could trigger an audit. If you are aware of these and can avoid them, you could also deter an audit.

Why am I audited by the IRS?: 8 Invitations to an IRS Audit

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Due to the current federal deficit, there is a $300 billion gap between the amount that we pay in taxes and the amount the IRS believes we should have paid. To close this gap, the IRS is conducting more audits, trying to find that extra tax money and mistakes that you may have made when filing.
The IRS has posted a job that is titled Internal Revenue Agent (Abusive Transactions Group) The job description for this position states, “Agents of the Abusive Transactions Group will be conducting examinations of individuals, sole proprietorships, small corporations, partnerships and fiduciaries. This group specifically goes after taxpayers who generally have higher incomes than most taxpayers, need to file more tax forms, and generally need to rely more on paid tax preparers.”

You may make the mistake of believing you will not be targeted for an audit because you are not wealthy, do not have an accountant filing your forms or do not operate a cash business. Even though you engage in none of these, you are still a target. In fact, tax return audits doubled from 2000 to 2009. During the same time period, enforcement earnings increased by 50 percent.
Unfortunately, not every taxpayer is treated impartially with regards to the potentiality of an audit. Of businesses that have less than $10 million in assets, one in every hundred or 1% will be audited by the IRS. For those with $10-$50 million in assets, that number jumps to ten out of every hundred businesses or 10% that are audited. When the business has more than $250 million in assets, they have a 1 in 4 chance or 25% of being audited.
There are certain industries that will be targeted more than others. Cash businesses are always on the top of the list. You may be surprised at the target groups of the IRS. There are auditor guidebooks for many industries, including veterinarians, Laundromats, car dealers, ministers and many more. There are specific auditing strategies for the IRS in the Retailer Guide which are aimed at e-commerce businesses, direct sellers, pizza shops, mobile food vendors and gas stations.
It is important for you to be aware of the red flags that could lead to an IRS audit.

1. Math Errors or Calculation Errors Submitted to the IRS

Always double check your numbers. Math errors are the leading cause of IRS audits.

2. Unusually High Itemized Deductions

The IRS can easily determine what your deductions should be. If your itemized deductions are not in line with your income, you will be a target for an audit.

3. Self-Employed / Schedule C Taxpayers

Most small businesses are suspected changing their expenses. Take caution when taking a home office deduction, have shown a loss for several years in a row and prepare your own taxes.

4. Submitting many 1099s to the IRS

The IRS began a three-year initiative in 2010 to crack down on the misclassification of contractors. In hopes of adding money to the depleted Treasury coffers, many businesses are targets for an audit. Never misclassify an employee as a contractor. If you are not certain seek a CPA’s advice for assistance. You will never be sorry you did.

5. Unreported Income to IRS

Always report your earned income. The IRS will know if you are not including income and you have received a 1099. Other sources of income must also be reported, such as alimony.

6. Previously Audited by the IRS

If you owed fines and taxes and have been audited in the past, you are still a target. Most people believe they will not get audited twice, but this is far from the truth.

7. Shareholder of a Company

If you invest in a partnership or a corporation that is being investigated by the IRS, they could come after you personally as well.

8. Disgruntled Former Employees

Former unhappy employees are the biggest informants. Many people will report another to the IRS for payback. However, the IRS is also allowed to pay informants a reward for reporting someone. The informant can actually receive as much as 30% of what the IRS collects from the audit.

IRS Tax Issues & Tax Audits

Posted on: February 21, 2017 at 3:57 am, in

Small business owners have five options available to help settle tax issues that could arise with the IRS. These methods may not all work for every business, but as an owner, you should know that there are options to resolve tax issues.

Protect your assets from lawsuits, divorce, Medicaid.
As a small business owner (SBO), you most likely will not enjoy any audits from the IRS. Things can become intimidating when the business owner is issued a letter for a tax audit or it addresses another tax concern.

5 Outcomes for Tax Issues with the IRS

Amy Lynn Keimasch, the head of Border 7 Studios recently had an experience with the IRS. She states, “We recently received an outstanding balance from the IRS for an amount just under $3,000 for the year of 2008. As a small business and while dealing with our current taxes for 2009, this was an unexpected e-mail. They sent us the notice because the IRS stated they did not receive our K-1’s and sent us back our entire 2008 tax returns. The K-1 was in the Tax Return and so we sent them a letter letting them know and re-sent our tax return. After speaking with some representatives at the IRS, they said that they didn’t receive our letter.”
Her situation was unsettled for a number of months. The IRS could have made various decisions on whether the company would have to pay the $3,000 tax adjustment which the form K-1 would have annuled. The issue was finally resolved. Keimasch explained that is took a few months and a lot of talking to representatives. The case originally had no prospect of resolution and it appeared as though the company would have to pay the $3000. Things changed for Keimasch while speaking to a representative who disgarded the $3000 tax fee since this was the first tax return sent for the company.
By being familiar with some of the possible outcomes from the IRS, you can make having to deal with the agency a little easier. Always keep an open line of communication with the IRS with any tax issues and try and resolve the situation quickly. If there is a disagreement regarding your taxes, the IRS could use some less desirable means to resolve the issue. Solving any tax issue with the IRS will allow you to reach one of the following five conclusions:

1. Resolution Without Headaches with IRS

When the IRS has all of the information they need, they may simply find the result is in the favor of the taxpayer. When locating certain tax issues and then resolving them, the IRS is not infallible. In addition, the IRS handles tens and millions of tax filings and it is not uncommon for a piece of tax filing to be misplaced. If you learn of a tax problem, know that the situation can usually be remedied and the result could possibly be a nice tax refund.

2. IRS Lump Sum Payments

Many tax issues of a business owner will be about how much tax the IRS thinks is owed. Resolving your tax problems could be as simple as paying the tax to the IRS for all taxes owed including the accumulated penalties. Of course, this is not an ideal situation, but it can get rid of the tax problem. To prevent any further penalties or interest charges, if you can afford it then it’s best to just pay your taxes as a lump sum payment.

3. Payment Plans to the IRS

You may have tax charges that you cannot afford as one lump sum. To resolve this, you can create a payment plan or agreement of payment installations over a period of time with the IRS. When requesting this, you will be able to set the date on which you will make the payment and propose a monthly amount. The IRS will either accept or deny the request. When paying on a payment plan, you will also incur interest. When you owe up to $25,000 in taxes, interest and penalties, you will usually qualify for a payment plan. Higher liabilities may also be authorized for payment plans but more paperwork will be involved.

4. What is “Offer in Compromise” with the IRS?

Should the IRS claim you owe money, a settlement may be accepted. One of the settlement agreements is called an “offer in compromise.” This agreement will settle the stipulations of the repayment as well as the amount. You must meet one of the following three criteria for the IRS to agree to this arrangement: (1) the IRS does not believe you can pay the amount in a lump sum or payment plan. This is called the “doubt as to collectability”; (2) the IRS does not believe the determined liability and penalties are accurate, in which case, the IRS will accept an agreement instead of re-assesing tax liabilities and penalties. This is called “doubt as to liability.”; and (3) the offer could be accepted if you successfully defend your case that the imposed tax is not impartial or that paying the tax would create a personal and financial destitution.

5. Appealing to the IRS

You can appeal the final decision of the IRS and receive the Taxpayer Advocate Service which will help you resolve tax issues that cannot be resolved by using normal IRS methods. The Taxpayer Advocate Service is an independent panel part of the IRS that helps resolve tax problems that cannot be resolved when dealing directly with the IRS and also ensures that all individuals have equitable treatment.

What is Estate Tax?

Posted on: February 21, 2017 at 2:44 am, in

How can you save on estate taxes?

Watch the video on 'What is Estate Tax?'
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Now I would like to talk to you about what is an estate and how it relates to the estate tax. An estate is everything that you own on the date of your death. The fair market value of that asset, your stocks, whatever it is worth on the date of your death, or 6 months after, there are some very specific rules that are a little bit complicated, but basically, it is to determine the value, the fair market value, of all of your assets so they become taxable. And the IRS, your lawyers, your accountant, your appraiser, are all haggling with each other about how much everything is worth, so that the government gets a bigger chunk. They’ll say your estate is huge, and you’ll argue that it’s not that much. The more your estate is worth the more the US government gets because of the estate tax.

What is the estate tax?

The estate tax is a very major item. The estate tax is the only voluntary tax within the IRS code. Without proper estate planning, the tax forces sales of your estate at the most inopportune time. You have heard horror stories where people have had to sell their farms in order to pay the IRS their dues. All of this can be avoided with an Ultra Trust®, the rock solid irrevocable trust asset protection plan without going offshore. With the Ultra Trust® you have no assets on the date of your death. In other words, you have repositioned your assets from yourself, in your name, to the Ultra Trust®. You have just protected your assets and estate from the estate tax, from probate and have deferred your capital gains tax too.

The Ultra Trust® irrevocable trust asset protection can save your assets and estate

However, if you have trouble with ownership, you have ownership issues. In other words, you must own things, you must own the land, you must own the building, you must own the car, you must own all your assets. If you have these kinds of issues and can’t separate yourself from the asset, then the UltraTrust® irrevocable trust is not for you. If the Ultratrust® irrevocable trust is not for you, then somebody will have to pay the taxes (the estate taxes); somebody will have to support all these lawyers, accountants, appraisers and so forth, within the legal system. And again, if you have more assets in different states, each state will have the whole process of taxation. Estate planning with the Ultra Trust® irrevocable trust, you can avoid all of these complications.
Continue to read part 9 of 11 on the Ultra Trust® benefits as one of the best irrevocable trust plans for asset protection here: Medicaid Spend Down Rules
Rocco Beatrice, CPA, MST, MBA, Managing Director, Estate Street Partners, LLC.
Mr. Beatrice is an asset protection award winning trust and estate planning expert.
To learn more about irrevocable trusts and senior elder care visit:

Irrevocable Trust: What Are Eligible Assets, The Tax Implications, Probate Court

Posted on: February 21, 2017 at 1:52 am, in

Ultra Trust®: Asset Protection, Reposition Assets, Taxes, Probate

Eligible Assets

Protect your assets from lawsuits, divorce, Medicaid.
I want to talk to you about what kinds of assets can be repositioned from you, to the irrevocable trust. Your personal residence, your vacation spot, your life insurance policy, and by the way, your insurance policy, if there is any incident of ownership in your name, then it’s taxable. The Ultra Trust will own the insurance policy, your automobile, if you have children under the age of 18, you may have read, and I’m sure you have, when your kids get in trouble, you the parent, have to step up to the plate and I’ve been there. I’ve walked around with an open checkbook, if the Ultra Trust owns the motor vehicle, you can reduce the premium, possibly you don’t have to buy a huge liability insurance. It’s an effective device.
The Ultra Trust® can own stocks, bonds, collectibles, art, antiques, boats, planes, anything that is valuable. The Ultra Trust can own investments. The Ultra Trust is the only vehicle that can own Subchapter S stock. There is no other vehicle to own Sub S stock, and for major asset protection, if your Ultra Trust owns limited liability shares, or is a partner of a partnership or family partnership, this is major asset protection. It is the Rolls Royce of asset protection. You have to go outside of the United States to get better. But, in the United States, the Ultra Trust, if it owns a limited liability company, it is a fortress. It is about the best that you can do in the United States.

Tax Benefits

And now I would like to talk to you about the tax benefits of an Ultra Trust. Again, with the example of the leased car. When you lease a car, you don’t own it, but you get to use it and you get to pay the expenses of using it, the gas, the insurance and so forth. If it is a business automobile, all the expenses related to the automobile are tax deductible. For example, if your Ultra Trust owns your personal residence, the interest and the real estate tax is deductible on your 1040. When you sell the property, you can take advantage of the capital gains tax or a $250,000 exclusion. The Ultra Trust, there is absolutely no down side, it is tax neutral.

What’s Probate?

What’s probate? It’s a big fancy word. Basically, it is a redistribution of your wealth. It begins on the date that you die; everything that is in your name has to go to probate. Whether or not you have a will, it goes to probate. Each of the 50 states has different rules, the common theme in all of it is, the court system takes over. If you have a will, the will itself is a member of a public record. If you don’t have a will, the state will determine who gets your assets. Creditors can file a claim, long lost relatives could file a claim, anybody can file a claim. Then the court determines who gets what, and the verification of the claim. All of this, lawyers, accountants, appraisers, court costs, it takes time, it takes money. In some states the probate process can take 2 years and cost 25% of the estate. With the Ultra Trust, or a top-notch irrevocable trust, you don’t own any assets, you don’t have to go through the probate process, and because you don’t own any assets, you don’t have to file an estate tax return. So your loved ones don’t have to worry where the assets are going to go, what the process is, or who they will need to speak with. They can focus on just grieving your death because you protected them with your estate planning ahead of time from the fiasco. Therefore, the probate process is to determine who gets what after you die. So everything in your name goes to probate. They determine who gets the house, who gets this, who gets that, and the other thing. The estate tax is based on how much the wealth is; Before it is distributed, the government would like to get the biggest chunk. You can avoid all this with an Ultra Trust®.
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Gift Tax: What are the Gift Tax Exemptions?

Posted on: February 7, 2017 at 11:48 pm, in

What is the definition of a gift tax? What are the gift tax exemptions and stipulations? How to avoid gift taxes within the family, with tuituion expenses, medical expenses and chartiable organization donations?

Any time you give someone money or property you may be subject to paying a gift tax. The federal government has established guidelines for gift tax exemptions and gift tax rates for all property transferred. These rates and exemptions can change on a yearly basis and it is important to check with the IRS for updated gift tax laws.
Starting in 2006 the IRS determined that gifts under $12,000 per year were exempt from federal gift tax, which is an increase from the $10,000 limit set for years prior. In 2012, the exemption was $13,000 and in 2013 it moved to $14,000. If you give a gift valued over this amount your gift will be taxed at the current gift tax rate unless you utilize your lifetime gift tax exemption. Giving a gift over the annual exemption just mean you do not have to file a gift tax return. But don’t be intimidated by a gift tax return because you can elect your exemption and pay no gift taxes. Federal gift tax laws state that there is a lifetime deduction amount of $5.12 million in 2012 and only $1M in 2013. If you don’t gift the entire amount in the first year, the balance gets grandfathered in. So if in 2012 you only gifted $1M, in 2013 you will have a balance to gift an additional $4.12M. If you donate more that this amount in your lifetime than you will be subject to a fifty-five percent gift tax rate.

What is the Definition of a “Gift”?

In order for the government to consider your donation a “gift” it must meet several requirements. First, your gift must be gratuitous. This means that when you give someone something, such as a car, you do so for less than the fair market value of the item. You cannot exchange or receive goods for the fair market value because then it will be considered a sale by the government and will not be exempt under gift tax laws.
Your gift must also be complete and voluntary. This means that you cannot retain control over the item you are transferring, and you must be giving the gift under your own free will. If you are being court ordered to put aside money for your children this is not considered a gift. Lastly, the gift you make must be tangible. According to current gift tax laws, an exchange of services is not considered a gift.

Stipulations on Gifting for Tax Exemptions

As long as your donation is considered a gift according to the above guidelines, and you keep the value of the gift below the annual limit, you do not have to claim anything on your taxes. Keep in mind that the annual limit is on a per person basis. You are allowed to give both Little Johnnie and Little Susie gifts of up to $12,000 each per calendar year and still be exempt from the federal gift tax.
You should also remember that the IRS counts the gift on the day your check is cashed, not on the day it was written. Therefore you may be liable for paying a gift tax if Little Johnnie didn’t cash his check until the following year, and you proceed to give him more money on Christmas.
Most people will never have to pay a gift tax based upon the federal guidelines previously mentioned. Several gifts are considered exempt from the gift tax assuming they meet particular guidelines. The exemptions, in no particular order, are as follows:
  1. Gifts made to pay for tuition and/or medical expenses
  2. Gifts to your spouse
  3. Gifts to a charitable organization

Tuition Expenses Exempt from the Gift Tax

Both tuition and medical expenses must be qualified transfers to meet exemption guidelines. Tuition payments to assist another individual must be made directly to the qualified institution, not the individual. Also, the money must be directed towards paying down the cost of attending the school and not put towards books and supplies.

Medical Expenses Exempt

Medical payments are similar. In order to qualify for a gift tax exemption the money must be paid directly to the medical facility and not to the individual who received services as reimbursement. The money gifted for medical expenses cannot be covered, and therefore reimbursed, by insurance. Failure to adhere to these guidelines will nullify your money as a “gift” since you will be receiving reimbursement from the insurance company equal to the money you paid to the medical facility.

Avoiding Gift Tax Within the Family (Between Spouses and Children)

Gifts between spouses can be unlimited. Additionally, spouses can pool their annual exclusion limits to give a larger gift to an individual or group of individuals. For example, a married couple with three children will be allowed to gift $39,000 from each individual (i.e. $13,000 per child x 3 children), for a total of $78,000 per year to the children. Now, instead of $13,000 per year, each child can receive $26,000 in gifts and both parents will still not be subject to paying any gift taxes in 2012.

Charitable Organizations

Gifts made to qualified charitable organizations may also be unlimited. Qualified organizations include foundations operated for the following reasons: prevention of cruelty to animals or children; educational purposes; scientific; literary; charitable; or religious. When filing your income tax return you will have a separate section for listing items which qualify for a charitable gift tax deduction.
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Inheritance Tax vs. Estate Tax, Inheritance Tax Exemptions

Posted on: February 7, 2017 at 11:47 pm, in

About inheritance tax: discuss the differences of an inheritance tax and estate tax. What are the inheritance tax exemptions? How to protect yourself from inheritance tax by creating a trust or gifting with a charitable gift annuity.

What is the Inheritance Tax Rate?

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There is no such thing as a federal inheritance tax rate. The inheritance tax is imposed on a state level, and not all states have one. For example, Texas does not impose an inheritance tax, and some states refer to an estate tax and an inheritance tax as the same thing even though they are technically very different.
Other terms you may hear used in place of inheritance tax are “death duty” in the United Kingdom, “estate duty” in Hong Kong, or “stamp duty” in Bermuda. Some places such as Australia and the British Virgin Islands do not currently have an inheritance tax nor have they ever had one.

Difference of an Estate tax and Inheritance Tax

The difference between the estate tax and the inheritance tax lies with who is actually responsible for paying the taxes owed.

Who Pays the Estate Tax?

With an estate tax it is the responsibility of the Administrator, or Executor, of the estate to pay the taxes. The taxes are calculated based on the entire value of the estate, and if the Administrator cannot pay the taxes out of the estate’s value then it becomes the responsibility of the heirs to pay the taxes. The federal government will impose this tax according to established guidelines which include the value of the estate.

Who Pays the Inheritance Tax?

An inheritance tax is the individual responsibility of each heir. Determining the financial responsibility of the heirs for the inheritance tax is based on several key factors.

What is the Inheritance Tax Rate? It Depends…

The inheritance tax rate varies depending on the relationship of the heir to the deceased (decedent). Each state may determine this rate, and if the heir is a distant relative or friend the inheritance tax rate will be much higher than if the heir is a spouse or child of the decedent.
A child may be entitled to an exemption of the first $3000 of their inheritance and be responsible for only a 7.5% tax on inheritance valued over $100,000. In contrast, a friend of the decedent may be taxed as much as thirty percent and only receive a tax exemption on the first hundred dollars.
Another consideration state government will make when determining the inheritance tax rate will be the fair market value of the property being transferred. Fair market value is not what it would cost to replace the property, but what you would be able to sell the property for if needed.

What are the Inheritance Tax Exemptions?

Your heirs may receive tax exemptions for taxes that have already been paid on the property and it is important to have all documents in a readily accessible location to prove that little or no debt is owed upon your death. If any of the inheritance has been designated for charitable organizations your heirs will not be held accountable for paying an inheritance tax on this portion of the estate.

Fraudulent Income Tax Returns Rise to Avoid Inheritance Tax

Opponents of the inheritance tax feel that in addition to an estate tax, the inheritance tax is harmful to families who may need the money immediately and cannot afford to pay harsh taxes imposed on them during an already emotionally difficult time. Critics also feel that taxes such as these encourage individuals to file fraudulent income tax returns by placing their money into annuities both on and offshore, and to establish trusts for their heirs to remove large amounts of property from their listed estate.
Call Estate Street Partners if you wish to know more about how to reduce your estate tax, eliminate your inheritance tax, possibly eliminate some of your income tax and learn how to strategize your money and assets to be in compliance with the IRS and federal and state-specific regulations. Estate planning can be complex and taking the route of doing it yourself can lead to severe financial penalties.

Seek Knowledgeable and Professional Estate Planning Advice from Estate Street Partners

Inheritance tax information can be obtained by seeking the services of a knowledgeable estate planner. Since each state differs in the amount taxed to heirs, an estate planner will be able to provide accurate information involving up-to-date tax laws and ways to protect assets.
One of the more common means of protecting inheritance from taxes is to place money into trusts and elect a trustee to transfer the property to your beneficiaries upon your death. Once money has been allocated into a trust it is removed from you listed estate and upon your death it will be distributed to your heirs free from estate and inheritance taxes.
Some people also choose to give their money in the form of gifts to organizations and establish a charitable gift annuity. Receiving money from an annuity protects your heirs from paying any inheritance tax, although they may still be responsible for an early withdrawal penalty from the IRS. Failure to consult with an advisor could result in unnecessarily high taxes for your heirs. Again please seek professional advice on these important financial matters.
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Real Estate Tax: Tax Maps, Real Estate Tax Exemptions, Estate Tax Lien

Posted on: February 7, 2017 at 11:43 pm, in

About real estate tax. Role of property assessor and real estate tax maps. What is the Homestead real estate tax exemption? What are the real estate tax penalties? Discuss estate tax lien and affidavit to remove the tax.

The history of real estate tax and property tax can be traced back to Colonial America. Land was taxed on a per-acre basis until the nineteenth century when uniformity clauses were adopted to help protect settlers. The uniformity clauses now require that property be taxed according to its value.
Illinois was the first state to adopt this clause, and some states such as Tennessee adopted additional provisions that exempted products produced from the soil and up to one thousand dollars of personal property. Elected officials would assess the market value of the property, collect taxes due, and turn the money over to the proper government (school districts, special districts for fire prevention, irrigation, etc.).
It wasn’t until 1907 that the National Tax Association was founded, and declared that trained professionals perform all assessments of real estate for tax purposes. This regulation curtailed favoritism and promoted equality.

Property Assessor and Real Estate Tax Maps

In the twenty-first century, state governments depend more on income and sales taxes than on property taxes for funding. Local governments still rely on a small percentage of property taxes to generate revenue. The tax assessment is based on the value of the building and the value of the land it occupies. The assessor maintains accurate “tax maps” which identify individual properties to ensure they are not taxed more than once.
Any improvements made to the structure or land will be noted on these maps. Methods used to calculate value of property have changed since colonial times. Assessors may now choose between the income approach, market value, or replacement cost. All values determined by the assessor are subject to a “second opinion” via administrative or judicial review. Once the value of the property is agreed upon, the assessor will multiply this value by the established tax rate to calculate how much you owe in taxes.

Homestead Real Estate Tax Exemption

Some states have passed laws to provide homestead exemptions to put limitations on how high property taxes may be raised. This exemption is only available to residents of these states in which the property in question is the primary residence. You cannot use a rental property or second home in a different state as your “primary residence” to receive this tax break. Once the property is sold, the exemption is removed and property taxes may rise for the new owner based on the purchase price of the home.

Delinquent Real Estate Tax Penalties (April 1st)

Failure to pay your taxes by April 1st each year will result in a delinquent real estate tax. Penalties for delinquent taxes may vary by state. In some states you will be charged a ten percent penalty on all unpaid taxes and will be charged an additional administrative processing fee.
If after the beginning of June you still have not paid your delinquent real estate taxes, your property will become tax defaulted. At this time you will begin to accrue additional penalties for each month that your taxes remain unpaid. If you continue to refuse paying delinquent taxes, the Tax Collector may appeal to the Court to seize and sell your property.

Lien on Property and Tax Certificates

A lien may be placed on the house through the purchase of a tax certificate, and the owner can only remove the lien by paying the required taxes due. After a period of two years, the holder of the tax certificate may request a tax deed application. This application allows the certificate holder to sell your property at a public auction. The only way to prevent losing your property is to pay all delinquent taxes and applicable fees that have accumulated.

Estate Tax Lien and Affidavit to Remove Tax

Some states such as Massachusetts will put an estate tax lien on property after the death of the owner, or anyone else who may have had a legal interest in the property (i.e. spouse). This usually occurs in the absence of probate and when the gross estate value does not exceed $1.5 million. Estates worth more than this limit will be subjected to federal estate tax filing.
Barring the above exceptions, an estate tax lien may be removed by filing an Affidavit. The Affidavit may be filed by an Executor or anyone in possession of the deceased’s property (i.e. spouse). An Affidavit must contain key information such as:
  1. Full name and date of death for the deceased
  2. Documentation that the estate does not require federal estate state filing
  3. The identity and title of the person signing the Affidavit and the form must be notarized
  4. The death certificate
  5. Any applicable recording fees for the Affidavit and death certificate
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Tax Sheltered Annuity, TSA, 403b: What is it?

Posted on: February 7, 2017 at 11:41 pm, in

Tax-Sheltered Annuity (TSA), also known as a 403(b), is an alternative retirement savings plan. Not everyone can participate in this plan, and it is restricted to those who are employed by educational, cultural, or non-profit organizations such as religious groups (also known as 501 (c)(3) organizations).

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Contributions to a Tax-Sheltered Annuity are done through a payroll deduction and are therefore taken out pre-tax. This feature of a Tax-Sheltered Annuity is very beneficial since your contributions are not seen as income and you may pay less federal tax at the end of the year. A Tax-Sheltered Annuity is also tax deferred during the accumulation phase. This means you will not pay any taxes on the amount you contribute or the interest earned until you begin the withdrawal phase.
If your plan allows, you may elect to contribute post-tax money to your Tax-Sheltered Annuity by using your paycheck. Any money you contribute post-tax must be declared on your income tax return and is not subject to the tax-deferred exemption. When selecting a Tax-Sheltered Annuity you may choose between fixed and variable, or a combination of the two.

It is possible to take loans from your Tax-Sheltered Annuity, but these loans are limited to the lesser of $50,000 or fifty percent of your vested amount. Another feature of a Tax-Sheltered Annuity is the ability to rollover funds into other investment options. For example, it is possible to use your 403(b) to fund your 401(k), Individual Retirement Account (IRA), or another 403(b).
It is important to check any contribution limits or rules established by the new plan administrator before committing to a rollover. If you die before receiving payments, your beneficiaries are entitled to similar options using your Tax-Sheltered Annuity. A spouse is entitled to all of the aforementioned options, while a non-spouse is prohibited from using your annuity money to fund an IRA. A non-spouse beneficiary is only able to transfer funds from one 403(b) to another.

Contribution Limits of a Tax-Sheltered Annuity

Unlike a regular deferred annuity, there are maximum contribution limits determined by the Internal Revenue Service (IRS) for each year. Beginning in 2006 the maximum personal (elective) contribution limit was increased to $15,000 per year, up from $14,000 in 2005. Also in 2006, your employer (non-elective) may choose to contribute to your Tax-Sheltered Annuity with a combined maximum contribution limit of $ 44,000.
You may be able to contribute up to $5000 more per year if you are age 50 or older and an additional $3000 per year if you have been with the same company for more than fifteen years. Failure to comply with these contribution limits can result in additional taxes and penalties for both the employee and contributing employer.

Tax Penalties of a Tax-Sheltered Annuity and Age Regulations

As with the deferred annuity, a Tax-Sheltered Annuity is used to supplement retirement income. If you decide to withdraw money prior to age 59 ½ you will be subject to a ten percent penalty by the IRS in addition to the standard income tax. There are a few exceptions to paying this penalty, although specific criteria must be met.
If you leave the service, encounter extreme and immediate financial hardship, or become disabled you can avoid paying the ten percent penalty. Although the ten percent penalty is not enforced in these cases, you are still responsible for paying income tax on the money you withdraw. You must begin taking minimum payments from your Tax-Sheltered Annuity in either the same year as your retire or by age 70 ½, whichever comes first.
Failure to do so will result in a fifty percent excise tax on the money you should be receiving. The only exception to this age restriction pertains to all contributions made to a Tax-Sheltered Annuity prior to January 1, 1987. Anyone who paid into a Tax-Sheltered Annuity before this date is allowed to defer withdrawal until age 75. If you die before the withdrawal period your beneficiaries may receive payouts from your Tax-Sheltered Annuity without paying the ten percent penalty, but they are still responsible for the income taxes.
Regulations on tax compliance change every few years to accommodate inflation rates, and it is important to familiarize yourself with these changes to avoid penalties from the IRS. Helpful resources including articles, worksheets, and an updated FAQ page can be located at www.irs.gov: Tax-Sheltered Annuity or call Estate Street Partners toll-free at 888-938-5872.
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