Understanding Gift Taxes

Understanding the Gift Giving Tax

Excess gift giving could cause a tax surprise

In an effort to keep taxpayers from transferring wealth from one generation to the next tax-free, there are specific limits to the amount of gifts one may give to any one person each year. Amounts in excess of this limit are subject to a potential gift tax and require filing an annual gift tax form. For most of us, this is not something we need to worry about, but if handled incorrectly it can create quite a surprise when the tax bill is due.

The Gift Giving Rule:

You may give up to $13,000 to any individual (donee) within the calendar year 2012 and avoid any gift tax filing requirements. If married you and your spouse may transfer up to $26,000 per donee. If you provide a gift to your spouse who is not a U.S. citizen, the annual exclusion amount is $139,000.

Gift Tax Reporting:

Amounts given in excess of this annual amount are subject to potential gift tax. The amount of tax is currently unified with estate taxes with a maximum rate of 35%. The donor of the gift is responsible for paying any associated tax. When you exceed the annual gift giving amount, this triggers the need to file a gift tax form with your individual tax return. It does not necessarily trigger a taxable event in the year the gift is given. The excess gift amounts are netted against your lifetime unified credit. If your lifetime gifts do not exceed the credit you may not have additional taxes owed.

When might a gift tax problem occur:

• Gifts for college. Grandparents like to help out with the tremendous expense of funding a college degree and amounts donated can quickly surpass the annual gift threshold. To avoid the gift tax problem consider making payments directly to the college as this form of payment can be excluded from the annual gift giving limit AS LONG AS the funds are not used to pay for books, room or board on behalf of the donee.
• Be careful with 529 plan funding. If your children are anticipating going to college,  many consider creating a 529 college savings plan. You may then fund the savings plan (or have someone else fund it) on behalf of your child. However, remember the deposits into 529 accounts are considered a gift and are subject to the annual gift giving limits.
• Gifts to cover medical expenses. It is very easy to mount up a large medical bill. While you may want to step in and help out by giving money to the individual with the medical bills, you may be creating a gift tax obligation. Better: make payments directly to health care providers for medical services on behalf of the patient to avoid gift tax exposure.
• Gifts to help make a down payment. It is becoming more common to have family members help their kids with the down payment on a first home. This can be tricky. Lenders will look for recent deposits in bank accounts and ask the prospective buyers to substantiate the source of funds. Providing the funds as a loan may disqualify the couple for taking on the mortgage. Even worse, if the purchasing couple claims the funds are a gift, this action may create a gift tax obligation to the person providing the funds. Care must be taken to provide the correct audit trail to prove the gift does not exceed the annual amounts.
• Gift of real estate.  If you give property to a relative for little or nothing in return, this generates the need to file a gift tax form as well.  Recent IRS studies suggest over 50% of taxpayers fail to declare property transfers as gifts.

Other things to consider:

• You may provide gifts to or receive gifts from ANYONE. There are no limits or restrictions on who you may give a gift to or who may provide a gift to you. Creative gift giving can be a useful tool to help someone in need without creating a tax obligation.
• Do not give a lump sum gift for the maximum amount. If you provide a gift for the maximum allowable to an individual, you may not provide any other gifts to this person during the year or the event would be deemed excess gift giving and require filing a gift tax form. For example, a grandparent gives $13,000 to her granddaughter for college. She also pays for a vacation trip to send the family to Disney World and provides a wonderful birthday gift. Technically, the additional gifts are in excess of the annual limit and would present a gift tax event.

What you need to know:

Understanding when to file the gift tax form each year is the most important thing to remember.  The IRS is paying attention to the massive non-compliance in the timely filing of the annual gift tax form.  So much so, that it is actively researching property transfers in key states to ensure the gift tax filing is taking place.

Paying Taxes on Stock Gains in 2012

Prospective changes in the capital gains tax rate after 2012 may motivate investors to sell holdings that have appreciated. Capital gains rates are set to go up 33% in 2013, and a proactive capital gains strategy may save you some money.

There is a generally accepted principal that is regarded as standard advice in taxation, “Postpone paying taxes for as long as possible.” On offshoot of this principal is holding onto stocks and letting them appreciate to postpone payment of capital gains taxes.

Consider this, speeding up the payment of capital gains to the government this year. Why? Bush Tax cuts expire, and there may be higher capital gains rates down the road.

The Bush tax cuts are set to expire at the end of this year. The current rate on capital gains is 15%. The rate may rise to 20% in 2013, barring an extension. Most people in the industry do not expect a capital-gains tax cut any time in the near future.

The rush to pay taxes is not right for everyone. This generally applies to investors who have held investments longer than one year.

Older investors can avoid taxes by passing these stocks to their heirs with a stepped up tax free basis. Also, investors with strict investment methodologies should not make trades based on taxes.

Some investors are considering their long-time holdings and selling some of them— recognizing the gains — and paying taxes on stock gains at the current rate, rather than the future one.

This plan is not right for everyone; however there are circumstances when investors have made significant gains in a stock. They want to remain long term investors, and they can guarantee one of the lowest gains rate they are probably going to get.

Tax Bill

Typical long term investor buys Ebay Inc. 10 years ago and has a gain of more than 100%, rushing the tax bill could save money.

For example you put $50,000 into Ebay 10 years ago, and it’s worth $105,000 today.

Sell now —gain of $55,000 — makes a tax bill of $8,250 at today’s 15% capital-gains tax rate.

Say the capital gains rate becomes 20%, the tax bill on that same gain would be $11,000, a difference of $2,750.

An investor can decrease their tax bill 33% on certain items. This is something to mull over as you analyze and work on your portfolio. There is still a lot of time left this year; run the numbers and make the calculations. The 15% capital gains rate may not be extended, creating value in accelerating gains this year. The greater the tax increase, the greater the savings by doing it this year.

The preceding information is not intended to replace the services of a professional. Consult a CPA or an Attorney who can better understand your particular circumstances. Please contact us.

Tax Prep Deerfield Beach

The Choice Between A Regular §401(K) Plan Or A Roth §401(K)

When we meet clients to review their tax information, there often is a frequent question. “Which retirement option is better, the Roth option of my employer’s retirement plan or the traditional option?”

Roth accounts started in 1998.  The key concept of a Roth accounts is sacrifice a current year deduction for a guarantee the distributions taken when you retire are tax free.

From 1998 until 2005, Roth accounts were only available in the form of an IRA account. A lot of middle-income and high-income taxpayers could not contribute to a Roth IRA, because their incomes exceeded the relatively modest limit based on their filing status.  (The Roth IRA limit for 2012 is $125k for single individuals and $183k for married couples.)

Our elected representatives liked the public giving up a current year tax breaks by opting to go with a Roth IRA instead of to a Traditional IRA. In 2005, politicians decided to expand this opportunity to employer plans.

What’s the difference between the Traditional and Roth versions? Traditional employer plans permit the salary deferrals to reduce your taxable income and grow tax deferred.  Income taxes are paid on distributions taken from these accounts when you retire.

Let’s say you earn $200,000, and you max out your salary deferrals for $17,000 during the year.  In this case, your W-2 will report taxable wages of $183k in Box 1.  Assuming you are in the 33% federal tax bracket, the $17k you contribute saves you $6,667 in federal income taxes.  That’s a pretty good tax break.

What happens if you instead decide defer into a Roth version? When you contribute money to a Roth account, you forego a current year tax-break.  Your W-2, therefore, will report the full $200k as taxable wages in Box 1, instead of $183k that would be reported had you gone with the Traditional version.  The benefit of giving up this tax break is the tax-free treatment of the compounded growth on the $17k of salary deferrals. In other words, you won’t owe any federal income taxes on the distributions taken from this account when you retire.

The Max Benefit Factor:

From a general tax perspective, the Roth IRA is the better choice if your tax rate during retirement will be the same or higher than your current tax rate, as the Roth IRA allows you to pay the taxes now, and receive tax-free distributions when your income tax rate is higher. If your tax rate will be lower during retirement, then the traditional IRA may be the better choice if you are eligible to receive a tax deduction now when your tax rate is higher.

Since the savings you accumulate in traditional employer plans will eventually be taxed at ordinary income rates when you withdrawal, high tax rates during retirement could dramatically reduce the after-tax value of those savings.

As a general rule the Roth accounts are better for savers in their 20s and 30s. This is when the option of paying taxes on your contribution now is generally a better deal than getting a tax break today. When people are in a lower tax bracket and should expect to be in the same or higher tax bracket when  they retire.

The core to financial planning is saving. Saving will start to make you a Money Hero. On the way to becoming a hero there will be others to like us, to help improve your financial well-being.

Tax Prep Deerfield Beach

Residential Energy Tax Credits for 2012

Summer’s here and if you’ve been thinking about “going green” and making your home more energy efficient, then there’s no time like the present, especially if you take advantage of residential energy tax credits still available to homeowners.

The Residential Energy Efficient Property Credit is available to individual taxpayers to help pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and residential wind turbines. Qualifying equipment must have been installed on or in connection with your home located in the United States.

Geothermal pumps, solar energy systems, and residential wind turbines can be installed in both principal residences and second homes (existing homes and new construction), but not rentals. Fuel cell property qualifies only when it is installed in your principal residence (new construction or existing home). Rentals and second homes do not qualify.

The tax credit is 30% of the cost of the qualified property, with no cap on the amount of credit available, except for fuel cell property.

Generally, labor costs can be included when figuring the credit. Any unused portions of this credit can be carried forward. Not all energy-efficient improvements qualify so be sure you have the manufacturer’s tax credit certification statement, which can usually be found on the manufacturer’s website or with the product packaging.

What’s Included in the Tax Credit?

• Geothermal Heat Pumps. Must meet the requirements of the ENERGY STAR program that are in effect at the time of the expenditure.
• Small Residential Wind Turbines. Must have a nameplate capacity of no more than 100 kilowatts (kW).
• Solar Water Heaters. At least half of the energy generated by the “qualifying property” must come from the sun. The system must be certified by the Solar Rating and Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed. The credit is not available for expenses for swimming pools or hot tubs. The water must be used in the dwelling. Photovoltaic systems must provide electricity for the residence, and must meet applicable fire and electrical code requirement.
• Solar Panels (Photovoltaic Systems). Photovoltaic systems must provide electricity for the residence, and must meet applicable fire and electrical code requirement.
• Fuel Cell (Residential Fuel Cell and Microturbine System.) Efficiency of at least 30% and must have a capacity of at least 0.5 kW.

Tax Prep