What to do if you Receive an IRS Notice

Posted by Thomas J. Bogar on May 10, 2010  |  No Comments

Now that most of us have filed our income tax returns for 2009, we can put last year’s taxes behind us . . .  or can we? Each year the IRS sends millions of letters and notices to taxpayers.  If you happen to have received one of these notices, don’t panic.  For starters, many of the issues addressed in the letters can be dealt through the mail without ever speaking with an IRS agent or visiting an IRS office.   

There are many reasons the IRS sends out notices.  For instance, they may need additional information, request payment of the taxes, or tell you there have been changes to your account.  Each notice will provide instructions on what you need to do to satisfy the IRS request.  You should first keep a copy of your tax return and any correspondence received from the IRS before proceeding either through the mail or by phone call. 

If at the end of the day after providing the IRS with the requested documentation and you receive a correction notice, make sure you compare that correction with your return.  Should you agree with the changes you do not need to do anything more (unless payment is requested).  But if you disagree, you should promptly send a written explanation of why you disagree and include any documents and information you want the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice.

At some point you may need to seek the advice of a qualified tax professional. 

Homebuyer Credit is about to Expire

Posted by Thomas J. Bogar on April 28, 2010  |  No Comments

The deadline for the $8,000 first-time and $6,500 long-time homebuyer credit expires this month.  Under the Worker, Homeownership and Business Assistance Act of 2009, signed into law on Nov. 6, 2009, an eligible taxpayer must buy, or enter into a binding Agreement of Sale on a principal residence on or before April 30, 2010. Closing on the sale must occur by June 30, 2010.

For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.  For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.  The credit is fully refundable meaning it will either be paid to eligible taxpayers although they may not owe any taxes or if the credit is more than the taxes they owe. 

To be first-time homebuyer, you and your spouse – if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase. For the long-time resident homebuyer, you and your spouse – if you are married – must have lived in the same principal residence for any consecutive five-year period during the eight-year period that ended on the date the new home is purchased.

To be eligible for the credit, adjusted gross income for individual taxpayers must have less than $125,000 and for married couples filing jointly must less than $225,000.

Specific documentation and reporting is required before obtaining either credit.  You should see your tax planner for the details.

MEDICARE ALERT!

Posted by Thomas J. Bogar on January 14, 2010  |  No Comments

In today’s economy, I am finding more clients asking advice and assistance for an elder parent or relative about to enter a nursing home.  The application and qualification process for Medicaid can be overwhelming, and the consequences for a poorly executed plan can be devastating and may be as serious as Federal criminal prosecution. Because of the resource restrictions on Medicaid eligibility, the transfer of assets by gift to a relative was once a common means for preserving assets from the costs of care in a nursing home. Since the enactment of the Deficit Reduction Act on February 8, 2006 (“DRA”), transferring assets for less than value in order to qualify for Medicaid has now become much riskier.  In fact, the DRA increased the look-back period from 3 to 5 years and the penalty period has been changed as well.  Poor planning without knowing all of the risks involved could jeopardize any chances for Medicaid leaving the senior with no ability to pay for nursing home care.  There are exceptions to these rules, however, but they are complex.  Anyone considering placing a spouse or a relative into a nursing home should consult with an experienced elder law attorney.

The Upside to the Down Economy

Posted by Thomas J. Bogar on December 16, 2009  |  No Comments

Take the following advice very seriously.  No better time than the present for estate planning has existed in decades.  Low interest rates, depreciated assets, and estate tax rates and legislation all create an ideal planning opportunity.  However, you had better act now while interest rates remain low and before Congress enacts proposed changes to the estate and gift tax laws next year which will eliminate many planning incentives.

 When things are down, an optimist may tell you to look at things as if the glass is half-full rather than half-empty.  For estate planning, the glass is half-full when considering the planning opportunities that now exist because of  low interest rates, depreciated asset values and current tax rates.  But these opportunities will not be around long because Congress is poised to eliminate many of the tax savings benefits next year. 

 Interest rates for estate and gift tax purposes are at their lowest levels in decades.  For several wealth preservation and succession planning devices designed to pass appreciated assets from an estate at discounted rates, lower interest rates mean more of the asset can pass from the estate at a lower estate tax rate. 

 In addition, the Treasury Department has published a “Green Book” which includes a general explanation of the Administration’s 2010 revenue proposals.  Included are plans to limit IRC 2704 valuation discounts which may consequently effect gift-planning, specifically planning that involves family limited partnerships and business succession planning.  Also included are plans to limit to ten years the term for a Grantor Retained Annuity Trust (GRAT-essentially it is a trust intended to pass portion of appreciating assets, at discounted rates, from a taxable estate over a term of the grantor’s years, while the grantor retains the benefit of the assets during the term of the trust).

 Clients should consider taking advantage of the current market before Congress acts and before interest rates rise. Plans should include shorter term transfers of wealth, particularly those that may pass into a trust for the benefit of the grantor, like a GRAT. 

For more detail and how the proposed legislation may effect you, speak with a qualified estate planning attorney.

CONGRESSIONAL ALERT: HOUSE EXTENDS FEDERAL ESTATE TAX FOR 2010

Posted by Thomas J. Bogar on December 4, 2009  |  No Comments

Yesterday, by a vote of 225 to 200, the House of Representatives voted to permanently extend the Federal estate tax exemption.  Under the current rules, the first $3.5 million of an estate, or $7 million for married couples, is exempt from Federal estate taxes. Net estates over the exemption are subject to 45% tax.  However, the bill still needs to pass the Senate.  If it does not pass the Senate, the estate tax will lapse for 2010 with no taxes charged against estates of decedents dying in 2010, but then return again in 2011 at 55% rates for estates over $1 million.

Uncertain on the future of the estate tax, clients and their planners are left in a particularly delicate position and will either need to plan accordingly for an evolving tax code, or proactively engage clients, at additional cost, to periodically review and revise estate planning documents each time Congress makes changes.

 Stand fast.  This is a moving target.  I will provide updates as they become available.

ESTATE PLANNING SHOULD INCLUDE PLANNING FOR STATE DEATH TAXES

Posted by Thomas J. Bogar on November 20, 2009  |  No Comments

Next year, the federal estate tax exemption is supposed to go away, meaning that no federal estate tax will be imposed on any estates for decedents dying in 2010.  However, there is a House bill that proposes keeping the current exemption of $3.5 million in place for 2010.   This means that no federal estate taxes will be imposed on estates with net value than $3.5 million.  Fortunately, at these levels, about 5,500 estates are taxed at the federal level each year.  Unfortunately, estates less than $3.5 million will still be taxed at the state level.  Considering the current economic crisis, many states have implemented their own death taxes capturing lost revenue through the imposition of an estate tax.  Delaware just added an estate tax this past year.  The estate tax is in addition to an inheritance tax imposed on the net estate.  By contrast, the inheritance tax is based on the particular beneficiary’s share of an estate.  Some states impose both an estate and inheritance tax (i.e., New Jersey on estates greater than $675,000), while others (like Pennsylvania) impose one of the two.  While other states, like Florida, do not impose any death taxes.  To make matters worse, Congress is considering eliminating the state death tax deduction which would affect estates subject to the federal rate.

 So how should couples concerned for state death taxes plan their estates?  One suggestion for couples whose estates are not subject to federal estate taxes but are subject to state estate taxes: consider bypass trusts as part of their estate plans.  On the death of the first spouse, assets up to the state (and/or federal) estate exemption would pass into the bypass trust which can be drawn on by the surviving spouse.  When the survivor dies, the assets in the bypass trust will pass to remainder beneficiaries free from estate taxes.

REVIEW YOUR WILLS AND ESTATE PLANS!

Posted by Thomas J. Bogar on October 28, 2009  |  No Comments

Next year the federal estate tax is supposed to lapse and then return again in 2011.  Beltway insiders doubt Congress will allow that to happen and expect that before the year’s end, Congress will extend the current system through next year.  Currently, the federal estate tax exemption is $3.5 million per individual (and $7 million per couple). 

Before the Bush tax cuts of 2001, the federal estate tax exemption was $675,000/person.  For anyone with assets over this amount, estate planning attorneys drafted credit shelter trusts for each spouse, allowing each spouse to take advantage of the full tax exemption.  What this means is that when the first spouse dies, some assets would go into a credit shelter trust created for the beneficiaries that may or may not include the surviving spouse.  The balance of the assets would pass to the surviving spouse (either outright or in trust), free of federal estate taxes.  The assets in the credit shelter trust would remain free from federal estate taxes as well when the second spouse dies. 

However, many wills drafted before 2001 (when the federal estate tax exemption remained constant for many years) direct that the entire or full amount of the federal estate tax exemption be used to fund the credit shelter trust.  Since individual net worth has correspondingly declined with the real estate and stock markets, net estates once valued at the exemption amount now are worth less, particularly when the exemption amount has increased significantly since 2001.  As a result, on the death of the first spouse, everything could end up in the credit shelter trust with nothing left to the surviving spouse.  If the surviving spouse is not the beneficiary of the credit shelter trust, the unanticipated consequences could be horrific. 

Bottom line:   Your wills and estate plans  should be reviewed, particularly now when the estate tax exemptions remain in flux.

TIME TO REVERSE REQUIRED MINIMUM DISTRIBUTIONS FOR 2009

Posted by Thomas J. Bogar on October 27, 2009  |  No Comments

A limited planning opportunity now exists for those with tax-deferred retirement accounts.  Last December, Congress suspended the required minimum distribution (RMD) rules for taking distributions from traditional tax-deferred accounts.  But to take advantage for this limited stay, individuals 70 ½ and older must do so before November 30^th of 2009. 

Usually, people age 70 ½ and older must take annual RMD based on their life expectancies.  For some, RMD is not a primary concern; but for others, preservation of wealth and minimizing income taxes is and they may be most interested in this one-time offer.

So what about those people who took unwanted RMD in 2009 because they were unaware of Congress’ limited offer?   There is hope.  But if interested, you need to act fast.  The IRS issued a ruling released September 24^th allowing people who took unwanted RMD in 2009 to return the money back and avoid paying income taxes on the withdrawals from the tax-deferred account.  Act now, because this offer expires November 30, 2009. 

In addition to the limited time for reversing payments, there are other potential complications.  Most people take periodic RMD. In other words, they take monthly withdrawals from their accounts.  But many plans will permit only one withdrawal to be returned to the account, leaving the account holder with an unwanted RMD and a tax bill.

There are options, but before doing so, you should seek professional tax advise.