Inherited Property: A Matter of Value

Estate

Avoid this potential tax headache

If you are expecting to inherit property when friends or relatives pass away, know that their generosity can come with tax consequences. It’s important to understand how the value of your inheritance is determined in order to avoid a potential tax surprise in the future.

Estate tax basics

When a friend or relative dies and leaves behind a will, someone will be named executor of their estate. The term “estate” means the total amount of the assets and liabilities the deceased person leaves behind, and the “executor” is the person named to handle the the affairs of the estate. It also includes managing the distribution of remaining assets to “beneficiaries,” which is another word for the people who inherit the assets.

The executor has the responsibility to calculate the value of the assets, generally on or around the date of death. This is called the “stepped-up basis.” If the total value of the estate is worth less than $5.49 million, the estate pays no federal tax. If it’s more than that amount, the IRS’s piece of the pie scales up to a whopping 40 percent. Thirteen states and the District Columbia also collect state estate taxes of as much as 20 percent.

The conflict over value

Generally speaking, executors would rather have the estimated value of an estate’s total property fall below estate-tax thresholds. But as a beneficiary receiving an inheritance, it’s in your interest to have a higher estimate of value. That way you may avoid higher capital gains tax if you sell the property.

A high estate valuation helps you as a beneficiary because you only pay tax on the increase in value from the “stepped-up basis.” So, if your inherited property was valued at $200,000 and you later sell it for $300,000, you would pay taxes on $100,000. But if the same property was valued at $300,000, you would potentially owe no tax.

A matter of value

In valuing a piece of property, an executor will compare it to similar properties that have recently sold. Ideally there is a qualified appraisal by an expert to determine the “fair market value”.

If you disagree with the way an executor has valued property you are inheriting, it may be a good idea to have your own appraisal done. With your appraisal in hand, reach out to the executor and make your case for the higher valuation based on your appraisal. Keep in mind that you don’t want an evaluation that is either too low or too high — you want a reasonable fair market value of the assets. If you don’t talk to the executor and you end up using a different valuation in reporting to the IRS, you could be facing a big tax headache.

If you’re able to talk to the executor and agree on a valuation, consider asking for a Form 8971 Schedule A. This form itemizes the valuation of property and is now often required by the IRS for estates worth more than $5.49 million. However it can also be used to provide you with documentation showing that you and an executor have reached an agreement on the value of a specific piece of inherited property.

Tick Tock. Tax Reduction Ideas Still Available

Tax MazeAs the end of the year approaches, there is still time to make moves to manage your tax liability. Here are some ideas to consider.

 

Icon Maximize your retirement plan contributions. This includes traditional IRAs, Roth IRAs, and SEP IRAs for self-employed. Given the contribution limits in 2017 are not increasing, now is the time to maximize the contribution potential for this year and plan for next year’s contributions.
Icon Estimate your current and next year taxable income. With this estimate you can determine which year receives the greatest benefit from a reduction in income. By understanding what the tax rate will be for your next dollar earned, you can understand the tax benefit of reducing income in this year versus next year.
Icon Make charitable contributions. Consider which tax year will benefit most from your charitable giving of cash and non-cash items. Shift your giving into the year that will provide you the most benefit.
Icon Take capital losses. Each year you can net capital losses against capital gains. You can also deduct up to $3,000 in excess losses against your other income. Start to identify which investments may make sense to sell to take advantage of this. If planned correctly, these losses can offset ordinary income.
Icon Consider donating appreciated stock. This strategy gives you a charitable deduction for the market value of the stock, while not having to pay capital gains tax on the charitable gift. If you provide an annual pledge sheet to your church, this can be a great way to maximize your gift while giving needed funds to your church at the beginning of the year.
Icon Standard or itemized deductions. The standard deduction for 2016 is $12,600 for joint filers and $6,300 for single filers. If your itemized deductions are close to these amounts, consider shifting the deductions into next year. You can then maximize the benefit of itemizing into one tax year.
Icon Retirement plan distributions. If you are age 70½ or older, take your required minimum distributions for the year. If you are retired, but younger than 70½, consider taking tax efficient distributions from your retirement accounts. By paying some tax now, you may avoid paying higher taxes later when you have to follow the minimum distribution rules.
Icon Consider tax legislation. Please recall that tax laws passed in late 2015 made many temporary tax savings permanent and extended others into 2016. So save classroom related receipts if you are a teacher. Consider charitable contributions from your retirement plan if you are a senior. Keep receipts of large purchases to track a potential sales tax deduction.

As always, should you have any questions or concerns regarding your situation please feel free to call.

Preview of Some Key 2017 Tax Figures

2017 compass

While official numbers for 2017 are not yet released by the Internal Revenue Service (IRS), many figures are based on the Consumer Price Index (CPI) published by the Department of Labor. Using the release of recent CPI figures, a number of sources are projecting key figures for 2017.

 

Tax Brackets: While the actual income brackets for tax rates are not set for 2017, the rate of inflation impacting the income levels for each rate is anticipated to raise the income brackets by approximately 0.6 – 0.8%.

Personal Exemption: $4,050 in 2017 (unchanged from 2016)

Standard Deductions:

Deduction Tax Year 2017 Tax Year 2016
Single
$6,350
$6,300
Head of Household
$9,350
$9,300
Married Filing Jointly
$12,700
$12,600
Married Filing Separately
$6,350
$6,300
Dependents (kiddie tax)
$1,050
$1,050
65 or Blind: Married
Add $1,250
Add $1,250
Single
Add $1,550
Add $1,550

Other Key figures:

Estate & Gift Tax Exclusion
$5.49 million
$5.45 million
Annual Gift Tax Exclusion
$14,000
$14,000
Roth and Traditional IRA Contribution Limit
$5,500
$5,500

Caution: Remember, these are early figures using the recently announced Consumer Price Index. Official numbers are released by the IRS later in the year.

 

Ghosting Identity Theft

What everyone should know

To most people “ghosting” is the act of breaking up with a boyfriend or girlfriend by breaking off all contact. Now there is a new ghosting phenomena; stealing the identity of a recently deceased loved one.

Magnifying glass on obituaries page

Ghosting protocol

Would-be identity thieves scour obituaries to find as much personal information as possible about the recently departed. The more information available about the loved one the better. With this information, thieves can make purchases, open credit cards, create false IDs, and file fraudulent tax returns. This activity can go unchecked until all the proper paper work is filed on the deceased. It can be a nightmare to clear up the mess, all while dealing with the grief associated with losing someone close to you.

What can be done

There are actions available to reduce the risk of this happening.

1 Less is more. When creating an obituary, avoid being too specific on information that could be used by ID thieves. Print a birth year, but not the day and month. Omit the maiden name and the address of the deceased.
1 Home unattended. During the funeral and visitation, consider having a friend or relative stay at the home of the deceased. Thieves are known to target homes for burglary during the service.
1 Notify the bank. Remove the deceased’s name from joint bank and credit card accounts. Immediately close solo credit card accounts. Closely monitor any activity in the accounts.
1 Be proactive. Knowing it can take Social Security months to inform all interested parties of the death, proactively contact anyone who may need to know of the death. Report the death to Social Security. File a final tax return. Cancel the driver’s license to avoid duplicates being ordered.
1 Work with credit agencies. Contact the major credit agencies and follow their instructions to place a death notice in their records. This should help stop a thief from opening new accounts. Obtain a free credit report from one of the credit agencies and look for suspicious activity. Wait a few months and review a free credit report from a second agency. Continue to monitor activity on the deceased’s credit reports.

Fortunately, as long as your name is not on the accounts, family members are rarely liable for any illegal activity. But cleaning up the mess can be a real hassle.

You Still May Wish to File a Tax Return

1040 form and IRS logo

Too many taxpayers fail to file a tax return under the false notion that one is not required to pay income tax. This assumption can cause problems. Here are some examples of when to file a tax return even when not required to do so.

Check mark Wish to qualify for Premium Tax Credit. This tax credit helps reduce the cost of health insurance for those who purchase their insurance through the new health insurance marketplace. Without a filed tax return you cannot have the Premium Health Credit applied towards your monthly premiums. In fact, non-filing could limit your ability to receive this credit in future tax years as the IRS continues to place controls on the payment of this credit.
Check mark Receive refundable tax credits. There are certain tax credits that will provide refunds even if you do not owe income tax. The most common of these is the Earned Income Tax Credit.
Check mark You wish to limit potential audits. The IRS typically has three years to audit a filed tax return. If no tax return is filed, this audit time limit never starts.
Check mark You are applying for financial aid or loans. Banks and colleges will often use tax return information to qualify you for loans and financial aid. Even if not required to file, it is nice to provide this information if requested.
Check mark You are filing a final tax return for a loved one. The IRS will eventually receive death information through the Social Security Administration. By filing a final tax return, you can put the breaks on unwanted communication from the IRS as they wait for this confirmation.
Check mark You want withholdings returned to you. Always file a tax return if an employer or other supplier withheld tax funds. It is the only way you will receive them back from the federal government.
Check mark You wish to protect against someone else filing a tax return. With the vast increase in identity theft from the IRS, filing a tax return can close the door on would-be thieves. Your filed tax return can block attempts by someone else who files a second tax return with fake information.

Tis the Season…for Review

StopwatchAs 2015 winds to a close, there are a number of tasks that should be reviewed. To help you plan accordingly, here are some things to consider.

 

Checkmark Employee benefits. Most employer benefit plans have enrollment periods that coincide with the calendar. Please review your benefit options with your employer and make any necessary changes. Common areas of review include employer-provided health insurance, dental benefits, childcare benefits, Health Spending Account contributions, Flex Spending Account contributions, disability insurance and employer retirement account contributions.
Checkmark Beneficiary review. Make it a practice to review beneficiary assignments on all your key accounts. This is especially important for your retirement accounts as the beneficiary assignment within the account can supersede a will.
Checkmark Retirement plan contributions. Review and adjust your contributions to your retirement plans. At minimum, try to contribute enough to take advantage of any employer matching funds in your work sponsored plan. This review should include IRAs (Roth, Traditional, SEP and SIMPLE), 401(k)s, 403(b)s, and 457 plans.
Checkmark Insurance review. Consider an annual review of your insurance policies. This includes health insurance, life insurance, disability insurance, home insurance and potential umbrella policies. Are the beneficiaries up to date? Are you happy with the coverage?
Checkmark Automatic billing. Review your checking account’s automated billing transactions. This is a good time to identify what automatic monthly expenses should be reviewed, reduced or eliminated. You may also discover billing for services you thought were cancelled. This specific review often catches errors that a simple account reconciliation may be missing.
Checkmark Withholdings. Sometime in December or early January you may wish to review your payroll withholdings. Many of us do this after our tax return is filed. However, if you file close to April 15th, you are losing four plus months of proper withholdings.
Checkmark Develop your own list. The review suggestions mentioned here impact most of us. However, everyone’s situation is not the same. Use this time to develop a list of your own annual review items. It might include reviewing College Savings Accounts or having an annual sit down to go through an aging parent’s financial accounts.

Preview Key 2016 Tax Figures

2016 compassWhile official numbers for 2016 are not yet released by the Internal Revenue Service (IRS), many figures are formulas set within the Internal Revenue Code (IRC) or are based on the Consumer Price Index (CPI) published by the Department of Labor. Using the release of recent CPI figures, a number of reference sources are projecting key figures for 2016. While many are unchanged from 2015 they are noted here for your planning purposes.

Tax Brackets: While the actual income brackets for tax rates are not set for 2016, the rate of inflation that impacts the income levels for each tax rate is anticipated to raise the income brackets by approximately 0.4 – 0.5%.

Personal Exemption: $4,050 in 2016 ($4,000 in 2015)

Standard Deductions:

Deduction Tax Year 2016 Tax Year 2015
Single
$6,300
$6,300
Head of Household
9,300
9,250
Married Filing Joint
12,600
12,600
Married Filing Separately
6,300
6,300
Dependents (kiddie tax)
1,050
1,050
65 or Blind: Married
Add $1,250
Add $1,250
Single
Add $1,550
Add $1,550

Other Key figures:

Estate & Gift Tax Exclusion
$5.45 million
$5.43 million
Annual Gift Tax Exclusion
$14,000
$14,000
Roth and Traditional IRA Contribution Limit
$5,500
$5,500

Caution: Remember, these are early figures using the recently announced Consumer Price Index. Official numbers are released by the IRS later in the year.

 

Is a Reverse Mortgage the Solution?

Reverse MortgagesFor many the transition to retirement means adjusting to a fixed income that is often lower than the income you received while employed. To make matters worse, the most valuable asset you have is usually your home, but it cannot be readily turned into cash. To help with this lack of financial liquidity, banks offer reverse mortgages as a way to tap into the equity of your home.

How a reverse mortgage works

A reverse mortgage is a special bank loan to a qualified senior citizen (age 62 and over) that enables older homeowners to tap the equity they have in their home. Importantly, no repayment of the loan is required until the home is no longer the borrower’s primary residence. This means you can receive cash today based upon the equity of your home without making loan payments. The bank receives repayment for their loan out of the proceeds obtained when the home is sold at a later date.

Why does the bank do this?

First, the bank charges up-front fees to create the reverse mortgage.

Second, the bank still receives their interest, service fees and principal. They just need to be patient as the payments occur after the borrower leaves the home (usually when the house is sold).

Third, the bank has little risk. The bank is insured by a federal agency so their risk is controlled and they are guaranteed repayment.

What are the advantages?

One You can use the equity of your home without the burden of house payments or selling your home.
Two You retain title to your home.
Three It is a HUD program, ensuring Federal compliance and consistency within the program.
Three Eligibility has few restrictions. You must be over 62, occupy the property as a primary residence, and own the home free and clear (or have little remaining balance on the mortgage).
Three Most single-family dwellings qualify (up to a four unit dwelling).
Three The amount that can be borrowed is based upon a HUD formula that uses the age of the youngest homeowner, interest rate, and appraised value of the home. There are also upper borrowing limits.
Three Cash advances from the program can be used for any purpose.
Three The income is tax-free and will not impact Social Security, Medicare, or Medicaid benefits.

What are the Pitfalls?

One The closing costs for a reverse mortgage are high. While all but the application fee can usually be folded into the reverse mortgage, the cost should be weighed against the outright sale of the home.
Two Passing your home to your beneficiaries becomes limited. Once you move or pass away the reverse mortgage becomes payable. Your inheritance would then be reduced by the amount owed.
Three What is the plan? If you are planning to move in the near future it may be better to sell your home to tap the equity versus undertaking the expense of a reverse mortgage.
Three Is it a legitimate reverse mortgage? Make sure the reverse mortgage program is a HUD program. If not, the program may contain some unforeseen risks.

While not for everyone, reverse mortgages are an option to use the equity of your home if you are retired and on a fixed income. If you are interested, most programs provide a free face-to-face counseling session from an independent counselor prior to a bank being allowed to offer the reverse mortgage.

2015 Pension Contribution Limits

As the end of the year rolls around, if you have not already done so, now is the time to plan for contributions into your retirement accounts in 2015. While Traditional IRA and Roth IRA plan limits are unchanged versus 2014, please note the contribution increases in 401(k), 403(b), 457 and SIMPLE IRAs.

Retirement Program 2015 2014 Change Age 50 or over catch up
IRA: Traditional $5,500 $5,500 none add: $1,000
IRA: Roth $5,500 $5,500 none add: $1,000
IRA: SIMPLE $12,500 $12,000 +$500 add: $3,000 (up $500)
401(k), 403(b), 457 plans $18,000 $17,500 +$500 add: $6,000 (up $500)

Don’t forget to take advantage of any matching programs offered by your employer as you review your various funding levels.

2014 Planning Note: Remember you have until April 15th, 2015 to make contributions to your Roth or Traditional IRA for the 2014 tax year.

Estate & Gift Tax Update

Now that the federal Unified Estate and Gift Tax has a level of certainty in it, here are the updated figures for 2014.

Estate and Gift Tax Update
Maximum Estate and Gift Tax rate 40%
Inflation adjusted estate exclusion: $5.34 million
Annual Gift Giving Exclusion: $14,000
($28,000 per couple)

Observations:

Check Portability of an unused estate exclusion to a spouse is possible
Check There is an allowed deduction to account for estate taxes paid to a state
Check Use the annual gift giving exclusion as an estate planning tool for yourself and your heirs

So while you still can’t take it with you, at least the federal government will let your survivors take more of it with them.