Don’t Die Here

Estate tax surprises at state level

Recently passed federal legislation increased the exemption amount before your estate pays taxes on your assets when you die. The amount for 2013 is $5.25 million. This makes most of our estates tax-free when we die. Or does it?

Where you live could cost you a bundle in inheritance and estate taxies since 21 states have some form of estate taxes, inheritance taxes, or both. To make matters worse, this state tax landscape is constantly changing making it tough to stay current. Here is useful information on which states want a cut of your money when someone passes away.

8 states currently tax your inheritance. The following states charge inheritance tax: Iowa, Nebraska, Indiana, Pennsylvania, Kentucky, New Jersey, Tennessee, and Maryland. The tax rate can be as high as 20% and start with inheritance as low as $1 if you are unlucky to inherit money and live in Pennsylvania or Iowa.

Some states have estate taxes starting at lower amounts than the federal $5.25 million. Noted here are these states’ estate tax exemption amount and their maximum estate tax rate (in parentheses).

CT: $2 mil. (12%) IL: $4 mil. (16%) MA: $1 mil. (16%)
MD: $1 mil. (16%) ME: $2 mil. (12%) MN: $1 mil. (16%)
NJ: $675,000 (16%) NY: $1 mil. (16%) OR: $1 mil. (16%)
RI: $910,725 (16%) VT: $2.75 mil. (16%) WA: $2 mil. (19%)
DC: $1 mil. (16%)

Some states match the federal exemption amount. These states match the current federal estate tax exemption, but charge their own estate tax as well.

DE: 5.25 mil. (16%) HI: $5.25 mil (16%) NC: $5.25 mil (16%)

Two states charge both. New Jersey and Maryland currently charge both an estate tax and an inheritance tax.

What can you do?

  1. Understand inheritance consequences. If you have a relatives mentioned in your will that live in Iowa, Nebraska, Indiana, Pennsylvania, Kentucky, New Jersey, Tennessee or Maryland, you may wish to conduct some planning activities.
  2. Move before it is too late. 29 states have no estate taxes (or inheritance tax). Many of them (Florida, Texas, Alaska, South Dakota, Nevada, and Wyoming) also have no state income taxes. But prior to packing your bags, review other tax implications within your target “move to” state.
  3. Set up a trust. If you live in one of the states with estate taxes, consider setting up appropriate trusts to help protect your assets from the state tax man.
  4. Gifts? Remember you can also use gifts as a means of transferring some of your assets tax-free. Just make sure you understand the limits on tax-free gift giving.
  5. Want more information? Visit each state’s respective web site and review their estate and inheritance laws.

Time to Think About Commuting

Don’t leave this benefit on the table

$3.40 to $4.00 per gallon gas prices are quickly becoming the new norm. Congress and the President appear to be doing very little to control this inflationary cost. What can you do? Thankfully there are commuting benefits that can lower your cost of getting to and from work during 2013.

Transit Passes: up to $245/ month
Van Pooling: up to $245/month
Parking Allowance: up to $245/month
Bicycle Commuting: up to $20/month

How it works

Your employer can provide you the benefits listed above and you do not have to report the benefit on your income tax return. Because the benefit does not hit your W-2, you pay no federal tax, no state tax, no Social Security or Medicare.

Some tips

  • Transit AND parking. Transit passes are good for the train, subway and bus systems and can be used in addition to parking passes. So you can park at the train station, receive a parking allowance AND receive the transit pass benefit.
  • Employer-provided. Remember these benefits are employer-provided benefits. Check with human resources to see if your employer provides these benefits.
  • The salary-reduction alternative. If your employer does not provide these benefits they might allow you to reduce your take-home pay instead. If allowed by your employer, you set aside money from your wages to pay for the passes or parking allowance. This salary-reduction would then allow you to pay for your commuting costs up to the limits in pre-tax dollars. You may not use this method to pay for bicycle commuting.
  • Bicycle commuting only. You may use the $20/ month benefit to help pay for the repair and maintenance on your bike, however you may not receive this benefit in any month that you also receive other transit benefits.

Many employees are unaware that their employer provides a transit benefit, so check it out. Even if they do not, perhaps they’ll consider creating a salary-reduction alternative instead.

Are My Social Security Benefits Taxable?

Don’t be surprised at tax time

When it comes to retirement many Americans believe they can count on their full Social Security benefits as a core element of income. You can imagine the surprise at tax-time when some of these same benefits are returned to the Federal Government in the form of benefit reduction and taxation. Here is what you need to know.

      1. Social Security and Retirement Benefits can be “REDUCED” as well as taxed. The benefit reduction calculation is separate from the taxability of your benefits. If you start drawing retirement benefits prior to reaching your full retirement age (65 if born prior to 1938, and it gradually increases up to age 67 if born in 1960 or later) in 2013 your benefits could be reduced $1 for every $2 of earnings over $15,120. This calculation is less punitive if it occurs during the year of retirement, but you should forecast this potential benefit reduction prior to deciding to start taking your benefits.
      2. If you do not work, your Social Security benefit will probably not be impacted.
      3. Your Social Security Benefits can be taxed no matter how old you are. There is not an age threshold that protects your Social Security Benefits from federal taxation. If you have sufficient income, your benefits could be taxed.
      4. If you have other income your Social Security benefits may be taxed. The taxability of Social Security benefits depends on two things; your qualified total income and your marital status. If your total income surpasses certain thresholds (called base amount), some of your benefits could be taxed.
      5. Can you estimate whether your benefits will be taxed?Yes. Per the IRS, here is a quick calculation to determine if your benefits may be taxable:

        1st: Calculate 1/2 of your annual Social Security benefit

        2nd: Add the 1/2 benefit total to all your other estimated income. (Use income from all sources including tax exempt interest.)

        3rd: Compare your calculated total to the base amount for the year. If it exceeds the base amount, some of your Social Security benefit may be taxed.

        2013 Social Security Base Amounts:

        $25,000: Single, Head of Household, Widow or Married Filing Separately:

        $32,000: Married filing Joint

      6. Are all your Social Security benefits taxable? No, a maximum of 85% of your Social Security benefits is subject to federal tax.

Note: To qualify as married filing separately, you must also be living apart for the entire year. The base amount if you lived together is $0. There is also a significant marriage penalty in the taxability of your Social Security benefits as the joint amount is only $32,000 instead of $50,000 (or 2 times the single “base” amount).

The Dust Settles on 2013 Taxes

The AMT Patch Might Not Get a Patch JobWith the passage of the American Taxpayer Relief Act of 2012 the proverbial “fiscal cliff” was officially moved down the road.

While annual deficits still loom large and a higher “cliff” will need to be navigated in the future, at least there is now some clarity for each of us in 2013.

Time to be thinking about health insuranceWhile a major piece of tax legislation was passed on the first day of January 2013, don’t expect it will be the last. Congress and the President will be continuing the debate over our massive annual spending deficit and the national debt. Because of this, more tax changes could occur in the near future.

As part of the legislation passed in the wee hours of January 1st, 2013 is some permanency to the Estate and Gift Tax laws. Effective in 2013 and beyond:

Maximum Estate and Gift Tax rate: 40%
(up from 35%)
Inflation adjusted estate exclusion: $5,250,000
in 2013

Other Observations:

Check Portability of an unused estate exclusion to a spouse is made permanent.
Check There is an allowed deduction to account for estate taxes paid to a state.
Check If this law was not passed; estates over $1 million were subject to an estate tax with a maximum tax rate of 55%.

Final Touches on 2012 Taxes

Check Your 2013 Pay StubIn a last minute gesture, the tax laws that apply to 2012 were made final on January 1st, 2013. Whether you consider this incompetence or just simple lack of respect for the general population, one thing is clear. These late changes gave no time to plan your 2012 tax situation. Here are the major tax changes that were made retroactive to the beginning of 2012

Circle $250 above the line out-of-pocket expense deduction for teacher’s classroom expenses
Circle The ability to deduct either general sales tax or state income tax as an itemized deduction.
Circle The ability to treat mortgage insurance premiums the same as interest expense on your itemized deductions.
Circle Cancellation of income for certain home indebtedness forgiveness.
Circle The ability for those 70½ or older to make up to $100,000 in charitable contributions directly from qualified individual retirement accounts and exclude the contribution from income.
Circle Extension of Section 179 business expensing of up to $500,000 in qualified capital purchases
Circle Alternative Minimum Tax “patch”

What you need to know

1 Expect delays. Because of these late changes the IRS did not begin processing 2012 tax returns until January 30th. This delay has created a logjam for those who wish early refunds.
2 Expect more delays. If your tax return includes adoption expenses, depreciation, energy credits or any small business credits your return cannot be processed until late February or early March, 2013.
3 Don’t delay. Since the processing of tax returns may be delayed it is more important than ever to have your materials ready to go as soon as possible. Waiting until a tax return can be processed will make it difficult to prepare and process all the tax returns on time. It is best to have your tax return ready to go when processing windows are opened.

New Safe Harbor for Home Offices

Beginning in 2013 there is a simplified way to take a home office expense for a portion of your home. This new ‘safe-harbor’ option greatly simplifies how to record valid expenses for business use of your home. Here is how it works.

  • You may opt to take your office space square feet times $5 and use this as a valid home office expense up to $1,500 (300 sq. ft.).
  • This replaces the cumbersome allocation of valid home expenses like electricity, heat, depreciation, and other home expenses that are allocated by a % of the home devoted to your office space.
  • You may still take property taxes, mortgage interest deductions and casualty losses as itemized deductions on your personal tax return. Better still, you no longer need to allocate these expenses between personal and business use.
  • Your home office must still qualify for the deduction using current home office standards in the tax code. Foremost among these is that your home office must be used regularly and exclusively by the business.
  • The deduction may not be taken in excess of available business revenue.
  • You may still take other qualified business expenses unrelated to the home. This “safe-harbor” calculation is meant to simplify the household expense allocation process only.

What you should know

  • The IRS estimates 3.4 million taxpayers used 1.6 million hours to calculate the home office deduction’s 43 line form to allocate their home office use.
  • If the IRS reviews these returns in the future it hopes to save a tremendous amount of time and effort used in prior years to confirm the accuracy of the old home office allocation.
  • Since 2013 is the first year of this new provision, you will probably need to conduct the home office use calculation using the old method to ensure the safe-harbor opportunity makes sense for you.
  • One of the nice benefits of this new safe-harbor rule is that your home value (basis) is not reduced by depreciation. This should help reduce risk of a tax surprise from depreciation recapture calculations when you sell your home.

Educational Credits Fail IRS Test

More return processing delays…
If you have a tax return that will utilize a number of common educational credits, your tax return cannot be processed by the IRS until mid-February.  Affected tax returns include any provisions found on Form 8863 and include:

  • The American Opportunity Tax Credit
  • The Lifetime Learning Credit

This delay does not impact tax returns with other educational tax benefits like student loan interest deductions or the higher education tuition and fees deduction.

What you need to know

  1. The IRS testing discovered processing errors with Form 8863, which is causing this additional delay for those who have education credits.
  2. Clients who have these credits often want to file tax returns early for timely submission of their Free Application for Federal Student Aid (FAFSA).  If this is your situation, consider filing your FAFSA application using the “will file” status.  Then go back into the FAFSA form and update the figures as soon as possible.  If this impacts your situation please call.
  3. You should still submit your tax information as soon as it is available.  That way your tax return can be processed as soon as the IRS says it is ready to accept your tax return.
  4. If this impacts you, you are not alone. This delay is expected to impact 3 million tax returns.