Portability of the Estate Tax Exclusion Amount

When loved ones pass away there are many decisions to be made.  If the value of the decedent’s gross estate is under the current $5 million estate tax exclusion, most executors choose not to file an estate tax return.  However, under existing law, executors should consider filing an estate tax return to take advantage of the “portability” of the estate tax exclusion amount for decedents who are survived by a spouse.

For the estate of a decedent dying after December 31, 2010 who is survived by a spouse, a portability election is available that allows the surviving spouse to apply the decedent’s unused estate tax exclusion to the surviving spouse.  The deceased spousal unused exclusion (or “DSUE”) can only be applied to the surviving spouse by filing an estate tax return, Form 706, for the deceased spouse. 

The Form 706 must be timely filed (including extensions).   A portability election is made by filing an estate tax return and does not require an affirmative statement or box to check. 

The surviving spouse’s basic exclusion amount, currently at $5 million, is combined with the deceased spouse’s unused exclusion amount (DSUEA).  The new total exclusion amount for the surviving spouse can be used for lifetime taxable transfers (gifts) or at death.  Please note that if a surviving spouse remarries, the DSUEA from the first spouse is lost. 

Below is an example to understand the topic better.

After a prosperous life, Angelina dies in 2011.  Angelina has made lifetime gifts of $2 million and has no taxable estate.  The executor of Angelina's estate files Form 706 and elects to apply Angelina's deceased spousal unused exclusion amount (DSUEA) to Brad (the surviving spouse).  Brad has made no taxable lifetime gifts.  Brad's new applicable exclusion amount is $8 million ($5 million basic exclusion amount plus $3 million from Angelina's unused exclusion amount) which he can use against lifetime gifts in memory of his late wife or for transfers at his death.

There are many factors to consider before considering the portability election, including the traditional credit shelter trust and the unlimited marital deduction.  Please discuss your estate plan with your tax preparer, keeping in mind that the current law is in effect through the end of 2012.

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Melissa Hansen is a Certified Public Accountant at Nasif, Hicks, Harris & Co., LLP.  Melissa can be reached via phone at (805) 963-5106 or e-mail at mhansen@nhhco.com.

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The material appearing in this communication is for informational purposes only and should not be construed as an opinion or legal, accounting, or tax advice provided by Nasif, Hicks, Harris & Co., LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Nasif, Hicks, Harris & Co., LLP assumes no obligations to provide notification of changes in tax laws or other factors that could affect the information provided. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. The user assumes all responsibility for the use of such information. Any written tax advice contained herein was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code or any taxing authority.

Will 2012 be the Last Year for the Last Tax Incentive Available to Exporters of Manufactured Goods and Software?

The expiration of the Bush/Obama tax cuts is now part of our national conversation. Politicians are jockeying for political leverage in the face of both the upcoming presidential election and the expiration of the Bush/Obama tax cuts at the end of 2012. One of the hot items right now is the current tax rate of 15% for long term capital gains rates, which oddly enough, is the primary driver for the best and last available tax incentive available to exporters of US made products and software.

The current Federal tax system allows international exporters to take advantage of an Interest Charge Domestic International Sales Corporation (DISC). By using a DISC, a portion of the international export income can be taxed at the favorable long term capital gains rate of 15% as opposed to ordinary income rates that may be as high as 35% for individuals. The average manufacturer with $5 million in international sales and a 20% profit margin can reduce their Federal tax liability by approximately $100,000. The DISC tax incentive can be utilized by closely held businesses with $1 million to $100 million of export revenue.

In order to qualify for DISC benefits the following three components must be present in the exported goods or software:

1.    The product being sold must be manufactured, produced, grown or extracted in the United States by a person (person meaning the exporting company) other than the DISC.

2.    The end use of the property must be outside of the United States.

3.    The product must not include imported raw materials that account for more than 50% of the final sales price.

The DISC is invisible for most purposes except for tax filings. The DISC has no economic substance and does not require any change in operations for the export company.

DISC’s are also available for companies that buy US manufactured products and resell those products internationally and architects and engineers with international projects. Additionally, a DISC can also be owned by a ROTH IRA or trusts for the business owner’s children.

Will the DISC be useful post 2012?

A DISC will provide a reduced tax liability as long as there is a spread between the highest ordinary income tax rate and the long term capital gains rate. If the Bush/Obama tax cuts expire the maximum individual tax rates will increase to 39.5%. If the “Buffet Rule” is enacted, the long term capital rate will most likely increase to 30%. At the 39.5% rate for ordinary income and 30% rate for capital gain income a DISC will reduce the tax rate by 9.5% instead of the current 20%. At 9.5%, the DISC will still be a powerful tax tool, but the revenue required to make a DISC start to make sense will increase to $2 million in export sales.

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Joe Bishop is a Certified Public Accountant at Nasif, Hicks, Harris and Co., LLP. Joe can be reached via phone at (805) 979-9383, email at JBishop@nhhco.com, or Linkedin at http://www.linkedin.com/in/joebishopcpa.

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The material appearing in this communication is for informational purposes only and should not be construed as an opinion or legal, accounting, or tax advice provided by Nasif, Hicks, Harris & Co., LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Nasif, Hicks, Harris & Co., LLP assumes no obligations to provide notification of changes in tax laws or other factors that could affect the information provided. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. The user assumes all responsibility for the use of such information. Any written tax advice contained herein was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code or any taxing authority.

Is a Tax Refund Really That Great?

The automatic response to that question is usually, "YES!  It's extra money!"  But is it really extra money?  Below are some pros and cons of receiving a tax "refund".

For many W-2 employees, withholding taxes is the most efficient way to meet their yearly tax obligation. Oftentimes, new employees complete Form W-4, the form that the human resource or payroll department utilizes in order to determine how much to withhold from each paycheck, on the first day of work.  The information you enter on Form W-4 may lead to withholding too much tax, which usually results in a tax refund.  Great! Right?  Well, the money that is "refunded" was yours.  The "refund" money is money you are "refunded" without any interest, essentially giving the government an interest free loan for a year.  In the meantime, you could have used the money to pay down debt, save for emergencies or retirement.

Alternatively, and what most people fear, is that taxes may be owed on April 15th.  Taxes will be due on April 15th if you do not withhold enough or make sufficient tax payments during the year to satisfy the tax due.  There may also be penalties and interest for not withholding enough.  However, you enjoy a higher paycheck each week.  During the year, you may have set aside the amount of additional tax that would be due in April in an interest bearing checking account or CD, earning interest that would not have happened had you had too much withheld.  While interest rates are currently low, that may not always be the case.

How do you know what amount to withhold?  The first step is to take a look at your prior year tax return to see what has changed.  Did you get married?  Did you have a child?  Did you buy or sell a house?  Once you have determined what is the same or different, take a look at your actual tax liability.  The tax liability is not the refund or amount owed, but the calculated total tax.  You will need to withhold at least 100% of the prior year tax liability (you may have to withhold more if your adjusted gross income is above a certain threshold).  To check if you are withholding enough, divide your estimated current year tax liability by the number of paychecks in the year. 

Not paying anything at tax time and not receiving a refund is true victory. Let me help you reach this victory!

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Yeni Anaya is a Certified Public Accountant at Nasif, Hicks, Harris & Co., LLP.  Yeni can be reached via phone at (805) 979-9381 or e-mail at yanaya@nhhco.com.

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The material appearing in this communication is for informational purposes only and should not be construed as an opinion or legal, accounting, or tax advice provided by Nasif, Hicks, Harris & Co., LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Nasif, Hicks, Harris & Co., LLP assumes no obligations to provide notification of changes in tax laws or other factors that could affect the information provided. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. The user assumes all responsibility for the use of such information. Any written tax advice contained herein was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code or any taxing authority.

Getting the Most Out of Your HSA and FSA Accounts

A Health Savings Account (HSA) and Sec 125 Flexible Spending Account (FSA) can work together and maximize your out of pocket medical, dental and vision expenses with tax-free dollars for you, a legal spouse, and/or dependent(s).  However, you must be aware of how these two tax-free funds work together so that you do not “double dip” or inadvertently use the FSA or HSA for ineligible expenses.  This can result in significant tax penalties.

Elective contributions to an FSA plans are determined annually at the beginning of the year.  If you do not use all of the money contributed during the year on eligible medical expenses incurred during the year, you forfeit the balance in the account.  It is “use it or lose it” and unlike an HSA, the excess funds cannot be rolled over year by year.   Careful planning can result in the highest pre-tax dollars available under the current IRS rules.

Using HSA and FSA to the MAX!

Your HSA account must be used for the first $1,200 (single coverage) or $2,400 (family coverage) of out of pocket medical expenses, such as co-pays, deductibles, and prescriptions, regardless of what your HSA health plan has as its deductible.  This limit is adjusted annually and can be found in IRC section 223 (c)(2)(A)(i).  In addition, you can pay your long-term care insurance premiums from your HSA account.

If you want to use FSA money for out of pocket medical expenses, such as co-pays, deductibles, prescriptions, there are some guidelines you must meet.  Every year the IRS sets a HSA statutory deductible limit for HSA health plans.  This statutory deductible limit is used to determine WHEN you can be paid for MEDICAL expenses from your FSA account.  This year the IRS set the deductible limit as follows:

1. SINGLE coverage: it is $1,200 REGARDLESS of what your HSA health plan has as its deductible.
2. FAMILY coverage: it is $2,400 REGARDLESS of your HSA health plan has as its deductible.

Your HSA account should be funded to the maximum each year.  Your contribution to your FSA Plan will take careful planning and should be funded for all anticipated expenses.  

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Marianne Bloom is a Certified Public Accountant at Nasif, Hicks, Harris & Co., LLP.  Marianne can be reached via phone at (805) 963-5101 or e-mail at mbloom@nhhco.com.

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The material appearing in this communication is for informational purposes only and should not be construed as an opinion or legal, accounting, or tax advice provided by Nasif, Hicks, Harris & Co., LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Nasif, Hicks, Harris & Co., LLP assumes no obligations to provide notification of changes in tax laws or other factors that could affect the information provided. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. The user assumes all responsibility for the use of such information. Any written tax advice contained herein was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code or any taxing authority.

IRS New Foreign Requirements: Form 8938

The IRS has announced new foreign financial information filing requirements for all 2011 tax returns. The new Form 8938: Statement of Specified Foreign Financial Assets requires taxpayers to disclose identifying information of their foreign financial assets on their personal and business tax returns. 

According to regulations released by the IRS, the definition of a foreign financial asset is: 

1. Any stock or security issued by any person other than a United States person, or
2. Any financial instrument or contract held for investment that has an issuer or counter party that is not a United States person, or
3. Any interest in a foreign entity.

A taxpayer must file Form 8938 if they have an interest in one or more foreign financial assets and those assets have an aggregate fair market value exceeding $50,000 or more as of the last day of the year or $75,000 at any time during the year.

Information that needs to be reported on Form 8938 includes (but is not limited to): 

1. The name and address of the financial institution in which the account is maintained.
2. The account number.
3. The maximum value of each foreign financial asset.
4. The information necessary to identify the foreign financial interest, contract or instrument. 

It is also worth noting that even though Form 8938 may appear to duplicate information that may have already been reported on other tax return forms, taxpayers are still required to file the Form 8938 if they meet the filing criteria.

For further information, please consult with your tax preparer to determine if you or your business are required to file Form 8938 with your 2011 tax returns.  Please note that failure to file Form 8938 when there is a requirement to file may result in severe penalties.

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Andrew Wallin is a Certified Public Accountant at Nasif, Hicks, Harris & Co., LLP.  Andrew can be reached via phone at (805) 979-9539 or e-mail at awallin@nhhco.com.

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The material appearing in this communication is for informational purposes only and should not be construed as an opinion or legal, accounting, or tax advice provided by Nasif, Hicks, Harris & Co., LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Nasif, Hicks, Harris & Co., LLP assumes no obligations to provide notification of changes in tax laws or other factors that could affect the information provided. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. The user assumes all responsibility for the use of such information. Any written tax advice contained herein was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code or any taxing authority.

December is the Best Month to Save on Taxes

In the tax preparer world December is known as tax planning month. As a CPA this is my favorite month because it is the month I can help save the most money for my clients.

I love my job most when I effectively use the tax code to my client’s advantage. Tax planning allows clients to save money.

Here are great tax planning strategies I employ to help my clients:

Charitable Giving

The holidays are a great time to give back to your favorite charity by making a donation of old clothing or miscellaneous personal property. Charitable donations may increase a taxpayer’s itemized deductions.

Gifts to Loved Ones

In 2011 you can gift up to $13,000 per person without filing gift tax returns or paying gift taxes. The lifetime gift and estate exclusion is currently $5 million. The lifetime exclusion amount may change at the end of 2012 as the current tax laws are set to expire on December 31, 2012.

Roth IRA Conversions

In 2010 and 2011 you can convert an unlimited amount from your 401(k), SEP IRA, Traditional IRA and other retirement accounts into a Roth 401(k) or IRA. You have to pay tax on the amount converted but if you have a low income year or unused itemized deductions, a Roth conversion may be a great way to let your retirement funds grow income tax free.

Timing of California and Real Property Tax Payments

In general, state income and property taxes that are deductible as an itemized deduction. By working with your tax preparer you can determine if paying more of the taxes in the current year versus in the next year will save you money. For individuals that have fluctuating income this strategy is especially effective.

Update your Trust and Estate Planning Documents

Your trust and estate plan may be the most important item when you are planning for your heirs. December is a great time to meet with your estate planning attorney and accountant to update your plan documents for any changes that have occurred. Trusts are easy to forget when you do not need them, but are vital when you do.

If you do not have a an estate plan, we highly recommend you meet with a local estate planning attorney and accountant so your family does not encounter delays in settling your estate.

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Joe Bishop is a Certified Public Accountant at Nasif, Hicks, Harris and Co., LLP. Joe can be reached via phone at (805) 979-9383 or via email at JBishop@nhhco.com.

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The material appearing in this communication is for informational purposes only and should not be construed as an opinion or legal, accounting, or tax advice provided by Nasif, Hicks, Harris & Co., LLP. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials have been prepared by professionals, the user should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented. Nasif, Hicks, Harris & Co., LLP assumes no obligations to provide notification of changes in tax laws or other factors that could affect the information provided. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. The user assumes all responsibility for the use of such information. Any written tax advice contained herein was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code or any taxing authority.