Posts Tagged Tax Management

New Estate Tax Rules for 2011 and 2012

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Estate tax rule changes for 2011 and 2012Last October, we wrote about the uncertainty around the estate tax and the potential changes that were coming depending on Congressional action. As you know, following the Tax Relief Act of (very late) 2010, that uncertainty has been laid to rest. In this post, we’d like to summarize the changes enacted by Congress at the end of 2010 and discuss a little about how those changes will affect you.

Regarding Estate Tax Rules, the following is a summary of the enacted changes:

  • The estate and generation-skipping transfer taxes were phased out and fully repealed in 2010.
  • The gift tax rate was reduced to 35%.
  • The gift tax exemption was increased to $1 million for 2010.
  • The estate and generation-skipping transfer taxes for 2011 and 2012 were reduced from the top rates of 55% to 35% and the exemption amount was increased from $1 to $5 million (as indexed after 2011).

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate, gift, and generation-skipping tax rules were set to automatically reinstate in 2011 unless Congress enacted changes before 2011. That would have meant the estate tax rates returning to the rates of 2001, with with the top estate and gift tax rates reverting to 55%!

Some additional technicalities that were included in the Tax Relief Act include, but are not limited to, the following:

  • For gifts made after December 31, 2010, the Act reunifies the gift tax with the estate tax and allows an application exclusion amount of $5 million with a top estate and gift tax rate of 35%.
  • The Act also provides that the generation-skipping transfer tax for descendants dying or gifts made after December 31, 2009 is equal to the applicable exclusion amount for estate tax purposes. Specifically, up to $5 million for 2010.

This means that up to $5 million in generation-skipping transfer tax exemption may be allocated to a trust created or funded during 2010. Although the generation-skipping transfer tax is applicable in 2010, the tax rate for transfers made during 2010 is 0%. The generation-skipping transfer tax rate for transfers made in 2011 and 2012 will be 35%.

Tax substantiation of charitable deductions

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By Art Auerbach
May 12, 2009
Situation: This is a good time during the year to discuss the Internal Revenue Service deductibility rules for charitable contributions with clients, as they are all probably being inundated with mail and telephone solicitations for donations.

Solution: Regarding cash contributions, the IRS requires either a bank record (canceled check), a charge showing on a credit/debit card statement or a pay stub showing a deduction from net pay.

If the contribution is either a single payment or a series of related payments to the same charity that totals $250 or more, then the donor needs a written communication from the charity stating the amount given and that nothing was given to the donor in exchange.

The letter must be dated prior to the date of filing the tax return for the year of the contribution, including extensions. The donor can receive items of de minimis value such as personalized mailing labels, cards, mugs, etc.

For contributions of property, a taxpayer must have appropriate documentation of the property donated and the condition of the property on the date of contribution.

Additional information on how the property was acquired and how the fair market value was determined on the date of the contribution must be retained by the taxpayer.

The taxpayer — not the charity — has this burden of substantiation. Used property must be in good condition or better. The taxpayer can use any one of several websites to assist in determining the “thrift shop value” for use on the tax return.

There is also the issue of how to show charitable deductions on a tax return.

It would be advisable to list each cash contribution with appropriate amounts and the name of the charity. Avoid listing a large figure for miscellaneous deductions, which might prompt an inquiry from the IRS. For donations of property, it is not necessary to attach an explanation to a return unless the contribution exceeds $500. That requires the completion of Part 2 of Form 8283 (non-cash charitable contributions).

Should the value exceed $5,000, then a qualified appraisal should be completed and submitted along with Form 8283.

Contributions that are no longer deductible are cash gifts to charities where no receipt is obtained and no bank record exists. Placing cash in a collection plate when the charity does not use the envelope system or tossing money into the kettle during the holidays no longer qualify. Merely having a trinket of appreciation in exchange for a property contribution will not satisfy the statute. It would lack the list, condition and value of the contribution.

Obviously, if regular, continuous or large contributions are going to occur, it is in the taxpayer/donor’s best interest to consult a tax professional.