by Dennis V. King, Managing Partner
At first glance, the failure of Congress to take action on federal estate tax laws before the end of the 2009 session may have seemed like good news. When you take a close look, however, Congress essentially created a situation where you or your heirs may owe more taxes on an inheritance. To further muddy the waters of
estate tax planning, there is speculation that Congress may pass legislation that reinstates some form of estate tax for 2010, retroactive to the first
of the year.
The Basics
Here’s what you need to know about the estate tax in its current state, and how to protect yourself and your heirs:
• Both the estate tax and the generation-skipping transfer tax (on assets given to grandchildren) were repealed at the end of 2009. No federal estate tax will apply to the estate of a decedent in 2010. Nor will any federal estate tax apply for generation-skipping tax transfers that occur in 2010.
• Both taxes are scheduled to return in 2011 at the 2001 rate. The amount that is exempt from each of these taxes will be $1 million rather than the $3.5 million in 2009. Tax on the remaining portion will be 55%, a 10 percent increase from the 2009 estate tax.
• There is still a “gift tax” if you give away more than $1 million during your lifetime, but the tax rate has been reduced from 45% to 35%.
• Heirs will now have to use the original price paid for assets when computing their tax liability, instead of the value upon the owner’s death. This change of “cost basis” could be very expensive and difficult for heirs. For example, say a parent purchased a home for $250,000 and upon the parent’s death the home was valued at $2 million. The heir of the estate in turn sells the home for the current value of $2 million. Under the current law, the heir must pay a capital gains tax on the sale. Each estate can exempt $1.3 million of gains from this “carryover basis” rule. Another $3 million exemption applies to assets inherited from a spouse.
Steps to Take Now
Until Congress takes action to change the law, take some time to organize your records to show the cost basis of assets that might ultimately be inherited by your heirs. It is also important to review your will or living trust to see if they use “credit shelter formulas” or formulas for funding marital deduction gifts that are tied to the federal estate tax exemptions or the amount of the generation-skipping transfer tax exemption. Because there are currently no tax concepts governing estates in 2010, intended gifts may not be exactly as you intended them or heirs may incur unnecessary taxes.
Give Your Estate Plan a Checkup
Our team of dedicated professionals at KKAJ welcomes the opportunity to review your existing estate planning documents. We offer expertive recommendations and useful research tools to make your estate planning simple, efficient, and worry-free. We are committed to ensure that your intentions are carried out properly despite the significant changes in the tax laws.
Proposed Changes in International Tax Laws
by Mike Wilford, Partner
International tax laws present numerous challenges and opportunities for taxpayers. One of the key aspects of the U.S. tax system is the Foreign Tax Credit, which is designed to mitigate the impact of multiple jurisdictions taxing the same income. In February, the Obama Administration presented its 2011 federal budget to Congress, proposing reforms to US taxation of foreign source income and foreign activities.
Under U.S. law, both the U.S. government and the government where income is earned impose tax. To reduce double taxation, the U.S.
allows a tax credit roughly equal to the amount of foreign tax paid. The budget proposal contains several provisions designed to curb
manipulation of the foreign tax credit.
Under the current proposal, companies will have to calculate their foreign tax credit by consolidating all foreign subsidiaries into a single pool. This creates a blended tax rate. Domestic companies could take a foreign tax credit only when the foreign levy is paid to a country that typically enforces an income tax. Domestic corporations will no longer be able to transfer intangibles to foreign subsidiaries in low tax nations in order to produce artificially high returns by increasing their foreign tax credit.
The Obama Administration also seeks to defer interest expense deductions attributable to deferred foreign sources income. Furthermore, the Administration proposes to require third parties to report information whenever foreign financial accounts are created and whenever assets are transferred to and from those accounts.
The proposed budget also includes a provision that eliminates the dividend withholding tax for 80/20 companies. This means that domestic corporations earning 80% of gross income from an active foreign trade or business will not be exempt from withholding tax on interest or dividends paid. One item left in place in the 2010 budget proposal is the “check-the-box rule”, which allows domestic companies to exclude a portion of their foreign earnings from taxable income.
These reforms, according to the Administration, are intended to raise $122 billion in revenue. First, they must endure Congressional hearings before becoming law. If Congress does adopt the reforms, they will take effect in 2011.
At KKAJ, we have a team of experienced advisors who can help navigate the complex world of international taxation. KKAJ is also a member of GMN International and Enterprise Worldwide, international alliances of leading independent accounting and consulting firms. As a member, KKAJ has access to resources and expertise around the world. For further details on how the new proposed changes may affect you and/or your business or for international tax advice, please contact us at (818) 848-5585.
New Jobs Credit for California Employers
SB 15 of the Third Extraordinary Session; Stats. 2009, Ch. 17 added R&TC Sections 17053.80 and 23623 operative for taxable years beginning on or after January 1, 2009.
About the Credit
• A new tax credit of $3,000 for each additional full-time employee hired is available to small businesses with 20 or less employees beginning January 1, 2009.
• The credit is not subject to the 50% limitation for business credits.
• The total amount of credit available to be claimed by all taxpayers is capped at $400 million.
• The credit must be claimed on a timely filed original return received by the Franchise Tax Board on or before a cut-off date specified by the Franchise Tax Board.
• Taxpayers claiming the credit on an original return received by the Franchise Tax Board after the cut-off date is met will be notified that the credit has been denied.
• Taxpayers that have been denied the credit as a result of the $400 million cap being reached will not be assessed an underpayment of estimated tax or underpayment of tax penalty to the extent the underpayment was created or increased by the disallowance of this credit.
To Qualify
An employer will qualify for the credit if:
• Each qualified full-time hourly employee is paid wages for not less than an average of 35 hours per week.
• Each qualified full-time employee that is a salaried employee was paid compensation during the year for full-time employment within the meaning of Section 515 of the Labor Code.
• On the last day of the preceding taxable year, they employed a total of 20 or fewer employees.
• There is a net increase in qualified full-time employees compared to the number of full-time employees employed in the preceding taxable year. For taxpayers who first commence doing business in California during the taxable year, the number of qualified full-time employees employed in the preceding year would generally be zero, unless certain special rules apply.
Exceptions
An employer may not claim the credit for those employees who are any of the following:
• Certified as a qualified employee in an Enterprise Zone or targeted tax area.
• Certified as a qualified disadvantaged individual in a manufacturing enhancement area.
• Certified as a qualified disadvantaged individual or qualified displaced employee in a local agency military base recovery area.
• An employee whose wages are included in calculating any other credit allowed.
Claiming the Credit
Claim the credit on a Personal Income Tax or Business Entity Tax Return using California Form 3527 – New Jobs Credit.
Source: http://www.ftb.ca.gov/businesses/New_Jobs_Credit.shtml
Is Now the Time to Convert to a Roth IRA?
By Robert N. Jensen, Jr., CPA, MAcc, Partner
It is never too early or too late to plan for your retirement and to utilize all the resources available to you. One of the best resources available is the Roth IRA Conversion. The decision to convert can have a significant impact on your ability to build wealth during your lifetime and preserve wealth for your beneficiaries.
Starting in 2010, taxpayers with an annual adjusted gross income of over $100,000 will be eligible to participate in a Roth IRA conversion. Everyone who converts in 2010 may defer and spread income recognition from the conversion over the tax years 2011 and 2012. A conversion in 2010 could, therefore, reduce the marginal tax rate and total taxes due on what otherwise would be a large single year distribution.
Keep in mind, the money you put into a traditional IRA is tax deductible, but is taxed on withdrawal. For Roth IRAs, the opposite is true. You invest the money that you’ve already paid taxes on, but your withdrawals are tax free. Therefore, when youconvert you will owe taxes on the amount you elect to convert.
Some taxpayers may benefit more than others when converting to a Roth IRA. Taxpayers who might stand to benefit the most are those who are wealthy, those seeking to reduce estate settlement costs, those who won’t need to draw income from converted retirement accounts, and those who are young high-income
earners. Another group that might stand to significantly benefit from the conversion are taxpayers who believe their tax bracket will be the same or higher in retirement when they draw income from their qualified retirement accounts.
Traditionally, the attractiveness of IRA accounts and other qualified retirement plans depends on the assumption that taxpayers will have a lower effective tax rate after retirement, when the deferred taxes on the savings will come due. Taxpayers whose tax rate seems more likely to be the same or higher in retirement might just as soon pay taxes on income now and accumulate tax-free gains.
If you intend to leave the retirement money to your heirs, Roth IRAs allow you to leave the maximum amount and reduce your taxable estate by the amount of income tax paid to convert. This can reduce estate taxes for your heirs.
Americans have redefined retirement and continue to be industrious into later years. Unlike traditional IRAs, a Roth IRA allows you to make contributions after reaching age 70½. While the annual adjusted gross income limits on regular contributions to a Roth IRA still apply, you can make nondeductible contributions to a traditional IRA and convert them to a Roth IRA under the current regulations. The contribution will then be able to grow tax-free.
Another factor to consider is your Social Security planning. When calculating your modified adjusted gross income for Social Security purposes, taxpayers must include all taxable and tax-exempt income and 50% of their Social Security benefits, but not Roth IRA distributions. Therefore, having a Roth IRA to supplement retirement income can be very important in managing the taxability of Social Security benefits.
A conversion could be an attractive retirement income and estate planning strategy for wealthy individuals and high-income earners who seek to reduce their tax liability later in life and transfer more wealth to beneficiaries tax-free. But, like any other approach to income tax, this decision is eventually based on your individual situation and goals. Please feel welcome to contact us to discuss how to structure a retirement plan that meets your specific objectives.
