Some gifts to charity should be made now, not in your will

In the past, many people’s wills included a sizable donation to charity. Because the federal estate tax was so burdensome, including charitable bequests in a will was a good idea since it reduced the amount of tax the estate had to pay.

Now, however, the federal estate tax applies only to estates of well over $5 million. As a result, for a great many people, leaving money to charity in a will no longer provides any tax benefit.

On the other hand, the federal income and capital gains taxes have gone up, new surcharges have been added on investment income, and many states have raised their income and capital gains taxes as well. As a result, many people could reap significant tax savings if they made planned annual gifts to charity while they’re alive, as opposed to making bequests in a will. [Read more…]

Saving taxes with WINGs, NINGs and DINGs

Some taxpayers with large state income tax bills have been trying to avoid them through the use of out-of-state trusts.

These trusts have been created in three states that have no or minimal state income tax – Wyoming, Nevada and Delaware. The idea is that people in high-tax states can set up trusts in these low-or-no-tax states to hold the investments that produce the income.

The trusts are called “incomplete non-grantor gift trusts.” A Wyoming incomplete non-grantor gift trust is known by the acronym WING. In Nevada and Delaware, there are NINGs and DINGs.

In theory, you can put income-producing assets into a WING, NING or DING and be an income beneficiary. You’ll pay no federal gift tax on the transfer to the trust, and no state income tax on the income you receive. [Read more…]

Eight states are easing their estate taxes in 2015

Eight states are reducing their estate tax burden in 2015, which is good news for anyone who lives or owns property in those states.

New York and Maryland are increasing their exemption amounts (the amount of assets an estate can have before any tax is due). For 2015, the New York limit goes from $1 million to just over $2 million, and the Maryland limit goes from $1 million to $1.5 million. Both states plan to gradually raise their limits to the amount of the federal limit by 2019. (The federal limit was $5.34 million in 2014 and will be $5.43 million in 2015.)

Tennessee’s limit will be $5 million in 2015, and the tax will be repealed altogether in 2016. [Read more…]

New danger for IRA rollovers

There’s now a big danger if you’re rolling money over from one IRA into another IRA, as a result of a decision from the U.S. Tax Court.

Under federal law, you can only do one IRA-to-IRA rollover per year. If you try to roll over more than one IRA in a 365-day period, it’s considered a distribution, and you’ll be subject to significant taxes and penalties.

In the past, the IRS has told taxpayers that this means you can’t roll over the same IRA within a year. So if you rolled your Fidelity IRA over to Schwab, and you later wanted to roll the same IRA over to Vanguard, you had to wait at least 365 days.

But the Tax Court says this is wrong, and in fact you can’t roll over more than one IRA per year even if they’re different IRAs. [Read more…]

Inherited IRAs aren’t protected from creditors

If you’re planning to leave an IRA or other retirement account to your heirs, you might want to consider creating a trust to hold the account. That’s the upshot of a recent ruling from the U.S. Supreme Court.

That’s because IRAs that are inherited from anyone other than a spouse are no longer protected from creditors in a bankruptcy.

Heidi Heffron-Clark and her husband Brandon filed for bankruptcy after their pizza shop failed in 2009. They owed their landlord $74,000, but didn’t have enough cash on hand to pay the debt.

Heidi did, however, have $293,000 in an IRA that she inherited from her mother.

In general, IRA funds are exempt from creditors in a bankruptcy. Congress created this rule in order to protect Americans’ retirement savings and to prevent elderly people from not having enough to live on. [Read more…]

How to help your trustee make good decisions for your family

As Yogi Berra supposedly said, “It’s hard to make predictions, especially about the future.” Yet when you create a trust for your heirs, you have little choice but to make predictions about what their needs will be many years down the road.

Because circumstances change, it’s a good idea to make your trust flexible enough to accommodate the unexpected. If you tell your trustee what to do in too much detail, the trust might end up being useless or counter-productive if something unforeseen happens.

That’s why most trusts give trustees quite a lot of discretion. For instance, a trust might say that a trustee can make distributions to a spouse to help maintain his or her lifestyle, or to children for their health, education and support. But it’s up to the trustee to decide when and in what amounts these distributions should be made. [Read more…]

Setting your salary: What’s the right amount for a small business owner?

One of the greatest perks of owning a small business is flexibility. You can set your own hours and salary. You can plot the firm’s trajectory without consulting your boss, upper management, or even corporate policy. But that same flexibility may become a curse if handled unwisely. A small business owner without discipline and a well-thought-out strategy may fall into serious financial trouble. Employees in larger firms often rely on the human resources department to establish pay scales, retirement plans, and health insurance policies. In a small company, all those choices – and many more – fall to the owner, including decisions about personal compensation. [Read more…]

Some very last-minute tax moves to consider

There’s not much time left to make tax-saving moves for 2014. Some ideas to consider:

  • Make your January mortgage payment before December 31 to squeeze an extra interest deduction into 2014.
  • Make tax-free gifts to use your annual gift tax exclusion for 2014. This year you can give up to $14,000 to as many individuals as you like without tax consequences. These gifts to individuals are not deductible by you; nor are they taxable to the recipients.
  • Sell appreciated stock to offset capital losses taken earlier in the year and vice versa. Any excess loss can offset up to $3,000 of ordinary income in 2014, and losses greater than that can be carried to future years.
  • Use your credit card to pay tax-deductible expenses by December 31 if you’re short of cash. You can deduct the expenses on your 2014 return even though you pay your credit card bill in 2015.
  • If you’re required to take a minimum distribution from your retirement plan, do so by December 31 or you face a 50% penalty. If you just turned 70½ this year, you could wait until April 1, 2015, to take a first distribution.
  • If a wedding or divorce is in your year-end plans, be aware that your marital status as of December 31 determines your tax status for the whole year. Changing the dates of a year-end event may save taxes.

To discuss these or other tax-cutting moves you might want to consider, give us a call now before it’s too late to act.

No bankruptcy protection for inherited IRAs

Your retirement funds are protected from creditors even if you file for bankruptcy, with only a few limitations. This protection extends to funds in all government-qualified pension plans, including IRAs (traditional and Roth), 401(k)s, 403(b)s, Keoghs, profit sharing, money purchase, and defined benefit plans. A recent U.S. Supreme Court decision has held, however, that an inherited IRA is not a “retirement fund” and therefore doesn’t qualify for bankruptcy protection.

An inherited IRA is a traditional or Roth IRA that a deceased owner has bequeathed to a beneficiary. It differs from a “true” retirement account in three ways: [Read more…]