While preparing our 2011 taxes I realized that there has been an error in the past few year’s MA tax returns (in the government’s favor) related to our Waltham home’s property tax.  What’s the likelihood we will get audited?  What’s our obligation to amend the prior year’s taxes and  how would we go about doing it?

ATTORNEY ANSWER:

The likelihood of audit is hard to judge, but States have been getting more aggressive as revenues have fallen.  Also, states now get more information from all sources and in lieu of full blown audits rely increasingly on return adjustment notices.  There are even situations where the taxing authority can look beyond a three year statute to adjust tax due in more current years.  Obviously, there are a lot of variables and a professional should be consulted to discuss the potential exposure. 

The Waltham Tax attorneys at Beliveau Law Group provide legal services for all tax related matters throughout Massachusetts.  The law firm provides legal representation to individuals, businesses and families in the Boston Metrowest communities including: Lincoln, Lexington, Watertown, Belmont, Newton, Wellesley and Weston.

• Take control of your credit cards. Over-reliance on credit cards hurts you in several ways. With interest rates typically in double digits, it’s the most expensive way to borrow money. Think of those monthly interest payments as draining off dollars that you could be investing in a home or saving for your retirement. And too much debt can hurt your credit score and make other borrowing more difficult. It takes time and discipline to reduce credit card debt, but it’s well worth the effort.
• Rid yourself of “stuff” you don’t use. Are you paying for a cell phone you rarely use? A magazine you never read? A mail-order video service you forgot about? An extra cable box for that basement TV you never watch? A membership to a gym you rarely attend? If so, now is the time to dump those wasted services and pocket the cash.
• Build a cash reserve for emergencies. Your financial situation can quickly spin out of control if you can’t come up with cash when you need it. If you lose your job, you might have to live on reduced income for several months. Or there could be unplanned medical bills, car repairs, or home repair costs. Even if you have insurance, reimbursements can take time and there are deductibles to meet. Work hard to put aside at least three months’ living expenses. Invest it in a safe, liquid account, and resist the temptation to raid it for non-emergencies.
• Save regularly and save smartly. Develop the habit of saving something every month, no matter how small the amount. The earlier you start, the longer your savings will have to compound for retirement. Save as intelligently as possible. If you have a 401(k) plan that your employer matches, that’s probably the best investment you’ll find. Other tax-advantaged plans usually make sense, especially for younger investors. But developing a regular savings habit is the key.
• Diversify your investments. You’ll reduce your risk by spreading investments among stocks, bonds, and real estate. Within each category, diversify among different industries and companies. The worst thing you can do is to have everything tied up in stock of the company you work for.
• Identify your tax opportunities for 2012. There are many credits and deductions available to you in such areas as retirement, education, home ownership, and child care. Identify those that will reduce your taxes, and make adjustments as needed to qualify for those tax breaks.
• Get that new filing system started now. Purge your old files. Destroy documents that you don’t need. Create new files for your 2012 documents. Keep a tax and financial calendar that shows all deadlines for making payments and filing returns. And if you don’t have a filing system, create one in order to organize and locate your tax and financial records.
• Educate yourself about financial matters. You don’t have to get a degree in finance, but read financial articles on topics that concern your affairs. Consider taking a seminar in basic investing. Ask questions of your advisors. The more you know about finance, the more you can take control of your own financial health.

• Standard mileage rate for business driving remains at 55.5¢ a mile. Rate for medical and moving mileage decreases to 23¢ a mile. Rate for charitable driving remains at 14¢ a mile.
• Section 179 maximum first-year expensing deduction decreases to $139,000, with a phase-out threshold of $560,000.
• Transportation fringe benefit limit decreases to $125 for vehicle/transit passes and increases to $240 for qualified parking.
• Social security taxable wage limit increases to $110,100. Retirees under full retirement age can earn up to $14,640 without losing benefits.
• Kiddie tax threshold remains at $1,900 and applies up to age 19 (up to age 24 for full-time students).
• Nanny tax threshold increases to $1,800.
• Health savings account (HSA) contribution limit increases to $3,100 for individuals and to $6,250 for families. An additional $1,000 may be contributed by those 55 or older.
• 401(k) maximum salary deferral increases to $17,000 ($22,500 for 50 and older).
• SIMPLE maximum salary deferral remains at $11,500 ($14,000 for 50 and older).
• IRA contribution limit remains at $5,000 ($6,000 for 50 and older).
• Estate tax top rate remains at 35%, and the exemption amount increases to $5,120,000.
• The annual gift tax exclusion remains at $13,000.
• Adoption tax credit decreases to $12,650 for adoption of an eligible child.

So what does happen with the will?

Once the will is located, it should be given to the estate’s attorney. Instead of reading the will aloud, the estate’s attorney sends copies to anyone who may have an interest in it. This includes:

• The executor or personal representative, who is in charge of applying for probate, managing the decedent’s property, and making sure the instructions in the will are carried out.
• Anyone who is named as a beneficiary. If any minor children or incapacitated individuals are named, then their guardians should receive a copy of the will.
• In some states, anyone who would have inherited if there was no will is entitled to a copy of the will.
• Even if it isn’t required by law, if there is the possibility of a legal challenge to the will, the attorney may want to send a copy to any legal heirs, close family relatives, or previous beneficiaries who aren’t included in the will, so that they have notice. This will limit the time frame for them to file a will contest.
• The estate’s accountant may get a copy, and if the estate is taxable, then the IRS may get a copy as well.
• If the will funds a revocable trust, then the successor trustee of the trust is entitled to a copy.

Note that once a will is probated, it is available to the public and anyone can read it.

Dementia is a general term for memory loss that is severe enough to interfere with daily life. The signs of dementia may include forgetfulness; difficulty making plans, thinking ahead, or using language; and a change in character traits, among other symptoms.

Alzheimer’s disease is a partially hereditary disease that causes a loss of brain cells. The symptoms start out mild, but grow progressively worse over time. An early symptom of Alzheimer’s is difficulty learning new information. The disease can then progress to more severe symptoms such as forgetting names and places, disorientation, and mood and behavior changes. Eventually, it can lead to the inability to talk, walk, or eat.

Alzheimer’s disease accounts for 50 to 80 percent of dementia cases, according to the Alzheimer’s Association, but there are many other causes of dementia, including vascular dementia, Lewy body dementia, frontotemporal dementia, and Wernicke-Korsakoff syndrome.

It’s important to know what type of dementia a person has, because the treatments are different. Some causes of dementia are treatable, and the person’s memory problems can be alleviated with proper medical care. With Alzheimer’s disease, there is no cure, but there are medications that can treat the symptoms and slow the disease’s progress.

Dementia is not a normal part of aging. If someone you love is exhibiting signs of dementia, he or she should get immediate medical attention to understand the underlying cause.

For more information on Alzheimer’s disease from the Alzheimer’s Association, go to: www.alz.org.

There has been a dramatic rise in the number of men and women providing parental care over the past decade and a half, the study notes. In 1994, only 9 percent of women and 3 percent of men in that age group were providing care to parents. By 2008, the percentage of female caregivers had more than tripled to 28 percent, while the figure for males had quintupled to 17 percent.

Daughters are more likely to provide help with personal activities such as dressing, eating and bathing, while sons are more likely to provide financial assistance, the study found.

Americans who take time off from work to care for their parents are losing a great deal of money, according to MetLife. For the individual female caregiver, the impact in terms of lost wages, pension and Social Security benefits averages $324,044. For male caregivers, the figure is $283,716.

The study, “Double Jeopardy for Baby Boomers Caring for Their Parents,” can be found at http://www.caregiving.org/archives/1773

The benefit of hiring a caregiver yourself is that you can select the person you like the best and who is the best fit for your family. In addition, hiring someone privately is usually cheaper than hiring through an agency.

On the other hand, if you hire a caregiver directly, you’ll need to consider all the tax and liability issues. As an employer, you’ll be responsible for filing payroll tax forms and verifying that the employee can legally work in the U.S. If you pay $1,700 or more in wages to any one employee in a year, you’ll need to withhold and pay Social Security and Medicare taxes. If you pay more than $1,000 in wages in a year, you’ll need to pay unemployment taxes.

In addition, the person you hire might not carry his or her own liability or workers’ compensation insurance. If an accident occurs on the job, you could be responsible.

If you hire through a home health agency, the agency is the employer, so you don’t need to worry about tax and liability issues. The agency takes care of screening and paying the employees, performing background checks, and providing insurance.

In addition, a licensed home care agency must provide ongoing supervision to its employees, helping them deal with difficult family situations or changing needs. And the agency might also be able to provide back-up if a regular caregiver is not available.

The downside of using an agency is not having as much input into the selection of the caregiver. In addition, caregivers may change or alternate, causing a disruption in care and possible confusion.

If you want to find a home health care agency near you, you can visit U.S. Government’s Eldercare Locator service at www.eldercare.gov.

Handled properly, an IRA can provide tax-sheltered growth for your heirs for many years to come. But you need to be careful, because it can be easy to make costly mistakes.

An IRA, or Individual Retirement Account, is a personal savings plan that allows you to set aside money for retirement. The advantage of an IRA is that you may be able to deduct some or all of your contributions from your taxes. Earnings in an IRA generally aren’t taxed until they’re distributed to you, at which point you pay income tax on the distributions. However, the assets in the IRA will have had a chance to grow through investment during this time without any capital gains or other taxes.

(This is true of a traditional IRA. There are also “Roth IRAs.” With a Roth IRA, you don’t get a tax deduction for your contributions, but you don’t have to pay tax when the money is distributed.)

Once you reach age 70½, you must start taking distributions from a traditional IRA. You must take out at least a minimum amount each year, which varies depending on your age and life expectancy.

But if you don’t need all the money in your IRA to live on, you can take only the minimum amount, and leave the rest of the assets in the account to grow and eventually pass along to your heirs.

Here are three things to consider:

Name beneficiaries. Give some careful thought to the beneficiaries of your IRA. A spouse may be a logical choice for a beneficiary, but if you name your spouse, be sure that you name contingent beneficiaries as well. If you don’t do so, then if you and your spouse die at the same time, or if your spouse dies and you’re not able to name a new beneficiary afterward, then the IRA will go to your estate.

It’s usually not a good idea to have your IRA go to your estate. For one thing, your estate will be subject to probate, which can result in costs and delays. Probate assets are also made public, so anyone can learn the details of your financial matters, which you might prefer to avoid. Further, having the IRA go to your estate can destroy a number of potential tax advantages.

You should know that if your spouse inherits an IRA, he or she can roll it over into his or her own IRA. When someone other than a spouse inherits an IRA, that person will need to start taking minimum distributions within a year after the IRA owner dies.

‘Stretch’ your IRA. If you don’t need all the funds in your IRA for retirement, you might want to “stretch out” your IRA. To do this, when you reach 70½, take only the required minimum distributions, leaving more assets in your IRA. When you die, your beneficiary can also take only the minimum distributions and “stretch” these distributions out over his or her lifetime, giving the IRA assets many extra years in which to grow tax-deferred.

It makes sense to name a young beneficiary, because the younger the beneficiary, the smaller each annual distribution must be, so there will be more assets in the IRA that can accumulate through tax-deferred growth.

If your heir doesn’t need all the funds in the IRA to live on, he or she can also name a second-generation beneficiary, and the tax savings can accumulate over many more years.

Name a trust as the beneficiary. In some cases, it may make sense to name a trust as your IRA beneficiary. This is particularly true if you have minor children, children with special needs, or a beneficiary who is not good at managing money.

While a trust can be a valuable idea, it’s essential to consult with an attorney to make sure the trust is properly drafted, because a mistake in the way the trust is set up can destroy the tax advantages of an IRA “stretch-out.”

Florida will no longer accept powers of attorney unless they are signed by two witnesses and notarized. Also, powers must take effect immediately, rather than only if the person becomes incapacitated.

Power of attorney documents that were signed before October 1, 2011 are still valid in Florida even if they don’t meet these requirements, but:

• A bank or other institution in Florida can refuse to accept an out-of-state document unless the agent provides a letter from an attorney saying the document is legally valid in its home state; and
• If the power of attorney becomes effective only when the person is incapacitated, a bank or other institution in Florida can require the agent to provide a letter from the person’s “primary physician” certifying that the person is incapacitated, and this physician must be licensed under Florida law.

If you have a power of attorney document that doesn’t meet the new Florida requirements, you might want to consider updating it so that it will be more easily accepted if you need to use it in Florida.

Recently, a handful of states have allowed people who make a will to go to court while they’re still alive and have a judge rule that the will is valid – thus preventing a will contest.

These states include Alaska, Arkansas, Nevada, North Dakota and Ohio. Similar legislation is pending in Delaware.

Even if you don’t live in one of those states, you might be able to obtain a court ruling there, such as by putting your assets into a revocable trust and hiring a trustee in that state.

Of course, there are many drawbacks, including the inconvenience and expense, the fact that you’ll have to make your estate planning documents public before you die, and the fact that if you later revise your estate plan, the ruling will be worthless and you’ll have to start all over again.

If you’re truly concerned about a will contest, this idea might be worth exploring. But there might also be other, less drastic methods of making sure that your intentions are carried out.

Ordinarily, you can give up to $13,000 each year to as many people as you like without paying gift tax. Through the end of 2012, you can also make total lifetime gifts in addition to these amounts of up to $5 million. You won’t have to pay gift tax on these additional lifetime gifts, although they will reduce your estate tax exemption when you die.

That means that if you make gifts before the end of 2012 of up to $5 million (such as, for instance, gifts to trusts that will benefit your children), it will have a neutral effect on your federal estate tax – your estate won’t owe more or less as a result.

However, it can have a very positive effect on your state estate tax. By making lifetime gifts rather than bequests in a will, you’ll reduce the amount of your taxable estate, which can lower or even eliminate the amount of state estate taxes that will be owed.

If you live or own property in a state that has a state estate or inheritance tax, this is a strategy you might want to consider.

A federal estate tax return doesn’t have to be filed every time someone dies. In fact, most estates never have to file one. In 2011 and 2012, a return has to be filed only if the person’s estate (including property, life insurance, taxable gifts, etc.) is worth $5 million or more.

However, even if a return isn’t required, a recent change in the law means there could be big tax savings for many families if they file one anyway.

The change applies to estates of people who die in 2011 or 2012 and are survived by a spouse.

There are strict time limits for filing a return, so if you know of someone whose family could take advantage of these savings, you or they should speak with an attorney right away.

Also, if you have an older will that includes a trust designed to reduce taxes when a surviving spouse later dies, you should have the will reviewed, because under the new law there might now be better alternatives.

How it works

Generally, when a person dies, his or her estate can give an unlimited amount to a surviving spouse. After that, if the person’s bequests (plus large lifetime gifts) total more than a certain “exemption amount,” then an estate tax is due. For 2011 and 2012, the exemption amount is $5 million.

Traditionally, the exemption amount applied separately to each spouse. So if a husband died first, his estate could use the exemption amount, and when his wife died later, she would get her own exemption amount.

But under a change in the law starting in 2011, if the first spouse to die doesn’t use all of his or her exemption amount, the difference can be passed along to the other spouse. So suppose a husband dies and doesn’t use any of his $5 million amount (because he leaves everything to his wife). When the wife dies, her exemption amount will be her own $5 million plus the $5 million that the husband didn’t use. So instead of being able to leave $5 million tax-free to her heirs, she can leave $10 million tax-free – a potential savings of millions of dollars.

However, this only works if the husband’s estate filed an estate tax return and elected to pass the exemption amount on to his wife. If the husband’s estate didn’t file a return (because it wasn’t legally required), then all the potential tax savings are lost.

This means that it’s almost always a good idea to file an estate tax return for anyone who dies in 2011 or 2012, if they are survived by a spouse.

Even if it seems highly unlikely that a surviving spouse will be worth more than $5 million when he or she dies, it’s still a good idea to file a return, because the $5 million exemption amount only lasts through 2012. After that, Congress can change it, and we don’t know what amount Congress will choose. It appears that if Congress doesn’t do anything, the amount will be reduced to just $1 million in 2013.

Because the current law only lasts through 2012, there are a lot of questions and uncertainties about what will happen after that. It’s possible that the law will change again, and the tax savings may be reduced or lost by the time the surviving spouse dies. However, in most cases, the cost of filing an “unnecessary” tax return will be small compared to the potentially huge savings down the road.

(In a few cases, executors might be put in an awkward position because the heirs who would have to pay for filing the return might be different from those who would benefit from the increased exemption. In such a case, the executor might want to ask the surviving spouse to pay the cost of the filing, since he or she will benefit from it.)

Many wills need to be reviewed

In the past, many people tried to achieve a similar result – using both spouses’ exemptions – through the use of a trust, sometimes called a “bypass trust.” Typically, when the first spouse died, some of his or her assets (often a sum equal to the current exemption amount) went into a trust, and the rest was left directly to the surviving spouse. The trust might pay income and principal to support the spouse during his or her lifetime, after which the assets would go to children or other heirs. When the surviving spouse died, the trust property wasn’t included in his or her estate, and so it didn’t “count” toward the exemption amount.

The new law might make these kinds of bypass trusts unnecessary for some people – at least until the end of 2012.

You might want to consider the costs and benefits of eliminating such a trust from your will, or at least providing that the trust provisions won’t take effect unless the law changes again such that the trust becomes a good idea.

Some of the disadvantages of a bypass trust include:

• The surviving spouse has less flexibility and access to the assets.
• There are expenses in managing the trust, filing trust tax returns, and sometimes hiring an outside trustee.
• If trust property is sold after the surviving spouse dies, the “basis” for capital gains tax purposes is its value at the time of the first spouse’s death – whereas without a trust, the basis would be the (presumably higher) value at the time of the second spouse’s death.

On the other hand, there are some powerful reasons to keep a bypass trust. For instance:

• Assets in such a trust will be protected from a surviving spouse’s creditors, and from the actions of a future spouse if the surviving spouse remarries.
• A spouse might want to put property in a trust to make sure that when the surviving spouse dies, the assets will go to the person’s children from a prior marriage.
• A bypass trust can also reduce state estate taxes, as well as generation-skipping transfer taxes.
• A bypass trust shields all future appreciation from estate taxes – even if the assets in the trust grow in value far beyond the amount of the first spouse’s exemption.

As an aside, if your old will says that the amount that will go into a bypass trust is equal to the exemption amount, you might want to review this in light of the fact that the exemption amount in 2011 and 2012 has been dramatically increased to $5 million. You might prefer to say that the trust assets will be the exemption amount or a certain dollar figure, whichever is less.

Seller beware! Business owners and regulators have found that scam artists use these types of transactions to strip value from companies, pulling out cash, and leaving the seller with a fistful of worthless stock. Within days of closing the sale, the buyer factors (sells) the receivables for cash, runs up company credit cards, sells off inventory, and empties cash accounts. The firm’s creditors don’t get paid. Your formerly prosperous business becomes an empty shell.

How can you avoid these types of scams when selling your business? Here are a few suggestions.

• Perform an extensive background check on any potential buyer, including a review of the person’s credit reports, litigation history, tax liens, and so forth. A skilled attorney can often help with this research.
• Beware of sales that go too smoothly. Legitimate buyers will perform due diligence, asking tough questions, inspecting financial records, and calling customers and vendors. If the buyer wants to close the sale in a hurry and doesn’t seem interested in the firm’s ongoing prospects, beware!
• The buyer must meet deadlines and supply all requested data in a reasonable time. If he or she is always late, move on. Find a buyer who’s serious about the transaction.
• Before turning over ownership, require a substantial percentage of the purchase price up front. Some advisors suggest 50% in cash at closing. Serious buyers, who want to continue growing the firm, will put their money on the line.

If you need help navigating the sale of your business, give us a call.

The law has “innocent spouse” rules that may limit an individual’s responsibility for unpaid taxes resulting from filing a joint return. If the “innocent spouse” can establish that he or she did not know, or have reason to know, that there was an understatement of tax when signing the joint return, relief can be requested. Under previous rules, this relief had to be requested within two years after collection proceedings were initiated by the IRS.

In a recent ruling, the IRS has decided to eliminate the two-year time limit for requesting innocent spouse status under the “equitable relief” provision in the law.

The new law extends the 4.2% social security tax on wages through February 29, 2012. Without this extension, the tax rate would have gone to 6.2% on the first $110,100 of wages earned in 2012.

The law also extends benefits for the long-term unemployed for two months and prevents a scheduled cut in fees paid to Medicare providers from taking effect January 1, 2012.

These extensions will be paid for by an increase in fees charged by government-backed mortgage companies (Fannie Mae and Freddie Mac) for new home loans.

Included in the agreement is a requirement that President Obama make a decision within 60 days on the construction of the 1,700 mile Keystone oil pipeline.

Finally, the agreement calls for a House-Senate conference committee to negotiate an agreement that would extend the payroll tax cut through the end of 2012, extend unemployment benefits, and prevent cuts in payments to Medicare doctors.

• January 17 – Due date for the fourth quarterly installment of 2011 estimated taxes for individuals unless you file your tax return and pay any taxes due by January 31.
• January 31 – Employers must furnish 2011 W-2 statements to employees. Payers must furnish payees with Form 1099s for various payments made. The deadline for providing Form 1099-B and consolidated statements to customers is February 15.
• January 31 – Employers must generally file annual federal unemployment tax returns.
• February 28 – Payers must file information returns, such as Form 1099s, with the IRS. This deadline is extended to April 2 for electronic filing.
• February 29 – Employers must send Form W-2 copies to the Social Security Administration. This deadline is extended to April 2 for electronic filing.
• March 1 – Farmers and fishermen who did not make 2011 estimated tax payments must file 2011 tax returns and pay taxes in full.
• April 17 – Individual income tax returns for 2011 are due.

Overview: The AMT is a separate tax system that runs parallel to the regular income tax system. This complex calculation includes additions for “tax preference items” and reductions for personal exemptions and certain tax deductions. There are five basic steps to computing the AMT.

1. Determine your taxable income for regular income tax purposes.
2. Make the technical AMT adjustments required by law.
3. Subtract a special “exemption amount” based on tax filing status ($48,450 for single filers, $74,450 for joint filers, and $37,225 for marrieds filing separately). These exemption amounts are reduced for high-income taxpayers.
4. Apply the AMT rate to the result. The rate is 26% on the first $175,000 of AMT income and 28% for amounts above $175,000.
5. Compare your AMT liability to your regular tax liability. You pay whichever tax is greater.

Best approach: Estimate your AMT exposure before year-end. Depending on your situation, it may make sense to avoid tax preference items or postpone certain deductions. Caution: This is a complex area of the tax law, so contact our office if you need more information or planning guidance.

• For starters, you may only deduct contributions made to a legitimate tax-exempt charitable organization. Note that a qualified charity cannot be established to benefit a specific individual or family.
• Generally, your deduction is limited to 50% of adjusted gross income (AGI) for the year (30% of AGI for contributions to certain charities and private foundations). Any excess may be carried over for up to five years. The deduction for gifts of property have other AGI limits.
• The tax law imposes strict substantiation requirements. No deduction is allowed for monetary gifts unless you maintain a bank record or written communication from the charity indicating your name and the amount and date of donation. For contributions of $250 or more, you must obtain a contemporaneous written acknowledgement from the charity. If you donate property valued above $500, you must provide a written description with your return. Independent appraisals are required for property donations above $5,000.
• Typically, you may deduct the fair market value of gifts of property owned longer than one year. Any appreciation in value remains untaxed. For instance, if you donate property valued at $5,000 that you acquired five years ago for $1,000, you can deduct $5,000. But the property must be used by the charity to further its tax-exempt purpose.
• For 2011, individuals age 70½ or older can transfer up to $100,000 from an IRA directly to a charity without paying any tax on the distribution. The downside is that the transfer doesn’t qualify for the charitable deduction.
• Finally, you can secure deductions late in the year by donating to charity by credit card. As long as the charge is posted in December, you can deduct it on your 2011 return, even if you don’t pay the credit card until 2012.

If you have any questions concerning year-end charitable donations, contact our office.