Articles Posted in Estate Tax

HOW THE NEW TAX BILL MAY AFFECT DIVORCES

In one of our previous posts we informed about the new Tax Cuts and Jobs Act (“TCJA”) and the major changes it brings, including the various adjustments in tax deductions. This article focuses on deductions applicable to alimony, as the new system may significantly affect and expedite divorce settlements in the months to come.

Alimony is a form of spousal support awarded by agreement or by court decision to the lower-income spouse after divorce, typically referred to as the “dependent” spouse. The courts have wide discretion in establishing the amount of alimony and the time period during which the higher-income spouse is obligated to pay. The purpose of alimony is to help the dependent spouse overcome the divorce and to at least partially maintain the standard of living the spouses shared during their marriage. To ease the burden of splitting one household into two, the alimonies were tax deductible – at least until now.

The New Tax Bill

At the end of last year, Congress passed the most significant tax reform since 1986 and unsurprisingly, it aroused many controversies. Its supporters are convinced that the bill is a big success for workers, pointing out positive changes already in effect, such as Wal-Mart raising its employee’s hourly rate. On the other side of the barricade, the opponents fear that the bill will have quite the opposite effect —that it will better benefit the company shareholders rather than its employees (numerous buybacks were announced in December). In the following months, we may witness attempts on the state level to mitigate some of the effects of the new federal law. While it is too soon to evaluate whether the bill will bring about the desired economic growth long-term, it is the right time to get acquainted with the most significant changes. Importantly, none of these changes will affect the 2017 taxes.

Individuals:

The provisions applicable to individuals are temporary and will expire at the end of 2025, at which time the brackets will return to the old rates, unless Congress extends this period. The rates will still be distributed into seven brackets based on income. Rates for six of the brackets have been lowered and accordingly, most of us will benefit from this. However, some who were in the 33% bracket may now find themselves in the 35% bracket.

Old rates: 10% 15% 25% 28% 33% 35% 39.6%

 

New rates: 10% 12% 22% 24% 32% 35% 37%
Income from (Individuals): $0 $9,526 $38,701 $82,501 $157,501 $200,001 $500,001
Income from (Couples): $0 $19,051 $77,401 $165,001 $315,001 $400,001 $600,001

 

Another benefit is that the personal deductions were nearly doubled to: $12,000 for single filers, $18,000 for head of households, and $24,000 for married couples filing jointly. On the other hand, the $4,450 deduction you could claim for yourself, your spouse, and each of your dependents, was eliminated. In sum, this may completely negate the new benefits for some families. Deductions for the elderly and for those who are blind stay in place and the tax credit for children under 17 was doubled to $2,000. The new law also allows parents to take a $500 credit for each non-child dependent they’re supporting.

The deductions for state and local income and property taxes will be newly capped to $10,000 and foreign real property taxes will no longer be deductible at all. Also, the deductions for itemized interest expense from mortgage debt (to acquire a first or second residence) were lowered from $1 million to $750,000. This change will not affect old mortgages that will be refinanced under the new law, as long as the old loan balance is not exceeded at the time of refinancing. The current up to $100,000 deduction for the interest on home equity loans will no longer be allowed.

Corporations and Businesses

As opposed to the changes affecting individuals, most of the corporate provisions are permanent. The corporate tax rate has been slashed from 35% to 21%. This deduction will not apply to some specific service industries, such as health, law, and professional services. However, single filers with income below $157,500 and joint filers with income below $315,000 can claim this deduction fully on income from service business. This provision is, like in the case of individual tax rates, only temporary.

American corporations will no longer be required to pay corporate taxes on money earned abroad if the corporation stays abroad. Once the income is brought back to the United States, it will be taxed at a new, considerably lower, rate of 15.5% on cash assets and 8% on non-cash assets.

Pass-through businesses such as S corporations and limited liability companies will benefit from the tax deduction as well. This might motivate people to either incorporate their businesses or to disguise their personal income as business income. However, the incorporation may not be the right choice for everyone and people should be cautious, as the bill incorporates some provisions to prevent income mischaracterization. If the owner or partner in a business will draw salary from it, it would be subject to ordinary income tax. Moreover, the bill also limits the income, which qualifies for the deduction. Nevertheless, it seems that the system will not be bullet-proof and will benefit the passive owners over the active ones.

If you are interested in learning how the new tax bill may affect you or your estate please do not hesitate to contact the attorneys at Chepenik Trushin LLP, who are ready, willing, and able to assist you with your estate planning needs. Bart Chepenik, 305-613-3548. Brad Trushin, 305-321-4946. Offices 305-981-8889.

Other Sources

Introduction:

https://www.cnbc.com/2018/01/17/how-democrats-can-neutralize-gop-tax-law-commentary.html

https://www.politico.com/agenda/story/2018/01/15/tax-law-bonuses-wages-trump-000617

Individuals:

https://www.forbes.com/sites/robertberger/2017/12/17/the-new-2018-federal-income-tax-brackets-rates/#fd26309292a3

http://money.cnn.com/2017/12/15/news/economy/gop-tax-plan-details/index.html?iid=EL

http://money.cnn.com/2017/12/20/news/economy/republican-tax-reform-everything-you-need-to-know/index.html

https://www.marketwatch.com/story/10-things-you-need-to-know-about-the-new-tax-law-2017-12-20

Corporations:

https://www.forbes.com/sites/kellyphillipserb/2017/12/22/what-tax-reform-means-for-small-businesses-pass-through-entities/#68335fd66de3

https://www.fool.com/taxes/2018/01/03/heres-who-got-the-biggest-tax-rate-break-from-corp.aspx

https://www.marketplace.org/2018/01/16/business/ive-always-wondered-tax-bill-2017/corporations-pay-effective-rate-corporate-tax

https://www.vox.com/2017/12/20/16790040/gop-tax-bill-winners

https://www.inc.com/zoe-henry/final-tax-bill-impacts-businesses-2017.html

https://hbr.org/ideacast/2017/12/breaking-down-the-new-u-s-corporate-tax-law

Expanding Florida’s Homestead Exemption

Florida voters will have an important decision to make for the 2018 election—whether to raise the Florida homestead exemption. At first glance, the legislation offers a substantial property tax break for homeowners; however, if approved, the homestead exemption bill may cost counties and cities enormous revenue.

The Florida legislature created the homestead exemption in 1934 to aid residents affected by the Depression. The homestead exemption—then $5,000.00—allowed residents to keep their homes despite inability to pay property taxes. http://www.tampabay.com/news/politics/legislature/florida-homestead-exemption-increase-closer-to-ballot/2322311. In 1980, under Democratic Governor Bob Graham, Florida voters raised the exemption to $25,000.00, and again in 2008 to $50,000.00 under Republican Governor Charlie Crist. http://www.tampabay.com/news/politics/legislature/florida-homestead-exemption-increase-closer-to-ballot/2322311. Now, the November 2018 ballot will give Florida voters the choice to raise the exemption even higher.

MORE MONEY, MORE PROBLEMS? 6 DO’S AND DONT’S OF ESTATE PLANNING AND INTELLECTUAL PROPERTY

At the end of last year it seemed as if every day there was a new report of a celebrity dying unexpectedly. As fans around the world mourned the death of some of Hollywood’s most iconic figures, reports of their estate planning, or lack thereof, also filled the headlines.

Prince: Intestacy and streaming music rights collide

Estate Planning: Income Tax Strategies

            Law firms have had to take a spike in income tax rates, a decline in the estate tax rate, and an increasing annual estate tax exemption threshold into account in devising estate planning strategies. There has been a decreasing gap between the income tax rates and estate tax rates: estate tax has moved to a maximum rate of 40% and a $5.45 million exclusion in 2016, from a 55% percent tax rate and a $675,000 exclusion in 2001; the maximum tax rate on ordinary income is 39.6%, up from a low of 35 percent in 2003; the maximum long-term capital gains tax rate increased to 20% from 15% in that same time frame. Furthermore, in 2013 an additional 3.8% surtax was added for net investment of individuals, estates, and trusts over statutory threshold amounts in certain cases. While these numbers might make you think that estate planning is only necessary for the super wealthy, financial planners advise that it is not. Taxes are just one consideration of estate planning: it is critical to plan for an orderly transfer of assets or for other circumstances such as incapacitation.

The capital gains tax rate – the long-term rate of 20% plus the 3.8% surtax – is significant because it affects the basis of assets. When a decedent dies, her beneficiaries get the benefit of a step-up in basis, which is appreciated assets held in the decedent’s estate are readjusted to fair market value at the time of inheritance. Through this mechanism, the beneficiary receives an income tax advantage because she is not liable for the capital gains tax on any appreciation that occurs up to the point she inherits the asset.

The importance of a Semicolon – Does property partially used as primary residence and partially for business purposes qualify as Homestead?

Does property partially used as primary residence and partially for business purposes qualify as homestead under Article X, Section 4 of the Florida Constitution? Surprisingly, the answer apparently rests on a semicolon.

This question was addressed in 2003 by the Florida Court of Appeal for the First District in Davis v. Davis, 864 So. 2d 458 (Fla. 1st DCA 2003). The facts of this case are as follows: Mr. Horace Davis lived with his wife Carolyn on a contiguous piece of property measuring less than 160 acres outside of municipality in an unincorporated portion of Nassau County. The property included the couple’s residence and on a portion separate from the residence, Mr. Davis operated a mobile home park generating profit through rent. Mr. Davis died in 2000 having written a will.

FIRPTA: Increased Withholding and Other Changes

Most professionals have familiarity with the Foreign Investment in Real Property Tax Act (“FIRPTA”), especially those that have foreign clients investing in U.S. real estate. On December 18, 2015, the President signed into law the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”).  The PATH Act significantly alters FIRPTA withholding for foreign persons disposing of investments in U.S. real estate.  Realtors, accountants, closing agents and title companies need to familiarize themselves with the changes.

The PATH Act increases the FIRPTA withholding rate from 10 percent to 15 percent on certain dispositions and distributions of United States Real Property Interests (“USRPIs”).[1]  Similarly, the withholding rate for the transfer of a partnership interest or the beneficial interest in a trust or estate has been increased from 10 percent to 15 percent.[2]  The new withholding rate applies to all such dispositions that take place after February 16, 2016.[3]  However, the new FIRPTA rules allow for a 10 percent withholding rate where the amount realized on the disposition of property being used as a residence is between $300,000.00[4] and $1 million.[5]  In other words, if a foreign person sells his or her personal residence for $999,000.00 the amount to be withheld shall be $99,900.00.  However, if the foreign person sells his or her personal residence for $1,000,100.00, the amount to be withheld on the sale shall be $150,015.00.  The amount withheld is offset by the gain on the disposition of the USRPI and is refundable to the extent the amount withheld exceeds the underlying tax liability.[6]  The increased FIRPTA withholding rate is not an actual increase in tax, but a means of ensuring compliance with U.S. tax law.  An exemption found in the old rule remains in place, providing that a foreign person is not subject to FIRPTA withholding where the property sold is used as a residence and the amount realized does not exceed $300,000.00.[7]

Music legend Prince’s mysterious death continues to cause speculation as all of the details regarding his estate plan, or lack thereof, have yet to emerge.  Prince reportedly amassed a fortune worth at least $300 million and his estate is expected to have an equally impressive future income stream.  The estate stands to profit from the posthumous records sales that have soared since the star’s death, as well as “a trove of unreleased recordings” rumored to be in what Prince called, “the vault.”  However, the future of Prince’s estate and legacy will depend on whether he created an estate plan.

Proper estate planning guarantees that your wishes are honored after death and the failure to do so may lead to unintended consequences.  In Prince’s case it means that his sister, Tyka Nelson, is likely to inherit a large portion of his estate.  Reportedly, Prince had a strained relationship with his sister, who at one point was allegedly addicted to crack cocaine and resorted to prostitution to support her children.  It is unlikely that Prince intended for a substantial portion of his estate to pass on to her without a mechanism to distribute assets over time.  Nevertheless, without the proper estate planning documents in place, this is the likely outcome as Tyka has indicated that the rock star died without a will. Continue reading

Recently, the Financial Crimes Enforcement Network (“FinCEN”) promulgated new rules which require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in Miami-Dade County, Florida.

According to the 2015 Profile of International Home Buyers in the Miami Association of Realtor Business Areas, foreign real estate buyers account for 36% or $6.1 billion of total sales volume in the South Florida real estate market. Florida remains the top state for international buyers accounting for 21% of all foreign purchases in the United States. Miami in particular continues to have the most foreign buyers accounting for 74%, which is more than double than the national figure of 35%.

As a result, it is more important than ever for realtors with foreign buyer clients to have their clients engage an international tax attorney to ensure that the ownership of the property is structured with tax efficiency.  Foreign persons purchasing U.S. real estate without consulting an international tax attorney may be putting themselves in precarious tax positions if the tax implications are not considered.  Below is a high level discussion of some of the key issues.

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