Deadline Extended to December 31, 2014 for Charitable Distributions from IRAs

Congress has extended the qualified charitable distribution tax break for 2014. An eligible taxpayer may make a tax free charitable distribution directly from their IRA or Roth IRA to a qualified charitable organization. An eligible tax payer is an individual age 70½ or older and the aggregate contribution cannot exceed $100,000.

This tax break was set to expire at the end of 2013 but has now been extended to the end of 2014. Those interested in participating in the program must make a distribution to their designated public charity on or before December 31, 2014.

Additional Points to Consider:

• For eligible taxpayers who are married and file joint tax returns, their spouse can also have a qualified deduction and exclude up to $100,000.

• Any distribution in excess of the $100,000 cap must be included in income but may be taken as an itemized charitable deduction, subject to the usual AGI annual caps for contributions.

• Distributions must go directly to a public charity that is not a supporting organization.

• Written substantiation of each IRA rollover contribution from each recipient charity is required to benefit from the tax-free treatment.

Whether this charitable tax break will be extended through 2015 or made permanent will be for next year’s Congress to decide.

If you have any questions about this charitable contribution deadline extension, please call the charity that you are considering or contact Jeffrey M. Cheyne at jcheyne@samuelslaw.com.

IRS Expands Relief for Missed Portability Elections for Surviving Spouses

On January 27, 2014, the IRS issued Rev. Proc. 2014-18 which provides a remedy for estate representatives who did not elect to combine the deceased spouse’s unused exclusion amount with the surviving spouse’s exclusion amount in a timely manner. As an example, assume the first spouse died in 2012 with an estate of $2,120,000. The Applicable Exclusion Amount (“AEA”) for 2012 was $5,120,000. Assume that his estate uses $2,120,000 of the deceased spouse’s AEA which leaves $3,000,000 remaining as the Deceased Spouse’s Unused Exclusion (“DSUE”). The executor of the estate can elect to combine the $3,000,000 DSUE amount with the surviving spouse’s AEA (currently 5,340,000 for 2014), giving the surviving spouse a total federal estate tax exclusion in 2014 of $8,340,000.

The relief provided by Rev. Proc. 2014-18 gives certain estates which did not file a federal estate tax return on a timely basis to now file a Form 706 Federal Estate tax return and make a delayed portability election.

Prior to January 27, 2014 the only option to remedy a late return was to request a private letter ruling with the Internal Revenue Service to seek permission to file a late return and pay a significant user-fee ($2,000 to $10,000). It is no longer necessary to seek private letter ruling or pay any user fees.

This relief is also available for the surviving spouse of a same-sex marriage. However, this relief is not available for domestic partners who are registered but not married in a state or county that had authorized same sex marriage.

If you are the surviving spouse and your spouse died after December 31, 2010 and prior to January 1, 2014 you should review this situation with your estate planning attorney and accountant to determine if filing of Form 706 Federal Estate Tax Return and making a portability election is possible and would be appropriate for you. The Federal Estate Tax return with the delayed portability election must be filed by December 31, 2014.

If you have any questions, feel free to contact any of the estate planning attorneys with the firm.

Oregon Inheritance Tax Return Filing Deadline Extended for Some 2010 Estates

 — But Not The Tax Due Date

As a result of Congress passing the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 in December 2010, the Oregon Legislature had to act expeditiously to determine which 2010 federal tax changes Oregon would adopt. As part of this review the 2010 Oregon Inheritance Tax return (“OIT return”) filing requirements for some 2010 decedents were changed to follow the federal filing requirements. Thus, if a decedent died after December 31, 2009, and before December 17, 2010, with property taxable in Oregon and a federal estate tax return is required, the due date for the OIT return is extended to the same date the federal estate tax is due.

Generally, this means that for 2010 decedents who died before December 17, 2010 with gross estates valued over $5 million, the extended filing deadline is September 19, 2011, for an OIT return (Form IT-1), plus six additional months if a timely extension request is applied for. For 2010 decedents with gross estates under $5 million, the 2010 OIT return remains due nine months after the date of decedent’s death. For 2010 decedents dying after December 16, 2010, the filing requirements remain unchanged and the OIT returns are due nine months following the date of decedent’s death.

Because of the revenue shortfalls, the Oregon Legislature did not extend the Oregon Inheritance Tax due date. Oregon Inheritance Taxes remain due and payable nine months after the date of the decedent’s death. Also, any penalties and interest must be calculated based on nine months after the date of the decedent’s death irrespective of the filing extension. The filing extension provision, tax due date, penalty and interest changes are contained in Section 33 of SB 301. (http://www.leg.state.or.us/11reg/measpdf/sb0300.dir/sb0301.en.pdf)

The Governor signed SB 301 on March 9, 2011, but it will not become law until the 91st day after the close of the legislative session. After SB 301 becomes law, Section 33 will be retroactive to estates of decedents who died after December 31, 2009. A representative from the Oregon Department of Revenue has confirmed that the Department will currently follow the intent of the new law and allow the filing deadline extension for 2010 returns.

If you are working with an estate that may be eligible for this filing extension, consider contacting the Oregon Department of Revenue to confirm the estate’s eligibility for these changes. Please note these changes in the law do not address the filing deadline for estates over $5 million that elect not to pay any federal estate tax and instead elect a modified carryover basis and file the Form 8939 information return in lieu of the federal estate tax return.
 

Oregon Tax Rule Invalidated For Failure to Consider Impact on Small Business

Because of a recent court decision, perhaps Oregon government agencies will begin to meaningfully consider the economic impact of state regulations on small Oregon businesses.

In Oregon Cable Telecommunications Association v. Department of Revenue the Oregon Court of Appeals invalidated a property tax regulation affecting cable and internet service providers. The court invalidated the rule because it failed to provide a legally sufficient small business impact statement.

 

Since 2005 all Oregon government agencies subject to the Administrative Procedures Act who adopt, amend or repeal any rule must as part of the rule making process satisfy the following steps:

  • Estimate the number of small businesses subject to the proposed rule.
  • Identify the types of small business industries and businesses subject to the proposed rule.
  • Briefly describe the reporting, recordkeeping and other administrative activities required to comply, including costs of professional services.
  • Identify the equipment, supplies, labor and increased administration required to comply.
  • Describe the manner in which small businesses were involved in the development of the proposed rule. [ORS 183.336(1)]

If the cost of compliance with the proposed rule has a significant adverse effect on small business, the agency, to the extent consistent with the public health and safety purposes of the rule, must reduce the economic impact of the rule on small business. [ORS 183.540]

This law defines “small business” as an independently owned and operated corporation, partnership, sole proprietorship or other legal entity with 50 or fewer employees. [ORS 183.310(10)]

This ruling represents a victory for small businesses in Oregon, as it aids in providing protection against the adoption of agency rules which fail to adequately consider the impact on small businesses. 

  • Generalized assumptions or undetermined estimates of the impact of the proposed rule are no longer adequate. 
  • Small businesses that will be impacted by the proposed rule have enforceable rights to require compliance with the above-described rules. 

This case invalidated a rule adopted by the Oregon Department of Revenue, but the holding applies to all Oregon governmental agencies when they adopt rules affecting small businesses. 

Hopefully, these agencies will communicate more meaningfully with small businesses and consider the economic impact of their regulations before adopting their rules.

Oregon Tax Basis for 2010 Oregon Estates Follows Federal Law

Since January 2010 Oregon tax professionals have been asking the Oregon Department of Revenue which income tax basis rules apply to 2010 Oregon Estates. 

Generally, this has been a pretty easy question to answer.  The traditional rule has been that most assets belonging to a decedent receive a tax basis step-up equal to the fair market value as of the decedent’s date of death. 

However, the Federal income tax basis rules are different this year. For 2010 estates the traditional rule does not apply. Generally the 2010 Federal rules are:

1.     First, determine the modified carry over basis (“MCOB”) of each asset held by the decedent. The MCOB is the lower of decedent’s actual basis or fair market value as of the date of death for each asset. 

2.     If the value of decedent’s assets exceeds the MCOB, then an additional basis increase of up to $1.3 million may be allocated to these assets.

3.     If the decedent is married and the value of decedent’s assets exceeds the MCOB, then the assets passing directly to the surviving spouse or into a qualified trust for the benefit of the surviving spouse, up to an additional $3 million can be added to the basis.

 

The Oregon Department of Revenue recently released Oregon Revenue Bulletin 2010-07 announcing that the Oregon income tax basis rules of 2010 Oregon estates will follow the Federal rules that are applicable this year.

 

For estates that have asset values in excess of what can be covered under these basis adjustment rules, the 2010 Oregon rule can result in a double tax.  First, the Oregon inheritance tax due 9 months after the date of death, and then an Oregon income tax based on the same asset value later on when the asset is sold. This double tax problem occurs with the larger estates becuase they will not receive a full income tax basis increase on the assets that are part of the Oregon estate.

The Oregon Inheritance Tax Workgroup of the Oregon Law Commission is looking into this matter, and there may be corrective legislation, but it will not be enacted until some time in 2011. 

Estate Values: What About Those Free Market Analysis Reports?

Heirs and personal representatives of estates frequently ask: “Why can’t we use the free market analysis report from the local real estate agent to determine the fair market value of the real property in the estate?” 

A free market analysis by a local real estate agent is a valuable service, if you are thinking of listing the property for sale. However, we do not recommend it for estate valuation purposes.

 

Generally, the income tax basis for any real property owned by a decedent receives a tax basis adjustment equal to the fair market value of the property as of the date the decedent died. This valuation rule is slightly different for 2010 estates, although Congress is expected to make some changes in the next few months. Those rules will be discussed in a later blog article. 

 

The date of death fair market value information is important for several reasons. 

  • First, this is the value that generally must be reported if an estate tax or inheritance tax return is required to be filed. 
  • Second, this is the information that determines the adjusted income tax basis for the real property of the decedent. 
  • Third, if the estate has multiple beneficiaries, the value of the real property may play a role in determining how much distribution each beneficiary is to receive. 
  • Last, if the asset is subject to probate, it is information that must be reported on the probate inventory. 

Even though a free market analysis may provide a market value very similar to an appraisal report, there are a number of reasons why the analysis will not be sufficient. 

 

  • First, the market analysis is generally based on current market data and is not specifically focused on the fair market value as of the date of death. 
  • Second, the agent providing the free market analysis is generally not licensed as an appraiser; and, therefore, is not in a position to defend the values provided in the market analysis in the event an auditor or a disgruntled heir questions the market analysis. 
  • Third, because the free market value analysis is not a qualified appraisal, government auditors are likely to reject the report as not being qualified, and thus if the value is challenged in an audit, the personal representative will need to get an appraisal anyway.
  • Last, disgruntled heirs could claim that the personal representative did not fulfill his or her fiduciary duty to the heirs of the estate by failing to obtain a qualified appraisal.

During the current economic downturn, the income tax savings will likely be reduced. As a result, disgruntled heirs could be further disgruntled. In this circumstance, a qualified appraisal is essential.

 

For these reasons, we generally recommend that the representative of the estate obtain appraisal reports from qualified appraisers for all estate real property. In the case of residential property, the cost is a few hundred dollars. In the case of commercial property, it is a few thousand dollars. Since most, but not all, properties have a higher value, the potential income tax savings is well worth the appraisal expense. 

Oregon Inheritance Tax Refund for 2007 & 2008 Estates with Natural Resource Property

In 2007, the Oregon legislature passed a law which allowed an estate to exclude up to $7.5 million of natural resource property from Oregon Inheritance Tax. The tax policy was two-fold. First, the legislature wanted to preserve family farms, fishing and forestry operations. Second, the legislature wanted to help preserve natural resource property, such as timber, from having to be harvested prematurely, before it was ready for harvesting. 

A number of 2007 estates and early 2008 estates relied on this exclusion and filed Oregon Inheritance Tax returns owing little or no tax.  But the 2007 legislation, which was passed in the last few days of that session, had a number of unanswered questions. So, in 2008, a number of technical corrections were made, and these were applied retroactively to 2007. As a result, estates which claimed the natural resource property exclusion for decedents dying between January 1, 2007 and March 11, 2008, had additional taxes due. 

 

Last year some of these taxpayers asked the legislature for relief from this retroactive tax burden, but some members of the legislature turned a deaf ear. However, during the February 2010 session, the Oregon legislature granted relief to these taxpayers. They may now apply for a tax refund. 

 

So, what are the eligibility requirements?

  • First, the estate must have eligible natural resource property. See the 2007 version of ORS 118.140.
  • Second, the death must have occurred between January 1, 2007 and March 11, 2008.
  • Third, less inheritance tax would be due under the 2007 version of the law.
  • Fourth, eligible taxpayers must apply by December 31, 2010 or within two years of the tax payment.

If you are aware of an estate which claimed a natural resource property exclusion in 2007 or early 2008 and then subsequently had to pay Oregon Inheritance Tax as a result of the 2008 law change, they are probably eligible for a refund. The Oregon Department of Revenue is in the process of finalizing Form NRE Inheritance Tax Refund Application which taxpayers may utilize to process their refund claim. Generally, this application must be completed by December 31, 2010.

2010 Estate Tax Repeal: Married Couples — Review Your Estate Plans!

Now that Congress has repealed the estate tax for all or some portion of 2010, Oregon married couples need to rexamine whether or not their estate plan will work as they intended. 

For any couple with a net worth over $1 million, it is common to have a tax plan which divides the marital property when the first spouse dies. 

These plans typically provide that the portion of the decedent’s estate that is exempt from estate tax will pass to pass to a tax exempt trust, often called the “credit shelter trust” and the balance passes to the surviving spouse or a marital trust. In situations with children from a prior marriage, it is very common for the beneficiaries of the credit shelter trust to include the children from a prior marriage as beneficiaries; whereas, the assets passing to the surviving spouse will not include those children.

For example, if the first spouse died in 2009 with a $5 million estate, $3.5 million would be transferred to the credit shelter trust, because that was the amount that was exempt from federal estate taxes, and the $1.5 balance will be transferred to the surviving spouse or placed in a trust for the benefit of the surviving spouse. 

 

However, if the first spouse dies in 2010, while the repeal is in effect, all of the first spouse’s estate will pass either to the credit shelter trust or to the marital trust, depending on the wording in the estate plan document. If there are children from a prior marriage, it will be important to know how the estate will be split. If all of the decedent’s estate passes to the surviving spouse, then the children’s shares may be significantly reduced. However, if the children are the sole beneficiaries or co-beneficiaries of the credit shelter trust, this could significantly reduce the amount of assets available to the surviving spouse. 

 

Further complicating this issue are the following:

  • Oregon’s Inheritance tax exemption of $1 million significantly complicates the trust allocations and the beneficiaries who may inherit trust property.
  • The federal income tax carryover basis rule changes apply to 2010 Oregon estates which may cause an unexpected income tax when inherited property is sold.
  • 2010 estates over $1.3 million will have to file an informational return with the IRS

Because of the 2010 law changes, every couple with a net worth in excess of $1 million should contact their estate planning attorney to review their current plan to determine how their estate would be handled if a spouse died in 2010 while the federal estate tax is repealed.

Nurse Successfully Deducts Her MBA Tuition and Beats the IRS!

Lori Singleton-Clarke, a nurse from Maryland, accomplished two rare feats last month. She represented herself before the U.S. Tax Court and won. On January 11, 2010, a Wall Street Journal article featured Ms. Singleton-Clarke who successfully defended her $15,000 deduction for her M.B.A. school tuition.

After 24 years as a distinguished career as a nurse, Ms. Singleton-Clarke wanted to improve her health care risk management skills and earn a masters degree so that she would have greater credibility with highly educated doctors.  So she enrolled in an MBA Health Care Management program, and she successfully completed the program approximately three years later. 

The IRS audited her income tax return and disallowed the $15,000.00 deduction she had claimed for her tuition. After a number of conferences with the IRS and endless paperwork, the matter came before a tax court judge in November, 2008. 

  • Ms. Singleton-Clarke did not have the money to hire a lawyer.
  • She represented herself, a rather daunting task in the face of two IRS attorneys and IRS several assistants. 
  • She held her ground, and carefully explained the time line of her career and her reasons for pursuing the MBA program.

The Tax Court finally issued its decision on December 2, 2009, and upheld the deduction of her educational expenses.  The court found that the MBA program was not a new trade or business for  Ms. Singleton-Clarke, but rather helped her improve her skills in her current employment of nursing.

Some of the key factors in the court’s decision were the facts that Ms. Singleton-Clark was already established in the nursing profession and the MBA was a general course of study the would not lead to a professional license or certification.

The deduction of educational expenses is always a challenge. In light of our current high unemployment economy, this is an important decision since it may encourage taxpayers learn how to prepare to substantiale deduction their education expenses in the pursuit of  additional education to maintain and improve their skills. 

[For a copy of the decision click here] Please note that the decision cannot be relied on by other taxpayers, but it does provide a good discussion of the regulations and applicable tax cases.

Congratulations Ms. Singleton-Clarke!