Death of the Death Tax?

On January 10, 2017, Rep. Kristi Noem (R-S.D.) introduced H.R. 631, the “Death Tax Repeal Act of 2017.” While this bill resembles a similar bill that failed to become law in 2015, with the 2016 elections, the political landscape in Washington has changed considerably. In brief, H.R. 631 provides that:

  • The estate tax will be repealed for descendants dying on or after the date of enactment.
  • The generation-skipping transfer (GST) tax is repealed for GST transfers occurring on or after the date of enactment.
  • The gift tax is retained with its current lifetime exemption of $5.49 million, but its tax rate is reduced to 35% (down from 40%). The gift tax exemption amount will continue to be adjusted annually for inflation.
  • The special “anti-freezing” tax rules, also known as Chapter 14, are retained, presumably to maintain the overall effectiveness of the current gift tax system.
  • The estate tax will continue to be imposed on principal distributions from pre-existing qualified domestic trusts (also known as “QDOTs”) with respect to non-citizen decedents dying before the date of enactment, but only for the 10-year period following the date of enactment.

Notably absent from this bill is any reference to a change in the current system in which the tax basis of an appreciated asset received from a decedent’s estate is “stepped-up” to the fair market value of such asset on the decedent’s date of death. This system effectively eliminates the capital gains on the pre-death appreciation of the value of such inherited assets. In earlier reports, many speculated that this rule would be changed either to a carryover basis system (where inherited assets would retain the same tax basis of the decedent), or even the “Canadian system” (whereby capital gains would be immediately recognized on the appreciated assets of a decedent, with such a tax payable shortly after death).

H.R. 631 is unlikely to pass simply as a stand-alone piece of legislation. Rather, as Congress begins to assemble a larger tax reform bill later in 2017, many tax experts feel that it’s likely that such legislation will include provisions that will repeal the current estate tax rules. Whether the tax basis rules will be changed, and whether a tax reform bill ultimately passes, will ultimately depend upon the political and fiscal realities that arise as the legislative process moves forward.

If the New England Patriots can win the Super Bowl from 25 points down, then anything can happen in 2017!

Bitcoin – Is It Really Money?

Florida court dismisses money-laundering case, saying that bitcoin is not money.

Recently, a Florida judge dismissed a money laundering charge against a man who sold $2,000 worth of bitcoin to an undercover agent. The agent claimed he was using the bitcoin to purchase stolen credit card numbers. The judge held that the digital currency is not money. Therefore, it does not fall within Florida’s money laundering statute. The judge stated that trying to regulate bitcoin using a statutory scheme regulating money is “like fitting a square peg in a round hole.” This leaves the door wide open for the Florida legislature to regulate bitcoin and other virtual currency.

Bitcoin was released in 2009. Since that time, courts and legislatures have struggled to fit it into existing legal framework. There are few laws or regulations specifically governing bitcoin and its price fluctuates widely. One expert witness compared bitcoin to “poker chips that people are willing to buy from you” (this expert was paid in bitcoin to appear as a defense witness). The currency isn’t printed, like the euro or the U.S. dollar. The IRS considers bitcoin to be property, as opposed to currency, so any exchanges are deemed to be bartering exchanges. New York now requires “BitLicenses”. They are needed for any businesses that buy, sell, or process bitcoin in the state. New York institutes a multitude of consumer and fraud protections on the businesses. Most notably, the business will have to maintain records of their customers’ names and addresses. This eliminates the anonymity that made bitcoin so appealing in the first place.

It is not just the US that struggles to define bitcoin. In Australia, bitcoin is double taxed. That is because in the country it is considered to be a commodity, not a currency. There is a 10% tax when consumers purchase the currency. They are taxed again when consumers use the bitcoin to purchase goods. Bitcoin is exempt from value-added tax (VAT) in many European countries, indicating that they do not see it as a good but instead as a legitimate currency. In Switzerland, the city of Zug is allowing citizens to pay for public services using virtual currency.

While the trend certainly seems to be towards treating bitcoin as currency, there is still plenty of uncertainty as to what its future will look like. The Florida case may have set precedent for how the rest of the United States will treat virtual currency. It may also encourage legislators to create more laws regulating bitcoin. Only time will tell.

Individual Kicker Credit Amounts Announced for Oregon

On August 26th, state economists announced that taxpayers will be getting a kicker rebate for the first time in eight years.  This is Oregon’s unique system of refunding taxes paid when general fund revenue exceeds 2% of projections.  For this period, revenue exceeded estimates by $111 million so folks who paid taxes in 2014 will be seeing a credit on their 2015 tax returns.

The credit looks to be about 5.8% of individuals’ “Total Tax Before Credits” (line 31 on the Oregon form 40).  To figure out what your kicker credit will look like, the Oregonian has set up a webpage to help calculate 5.8% or estimate if you don’t have access to your tax return.

Although the state used to send out checks, the cost of mailing was deemed prohibitively high, so the 2011 legislature changed the program to a refundable tax credit.

Get Your Discounts Before They Are Gone

The IRS is talking rule changes again.  It may be time to take another look at your estate plan.

Family-owned businesses often gift ownership interests in the business to younger generations in an effort to reduce gift or estate tax liability.  The reported tax value of those gifts is discounted to reflect the fact that the new owners lack the ability to control the business and cannot market the interest to other buyers.  The IRS now thinks it may be time for that practice to end.

The WSJ has recently reported that the IRS may soon greatly restrict or even disallow those discounts for family businesses. Exactly how and or when the IRS will inhibit discounts is still uncertain unclear, but, if the agency does act, the impact will be substantial.  Have you considered how such a change might impact you and your family?  Call the estate planning attorneys at SYK today to see how the proposed change affects you.

Is Picasso Coming to Portland?

On Monday, May 11, 2015 Pablo Picasso’s oil painting, “Women of Algiers (Version O)” sold for an astonishing, and record breaking, $179.4 million, inclusive of buyer’s premium, at Christy’s in New York.  This surpasses the paltry $142 million paid for the previous record holder “Three Studies of Lucien Freud,”  by Francis Bacon, which was loaned to the Portland Art Museum for public display over 15 weeks last year.  As with so many things in life, there is an interesting tax wrinkle here.

We wait with baited breath to see if the Portland Art Museum or some other Oregon museum announces a public viewing of this masterpiece.  Elaine Wynn’s decision to display Francis Bacon’s triptych for 105 days in Oregon is hardly surprising given the slightly over 8% sales tax rate at her home in Las Vegas, Nevada.  If the first use of the property occurred in Las Vegas, the tab would have been north of $11 million.  However, Nevada (like many states that have a sales tax) considers that tangible personal property like a painting) is not taxable in Nevada if the property is first used outside of Nevada.  Many states will say that there is a presumption that the first use occurs in their jurisdiction if the property comes into the state within 90 days after the sale takes place.  So, if the first use occurs in Oregon, no sales tax may be incurred. In many respects, this is a win-win for the public and for the collector.  The viewing public gets to see some of the most expensive works of art sold at auction and the buyers get to take advantage of a sales tax break. 

Sales tax at the relatively standard rate of 8% on $179 million would be closer to $14.3 million in sales tax revenue.  Hopefully that’s enough to motivate the anonymous buyer to let it hang in Portland for a few months.

 

A Tax-Favored Solution for Individuals With Disabilities

On December 19, 2014, President Obama signed the Achieving a Better Life Experience (ABLE) Act into law, allowing each state to establish a new type of tax-favored savings account, known as the Section 529-ABLE account, for individuals with disabilities. Like a “529” college savings account, these new accounts will allow friends and family members of qualified beneficiaries to contribute up to the annual gift tax exclusion amount ($14,000 for 2015), per year into an ABLE account, for a maximum of $100,000. The contributions will not be deductible for income tax purposes, but the funds will be eligible for tax-free accumulation when used for qualified expenses.

Qualified Beneficiary: the ABLE Act allows only one 529-ABLE account per qualified beneficiary. An individual may qualify in one of two ways:

1. The individual receives disability benefits under the Social Security Disability Insurance (SSDI) program or the Supplemental Security Income (SSI) program, and the individual became disabled before reaching the age of 26; or

2. The individual meets the SSI criteria regarding significant functional limitations, which is certified by a licensed physician and that the disability occurred before the individual reached the age of 26.

Qualified Expenses: distributions from 529-ABLE accounts are not subject to income tax to the beneficiary, so long as they are used for qualified expenses. A “qualified expense” is any expense related to the qualified beneficiary as a result of living a life with disabilities. These include education, housing, transportation, employment training and support, assistive technology, personal support services, health care expenses, financial management, and administrative services. In addition, the same reporting requirements for traditional “529” college savings plans apply to 529-ABLE accounts. If managed properly, distributions from a 529-ABLE account will not jeopardize eligibility for critical federal benefits.

To the extent funds are not used for qualified expenses for the qualified beneficiary, the growth would be taxed as ordinary income, plus a 10% penalty on the taxable portion.

Upon the death of the qualified beneficiary, any amounts in that account (after Medicaid reimbursements) would be distributed to the deceased beneficiary’s estate or to a designated beneficiary, subject to income tax on the investment earnings but no penalty.

With a full understanding of account features and benefits, individuals and families can use 529-ABLE accounts as another tool in planning for the lifetime needs of an individual with disabilities. If you have any questions about 529-ABLE accounts, please feel free to contact any of the estate planning attorneys with the firm.

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.

Deadline to Amend Retirement Plans to Reflect Windsor Decision Approaching Fast

The deadline to amend retirement plans to reflect the Windsor decision is approaching fast. As of September 16, 2013, the IRS requires qualified retirement plans to treat a same-sex spouse as a spouse for plan purposes. In April of this year, the IRS specified that amendments to qualified plans are required by the end of 2014 if the plan’s definition of marriage is inconsistent with the Windsor decision.

DOMA Section 3 was enacted in 1996 and defined marriage between one man and one woman as husband and wife. In 2013, the Supreme Court decided, in U.S. v. Windsor, that Section 3 of DOMA was unconstitutional because it deprived same-sex spouses of equal protection. Revenue Ruling 2013-17 provided that taxpayers may rely on Windsor retroactively “with respect to any employee benefit plan or arrangement or any benefit provided thereunder only for purposes of filing original returns, amended returns, adjusted returns, or claims for credit or refund of an overpayment of tax concerning employment tax and income tax with respect to employer-provided health coverage benefits or fringe benefits that were provided by the employer and are excludable from income” under Code Sec. 106, Code Sec. 117(d), Code Sec. 119, Code Sec. 129 , or Code Sec. 132 based on an individual’s marital status.

In an IRS Notice, the IRS provided further guidance on the effect of Windsor on qualified retirement plans and plan amendments. The Notice stated that a plan must be amended in certain situations, including if its terms with respect to the requirements of Code Sec. 401(a) define a marital relationship by reference to Section 3 of DOMA or are otherwise inconsistent with the outcome of Windsor. The deadline for adopting such amendments is generally December 31, 2014. Because the deadline to file amended returns is only two weeks away, retirement plans that have not already done so should change the terms of their plans so they are consistent with Windsor. Also, plans that have already amended their terms should make sure that they comply with any subsequently issued guidance.

IRS Telephone Scam – Don’t Fall for It!

Recently, I spoke with two clients who were almost victims of a pervasive telephone scam involving a person posing as an Internal Revenue Service agent.  In each instance, the caller demanded immediate same-day payment of thousands of dollars in order to prevent drastic enforcement measures as a result of alleged tax debts.  In one instance, the perpetrator actually threatened criminal arrest if the money was not paid the same day.  Luckily, in both instances the wannabe IRS agents failed in their attempted swindle as reasonable questions from both of my clients yielded answers that were both hostile and suspicious.

In a recent public notice, the IRS issued a consumer alert giving taxpayers additional tips to avoid these telephone scams.  The typical scam described in the alert is similar to that experienced by my clients.  In these situations, the scammer may know your name and address, and possibly other personal details such as the last four digits of the victim’s social security number.  Their caller ID may contain a false descriptor that references the IRS in some way.  In almost all instances, very serious enforcement actions – such as bank account levies or criminal arrest – will be threatened.  To avoid such consequences, the scammer seeks payment through some fast payment system, such as a temporary debit card or wire transfer.

In the recent alert, the IRS reminded taxpayers of the following five things the IRS will never do:

1. Call you about taxes you owe without first mailing you an official notice.

2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.

3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.

4. Ask for credit or debit card numbers over the phone.

5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

If in doubt about an alleged communication from the IRS, you can always call the IRS at 1.800.829.1040 to ask more questions.  If you do receive a scam call, you can also file a complaint using the FTC Complaint Assistant.  Just follow that line, choose “Other” and then “Imposter Scams.” If the complaint involves someone impersonating the IRS, include the words “IRS Telephone Scam” in the notes.

Refund Opportunities and Joint Returns for Same Sex Couples

Several months ago, I wrote a quick post to alert our readers to potential refund opportunities if the Supreme Court found in favor of Ms. Edie Windsor’s argument that she should be entitled to receive a refund for estate taxes that she had to pay. Ms. Windsor had married her long-time fiancée, Thea Spyer in Canada before Ms. Spyer’s death in 2009. Earlier this week, in an historic opinion, the Supreme Court ruled that Section 3 of the federal Defense of Marriage Act (“DOMA”) is invalid. At the time of the original blog post, I encouraged taxpayers to consider filing protective refund claims if they were married and filing separately or as individuals due to DOMA. Although several federal agencies have issued statements in the last 24 hours, we have yet to receive guidance about when the IRS anticipates paying out the refunds it owes to taxpayers who filed protective refund claims for years as far back as 2009. The initial filing deadline for 2009 has passed; however, many of our clients do elect to extend the deadline to file their tax returns. So, if you filed your 2009 personal income tax return on extension, it may still be worthwhile to investigate whether filing a joint 2009 personal income tax return would allow you and your spouse to claim a refund.

Also, if you were married in a state that recognizes same sex marriage and have since moved to another state that does not (e.g., Oregon), a 1958 revenue ruling may support your filing a joint federal income tax return. In Rev. Rul. 58-66, the Internal Revenue Service looked at common law marriages to determine how the taxpayers should file their personal income tax return. In that ruling, it considered the situation of a couple that establishes a common law marriage in a jurisdiction that recognizes common law marriage. The couple later moves to a state that does not recognize common law marriage, where a ceremony is required to initiate the marital relationship. The IRS ruled that it would continue to recognize the couple as husband and wife. It’s important to note that there are some cases that look at the domicile jurisdiction of the taxpayer to determine whether they are entitled to file joint personal income tax returns. However, those tend to focus on whether a taxpayer’s divorce was final under state law by the last day of the tax year. So they may not apply to the case of a same sex couple who are married and have not gotten divorced in any jurisdiction.

The Supreme Court’s opinion in United States v. Windsor only addressed married, same sex taxpayers’ rights for federal purposes. I expect that we will see activity at the state level to evaluate whether the equal protection and due process arguments that Justice Kennedy articulated in Windsor are applicable to state tax filings and rights under the due process and equal protection clauses contained in most states’ constitutions. We also anticipate that the courts will be called upon address questions related to the full faith and credit clause (Article IV, Section 1) of the United States Constitution. This clause requires states to respect the “acts, records, and judicial proceedings” of other states. Specifically, to the extent that a marriage in one state is deemed valid, will another state be able to disregard that marriage?

It will be very interesting to see how these questions are answered and how the issues evolve. Stay tuned – we’ll update you as developments occur.