However, the tax authorities may discover this if you or the recipient are audited, if they match transactions reported for certain assets, or when banks report cash transfers in excess of $10,000. Since it’s pretty simple to avoid paying gift tax, it doesn’t seem worth the risk of getting caught trying to skirt the rules. Understanding the gift tax is the best way to avoid issues.
The IRS stipulates that a gift is “the transfer of property by one individual to another, while receiving nothing, or less than full value, in return.” A gift is never taxable to the recipient, so only the person making the gift has to consider the gift tax.
The amount you can give will not be subject to gift tax if the gift amounts are less than the annual and lifetime exemptions. The annual gift exemption is currently $15,000 per recipient, which means that you can give up to $15,000 each year to an unlimited number of people with no reporting requirement at all.
You’re supposed to complete a U.S. Gift Tax Return (IRS Form 709) if you exceed the exemption, but don’t panic. Although you are required to file a gift tax return, it is highly unlikely any gift tax will be due.
That’s because gifts in excess of the annual exemption offset your lifetime exemption ($11,400,000 per person in 2019), before any gift tax is due.
The IRS can impose penalties if you they discover that you failed to file a gift tax return, even if no gift tax was due. Also note that the gift tax is integrated with the estate tax, which applies to amounts transferred upon your death in excess of your remaining lifetime exemption.
If you’re planning on making a gift to help pay another’s college costs or medical expenses, make the payment directly to the educational or healthcare institution because that payment isn’t considered a gift.
Ask your estate planning lawyer about any state gift, estate and inheritance taxes.
Do you or a loved one own savings bonds? If so, you might want to read this article because you may not know about some of the problems they can create.
For younger people who might not know what a savings bond is, it’s a debt instrument secured by the U.S. government. A debt instrument, also known as a bond, is evidence that you loaned the bond issuer money and are entitled to receive interest and, eventually, the return of the money you loaned. These particular bonds are issued in small amounts, from $25 to $10,000 to individuals.
They were first issued in 1941. At that time, they were called “war bonds” and patriotic advertising was used to induce people to buy them. War bonds – bonds issued by the federal government to help pay for wars, have actually been around since the beginning of our country. But, unlike previous wars, after WWII the bonds never went away; they just got a new name. For a long time, they were very popular gifts for birthdays and weddings, and many large employers offered employees the option to buy savings bonds with part of their paychecks. But their popularity has declined over the years.
Savings bonds used to be issued as small paper certificates (actually, they were printed on card stock) which made them easy to give as gifts or to collect in a safe deposit box. But now they are only issued electronically. Savings bonds are very safe because the payment of interest is guaranteed by our federal government. Of course, because they are so safe, the interest rate on them is very low. When a paper savings bond matures, the holder can cash them in at a local bank (called “redeeming”). Taxes on the interest are due in the year the bond is redeemed.
So, many people over the age of 60 have these paper savings bonds lying around – in desk drawers, in safe deposit boxes, under mattresses, or even stuck in books and in other hidey-holes around their homes. They may be registered in the name of one individual, joint with one or more co-owners, or in the name of an individual with a named beneficiary. If a joint owner or beneficiary is alive when an owner dies, there’s no problem. Just submit some paperwork to get the bond re-issued (electronically) in the correct name. But if the bond is only in the deceased person’s name, or everyone named on the bond is deceased, things get a bit trickier.
Treasurydirect.com has all the rules and forms needed, but the bottom line is that the bonds are subject to your state’s probate laws. If no probate for the rest of the estate is needed under state law and the total redemption value of all the bonds is less than $100,000, you can likely work directly with the Treasury Dept. Otherwise, the bonds will go through your state’s probate process.
Most people try to avoid probate, if they can, to make things easier on their loved ones. So, is there a way to avoid a potential probate if someone owns paper savings bonds? Perhaps. But every change to a paper savings bond now requires that the owner open an online account. Many older people aren’t comfortable with this.
To add a beneficiary, paper bonds can be converted to electronic bonds, and a beneficiary can be named once the bond shows up in the online account. To add a joint owner or change the owner to a revocable living trust – same process, except the Treasury Dept. considers that a change of ownership, and the current owner will owe taxes that year on all the interest accrued to the date of the ownership change. The same goes for ownership changes due to divorce.
And here’s the fun part – the IRS requires YOU, the owner, to keep track of all of that because when you do eventually redeem paper bonds where ownership was changed (maybe years ago), the 1099 you receive from the Treasury will show all of the interest from the original issue date to the final redemption date – and the IRS will be looking for the tax due on the entire amount! And do-it-yourself tax preparation programs, such as TurboTax, don’t have the capability to deal with explanations to the IRS about taxes already paid (as I found out the hard way when I did my Mom’s taxes).
The treasurydirect.com website has a ton of useful information and all the forms you’ll need. Savings bonds certainly serve a purpose for risk-averse investors, but just be aware that the paper form of these bonds can create some headaches. Ask your parents now whether they own any savings bonds – and where they are and whose name is on them – so you don’t have a potentially nasty surprise later on.
A frequently used strategy to save for retirement is an IRA. This money is saved to fund retirement, but there’s always the possibility that you’ll die before all the money is withdrawn. That means you must plan for what happens to that money after you are gone. Designating a trust as your IRA beneficiary is one option. It provides you with maximum control over the distribution of your assets after you die.
KTVA.com’s recent article, “How to Name a Trust as Beneficiary of an IRA,” discusses some of the important elements of naming a trust as an IRA beneficiary. Naming a trust as a beneficiary requires careful planning, so work with an experienced estate planning attorney.
Naming a trust as the beneficiary of your IRA gives you much more control over the funds because trusts use written instructions for how and when the money should be paid out. Designating a trust as the beneficiary of an IRA also lets you enjoy the tax benefits of an IRA while still maintaining maximum control of funds.
This is also a good move for a person who wants to leave her IRA to a beneficiary who may need some additional direction, like a minor child, a spendthrift child or spouse, or a person with special needs. Naming a trust as your beneficiary also shields the funds from creditors—a great estate planning strategy if your state doesn’t protect inherited IRAs.
However, naming a trust as a beneficiary of your IRA probably isn’t the best choice if you want your retirement savings to go to your spouse. Spouses who inherit IRAs are able to roll the deceased’s IRA into their own IRA account, tax-free. If you want your spouse to inherit your IRA with no strings attached, designate your spouse as the primary beneficiary of your IRA.
There are several requirements that must be met when designating a trust as the beneficiary of your IRA. They include the following:
It must be a valid trust under state law;
The trust must be irrevocable (or become so upon your death);
The trust’s beneficiaries must be individuals; and
The trustee must provide a trust document or certified list of beneficiaries to the IRA’s custodian or trustee by October 31st of the year after your death.
However, there are some drawbacks to doing this: the expense of structuring and maintaining the trust and designating a trust as the beneficiary of your IRA are much more complicated than simply naming a beneficiary of your IRA.
You also forfeit the ability for your spouse to roll over the IRA into his own IRA tax-free. This cancels out some of the tax benefits, because if you didn’t designate a trust as the beneficiary—and the IRA funds just rolled over—the tax-advantaged account would grow more quickly. But it also prevents your spouse from naming his new spouse or lover as the beneficiary on what used to be your IRA.
Keep in mind that just because a trust is named as the beneficiary of an IRA doesn’t mean the assets are transferred to the trust—they shouldn’t be. Instead, they should remain in the IRA to take advantage of the account’s tax benefits until distribution of the assets begins.
To set up a trust as the beneficiary of your IRA, you’ll need the help of a qualified estate planning attorney. Mistakes can be costly.
Roth IRA contributions can be used for emergencies. In a perfect world, no one would ever need to use retirement money for anything but retirement, but because Roth contributions are not deductible, they can be withdrawn at any time, for any reason, without taxes or penalties. A Roth IRA can serve as an emergency fund. However, it needs to be noted that the funds you can withdraw do not include amounts that were converted to a Roth IRA or investment gains. Therefore, if you put $5,000 into a Roth IRA that grew to $6,000, you may only withdraw the $5,000 without taxes and penalties.
You might be able to use a non-deductible IRA to fund a Roth. If you make over a certain limit, you can’t contribute to a Roth IRA—or can you? Some people who keep other retirement money inside qualified retirement accounts are permitted to make a non-deductible IRA contribution every year and then convert that into a Roth. This is sometimes called the “backdoor Roth.” However, you’ll need to be careful, and you may need help. In some cases, you can even roll a self-directed IRA back into a company plan, so in future years you could use the backdoor Roth strategy without having to pay taxes on the converted amount. Get a professional to help you with this: mistakes can be expensive!
You may roll after-tax 401(k) contributions into a Roth IRA. Many employer plans let you make after-tax contributions and then, at retirement, these after-tax contributions can be rolled into a Roth IRA. Any investment gain on the after-tax contributions can’t go into the Roth, but the contributions can.
Roth IRAs have no RMDs (Required Minimum Distributions). There aren’t any age requirements for when you take money out, so there are no delayed tax bombs lurking. However, non-spouse heirs will have to take required distributions from an inherited Roth. The nice thing: they will be tax free.
You can contribute to both a SIMPLE IRA and a Roth IRA. As long as your income is within the Roth IRA limits, then you can contribute to both the SIMPLE and the Roth. The contributions to the SIMPLE IRA will be deductible, the Roth contributions will not be. This dual funding strategy lets you reduce taxable income now and have funds in the Roth accumulate for tax-free benefits in retirement. For the self-employed person, who is diligent about saving for retirement, this is a good plan.
Your employer plan may allow Roth contributions. Many 401(k) plans let you make Roth contributions. They are called “designated Roth accounts.” Check with your HR department to see if their plan let you choose which type of contribution to make. Some may be all or nothing, while others let you do some of each.
Age is not the key factor in determining whether or not to use a Roth IRA. The primary deciding factor here is your income bracket, your tax rate now and your expected tax rate during retirement. If your expected tax rate during retirement will be lower, the deductible contributions may be better. If your tax rate during retirement is going to be the same or higher in retirement, which is often the case for people with large IRAs or 401(k)s, then a Roth IRA may make a lot of sense, regardless of your age.
You might be able to make a spousal Roth contribution. Even if your spouse has no earned income, as long as you have an earned income, you can make an IRA contribution on their behalf. Many couples can double their tax favored retirement account savings by doing this.
Be careful about Roth conversions. As stated previously, mistakes here can become expensive, so don’t rely on online Roth calculators to manage conversions. Talk with an experienced professional who can help make sure that your numbers and your strategy fits with your personal retirement scenario. Every person and every situation is different, so planning needs to be specific to your needs.
This form was created by the 2018 Bipartisan Budget Act. One of its provisions required the development of a tax return that would be easy for seniors to use. The form will highlight retirement income streams and other tax benefits for seniors. Taxpayers age 65 and older can use this form to file their 2019 tax returns.
It’s designed off the regular 1040, and the IRS says it uses all the same schedules, instructions, and attachments. Taxpayers who use tax software to file may not even notice the difference.
However, for taxpayers who still complete paper tax forms, the new form will be friendlier to aging eyes. The font is bigger, and the shading on the regular 1040 has been removed to improve the contrast and increase legibility.
One important feature of the new tax form is the addition of a standard deduction chart. The form lists the standard deduction amounts, including the extra standard deduction amount for which taxpayers age 65 and older qualify. This way, seniors don’t have to search around for the information. The chart also makes it simpler for seniors to take advantage of the full standard deduction for which they’re eligible, especially for those who may not even be aware of the extra amount for which they qualify.
The tax form has lines for specific retirement income streams, like Social Security benefits, IRA distributions, and pensions, as well as earned income from work.
Winding down the financial aspects of the estate is one of the tasks done by the executor. The executor is identified in the decedent’s Will or appointed by a judge. If the decedent had a revocable living trust or an irrevocable trust, the trust document names a trustee who works in conjunction with the executor.
The executor is responsible for filing the federal income tax returns for the decedent’s personal income (Form 1040) as well as for the income generated by the estate or trust (Form 1041). The estate’s first federal income tax year starts immediately after the date of death. The tax year-end date can be December 31 or the end of any other month that results in a first tax year of 12 months or less. The IRS form 1041 is used for estates and trusts and the estate income tax return is due on the 15th day of the fourth month after the tax year-end.
For example, if a person dies in 2019 and the executor chooses December 31 as the tax year-end, the estate tax return would be due April 15, 2020. An extension is available, but it’s only for five and a half months. In this example, the due date could be extended to September 30.
There’s no need to file a Form 1041 if all of the decedent’s income-producing assets are directly distributed to the spouse or other heirs and, thus, bypass probate. This is the case when property is owned as joint tenants with right of survivorship, as well as with IRAs and retirement plan accounts and life insurance proceeds with designated beneficiaries.
Unless the estate is valued at more than $11.4 million in 2019, no federal estate tax (also known as the “death tax”) will be due.
But the executor needs to find out if the decedent made any large gifts before death. That means gifts larger than $15,000 in 2018-2019 to a single person, $14,000 for gifts in 2013-2017; $13,000 in 2009-2012, $12,000 for 2006-2008; $11,000 for 2002-2005 and $10,000 for 2001 and earlier. If these gifts were made, the excess over the applicable threshold for the year of the gift must be added back to the estate to see if the federal estate tax exemption has been surpassed. Check with the estate attorney or tax professional to ensure that this is handled correctly.
The unlimited marital deduction permits any amount of assets to be passed to a spouse – as long as the decedent was married to a U.S. citizen. However, the surviving spouse will need expert estate planning to pass the family’s wealth to the next generation, without a large tax liability.
While the taxes and tax planning are more complex when significant assets and estate taxes are involved, estate planning is perhaps even more important for those with modest assets as there is a greater need to protect the family and less room for error. An estate planning attorney can strategically plan to protect family assets even when the assets are not so grand.