As you turn your calendar to 2014, I thought it would be helpful to outline some tax-related items to keep in mind in the New Year.
1. Estate and Gift Tax Reform
Just over a year ago, advisors around the country were engaged in significant estate and gift tax planning based on the fear that congressional inaction would result in a reduction of the gift and estate tax exemptions to $1 million in 2013. Although Congress acted in early 2013 (resulting in a $5.34 million inflation-adjusted exemption per taxpayer in 2014), there are still plenty of reasons to remain focused on estate and gift planning for you and your clients. These include:
- Generation Skipping Transfer (“GST”) Exemption. In addition to the $5.34 million per taxpayer exemption available for use either during life or at death, each taxpayer also has an additional $5.34 million GST exemption. Thus, for those taxpayers whose net worth exceeds the $5.34 million exemption ($10.68 million per couple), strong consideration should be given to advanced planning techniques designed to fully utilize the additional GST exemption in passing wealth to the next generation.
- Clients with net worth exceeding the exemption limits should also consider other advanced planning techniques, such as Grantor Retained Annuity Trusts (GRATs), Intentionally Defective Grantor Trusts (IDGTs) and Family Limited Partnerships (FLPs). These techniques continue to play an important role in the area of high net worth planning.
- The U.S. Supreme Court’s 2013 decision in Windsor declared the “Defense of Marriage Act” unconstitutional. This decision creates significant federal tax planning and compliance issues. Those advisors who are counseling clients who are in same-sex relationships need to fully understand these issues. An article within the firm’s November 2013 Tax Newsletter includes a detailed outline of the relevant issues that need to be considered.
- Congress’ increase in the federal estate and gift tax exemptions also added “portability” between spouses, thus eliminating the need to split assets between spouses to fully utilize the exemption. While portability is helpful when advising clients, there are still formalities that must be adhered to in order to ensure your clients receive the full benefit of portability. This includes the requirement to file a federal estate tax return to ensure that any unused exemption of the deceased spouse is properly preserved for the surviving spouse.
In summary, while estate and gift tax reform added clarity to what had been muddy waters, as advisors, there is still the need to keep your clients apprised of issues in the estate and gift tax arena. Please contact any member of the McGrath North Tax Group for any assistance you may need.
2. Sales Tax for On-Line and Mail Order Purchases
Most states, including Nebraska and Iowa, levy a sales tax that applies to the purchase of most items of tangible personal property. A complimentary “use” tax is the taxpayer’s responsibility to pay directly to the state when the taxpayer has not been subject to sales tax on a specific purchase.
The obligation of out-of-state retailers to collect sales tax has continued to be the subject of much controversy since the U.S. Supreme Court announced a “physical presence” rule for sales tax collection, under which retailers without a physical presence in a state may not be required to collect sales tax on sales to customers in that state.
As state revenue coffers have dwindled due to increased spending, unfunded pension liabilities, lower than expected stock market returns, etc., numerous state legislators have continued to pursue new legislation to try and impose collection responsibilities on out-of-state retailers. The latest chapter on this issue came with the U.S. Supreme Court’s decision in December 2013, wherein the U.S. Supreme Court declined to review a case in which Amazon challenged a New York law requiring Amazon (and others similarly situated) to collect sales taxes, based on the fact that Amazon had certain affiliates that were located in New York. This victory for the state of New York will likely continue to bolster the confidence of other states imposing a sales tax, to continue their efforts in adopting legislation to expand on sales tax collection responsibilities.
At the same time that new state legislation will continue to remain active, new legislation at the federal level is also a possibility. Specifically, in the Summer of 2013, the Senate passed the “Marketplace Fairness Act.” This proposed federal legislation would permit states to impose sales tax collection responsibilities on out-of-state sellers who sell to that state’s in-state residents. The legislation, which is currently in the House Judiciary Committee, requires sellers with more than $1 Million of annual out-of-state sales to collect and remit sales tax for the states they sell into.
We will continue to monitor court decisions and new legislation in this area. In the meantime, please contact any member of the McGrath North Tax Group if you need any assistance or counsel with respect to clients in the on-line/mail order industry.
In order to help fund Obamacare (i.e. the “Affordable Care Act”), 2013 brought about the addition of the new 3.8% Medicare surtax on net investment income. This new tax is subject to dollar limit thresholds based on a taxpayer’s specific filing status. In addition to the 2013 Medicare surtax, 2014 now brings with it new penalties under the Affordable Care Act for people who do not have health insurance. These penalties are set at $95 for adults and $47.50 per child, with family penalties capped at the greater of $285 or 1% of the income above specified limits. In light of the numerous difficulties that have been encountered by the Obama Administration, some exceptions to these penalties have been established. Further regulatory guidance is also forthcoming to provide advisors with additional insight and assistance as to when these penalties apply. The enforceability of these penalties will likely face further scrutiny by taxpayers – a process that will likely take years to make its way through the court system.
The Affordable Care Act is full of landmines for anyone who has not studied it closely. Autumn Long, who leads our firm’s employee benefits’ practice, is consulted on a daily basis on issues related to the Affordable Care Act. Feel free to contact Autumn Long, or any other member of the firm’s Tax Group, for assistance on these issues.
4. Simplification of Education Tax Breaks
There are currently 4 primary higher education tax breaks: the American Opportunity Tax Credit, the Hope Credit, the Lifetime Learning Credit and the tuition deduction. Confusion as to the specific (and varying) eligibility requirements for these different tax benefits has prompted certain members of the House Ways and Means Committee to prepare a bill aimed at simplifying these tax breaks by consolidating them into one combined bill. The new proposed bill would also have lower phase-out levels and would impose a maximum benefit of $2,500 (i.e., the benefit currently available under the American Opportunity Credit). Although the new proposed bill is still subject to change, as currently drafted, it could result in some currently eligible taxpayers no longer being eligible for a tax break. This disqualification and the lower phase-out levels could prove to be untenable, especially during an election year. We will keep you apprised of future action on these tax breaks, as they occur.
5. Expired Tax Breaks
Prior to December 31, 2013, people who were 70-1/2 or older were eligible for an IRA charitable rollover, thus allowing direct gifts of up to $100,000 of their retirement account balance for their favorite charity. With the New Year, this popular gifting technique is no longer available. Accountants and others who are advising IRA donors may want to consider advising such donors to delay taking their required distributions until later in 2014, thus giving Congress the time to retroactively reinstate the IRA charitable-roller (something they have done before).
Another expired provision is the income exclusion for mortgage-debt forgiveness. Created as a result of the housing crisis, this exclusion is no longer available to taxpayers, absent further action by Congress.