Episode 27: How to Make an Offer in Compromise to the IRS

Attorney Merrell Bailey details the steps for cleaning up a hot mess with the IRS and making your Offer in Compromise (OIC).

An OIC may be accepted if the IRS determines that the debt cannot be paid or would create a financial hardship.

  1. First, you will need to determine if you are eligible to make an OIC.
  2. Determine your reasonable collection potential to determine a minimum amount to offer.
  3. Prepare your offer in compromise using Form 656.
  4. Submit the form and your fee.
  5. Wait while the IRS reviews your offer.
  6. Negotiate if necessary.
  7. Pay the agreed upon amount, on time, or risk defaulting on the agreement.

*Attorney Bailey does not do this type of legal work, though she will happily refer it out to get our clients the best result.

Episode 24: Gift Tax Rules for 2023

Let’s discuss the gift tax rules for the United States in 2023:

Lifetime Exemption: You can gift $12.92 million (up from $12.06) over the course of your lifetime without incurring any gift tax. As a married couple, you can combine this amount for $25.84 million gifted before tax.

 

Gift Tax Rate: Any gift made in excess of your lifetime exemption will be subject to a 40% tax. In other words, if you are unmarried, the $12,920,000 and first dollar gifted will be subject to 40 cents tax.

More fun? There are additional gifts that are excluded from your lifetime exclusion.

Gift Tax annual exclusion: You can gift up to $17,000 a year (up from $16,000) to any number of individuals without eating into your $12.93 million lifetime exemption. If you are married, you and your spouse can combine to gift up to $34,000 per person, per year. This is in addition to your lifetime exclusion.

Even more fun? There are additional gifts that are excluded from both your lifetime exclusion and your annual exclusion.

Gifts to a Spouse: You can make unlimited tax-free gifts to your US citizen spouse.

Gifts to Charities: You can make unlimited tax-free gifts to qualified charitable organizations.

Gifts for Medical Expenses: You can make unlimited tax-free gifts for someone else’s medical expenses paid directly to the provider.

Gifts for Educational Expenses: You can make unlimited tax-free gifts for someone else’s tuition expenses paid directly to the educational institution. Not lab fees. Not housing. Not books or computers or athletic fees charged by the educational institution – only tuition is the freebie.

Here is an example to maximize your gifting each year.

Let’s assume your son Boo is the father of your darling granddaughter, Gracie. First, pay Gracie’s health insurance premium directly to the provider. Second, pay all other of Gracie’s medical costs by giving Boo a credit card that you pay, with which Boo can charge Gracie’s other medical expenses. Third, pay Gracie’s tuition directly to Gracie’s school. Finally, write Gracie a check for $17,000 and let Gracie pay for her books and athletic fees and lab costs.

You would be delighted to know of the many, many techniques I have available to leverage your gifting if you have a taxable estate. It is magic.

 

Episode 20: The Biden Administration Proposed Tax Code Changes

How will the Biden Administration’s Proposed Tax Plan affect me?

Merrell and Krystal discuss the proposed tax plan under the Biden administration and the importance of getting the information out to clients.

Most proposed changes affect those individuals with taxable income rates over $400,000. There are also substantial changes for investors and corporations, and changes to the gift and estate tax codes. Among other tax credit changes, Biden’s first time homebuyers’ credit would provide up to $15,000.

Timestamps

:45 – We know our clients want to know if their estate plans will need revision

1:10 – The proposed changes affect individual income tax rates, corporate income tax rates, federal estate taxes and lifetime gifting limits. Most changes affect those with taxable income over $400,000

1:49 – The donut hole in the Social Security payroll tax

2:55 – Top taxable income rate changes from 37% to 39.6% (applies to income over $400,000)

3:35 – What about itemized deductions?

4:06 – Long term capital gains changes are a BIG change to investors

4:33 – Qualified business income deductions (Section 199A) will be phased out

4:47 – Real estate opportunity zones and capital gains exemptions

5:43 – Tax benefits for renewable energy and expiring solar energy credit

6:38 – Corporate income tax rate increases from 21% to 28%

6:55 – Estate tax and gift tax changes. One proposal involves restoring them to the 2009 level

8:54 – Additionally, the step-up in basis could be eliminated. This is problematic for a number of reasons

10:21 – Implications of losing step-up in basis when it comes to inheriting property

13:27 – Because Congress will make the rules, we probably don’t want to make changes until we see what happens

14:10 – Merrell pleads with Biden to 1) not to make anything retroactive 2) or make the gift tax exemption and the estate tax exemption bifurcated and 3) take away the step-up in basis

15:00 – Krystal discusses strategic gifting for clients with a large combined net worth before the end of the year

16:56 – Additional changes include expanding the Earned Income Tax Credit, Child Dependent Care Tax Credit, and re-establishing the First Time Homebuyers’ Tax Credit.

17:35 – Brief discussion of the current housing market

Tax Bosses’ detailed notes:

Most of the proposed income tax changes affect those individuals with taxable income over $400,000 and include:
  • Imposing a 12.4 percent Social Security payroll tax on income earned above $400,000, evenly split between employers and employees. This would create a “donut hole” in the current Social Security payroll tax, where wages between $137,700, the current wage cap, and $400,000 are not taxed.
  • Reverting the top individual income tax rate for taxable incomes above $400,000 from 37 percent under current law to the pre-Tax Cuts and Jobs Act level of 39.6 percent.
  • Capping the tax benefit of itemized deductions to 28 percent of value for those earning more than $400,000, which means that taxpayers earning above that income threshold with tax rates higher than 28 percent would face limited itemized deductions.
  • Imposing a limitation on itemized deductions for taxable incomes above $400,000.
  • Phasing out the qualified business income deduction (Section 199A) for filers with taxable income above $400,000.
  • Taxes long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million
Proposed corporate income tax changes include:
  • Increasing the corporate income tax rate from 21 percent to 28 percent.
  • Creating a minimum tax on corporations with book profits of $100 million or higher. The minimum tax is structured as an alternative minimum tax—corporations will pay the greater of their regular corporate income tax or the 15 percent minimum tax while still allowing for net operating loss (NOL) and foreign tax credits.
  • Expands the New Markets Tax Credit and makes it permanent. The NMTC Program attracts private capital into low-income communities by permitting individual and corporate investors to receive a tax credit against their federal income tax in exchange for making equity investments in specialized financial intermediaries called Community Development Entities (CDEs). The credit totals 39 percent of the original investment amount and is claimed over a period of seven years.
  • Offers tax credits to small business for adopting workplace retirement savings plans.
  • Expands several renewable-energy-related tax credits, including tax credits for carbon capture, use, and storage as well as credits for residential energy efficiency, and a restoration of the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit. The Biden plan would also end tax subsidies for fossil fuels.
Proposed federal estate and gift tax changes include:
  • Restoring the federal estate and gift tax rates and exemption to the 2009 level. In 2009, the federal estate tax exemption amount was $3.5 million and the lifetime gift exemption was $1 million. The maximum tax rate was 45%.  There is also talk that the exemption amount might be in the $3.5 – $6 million range, but even on the highest end, that is ½ of what we currently have.  And the lifetime gifting may no longer be tied to the federal estate tax exemption.
  • Eliminating step-up in basis at death for capital gains taxation.
Some additional proposals that may be of interest to advisors and our clients include:
Expanding the Earned Income Tax Credit (EITC) for childless workers aged 65+; provides renewable-energy-related tax credits to individuals.
Expanding the Child and Dependent Care Tax Credit (CDCTC) from a maximum of $3,000 in qualified expenses to $8,000 ($16,000 for multiple dependents) and increases the maximum reimbursement rate from 35 percent to 50 percent.
For 2021 and as long as economic conditions require, increases the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children 17 or younger, while providing a $600 bonus credit for children under 6. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15 percent phase-in rate.
Reestablishing the First-Time Homebuyers’ Tax Credit, which was originally created during the Great Recession to help the housing market. Biden’s homebuyers’ credit would provide up to $15,000 for first-time homebuyers.

Details and Analysis from the Tax Foundation

Summary of Changes from the Wall Street Journal

Higher Taxes on Corporations and the Wealthy

Episode 19: What about Ivanka Trump’s consulting fees and payroll?

Can you pay an employee their salary and a consulting fee?

Advisors, have you had a client ask you if the technique of paying consulting fees is better than paying payroll or gift tax? Krystal and Merrell discuss what is legal and tax efficient, using the following example.

The New York Times matched a consultant payment of $747,622 deducted by President Trump to an income item on Ivanka Trump’s disclosure forum. The payments allegedly were for consulting work on projects that Ivanka already was being paid for as an employee.

Timestamps

:45 – Family owned businesses have recently asked if they can pay family members on the payroll as executives, and also pay the same family members a consulting fee for the same project.

1:12 – Families very often are looking for ways to transfer wealth from one generation to the next. Only a couple of ways to do this. You can pay a family member compensation which is subject to income taxes and payroll taxes but may be deductible as a business expense, or you can gift money to a family member, subject to gift tax.

1:50 – Krystal discusses her experience with families wishing to pay salary and gift but not layer salary and consulting fees.

2:19 – Merrell reviews President Trump and the fees to Ivanka.

3:30 – Using a $1m salary example, we look at deductions, payroll taxes, the child’s income taxes and payroll taxes. Is it less than the gift tax if they’d have made a gift of a $1m? It depends on whether or not it’s a taxable estate.

6:10 – What if the estate tax rate goes down under President Biden?

7:15 – Krystal and Merrell examine the business deductions assuming an example of an unreasonable payment (in excess of $1m). Breaking compensation into different categories doesn’t help.

8:50 – It’s about sitting down with clients and helping them work through the math. What is legal, and what is the most tax-efficient way to transfer wealth?

9:20 – It takes a village. We, the CPAs, the estate tax attorneys, the business tax attorneys, the financial advisors – we need to work together to do the math to get the best result for our clients. Each of us has a piece of the puzzle, and when we put the pieces together, it is so much better for our clients.

Resources

NYT Trump tax records

CNN Ivanka Trump’s categorization as a consultant

Is your consultant really your employee?

Florida Payroll Tax Calculator

Net Investment Income Tax

2020 Tax Brackets

Section 162(m) Proposed Regulations 

Limits on Deductions for Executive Compensation

Episode 13: The SECURE Act and Your Client’s Estate Plan

The SECURE Act of 2020 (Setting Every Community Up for Retirement):

  • is changing retirement, and it may change how your wealth is distributed;
  • it may require a check-in with your estate planner to adjust your estate plan’s language and/or structure to do what you originally intended;
  • or if you’re an advisor, it may require a check-in with the estate planner and other financial professionals in your client’s sphere

Timestamps

:30 Krystal and Merrell introduce the impacts to qualified retirement plans and what changes after the planholder passes away. What should advisors expect from other advisors in response to the SECURE Act?

1:30 The rules before 2020…inherited IRAs, rollover IRAs, and ability of a beneficiary to stretch distributions over their life expectancy

2:33 As estate planning attorneys we considered passing wealth to another generation in IRA trusts. (A two-year old grandchild as example)

3:38 Krystal outlines the rules now, as of January 2020. If you inherit an IRA and are not a spouse, the entirety of the retirement plan must be paid out within ten years (and associated income tax)

5:00 Merrell discusses the SECURE Act in context of leaving wealth to grandchildren…

5:52 Exceptions to the ten year rule include: a surviving spouse; and person that fits the SECURE Act’s definition of  disabled and chronically ill persons; a beneficiary that is fewer than ten years younger than the planholder; and a minor child – not grandchild – until the age of majority

7:30 Krystal talks about revisiting client goals and trust provisions with CPAs and financial advisors

8:30 Merrell compares beneficiary possibilities – either as a trust or as a human, and the respective tax rates for each; she explains how the trust may need to have accumulation language so as not to force distributions and give the trustee some discretion

10:52 Common trusts (aka pot trusts, multiple beneficiary trusts) vs. Separate trusts; spreading the IRA tax hit

14:43 Explaining to the client how the 2020 SECURE Act laws are different than when we did their initial planning, and opening up the possibility of letting other assets appreciate

16:00 Merrell compares the relative risk of setting up a structure that requires the trustee to distribute wealth that will harm the beneficiary vs. taking the tax hit under the new law

17:28 Takeaways for estate planning clients as well as their advisors; revisiting your plan with your estate planning attorney to make sure it still makes sense and if an advisor, reaching out to make sure the client has the option to make changes

Resources

Other provisions of the SECURE Act 

If you like charts, National Association of Planners’ summary points of SECURE Act

 

Episode 12: Estate Planning through Beneficiary Designations

When is estate planning through beneficiary designations and/or payable on death designations a good idea? Merrell and Krystal discuss the very particular situations and criteria that makes this a safe estate planning tool.

Timestamps

:30 Merrell discusses her perfect client for this kind of estate plan – life insurance, homestead, checking account, and a retirement account, a modest estate and two adult children that are in good places in their life.

1:47 Krystal elaborates on additional things she looks for in trying to plan outside of a will, recommending estate planning through beneficiary designations: children that get along and have a good relationship if they will inherit assets together; no special needs issues, and more

3:08 The estate planning quadrant (take a trip inside Merrell’s head). “The Asset Action Plan” is divided into 1) own it with someone else, joint tenants, rights of survivorship, 2) assets that have beneficiary designations, 3) in their own name, not owned with anyone else and without a beneficiary designation (this kind of asset would go through probate), and 4) if a revocable living trust, the things that are titled in there.

4:08 How the Asset Action Plan works to avoid probate – moving all assets into box 1 or 2. Caution – this does not provide asset protection to the next generation.

4:36 What about business ownership transfers upon death?

5:30 If you’re going to do estate planning like this, you MUST have a good Durable Power of Attorney. A good one!

6:14 When other advisors tell you to use beneficiary designations and screw up a carefully crafted trust-based estate plan. (Advisors and estate planners, this is why we need to work together.)

7:22 For example, financial advisors, our mutual client may not be comfortable discussing her daughter’s bad marriage and why I have things set up so that she won’t inherit everything outright.

Resources

When is not making a last will and testament a bad idea? See Your Caring Law Firm’s article about jointly owned accounts and Quit Claim deeds.

 

 

Episode 11: Planned Giving, Gift Tax, and Other Options

Everything you need to know about a planned giving plan and the IRS:

Timestamps

1:00 Merrell explains why she generally advises against her clients gifting large amounts

1:25 Krystal discusses a client who wants to gift the proceeds from a house sale to her children, and whether or not she’d be better off paying off their mortgages or making smaller gifts over the years to fall under the reporting requirements

2:06 Tax reporting, and IRS form 709

3:05 Gift tax rules, what has to be reported and what doesn’t

4:25 Gifts that don’t count toward the gift tax limit (tuition, medical expenses directly to the provider, charitable giving, etc.)

5:50 Splitting gifts with a spouse

6:45 What about gifting portions of a Family Limited Partnership?

10:00 Gifting a house – now or after you get on the bus?

12:00 Summarizing – conversations that need to be had about reporting, basis, and getting a professional to help fill out a 709

 

 

 

Episode 9: When Your Client Doesn’t Want What’s in Their Best Interests

What can you do when your client already knows what they want, and it’s not a good fit?

Timestamps

:37 Case example – clients wanted a charitable remainder trust set up using retirement assets.

2:50 Counseling the client, thinking about the next generation that is living through decisions

3:45 Case example #2 – Mom set up a special needs trust. Dad set up a trust that split assets three ways, including to the special needs sibling. Trust administration issues abound.

6:13 Case example #3 – three siblings, five years, and one of them wants to make a deal. Merrell counsels holding sibling #1 to the fiduciary standard rather than accepting the deal.

8:28 Clients ultimately need to make the decision. We provide the best advice we can.