It's Back! -Repeal of the federal estate tax
As widely anticipated, the "repeal" of the federal estate tax has proven to be short-lived. And there are some new wrinkles in our transfer-tax laws, courtesy of the 2010 Tax Relief Act. Here's what you need to know.
Taxpayers inheriting assets from individuals who died in 2010 and the executors/personal representatives 2010 estates must deal with new tax complexities. The new law has reinstated the estate tax [or 2010. However, executors may elect out of the estate tax by choosing "modified carryover basis" treatment for assets that estate beneficiaries receive. Generally, using carryover basis means more capital gains tax [or beneficiaries when they dispose of the assets.
For 2011 and 2012, a 35% maximum rate will apply for gift, estate, and generation skipping transfer (GST) tax purposes. What will happen in the future is any ones' guess, but the law as currently written imposes a 55% maximum rate on taxable transfers made after 2012.
The new law provides an exemption (technically, an "applicable exclusion amount") of $5 million for a taxpayer's cumulative lifetime gifts and transfers at death. Basically, this means a taxpayer may transfer assets worth up to $5 million in total without having to worry about a liability for gift or estate tax.
But the $5 million exemption is short-lived: It drops to $1 million after 2012 under the law as currently written.
Married couples have more to think about as they plan their estates. Another 2010 Tax Relief Act provision makes it possible [or the estate o[ the last spouse to die to utilize any unused portion o[ the first spouse to dies exemption. Essentially, this means that married couples will be able to pass up to $10 million o[ assets to their families free of estate tax without the use of trusts or other planning mechanisms.
Example. Jack and Jill have two children and make no taxable gifts during their lifetimes .. Jack dies in 2011 with an estate worth $5 million. it leaves everything to Jill. His estate claims the unlimited marital deduction for the amount passing to Jill, reducing his taxable estate to zero. Because Jack's $5 million exemption isn't used, it carries over to Jill. If she dies in 2012, with a $10 million taxable estate that she leaves to the children, her $10 million exemption (which includes the amount carried over from Jack) will shield the entire estate from tax.
Since the $5 million exemption ruled the portability provision are effective [or 2011 and 2012 only under current law, a measure of caution is in order.
A Better Plan
Employers that reimburse employees for business expenses can save payroll taxes by setting up an "accountable" plan. With an accountable plan that meets IRS rules, expense reimbursements are not treated as wages - avoiding FICA (Social Security and Medicare) taxes on those amounts.
Employees must provide an adequate accounting o[ their expenses (some type of log plus receipts or other substantiation) and return any excess reimbursement or expense allowance within a reasonable period. The reimbursed expenses must have a clear business connection.
Employees don't have to pay FICA taxes or income taxes on reimbursements received under an accountable plan. If there is no accountable plan in place, amounts provided to employees for business expenses are included in their income. Employees may deduct the expenses, but only if they itemize (rather than claim the standard deduction). Even then, the expense deduction is limited - and it's possible that an employee will receive no deduction.
*Tax Relief, Unemployment Insurance Re-authorization, and Job Creation Act of 20 I 0
March 2011 Page 1