A revocable trust — often referred to as a “living trust” — can help ensure smooth management of your assets during life and avoid probate at death. And you may know that the trust isn’t effective unless you “fund” it — that is, transfer ownership of your assets to the trust.
But what about assets such as automobiles and other vehicles? Should you transfer them to your revocable trust?
Navigate potential bumps in the road
If you still owe money on an auto loan, the lender may not allow you to transfer the title to the trust. But even if you own the vehicle outright (whether you paid cash for it or your loan is paid off), there are risks to consider before you make such a transfer.
As owner of the vehicle, the trust will be responsible in the event the vehicle is involved in an accident, exposing other trust assets to liability claims that aren’t covered by insurance. So you need to name the trust as an insured party on your liability insurance policy.
On the other hand, because you’re personally liable either way, owning a vehicle through your revocable trust may not be a big concern during your life.
But after your death, when the trust becomes irrevocable, an accident involving a trust-owned vehicle can place the other trust assets at risk. Keeping a vehicle out of the trust eliminates this risk. The downside, of course, is that the vehicle may be subject to probate, although some states offer streamlined procedures for transferring certain vehicles to heirs.
Steer your questions to us
If you’re considering transferring an automobile or other vehicle to your revocable trust, get in touch with us. We’d be pleased to explain the ins and outs of such a move.
With the dawn of 2019 on the near horizon, here’s a quick list of tax and financial to-dos you should address before 2018 ends:
Check your FSA balance. If you have a Flexible Spending Account (FSA) for health care expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2½-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.
Max out tax-advantaged savings. Reduce your 2018 income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts to the extent you’re eligible. (Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your 2018 return if they’re made by April 15, 2019.)
Take RMDs. If you’ve reached age 70½, you generally must take required minimum distributions (RMDs) from IRAs or qualified employer-sponsored retirement plans before the end of the year to avoid a 50% penalty. If you turned 70½ this year, you have until April 1, 2019, to take your first RMD. But keep in mind that, if you defer your first distribution, you’ll have to take two next year.
Consider a QCD. If you’re 70½ or older and charitably inclined, a qualified charitable distribution (QCD) allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and to apply the amount toward your RMD. This is a big advantage if you wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).
Use it or lose it. Make the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.
Contribute to a Sec. 529 plan. Sec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction (depending on your state and plan).
Review withholding. The IRS cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld due to changes under the Tax Cuts and Jobs Act. Use its withholding calculator (available at irs.gov) to review your situation. If it looks like you could face underpayment penalties, increase withholdings from your or your spouse’s wages for the remainder of the year. (Withholdings, unlike estimated tax payments, are treated as if they were paid evenly over the year.)
For assistance with these and other year-end planning ideas, please contact us.
As the year winds to a close, most businesses see employees taking a lot of vacation time. After all, it’s the holiday season, and workers want to enjoy it. Some businesses, however, find themselves particularly short-staffed in December because they don’t allow unused paid time off (PTO) to be rolled over to the new year, or they allow only very limited rollovers.
There are good business reasons to limit PTO rollovers. Fortunately, there’s a way to reduce the year-end PTO vortex without having to allow unlimited rollovers: a PTO contribution arrangement.
Retirement saving with a twist
A PTO contribution arrangement allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting excess PTO amounts to employer contributions.
This can be appealing to any employees who end up with a lot of PTO left at the end of the year and don’t want to lose it. But it can be especially valued by employees who are concerned about their level of retirement saving or who simply value money more than time off of work.
Good for the business
Of course the biggest benefit to your business may simply be that it’s easier to ensure you have sufficient staffing at the end of the year. But you could reap that same benefit by allowing PTO rollovers (or, if you allow some rollover, increasing the rollover limit).
A PTO contribution arrangement can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books.
Also, a PTO contribution arrangement might help you improve recruiting and retention, because of its appeal to employees who want to save more for retirement or don’t care about having a lot of PTO.
Set-up is simple
To offer a PTO contribution arrangement, simply amend your retirement plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms. Additional rules apply.
Have questions about PTO contribution arrangements? Contact us. We can help you assess whether such an arrangement would make sense for your business.
As the holidays approach and the year draws to a close, many taxpayers make charitable gifts — both in the spirit of the season and as a year-end tax planning strategy. But with the tax law changes that go into effect in 2018 and the many rules that apply to the charitable deduction, it’s a good idea to check deductibility before making any year-end donations.
Confirm you can still benefit from itemizing
Last year’s Tax Cuts and Jobs Act (TCJA) didn’t put new limits on or suspend the charitable deduction, like it did to many other itemized deductions. Nevertheless, it will reduce or eliminate the tax benefits of charitable giving for many taxpayers this year.
Itemizing saves tax only if itemized deductions exceed the standard deduction. For 2018 through 2025, the TCJA significantly increases the standard deduction, to $24,000 for married couples filing jointly, $18,000 for heads of households, and $12,000 for singles and married couples filing separately.
The nearly doubled standard deduction combined with the new limits or suspensions of some common itemized deductions means you may no longer have enough itemized deductions to exceed the standard deduction. And if that’s the case, your donations won’t save you tax.
So before you make any year-end charitable gifts, total up your potential itemized deductions for the year, including the donations you’re considering. If the total is less than your standard deduction, your year-end donations won’t provide a tax benefit.
You might, however, be able to preserve your charitable deduction by “bunching” donations into alternating years. This can allow you to exceed the standard deduction and claim a charitable deduction (and other itemized deductions) every other year.
Meet the delivery deadline
To be deductible on your 2018 return, a charitable gift must be made by Dec. 31, 2018. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:
Check. The date you mail it.
Credit card. The date you make the charge.
Stock certificate. The date you mail the properly endorsed stock certificate to the charity.
Make sure the organization is “qualified”
To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.
The IRS’s online search tool, Tax Exempt Organization Search, can help you easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access this tool at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly. Remember that political donations aren’t deductible.
Consider other rules
We’ve discussed only some of the rules for the charitable deduction; many others apply. We can answer any questions you have about the deductibility of donations or changes to the standard deduction and itemized deductions.
With the federal gift and estate tax exemption at $11.40 million for 2019, people whose estates are below the exemption amount are shifting their focus to income tax reduction. High-income taxpayers — particularly those who live in high-income-tax states — may want to consider incomplete nongrantor trusts, which make it possible to eliminate state taxes on trust income.
Defining an incomplete nongrantor trust
Generally, trusts are classified as either grantor trusts or nongrantor trusts. In a grantor trust, you, as “grantor,” establish the trust and retain certain powers over it. You’re treated as the trust’s owner for income tax purposes and pay taxes on income generated by the trust assets.
In a nongrantor trust, you relinquish certain controls over the trust so that you aren’t considered the owner for income tax purposes. Instead, the trust becomes a separate legal entity, with income tax responsibility shifting to the trust itself. By setting up the trust in a no-income-tax state (typically by having it administered by a trust company located in that state), it’s possible to avoid state income taxes.
Ordinarily, when you contribute assets to a nongrantor trust you make a taxable gift to the trust beneficiaries. By structuring the trust as an incomplete nongrantor trust, you can avoid triggering gift taxes, or tapping your gift and estate tax exemption. This requires relinquishing just enough control to ensure nongrantor status, while retaining enough control so that transfers to the trust aren’t considered completed gifts for gift-tax purposes.
Analyzing the benefits
Although the trust will allow you to receive distributions, assets you place in the trust should produce income that you don’t need. If you take money out, trust taxable income could follow to you and be taxed in your state of residence.
Incomplete nongrantor trusts aren’t right for everyone. It depends on your particular circumstances and the tax laws in your home state.
While this strategy can produce significant state income tax savings, it may increase federal income taxes, depending on your individual tax bracket. Nongrantor trusts pay federal income taxes at the highest marginal rate (currently, 37%) once income reaches $12,700 for 2019, while the 37% rate threshold is $612,350 for married couples filing jointly and $510,300 for singles and heads of households. If you’re not in the 37% bracket, the increased federal income taxes the incomplete nongrantor trust would pay might outweigh the state income tax savings.
Also, if federal estate taxes aren’t a concern now but could be in the future — such as if your estate could exceed the estate tax exemption when it drops to an inflation-adjusted $5 million in 2026, as currently scheduled — be sure to consider the potential estate tax consequences. Incomplete gifts remain in your estate for estate tax purposes.
Is it right for you?
To determine whether an incomplete nongrantor trust is right for you, weigh the potential state income tax savings against the potential federal estate and income tax costs. Contact us with any questions.
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2019. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
- File 2018 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
- Provide copies of 2018 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
- File 2018 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
- File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2018. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 11 to file the return.
- File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2018. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 11 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”)
- File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2018 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 11 to file the return.
- File 2018 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is April 1.)
- If a calendar-year partnership or S corporation, file or extend your 2018 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2018 contributions to pension and profit-sharing plans.
Prepaying property taxes related to the current year but due the following year has long been one of the most popular and effective year-end tax-planning strategies. But does it still make sense in 2018?
The answer, for some people, is yes — accelerating this expense will increase their itemized deductions, reducing their tax bills. But for many, particularly those in high-tax states, changes made by the Tax Cuts and Jobs Act (TCJA) eliminate the benefits.
The TCJA made two changes that affect the viability of this strategy. First, it nearly doubled the standard deduction to $24,000 for married couples filing jointly, $18,000 for heads of household, and $12,000 for singles and married couples filing separately, so fewer taxpayers will itemize. Second, it placed a $10,000 cap on state and local tax (SALT) deductions, including property taxes plus income or sales taxes.
For property tax prepayment to make sense, two things must happen:
- You must itemize (that is, your itemized deductions must exceed the standard deduction), and
- Your other SALT expenses for the year must be less than $10,000.
If you don’t itemize, or you’ve already used up your $10,000 limit (on income or sales taxes or on previous property tax installments), accelerating your next property tax installment will provide no benefit.
Joe and Mary, a married couple filing jointly, have incurred $5,000 in state income taxes, $5,000 in property taxes, $18,000 in qualified mortgage interest, and $4,000 in charitable donations, for itemized deductions totaling $32,000. Their next installment of 2018 property taxes, $5,000, is due in the spring of 2019. They’ve already reached the $10,000 SALT limit, so prepaying property taxes won’t reduce their tax bill.
Now suppose they live in a state with no income tax. In that case, prepayment would potentially make sense because it would be within the SALT limit and would increase their 2018 itemized deductions.
Look before you leap
Before you prepay property taxes, review your situation carefully to be sure it will provide a tax benefit. And keep in mind that, just because prepayment will increase your 2018 itemized deductions, it doesn’t necessarily mean that’s the best strategy. For example, if you expect to be in a higher tax bracket in 2019, paying property taxes when due will likely produce a greater benefit over the two-year period.
For help determining whether prepaying property taxes makes sense for you this year, contact us. We can also suggest other year-end tips for reducing your taxes.
The holiday season is a great time for businesses to show their appreciation for employees and customers by giving them gifts or hosting holiday parties. Before you begin shopping or sending out invitations, though, it’s a good idea to find out whether the expense is tax deductible and whether it’s taxable to the recipient. Here’s a brief review of the rules.
Gifts to customers
When you make gifts to customers, the gifts are deductible up to $25 per recipient per year. For purposes of the $25 limit, you need not include “incidental” costs that don’t substantially add to the gift’s value, such as engraving, gift-wrapping, packaging or shipping. Also excluded from the $25 limit is branded marketing collateral — such as pens or stress balls imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.
The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (a gift basket for all to share, for example) as long as they’re “reasonable.”
Gifts to employees
Generally anything of value that you transfer to an employee is included in the employee’s taxable income (and, therefore, subject to income and payroll taxes) and deductible by you. But there’s an exception for noncash gifts that constitute “de minimis fringe benefits.”
These are items so small in value and given so infrequently that it would be administratively impracticable to account for them. Common examples include holiday turkeys or hams, gift baskets, occasional sports or theater tickets (but not season tickets), and other low-cost merchandise.
De minimis fringe benefits are not included in an employee’s taxable income yet are still deductible by you. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.
Keep in mind that cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.
The Tax Cuts and Jobs Act reduced certain deductions for business-related meals and eliminated the deduction for business entertainment altogether. There’s an exception, however, for certain recreational activities, including holiday parties.
Holiday parties are fully deductible (and excludible from recipients’ income) provided they’re primarily for the benefit of non-highly-compensated employees and their families. If customers also attend, holiday parties may be partially deductible.
Gifts that give back
If you’re thinking about giving holiday gifts to employees or customers or throwing a holiday party, contact us. With a little tax planning, you may receive a gift of your own from Uncle Sam.
Sometimes estates that are large enough for estate taxes to be a concern are asset rich but cash poor, without the liquidity needed to pay those taxes. An intrafamily loan is one option. While a life insurance policy can be used to cover taxes and other estate expenses, a benefit of using an intrafamily loan is that, if it’s properly structured, the estate can deduct the full amount of interest upfront. Doing so reduces the estate’s size and, thus, its estate tax liability.
Deducting the interest
An estate can deduct interest if it’s a permitted expense under local probate law, actually and necessarily incurred in the administration of the estate, ascertainable with reasonable certainty, and will be paid. Under probate law in most jurisdictions, interest is a permitted expense. And, generally, interest on a loan used to avoid a forced sale or liquidation is considered “actually and necessarily incurred.”
To ensure that interest is “ascertainable with reasonable certainty,” the loan terms shouldn’t allow prepayment and should provide that, in the event of default, all interest for the remainder of the loan’s term will be accelerated. Without these provisions, the IRS or a court would likely conclude that future interest isn’t ascertainable with reasonable certainty and would disallow the upfront deduction. Instead, the estate would deduct interest as it’s accrued and recalculate its estate tax liability in future years.
The requirement that interest “will be paid” generally isn’t an issue, unless there’s some reason to believe that the estate won’t be able to generate sufficient income to cover the interest payments.
Ensuring the loan is bona fide
For the interest to be deductible, the loan also must be bona fide. A loan from a bank or other financial institution shouldn’t have any trouble meeting this standard.
But if the loan is from a related party, such as a family-controlled trust or corporation, the IRS may question whether the transaction is bona fide. So the parties should take steps to demonstrate that the transaction is a true loan.
Among other things, they should:
- Set a reasonable interest rate (based on current IRS rates),
- Execute a promissory note,
- Provide for collateral or other security to ensure the loan is repaid,
- Pay the interest payments in a timely manner, and
- Otherwise treat the loan as an arm’s-length transaction.
It’s critical that the loan’s terms be reasonable and that the parties be able to demonstrate a “genuine intention to create a debt with a reasonable expectation of repayment.”
If you’re considering making an intrafamily loan, contact us. We’d be pleased to answer any questions you may have.
Will you be age 50 or older on December 31? Are you still working? Are you already contributing to your 401(k) plan or Savings Incentive Match Plan for Employees (SIMPLE) up to the regular annual limit? Then you may want to make “catch-up” contributions by the end of the year. Increasing your retirement plan contributions can be particularly advantageous if your itemized deductions for 2018 will be smaller than in the past because of changes under the Tax Cuts and Jobs Act (TCJA).
Catch-up contributions are additional contributions beyond the regular annual limits that can be made to certain retirement accounts. They were designed to help taxpayers who didn’t save much for retirement earlier in their careers to “catch up.” But there’s no rule that limits catch-up contributions to such taxpayers.
So catch-up contributions can be a great option for anyone who is old enough to be eligible, has been maxing out their regular contribution limit and has sufficient earned income to contribute more. The contributions are generally pretax (except in the case of Roth accounts), so they can reduce your taxable income for the year.
More benefits now?
This additional reduction to taxable income might be especially beneficial in 2018 if in the past you had significant itemized deductions that now will be reduced or eliminated by the TCJA. For example, the TCJA eliminates miscellaneous itemized deductions subject to the 2% of adjusted gross income floor — such as unreimbursed employee expenses (including home-off expenses) and certain professional and investment fees.
If, say, in 2018 you have $5,000 of expenses that in the past would have qualified as miscellaneous itemized deductions, an additional $5,000 catch-up contribution can make up for the loss of those deductions. Plus, you benefit from adding to your retirement nest egg and potential tax-deferred growth.
Other deductions that are reduced or eliminated include state and local taxes, mortgage and home equity interest expenses, casualty and theft losses, and moving expenses. If these changes affect you, catch-up contributions can help make up for your reduced deductions.
2018 contribution limits
Under 2018 401(k) limits, if you’re age 50 or older and you have reached the $18,500 maximum limit for all employees, you can contribute an extra $6,000, for a total of $24,500. If your employer offers a SIMPLE instead, your regular contribution maxes out at $12,500 in 2018. If you’re 50 or older, you’re allowed to contribute an additional $3,000 — or $15,500 in total for the year.
But, check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do. Also keep in mind that additional rules and limits apply.
Catch-up contributions are also available for IRAs, but the deadline for 2018 contributions is later: April 15, 2019. And whether your traditional IRA contributions will be deductible depends on your income and whether you or your spouse participates in an employer-sponsored retirement plan. Please contact us for more information about catch-up contributions and other year-end tax planning strategies.