The ASK A CPA program offers general information for managing personal and business finances and does not recommend specific financial actions. Be advised that tax laws can be very specific and varying facts can produce a different answer. Any information contained in this resource is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer For financial advice tailored to your situation, please contact an expert such as a CPA or a personal financial advisor.

General Information

What are the Section 179 limits?  Bonus Depreciation – Is it allowed and how much?

The Section 179 deduction was made permanent during 2015. The maximum amount of Section 179 that can be claimed for 2016 is $500,000.  This amount is phased out dollar-for-dollar once your annual investment in qualifying fixed assets exceeds $2,000,000. The maximum amount of Section 179 and deduction phase-out will be indexed annually for inflation.

Bonus depreciation is available on new asset additions and allows for 50% first year write-off on assets placed in service by December 31, 2016. 50% bonus depreciation is available through 2017. In 2018 and 2019, bonus depreciation is reduced to 40% and 30%, respectively.

I have a 401k with a company that I terminated from.  Can I roll it over to a Roth or regular IRA?  What happens if I decide to just keep the money?

You can choose to roll your vested balance from a qualified 401(k) plan into an Individual Retirement Account (IRA) without being subject to the additional early withdrawal tax and income tax. You can also choose to roll your vested balance from a qualified plan into a Roth IRA upon termination without paying an additional early withdrawal tax; however this would still be considered a distribution and would be subject to income tax, there are some exceptions that may apply.

If you choose to keep the money and are under 59 ½, you will be required to pay an additional early withdrawal tax of 10% of the distribution. Because the contributions were excluded from income taxes at the time they were contributed into the qualified 401(k) plan, these distributions are also subject to income tax at the time they are distributed from the plan. Taxation would be different if some or all of the 401k contributions were made as Roth contributions.

What are available retirement options and what are the deductibility limits?

The 2016 IRA contribution limits are the lesser of earned income or $5,500 ($6,500 if you are 50 or older). There are phase out levels based on modified adjusted gross income and your filing status if you or your spouse participate in another qualified plan.

Dependency/Filing Status

What determines if I am head of household?

To qualify, a taxpayer must meet all four of the following tests. 1. The taxpayer is not married at the end of the year (exception if taxpayer meets tests for “considered unmarried.”) 2. The taxpayer paid more than half the cost of keeping up his home. 3. The home was the principal residence for more than half the year of either the taxpayers qualifying child or taxpayers qualifying relative. 4. The taxpayer is a US Citizen or resident during the entire year.

Can I claim my 23 year old daughter as a qualifying child on my 2015 tax return? She was under 24 at the end of the year, was a full-time student until 11/30/14 and we paid more than 50% of her support. She did however not live with us at all during the year. She has had her own apartment in Omaha since September of 2013.

Your daughter meets all the tests to be claimed as a dependent. One qualification is that the child must live with the taxpayer for more than half the year.  They do allow an exception to this residency test due to temporary absence due to special circumstances, including education.  Since she was a full time student, she would meet this exception allowed in the residency test.

How do I file if my spouse died during the year?

You can file as either married filing separately or married filing jointly.

How do I file if I got married or divorced during the year?

If the taxpayer was married during the year; the couple would file either as married filing separately or married filing jointly. A taxpayer that is divorced during the tax year and their divorce was finalized during the year and the taxpayer has not remarried would file as single or head of household. Additional filing status criteria must be met to file as head of household.

What income level do I need to file a return for my child?

For 2016, if an individual can be claimed as a dependent on another persons’ return, that individual/dependent must file a return if unearned income exceeds $1,050 plus any additional standard deduction allowed. The additional standard deduction that may be allowed is equal to the earned income plus $350 but not to exceed $6,300.

Is health insurance going to be reported on my W-2 and will I have to pay tax on it?

Most employers must report the aggregate cost of employer-sponsored health insurance coverage on Form W-2 in box 12; using code DD. Employers that are required to file fewer than 250 Form W-2’s for the preceding calendar year are exempt from the reporting requirement in 2016. The amount reported should not be taxable income. Any insurance paid by the employer that is taxable should be included on the W-2 as part of the taxable wages.

My son is 25 and done with college.  Can he still be on my health insurance?

The Health Care and Education Reconciliation Act of 2010 states that any health care plan which provides coverage for dependent children must continue coverage for an unmarried adult child until the child’s 26th birthday.

Income Inclusion

How much is the gift exemption? I received $14,000 do I have to claim it? Is there a difference if the gift is land vs. cash?

The gift tax annual exclusion for 2016 is $14,000 per donee but is not taxable to the donee. The donor is responsible for reporting and paying any gift tax on gifts in excess of $14,000 per donee. The $14,000 applies to both property and cash. However, if the donor gifted land, the donor may want to file a gift tax return in order to establish a value for the land. Filing a gift tax return starts the statute of limitations running for the period of time the IRS can challenge the value of the land gifted. If no gift tax return is filed, no statute of limitations is started, and therefore, the IRS can go back more than three years to challenge the value of the land gifted.

I’m inheriting $50,000.  Is this money taxable?  What if it is property?

An inheritance would only be taxable to the recipient if the income was earned prior to a taxpayer’s death but not included in their taxable income during their lifetime. A common example is a taxpayer’s IRA or other qualified plan retirement account. Other examples include annuities, investment income paid after death, wages due, contracts-for-deed, interest on savings bonds, and accounts receivable from a cash basis business are all taxable as received.

Does taking money from a retirement account count as earned income when you are on social security?

No. Retirement account income is not earned income so will not affect your social security benefits. Retirement income does however count toward your income for tax purposes when determining the amount of Social Security benefits that are taxable. If your income is above $25,000 filing single or above $32,000 filing jointly, 50% of your Social Security benefits may be taxable. If your income is above $34,000 filing single or above $44,000 filing jointly, 85% of your Social Security benefits may be taxable.

My husband worked this fall for a local farmer with the harvest and received a $2,400 check. How do I report this income since the farmer did not take out any taxes and no Form W-2 was provided? Is there a special form?

You should report this income on a Schedule C as self-employment income.  You will also use Schedule SE to compute the social security tax on the net income from this job, net income being income less any related job expenses. Your husband most likely will receive a Form 1099-MISC from the local farmer for the income received.

Itemized Deductions

Is there a limit to how much you pay out of pocket for medical expenses before you can deduct them for taxes?

If you are itemizing your deductions (meaning your deductions are greater than your standard deduction of $6,300 for single or $12,600 for married filing joint) then your medical costs paid out of pocket must be greater than 10% of your adjusted gross income before you see any benefit or deduction for them. This percentage decreases to 7.5% of adjusted gross income if the taxpayer is age 65 and older.

I give cash most often in church for offering. Can I deduct this without proof of it? I also donated a lot of items to goodwill over the year. Is there a way to claim that?

Cash donations

Outright gifts of cash (which include donations made via check, credit card and payroll deduction) are the easiest. The key is to substantiate them. To be deductible, cash donations must be:

Supported by a canceled check, credit card receipt or written communication from the charity if they’re under $250, or

Substantiated by the charity if they’re $250 or more.

Deductions for cash gifts to public charities can’t exceed 50% of your adjusted gross income (AGI). The AGI limit is 30% for cash donations to non-operating private foundations. Contributions in excess of the applicable AGI limit can be carried forward for up to five years.

Non-cash donations must be substantiated with: 1. Name of charity, 2. Date and location of donation, 3. Reasonable detailed description of the property (i.e. 3 jeans, 4 blouses, 2 coats, etc.), 4. Fair market value and method of valuing. Specific requirements exist for non-cash donations exceeding $250. The above information must be in a written statement from the charity or reliable written record. If the non-cash donation is greater than $500, then in addition to the above, your records must include how the property was acquired, the date acquired, and the adjusted basis. Non-cash gifts greater than $500 must also complete Form 8283 and attach it to your return. If the non-cash donation is greater than $5,000, then in addition to the above you must also have a written appraisal.

How far do you travel for National Guard before it can be treated as a deduction?  What is mileage reimbursement rate?

If you are a member of the National Guard or military reserve you may be able to claim a deduction that reduces adjusted gross income rather than an itemized deduction on Form 1040, Schedule A, for unreimbursed travel expenses paid in connection with the performance of services as a reservist. Guard and Reserve personnel who stay overnight more than 100 miles from their home while in service (for a drill or meeting) may deduct the unreimbursed travel expenses as an above-the-line deduction. Expenses must be ordinary and necessary. This deduction is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate of 53.5 cents per mile (for car expenses) plus any parking fees, ferry fees, and tolls. These expenses are claimed on Form 2106, or Form 2106-EZ and carried to the Form 1040. Expenses in excess of these federal per diem rate limits can be also be claimed but only as an itemized deduction on Form 1040, Schedule A.

Can sales tax be deducted and how do you determine the correct amount?

There is an option of claiming either state and local income tax or state and local general sales tax. If you itemize (meaning your actual deductions exceed your standard deduction) and you choose to deduct state and local general sales tax, then you can determine your deduction either based on 1) actual sales tax amounts based on your actual receipts, or 2) a predetermined amount from the IRS tables listed in Publication 600 increased by actual sales tax on major purchases (defined as motor vehicles including recreational vehicles, aircraft, boat, homes and home building materials) from the year.

With the purchase of a 2015 car in June--are we able to use the sales tax as an income tax deduction?

In 2016, only if you itemize on Schedule A, you can increase your sales tax deduction by the actual amount of sales tax paid on a vehicle purchase.

Credits

When do I get the child tax credit and how much per child?

The maximum credit per qualifying child is $1,000. To qualify the child must be claimed by the taxpayer on their return and also be less than 17 years of age. The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, if the Child Tax Credit is more than the amount of income tax you owe, the excess is refundable to the extent of the greater of:

15% of earned income above $3,000 or

For taxpayers with three or more qualifying children, the excess of the taxpayer’s social security taxes for the year over the taxpayer’s earned income credit for the year.

Taxpayers with earned income of $3,000 or less will not qualify for the refundable tax credit under the 15% rule.

I flex $5,000 in dependent care, but pay $3,000 more than that.  Can I get a credit for that?

The maximum dependent care costs per dependent that qualify for the credit is $3,000 for one dependent or $6,000 to two or more qualifying dependents. The $5,000 flex would be offset against the $3,000 for one dependent or the $6,000 for two or more dependents in arriving at the amount of care that qualifies for the credit, or if any of the flex would need to be included in income.

College

What expenses are eligible for credit for my child attending college?

Qualifying tuition and related expenses are eligible for the American Opportunity Credit and the Lifetime Learning Credit. Qualifying expenses for the American Opportunity Credit include tuition, required enrollment fees and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution. For the Lifetime Learning Credit qualifying expenses include tuition and required enrollment fees (including amounts required to be paid to the institution for course-related book, supplies and equipment. Room and board, insurance, transportation or other similar personal living expenses do not qualify.

Are there differences between the college credit available and how do I know which credit is the best?

The credits available are the American Opportunity Credit or Lifetime Learning Credit. The differences in the credits are based on the year the student is in college, the amount and type of expenses qualifying for the credit, and also income phase out limits. Expenses for students in their first two years of college qualify for the American Opportunity Credit and generally provide the largest amount of credit. You should review the instructions to Form 8863 for more information on credit maximizes your tax benefit.

Who is eligible to take the education credits?

Individual taxpayer may claim an income tax credit for higher education expenses at accredited post-secondary educational institutions paid for themselves, their spouses and their dependents. All credits have a phase out for higher-income taxpayers.

Is student loan interest deductible?

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500.

The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040's Schedule A.

Home

Is your home mortgage interest tax deductible?

Qualified residence interest is interest incurred from buying, building, or improving your qualified residence (acquisition debt), or from home equity loans on that residence. You can deduct interest from up to two qualified residences: your primary home and one other vacation home or similar property. You can't deduct the interest for acquisition debt greater than $1 million ($500,000 for married individuals filing separately). Note also that the $1 million ceiling on deductible home mortgage debt includes both your primary residence and your second home combined. The rules are different for home equity loans. Home equity debt is debt (other than acquisition debt) secured by your principal or second residence. Home equity debt is limited to the lesser of $100,000 ($50,000 if your filing status is married filing separately) or your equity in the home. Interest on home equity loans is generally deductible no matter how you used the loan proceeds but is not deductible for purposes of alternative minimum tax unless you used the loan proceeds to improve your home.

Are any of my closing costs deductible?

Mortgage closing costs are never deductible, but are capitalized as a part of the cost of the home. The only exception to this is if the closing costs involve mortgage interest in the form of “points paid” which are deductible as a Schedule A itemized deduction. Points paid as part of a home refinancing are amortized as a Schedule A deduction over the life of the loan versus deducted in the year paid.

We have been doing home improvements out of pocket, are these expenses eligible as a tax write off?

Generally no. These costs would only be deductible to the extent a portion of the home was used for business purposes. Also, some home improvements may qualify for residential energy credits.

I purchased a new furnace; can I receive an energy credit?  Are there other items that qualify?

Taxpayers can claim a credit for certain home improvement property placed in service in 2016.  The allowable credit is equal to 10% of the cost of qualified energy-efficient property or improvements.  The credit is limited to (1) $50 for each advance main air circulating fan; (2) $150 for each natural gas, propane or oil furnace or hot water boiler and (3) $300 for each item of (a) electric heat pump water heaters, (b) electric heat pumps, (c) biomass fuel stoves, (d) high-efficiency central air conditioners or (e) high-efficiency natural gas, propane or oil water heaters.  The total credit that can be claimed in 2016 combined is $500 ($200 for exterior windows and skylights).  This amount is further reduced (but not below zero) for any credits claimed in 2006-2015. This credit expired 12/31/16.

I sold my residence for $350,000, do I have to pay taxes on the $30,000 gain that I had from the sale?   Does it make a difference if it is not my primary residence?  

A taxpayer can generally exclude from income up to $250,000 of gain ($500,000 for joint filers) from the sale of a home owned and used by the taxpayer as a principal residence for at least 2 of the 5 years before the sale.

Are there any expenses or costs that I can deduct on the sale of my residence?

Generally no. If the sale of the home was excluded, none of the costs associated with the sale would be deductible. If the sale of the home was not excluded, costs associated with the sale are deducted as an expense of sale and reduce the amount of gain that is reported.

We refinanced our home in February 2014. Today we received our Form 1098 from the mortgage company which shows points paid of $1,850. This appears to be the loan origination fee included in the total settlement charges paid at closing. Can we deduct this $1,850? Would it be fully deductible or just partially deductible?

You can deduct the points paid on a refinance over the life of the mortgage.  Thus if your mortgage is a 20-year loan, you will deduct 1/20 or $93 each year for the next 20 years or until the home is sold or again refinanced.  The remaining points become fully deductible when the loan is paid off – either due to sale or refinance.

My wife and I decided to downsize our finances so that she could stay home with our children. In October we purchased a smaller home and put our existing home on the market (it is still for sale). We had a December loan payment for the newly purchased (less expensive) house in 2014 plus 12 normal monthly payments on our other more expensive house. For tax purposes when it comes to writing off the interest on the mortgage(s), I would imagine the IRS only allows for one of the two loans. Who determines which of the interest payments is applicable? Can we choose between the two houses for the months of Nov/Dec (as well as this year for our 2014 taxes in 2015)? If so, we would prefer to take the interest write-off on the larger mortgage (the first house that we occupied through October). Or will we need to get our lenders to amortize the interest by month and write off mortgage interest from loan 1 Jan-Oct and loan 2 from Nov-Dec? If we are able to choose to write off the interest for all 12 months of the house that we moved out of in October, does this affect our ability to write off mortgage points, etc. on the newly purchased house?

The IRS allows for the deduction of interest on two homes, so you can deduct all of the interest paid on both homes in addition to the points paid on the purchase of the new home.

Capital Gains/Losses

I own stock that is currently less than .01 cents per share.  Do I need to sell the stock to recognize capital loss or is there some other way to declare the stock worthless?

The law states that a specific event must occur that declares the stock completely worthless before you can recognize the loss. If the stock is sold, the loss would be deductible subject to the capital loss rules. Check with your broker to determine if the stock is completely worthless.

My husband was a partner is a land deed.  The land was given to him 7 years ago and was sold this year.  Does he have to report the sale and where does it get reported?  

First, as to holding period, it is the same as the original holder. Therefore, his/her holding period of at least seven years is greater than the twelve months required to receive long-term capital gain treatment.  Next basis must be addressed, in that if it was received through a gift his basis is the same as the basis of the original holder. If it was received through inheritance, his basis will more than likely be the stepped up basis, meaning Fair Market Value (FMV) at the date of death. Last, he should receive a 1099-S from the real estate broker. If the property was used for business purposes, then the gain would be reported on Form 4797 part I, which in turn flows through to Form 1040 Schedule D. If the property was merely held for investment, then the gain would be reported on 1040 Schedule D. When computing the gain, the sale proceeds are reduced by expenses of sale and the basis of the land.

I purchased a common stock for $6,000.00 two years ago. The Company declared bankruptcy in 2014 and the stock was declared worthless. My question is do I have to declare the full loss for tax year 2014 or lose it. Also can I spread that loss over several years?

The criteria for deducting a stock loss is evidence of worthlessness. There are several ways to prove worthlessness and bankruptcy is one of them. Once a company declares bankruptcy, the basis in the stock, in this case $6,000 can be deducted as a long term capital loss. If there are no other capital gains present in your tax return, $3,000 of those losses will be utilized in 2016 and the other $3,000 in 2017. If you happen to have at least $3,000 of capital gains on your 2016 return, then the entire loss can be realized in 2016. It is not lost regardless, but capital losses in excess of capital gains are limited to $3,000 each year.


Estate Planning Top 10 Questions

Question 1: How is property transferred at death?

Property is transferred at death in several ways:
Valid Will – A legal document by which a person expresses his or her wishes as to how his or her property is to be distributed at death, and names one or more persons to manage the estate until its final distribution. Also see question 2.
Contract Designations – For example, life insurance policies, death benefits of retirement plans, prenuptial agreements, postnuptial agreements, etc. Also see question 3.
Operation of law – A legal term indicating that a right or liability has been created for a party, irrespective of the intent of that party, because it is dictated by existing legal principles. For example, jointly owned property with right of survivorship. Also see question 3.
State law – You can access South Dakota Uniform Probate Code at http://sdlegislature.gov/Statutes/Codified_Laws/DisplayStatute.aspx. Also see Question 2.

Question 2: What happens if one dies without a will?

Except for the assets that are passed by Contract Designation or Operation of Law (See Question 1), South Dakota Uniform Probate Code will determine the distribution of estate assets. Listed below are some typical scenarios if one dies without a valid will in South Dakota.
John Doe (a SD resident) died without a valid will, and he has no assets to be passed under Operation of Law or Contracts (See question 1 and 3). If John Doe is survived Distribution of Estate Properties per South Dakota Uniform Probate Code (SD Intestacy Law):
ONLY by his spouse Jane Roe All to Jane Roe
By Jane Roe and their children All to Jane Roe
By Jane Roe, their children and child(ren) of Jane Roe All to Jane Roe
By Jane Roe, their children and child(ren) of John Doe Jane Roe receives $100,000 and 50% of any balance of the estate. The other 50% goes to John Doe's children by representation
By Jane Roe and John Doe's parents All to Jane Roe
ONLY by John Doe's children and grandchildren Divided equally among children. If one of the children, Mike predeceased John Doe, then Mike's children divide Mike's share equally.
ONLY by John Doe's father and mother Divided equally if both alive
ONLY by siblings Divided equally
ONLY by John Doe's grandparents 50% to paternal grandparents, 50% to maternal grandparents
By NO relatives at all Escheats to the State

Question 3: I was listed in the will as a beneficiary of certain assets. Why didn’t I inherit the assets?

Estate properties can be passed by (1) Will, (2) Contract Designation, (3) Operation of Law and (4) State Law (See question 1). Under most circumstances, passing of property by Contract Designation and Operation of Law is not influenced by the will. For example, life insurance proceeds pass outside the will to the named beneficiary, be it mentioned in the will or not. So are the death benefit proceeds from a retirement plan. If estate planning was not properly carried out, and the property transfer rules are in conflict, some very unfortunate endings such as the following two stories could happen: John Doe’s mother said in her will that her estate would be divided equally among John and his two sisters. However, one of the sisters Mary, lived very close to her mother and so for convenience she titled all the bank accounts jointly with Mary. This allowed Mary to access the information and assist in handling some transactions. Upon death, 100% of these jointly titled bank accounts will be passed to Mary, if she insists, instead of being divided equally. Jane Roe said in her will that her niece Laura would inherit her IRA. However, Jane established the IRA long ago and forgot to update the beneficiary form, so the name of the beneficiary remained her ex-spouse John Doe. By this contract, John will receive the distribution from the IRA regardless of Jane’s intention to benefit her niece Laura. Engaging an estate planning professional during the process will avoid such overlook(s), and therefore pass the right amount of assets to intended beneficiaries.

Question 4: What is estate planning? I am not wealthy, why do I need to have an estate plan?

Estate planning is the process of anticipating and arranging, during a person’s life, for the management and disposal of that person’s estate during the person’s life and at and after death, while minimizing gift, estate, generation skipping transfer, and income tax. A will is part of the estate plan. Depending on the complexity of the situation, an estate planner might use other tools such as trusts, pass-through entities and/or life insurance to accomplish the estate planning goals.

For most people, estate planning is never about avoiding death tax as that is relevant only to those exceeding the tax exemption (See question 5 for death tax threshold). Some of the most important reasons for estate planning are listed below.
Pass property to the intended beneficiaries. For example, John Doe had no living relatives, yet he enjoyed a wonderful life thanks to the pastor and kind friends at his church. Before death, he verbally told his pastor that he would donate all of his estate to the church. But unfortunately, he did not have a valid will. Per South Dakota’s probate code (See Question 2), the State will receive John’s estate, not the church.

Alleviate the burdens of surviving family members. Imagine on top of emotional turmoil, our loved ones have to administer the estate without clear instruction? Many parents think if they die, kids will just divide everything equally and figure things out. In reality, once the “benevolent dictator” passes, sibling rivalry, in-law influences and many other issues arise. It is not unusual that an estate is significantly drained by legal fees due to these conflicts. The only way to avoid such tragedy is to have solid estate plan in place before death.

Protect the estate assets from unintended recipients. Divorce is a prevalent issue nowadays and the beneficiaries might be drowning in debt. Without a proper estate plan, the assets could be transferred outright to the beneficiaries who have no means to protect themselves. All or a significant portion of the assets of the deceased are passed to a divorced spouse or creditors.

Question 5: I heard that Death Tax will be repealed, does this mean we no longer need to prepare our estate plan?

Please note that gift, estate and generation skipping taxes will only affect about 1% of the population in this country. Most of the estates are below the death tax filing threshold, which is $5.49 million per individual ($10.98 million for couple) for 2017. Whether the upcoming administration repeals death tax or not, most of the Americans will not be affected. Please see question 4 for important reasons of estate planning.

Question 6: Hiring estate planning professionals is expensive, can I prepare my own will and figure out a plan all by myself?

Yes, but not recommended. South Dakota residents can prepare their own will, some retail stores or websites offer will kits and software. However, a self-prepared will, without the assistance of estate planning professionals, will be easily attacked by discontented beneficiaries after death, leave loopholes for unintended beneficiaries, and in many situations considered invalid to begin with.

There are many ways to save cost of estate planning:
Attend free educational seminars.

Complete attorney’s questionnaire before walking into the meeting, be prepared and decisive about this basic question: When, how, what properties will be received by who?

Negotiate a flat fee with the attorney with specific scope(s) of service.

Some banks and trust companies offer free consultation meetings.

Talk to a CPA who has estate planning expertise. CPA’s specializing in this area can quickly understand your financial picture and tax situation, are able to give you a good start and guide you through this process efficiently, so you don’t waste time and resource on the issues that are not relevant to you.
As laws and regulations governing this area are highly complicated and ever-changing, it is important not to rely on piecemeal information and previous experience of friends and family members. Please also see comments in Question 3, 4 and 8.

Question 7: Why don’t my parents talk about their estate plan with me? How can I break the ice?

The thought of death may be unpleasant, especially for elder parents and grandparents. This topic makes them feel “unwanted” and “being rushed to death”. What’s more, many people mistakenly picture estate planning as furious battles for assets. Many parents are reluctant to proceed during their life time because they wrongfully think it might take away their right to enjoy their own properties. In addition, some parents think that depending on future inheritance will discourage children from working hard.

The best results come from continuous and transparent estate planning efforts during life time, some important benefits include:
Continuous and transparent communication will eliminate erroneous ideas and conflicts. Instead of guessing or planning on costly “revenge” later, the family members should address the issue during the decedent’s life time to avoid misunderstanding and conflicts after death, which can be expensive and hurtful to reconcile.

Continuous and transparent communication brings family together and can enable family values to pass. Indeed, estate planning is not just about ASSETS. More importantly, it is about FAMILY. Clear and thoughtful instruction from estate planning documents will unite the family members to go through the tough time together and increase their pride for family history. Estate planning can be behavior-shaping, family values can be preserved, younger generations can be motivated to pursue the right goals. This can be very important for business owners, especially when some children will take over the family business and some will not.

Continuous and transparent communication helps prepare family for uncertainties, such as untimely death and disability of the major income-producing family member.
Breaking the ice with parents and grandparents might be easier than you thought. Based on past experiences, the factors that lead to successful communications include:
Be honest and sincere.

Find the right time and right environment.

Stress the importance and benefits of having a solid estate plan, discuss the costly consequence if no plan is in place. Be helpful to elder parents and grandparents.

Share your thoughts, do not let your feelings stew.

Question 8: Can you tell me about gift tax and its filing requirement?

In general, if you are US citizen, you must file a gift tax return (Form 709) if you gave cash or noncash gifts to someone in 2016 totaling more than $14,000, unless this gift is made to your spouse, charities, or made for education and medical purpose. Under certain circumstances, for example, if married couple decides to split the gift, a return is required even if the gifting amount per recipient is under $14,000. Please note that the DONOR is responsible for filing a gift tax return, not the gift recipient.

Just because a gift tax return filing is required, it does not necessarily mean a gift tax is due. Most US citizens will never pay gift tax. Based on current law, in addition to the $14,000 annual exclusion, any amount in excess of $14,000 is offset by a lifetime exemption (also called the unified credit), which is $5.49 million per individual in 2017. If a gift tax return filing is required, the donor must file Form 709 by April 15, but will not likely pay any tax.

Gifting is a powerful way for some families to reduce the estate tax burden, but not so much for the families with moderate estates. Gifting without careful consideration could lead to disaster. For example, John Doe has farm land with a current fair market value of $500,000, he purchased it 30 years ago for $5,000.
If he gifts this land to his son Mike before his death and the land is later sold by Mike for $500,000, Mike has to pay capital gain tax on the $495,000 ($500,000 - $5,000) gain. The capital gain and net investment income tax liability could total as high as $117,810 ($495,000 X 23.8%).

Instead of gifting the land while living, John Doe provides in his will that Mike will inherit this land upon his death. Based on current law, the land will receive a step-up in basis. If the land is later sold for $500,000, no gain is recognized ($500,000 - $500,000), hence no tax to pay.
There are many other gifting strategies to consider. For example, families could consider gifting income-producing property to the family members in a low tax bracket. The laws and regulations covering estate and gift tax and planning are highly complicated and are subject to changes as a result of new regulations and law changes. We strongly encourage you to talk to a CPA with estate planning expertise before making significant gifts. As you can see from the example above, mistakes can be costly.

Question 9: What is the role of a trust in estate planning?

A trust is a fiduciary arrangement that allows a third party to hold assets on behalf of a beneficiary, or beneficiaries. Trusts can help families reduce death taxes, but can have many other benefits besides saving taxes. There are many kinds of trusts, one of the most popular types is living trust. For example, John Doe has a moderate estate, he established a living trust so he can place his assets in the trust for the benefit of his children. During John Doe’s life time, he can take out these assets for his own enjoyment, spend the assets as he chooses and he can change beneficiaries. He can remove undesired provisions or add new ones, he can appoint himself as trustee or appoint some other person or trust company to be the trustee, and he can even terminate the trust if it is no longer relevant. By setting up this trust, John Doe potentially accomplished the following estate planning benefits and goals.
By placing assets in the trust, John can avoid probate. This could be very important for many families because files from probate become public record.

It may be more difficult for a discontented beneficiary to challenge the provisions in a trust than the provisions in a will. Trust files are confidential.

By distributing the estate assets to an irrevocable trust for the benefit of a child, if done properly it is possible to shield estate assets from a child’s creditors.

By limiting and timing the distributions of trust assets to children, the estate assets can be protected from spendthrifts. Establishing a trust is especially important if John Doe’s child has a disability.
Generally speaking, a trust is not a relevant tool for the family with few assets. Families who don’t own real estate property and whose net worth is less than $100,000 may not find a trust worthy.

If you are aware that you became the beneficiary of a trust, it is important you contact the trustee to find out if the trust will issue a Schedule K-1. Schedule K-1 reflects the income and deductions you will need to report on your individual income tax return (Form 1040). ,

Question 10: I was named the executor of an estate, now what?

From a tax compliance perspective, it is the executor’s responsibility to file the tax return(s) for the deceased. IRS and state revenue authorities might charge significant penalties for late filing. Below is a list of the tax forms that might be required:
Tax Return Form Due Date
Income Tax Return(s) 1040 The final return is due April 15 of the year following death. Please note that you might be responsible for decedent’s prior year tax return(s) if they have not been filed by the date of death.
Fiduciary Income Tax Return 1041 15th day of the fourth month following the close of the tax year.
Estate Return 706 Nine months after the date of death.
Gift Tax Return 709 Earlier of April 15 of (a) the year following gift OR (b) Form 706 due date.
Various State Returns Various Various

Although not all of the abovementioned forms are applicable, we urge you to schedule a meeting with a CPA at the earliest convenience to determine the filing requirements and start collecting important information to ensure timely filing.

When a taxpayer passes away, a new taxpaying entity – the taxpayer’s estate – is established. The estate should apply for its own employer identification number (EIN) for tax filing purposes. The estate executor should notify all payers of income about the death, this includes but not limited to: employers, Social Security Administration, financial institutions, life insurance or annuity companies and the pass-through entities (Partnerships or S Corporation) owned by the decedent.

We also encourage the executor to open an estate checking account as soon as possible to hold liquidated financial assets during the probate or administration process, and use this account to pay bills owned by the estate.

Besides issues related with tax compliance, many other details should be addressed without delay, these include but not limited to: projection of income tax, update the estate plan and restructure life insurance policies and investments. We encourage the executor to contact a CPA with estate planning expertise to alleviate their burdens and navigate their way through this process.