Ask a CPA

General Information

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

The maximum amount of Section 179 that can be claimed for 2018 is $1 MM.  This amount is phased out dollar-for-dollar once your annual investment in qualifying fixed assets exceeds $2.5 million. Starting in 2019, the maximum amount of Section 179 is projected to be $1.02 million and the phase-out amount is increased to $2.55 million.

Bonus depreciation is available on qualified new and used asset additions and allows for 100% first year write-off on assets placed in service from after September 27, 2017 and before January 1, 2023, taxpayers.

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 the 401k contributions were made as Roth contributions.

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

The 2018 IRA traditional and Roth contribution limits are the lesser of earned income or $5,500 ($6,500 if you are 50 or older). For tax year 2019 the limits have been raised to $6,000 ($7,000 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.

There are other retirement options if you are self-employed, such as SEP (Simplified Employer Pension), SIMPLE (savings incentive match for employees) and a Solo 401k Plan. Each of these has its own rules such as when it must be established by to use and contribution limitations. They are typically used when you want to put more money into retirement than a traditional or Roth IRA will allow.

Dependency/Filing Status

What determines if I am head of household?

To qualify, a taxpayer must meet all three of the following tests. 1. The taxpayer is not married or is considered unmarried, and not a surviving spouse on the last day of the year. 2. The taxpayer paid more than half the cost of keeping up his/her home. 3. A qualifying individual lived with the taxpayer in the home for more than one-half the year, unless the person is the taxpayer’s dependent parent.

A qualifying individual includes a qualifying child that is a dependent of the taxpayer determined without regard to the rules for divorced parents. However, a child is not a qualifying individual if the child is married at the close of the tax year and a) files a joint return with his or her spouse, or b) is not a U.S. citizen, national or resident of the United States, Canada or Mexico.

Can I claim my 23-year-old daughter as a qualifying child on my 2018 tax return? She was under 24 at the end of the year, was a full-time student until 11/30/18 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 since September of 2016.

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. Filing married filing jointly typically produces the best tax result.

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 2018, 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 $12,000.

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 2018. 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 2018 is $15,000 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 $15,000 per donee. The $15,000 applies to both property and cash. However, if the donor gifted land, the donor may want to file a gift tax return to establish a value for the land. Filing a gift tax return starts the statute of limitations running for the period 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 of cash is not taxable. An inheritance of property other than cash may or may not be taxable.

An inheritance would only be taxable to the recipient if the amount was income 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 it 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.

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 is calculated as 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

How much is the personal exemption in 2018?

The Tax Cuts and Jobs Act removed the personal exemption deduction in 2018. However, the standard deduction nearly doubled.

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 $12,000 for single or $24,000 for married filing joint) then your medical costs paid out of pocket must be greater than 7.5% of your adjusted gross income before you see any benefit or deduction for them.

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 60% 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 charity does not give an approximate fair market value, then take a picture of what was donated and consult the web for charity publications regarding values of certain items. 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 to reduce Adjusted Gross Income. To qualify, Guard and Reserve personnel must travel more than 100 miles from their home in connection with their performance of services (for a drill or meeting). Expenses must be ordinary and necessary, and the deduction is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate of 54.5 cents per mile (for car expenses) plus any parking fees, ferry fees, and tolls. These expenses are claimed on Form 2106 and carried to the Form 1040.

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) for the year.

With the purchase of a car in June 2018--are we able to use the sales tax as an income tax deduction?

In 2018, only if you itemize on Schedule A and choose to deduct state and local general sales tax, 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 new Child Tax Credit is worth up to $2,000 per qualifying child with a refundable amount of up to $1,400 per qualifying child. The phase-out for the credit begins at $200,000 ($400,000 for joint filers). A qualifying child must have been under age 17 (i.e., 16 years old or younger) at the end of the tax year for which you claim the credit. A partial credit of $500 is available for each qualifying child for whom the credit is not otherwise allowed and for each qualifying relative. The definition of a qualifying child and relative is the same as the definition of a dependent, except the dependent must be a U.S citizen, national or resident.

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 that qualify for the credit is $3,000 for one dependent or $6,000 for 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 or the Lifetime Learning Credit. Qualifying expenses for the American Opportunity Credit include tuition, required enrollment fees and course materials purchased as a condition of enrollment or attendance. For the Lifetime Learning Credit qualifying expenses include tuition, required enrollment fees as well as books and course materials purchased directly from the school. Room and board, insurance, transportation or other similar personal living expenses do not qualify as expenses towards these credits.

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 income phase out limits. Expenses for students in their first four 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 which credit maximizes your tax benefit.

Who is eligible to take the education credits?

You can claim the American Opportunity credit for qualified education expenses you pay for a dependent child as well as for expenses you pay for yourself or your spouse. If you have several students in your family, you can claim multiple credits based on the expenses of each student. For example, if you have three kids in college, you can claim up to $7,500 ($2,500 x 3) in American Opportunity credits.

The credit is not allowed for a student who has completed the first four years of post-secondary education as of the beginning of the year. So, if your child completed less than four years of college as of January 1, 2018, you can claim the credit on your 2018 return.

Note: You can only claim the credit for a year during which the student carries at least a half-time course load for a minimum of one semester beginning in that year. Additionally, the student must be enrolled in a program that leads to an associates or bachelor’s degree or some other recognized credential.

You can claim the Lifetime Learning credit for qualified education expenses you pay for a dependent child as well as for yourself or your spouse. However, the maximum amount of covered expenses is $10,000 no matter how many students you have. This translates into a $2,000 maximum credit ($10,000 X 20%).

Warning: You can’t claim both the American Opportunity credit and the Lifetime Learning credit for the same student for the same year. However, you can potentially claim the American Opportunity credit for one or more students and the Lifetime credit for up to $10,000 of qualified expenses for other students in your family.

Both are subject to income phase-out.

Is student loan interest deductible?

In most cases, the interest portion of your student loan payments during the tax year is tax deductible. Your deduction is limited to interest up to $2,500, or the amount of interest you paid, whichever amount is less. As with most tax credits and deductions, there are limits in place.

You can deduct student loan interest if:
  • You paid interest on a qualified student loan in the tax year
  • You are legally obligated to pay interest on a qualified student loan
  • Your filing status is not married filing separately
  • You and your spouse, if filing jointly, cannot be claimed as dependents on someone else’s tax return
  • You are a single filer with income under $65,000, however, your full tax deduction phases out (is gradually reduced) between $65,000 and $80,000 ($135,000 and $165,000 married filing jointly). If your income falls above those limits, the deduction is phased out and not available.
The other good news regarding the student loan interest deduction is that you do not need to itemize deductions to claim it.

If you paid more than $600 in interest to a single lender during the year, you should receive a 1098-E form showing how much interest you paid for the year. If you made student loan payments but did not receive a 1098-E, you are still entitled to claim the interest deduction, but you should verify the amount.

Home

Is your home mortgage interest tax deductible?

Qualified residence interest is interest incurred from buying, building, or improving your qualified residence (acquisition or home equity debt). You can deduct interest from up to two qualified residences: your primary home and one other vacation home or similar property. You can deduct the interest for acquisition debt incurred or modified after 12/15/17, on the first $750,000 of debt ($375,000 for married individuals filing separately) regardless of whether the debt is labeled acquisition debt, home equity loan, home equity line of credit or second mortgage. Note also that the $750,000 ceiling on deductible home mortgage debt includes both your primary residence and your second home combined.

Debt incurred on or before 12/15/17 is limited to $1 million on acquisition debt and $100,000 of home equity debt. An individual with debt incurred before 12/15/17 can deduct interest on debt of up to $1.1 million.

Any home equity debt used for any purpose other than acquisition debt is no longer deductible.

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 if they are associated with acquisition debt. Points paid as part of a home refinancing and the loan is qualified acquisition debt are amortized as a Schedule A deduction over the life of the loan.

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

Generally no. These costs would increase your basis of the home and are used to determine a gain or loss in the year of sale.

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

Nonbusiness energy property credits are only available for property placed in service prior to January 1, 2018. Absent further legislation, this credit expired effective for property placed in service after December 31, 2017.

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 2018. Today we received our Form 1098 from the mortgage company which shows points paid of $1,850.00. 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?

You can deduct the points paid on a refinance of qualified acquisition debt 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, 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. 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 can 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 qualified acquisition debt on two homes, so you can deduct all the interest paid on both homes in addition to the points paid on the purchase of the new home on total debt up to $750,000 ($375,000 MFS).

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?

he 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 in 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 2018 and the stock was declared worthless. My question is do I have to declare the full loss for tax year 2018 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 on your tax return, $3,000 of those losses will be utilized in the current year and the remaining carried forward. If you happen to have at least $3,000 of capital gains on your return, then the entire loss can be realized. 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 created to express how a person desires his or her property to be distributed at death. It also names one or more persons to manage the estate through its final distribution. Also see question 2.

Beneficiary designations – Examples include life insurance policies, death benefits of a retirement plan, 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 – This will typically come into play if no will is presented for probate for a deceased. 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 I die without a will?

Except for the assets that will be passed by beneficiary designation or operation of law, your state’s probate laws will determine the distribution of estate assets if you do not have a will. Please keep in mind that many states have different rules related to the distribution of a deceased’s assets when no will is presented for probate. 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 Doe All to Jane Doe
By Jane Doe and their children All to Jane Doe
By Jane Doe, their children and child(ren) of Jane Doe All to Jane Doe
By Jane Doe, their children and child(ren) of John Doe Jane Doe receives $100,000 and 50% of any balance of the estate. The other 50% goes to John Doe's children by representation
By Jane Doe and John Doe's parents All to Jane Doe
ONLY by John Doe's children and grandchildren Divided equally among children. If one of the children, e.g. son 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 will, beneficiary designation, operation of law and state law. Under most circumstances, passing of property by beneficiary 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, as do 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 results, such as in the following two stories, could happen:

Case #1: 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 the mother’s death, 100 percent of these jointly titled bank accounts, barring any other agreement, will be passed to Mary, instead of being divided equally.

Case #2: Jane Doe 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 to be someone other than Laura. Because the IRA beneficiary designation was not changed, Laura will not receive the distribution from the IRA, regardless of Jane’s intention to benefit her niece Laura.

Utilizing an estate planning professional will avoid these undesired results.

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 for the management and disposal of your estate during your life, as well as at and after death, while minimizing gift, estate, generation skipping, 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 your estate planning goals.

For some people, estate planning is not about avoiding the estate tax, as that is relevant only to those exceeding the tax exemption (See question 5 for estate tax information). Some of the most important reasons for estate planning are to:
Pass property to the intended beneficiaries. For example, let's say 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. Without a will, state law will be used to determine who gets the assets, which most likely will not be the church.

Alleviate the burdens of surviving family members. Imagine that on top of the emotional turmoil your death causes, your loved ones have to administer your 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 a solid estate plan in place before death. A carefully prepared estate plan is the best love letter you can pass down.

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.

Deciding who will raise your children. This is particularly relevant to those with younger children. Without a will, a terrible accident in which both parents die, will leave the fate of their children most likely for a court to decide.

Question 5: I heard that the estate tax will be repealed. Does this mean I no longer need to prepare an estate plan?

No. Gift, estate and generation skipping taxes will only affect about 1 percent of the population in the U.S. Most estates are below the estate tax filing threshold, which is currently $11.4 million for 2019 per individual under the 2017 Tax Cuts and Jobs Act. Under the new tax law the gift, estate and generation skipping tax exemptions doubled in 2018 and will continue at the higher level, adjusted for inflation, until January 1, 2026 when the amount will sunset back to the exemption in place prior to the new law bringing the exemption back to $5.6 million, adjusted for inflation. Therefore, for those taxpayers who find themselves at this threshold and who survive through 2026, may view this change under the new law as an increased gift tax exemption amount, because there is no certainty that these increases will be available after 2025. Wherever we find the exemption to be after 2025, most taxpayers will not be affected. But, as noted before, keeping the estate tax amount low is not the only reason estate planning is important.

In addition, several states consider estate and gift taxes as a significant source of revenue, and will not likely conform to changes in federal tax laws. For example, many South Dakotans own properties in our neighboring state of Minnesota, without proper planning, you will be subject to Minnesota estate tax if your overall gross estate is over $2.7 million for 2019, $3 million for 2020 and after.

And, no matter what happens, income tax is not going away. Careful estate planning can achieve significant income tax saving, and this is especially true for business owners or taxpayers with significant investments and interests in pass-through entities. Without professional guidance, disposing, exiting or transitioning family business interest can come with costly income tax consequences.

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

Yes, but this is not recommended. Many states allow residents to prepare their own wills, and some retail stores or websites offer will kits and software. However, a self-prepared will, without the assistance of estate planning professionals, can be easily attacked by discontented beneficiaries after your death, can leave loopholes for unintended beneficiaries, and in many situations, be considered invalid right from the start.

There are many ways to save costs when it comes to estate planning. You can:
Attend free educational seminars.

Complete your advisor’s questionnaire before walking into an estate planning meeting, and be prepared and decisive about this basic question: When, how, and what properties will be received by whom?

Talk to an accountant who has estate planning expertise. Accountants specializing in this area can quickly understand your financial picture and tax situation. This can give you a good start and guide you through the process efficiently, so you don’t waste time and resources 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.

Question 7: My parents never talk about their estate plan with me. How can I break the ice?

The thought of death is very unpleasant, especially for older parents and grandparents. This topic can make them feel “unwanted” and “being rushed to death”. What’s more, many people mistakenly picture estate planning as aggressive battles for assets, so they become reluctant to proceed during their lifetime because they wrongfully think it might take away their right to enjoy their own properties. In addition, some parents think that depending on a future inheritance will discourage children from working hard.

In modern days, the best results come from continuous and transparent estate planning efforts. Some important benefits of this method include:
Eliminating erroneous ideas and conflicts. Instead of guessing or planning on costly “revenge” later, parents and family members should address issues now to avoid misunderstanding and conflicts after death, which will be very expensive and hurtful to reconcile.

It brings family together and passes family values. It’s easy to forget estate planning is not just about assets. More importantly, it is about family. Clear and thoughtful instruction from estate planning documents will unite family members to go through a tough time together, increasing their pride for family history. Estate planning can be behavior-shaping—family values can be preserved and younger generations can be motivated to pursue the right goals. This is very important for business owners, especially when some children will take over the family business, and some will not.

Helps prepare family for uncertainties. This can include the untimely death or disability of a major income-producing family member. It also will make the transition to assisted, memory care or long-term care facilities less stressful and allow family members to have a sense of the financial assets available for such care.
Breaking the ice with parents and grandparents might be easier than you thought. Based on past experiences, the following factors can lead to successful communications:
Be honest and sincere.

Find the right time and right environment.

Stress the importance and benefits of having a solid estate plan and discuss the costly consequence if no plan is in place.

Be helpful to older parents and grandparents.

Share your thoughts. Do not let your feelings stew.

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

In general, if you are a U.S. citizen, you must file a gift tax return (Form 709) if you gave cash or noncash gifts to someone in 2019 totaling more than $15,000 unless this gift is made to your spouse, charities, or made directly to an education institution or medical facility. This is called the annual exclusion. Under certain circumstances (for example, if the couple decided to split the gift) the gift tax return is required even if the gifting amount per recipient is under the annual exclusion. Please note that the giver is responsible for filing the gift tax return, not the gift recipient.

Just because you need to file a gift tax return, it does not necessarily mean you will need to pay gift tax. For most U.S. citizens, they will never pay gift tax. That is because currently, any amount in excess of the annual exclusion can be shielded by a lifetime exemption (also called unified credit), which is $11.4 million per individual in 2019.

Gifting is a powerful way for wealthy family members to reduce the tax burden, but not so much for the families with moderate estates. As a matter of fact, gifting without careful consideration could lead to unexpected tax consequences. For example, let’s say John Doe has farmland with a current fair market value of $500,000 that he purchased 30 years ago for $5,000.
If he gifts this land to his son Mike, and the land is sold later for $500,000, Mike has to pay capital gain tax on $495,000 realized gain ($500,000 minus $5,000). The capital gain and net investment income tax liability could total as high as $117,810 ($495,000 x 23.8 percent).

If John Doe indicates in his will that Mike will inherit this land upon his death, based on current law, the land will receive a stepped-up tax basis upon John’s death. When sold later for $500,000, it will recognize no gain ($500,000 - $500,000), so therefore there is no capital gains tax to pay.
There are many other gifting strategies. For example, families could consider gifting income-producing property to family members in a lower tax bracket. The laws and regulations covering gift tax and planning are highly complicated, and could be part of future tax reform efforts. We strongly encourage you to talk to an accountant with estate planning expertise before making a significant gift. As you can see from the example in the last paragraph, 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, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can help wealthy families minimize the estate tax, but don’t let this reason blind you from the many other benefits a trust can provide. There are many kinds of trusts, and one of the most popular types is a living trust. Let’s say John Doe has a moderate estate, and he established a living trust so he can place his assets in the trust for the benefit of his children. During John Doe’s lifetime, he can take out these assets for his own enjoyment, change beneficiaries, remove undesired provisions or add new ones, appoint himself as trustee or appoint other individuals or a 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 may be beneficial in some states due to statutory probate fees and depending upon state law, probate files may become public record.

Trust files are confidential.

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

By limiting and timing the distribution of trust assets to the children, the estate assets can be protected from a spendthrift child.

Establishing a trust is especially important if a child has a disability.
Generally speaking, a trust is not a relevant tool for a 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 will become the beneficiary of a trust, it is important you contact the trustee to find out if the trust will issue a Schedule K-1 or grantor letter (in some circumstances, you might be treated as grantor of the trust) to you. A Schedule K-1 or grantor letter reflects the income and deductions you will need to report on your individual income tax return.

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

From a tax compliance perspective, it is the executor or survivors’ 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 the deceased’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 would urge you to schedule a meeting with an accountant at the earliest convenience to determine the filing requirements and to 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 is not limited to: employers, Social Security Administration, financial institutions, life insurance or annuity companies and the pass-through entities (partnerships or S corporations) owned by the deceased.

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 owed by the decedent or the estate.

Besides issues related to the tax compliance, many other details should be addressed without delay, these include but are not limited to: projection of income tax, updating the estate plan and restructuring life insurance policies and investments. If you are an executor, we recommend you contact an accountant with estate planning expertise to alleviate these burdens and help you navigate the way through this process.
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.