One tax increase that is in the proposed Jobs bill going through Congress right now is that it will limit the availability of the use of Grantor Retained Annuity and Unitrusts to periods of ten years or more. These are also known as “Walton GRATS”. The bill version that I saw indicates that the effective date is the date the Act is signed into law. So, if you’re considering short term GRATs, this is the time to do it or possibly lose it. Update as of 4:00 p.m. The Senate passed the bill. It now goes back to the House for ratification. On the good side if you sell your small business before 2012, you get to exclude up to $10 Million of gain.
Author Archives: John
To Disclaim or not to Disclaim
With no estate tax in 2010 at this point in time, taxpayer has died and leaves a $5 Million life insurance policy to wife and then to his revocable trust. Should the wife disclaim the life insurance interest to put it into the revocable trust and have the entire amount in husband’s estate for estate taxes? What happens if Congress pulls a retroactivity genie out after the return is filed?
Sorry-Update
Its been about 2 months, but things have been wierdly hectic for an end of summer. I wanted to let you know that I will be watching the Small Business Tax Bill that may or may not come out of Congress. The easiest approach would be to extend the Bush Tax cuts for all to January 1, 2012 and that would allow the next Congress to tackle tax issues on a more cohesive basis. If they put in some hybrid to deal with high income earners, that will be create some interesting issues. Will it for example exclude capital gains from the $250,000 threshhold? So, for example elderly couple wants to move into a nursing home and sells their house for $1 Million. Their basis is $40,000 and they get a $500,000 exclusion. Their adjusted gross income will be $460,000 (without even counting things like retirement and social security). Will they get hit by the new taxes? Whenever complexity is added to the Code there are opportunities for planning.
Collections-the law
Let’s review some legal issues that these folks are facing. (1) the IRS has the right to levy on any property owned or receivable by a party (except retirement accounts). Further, the IRS can sell real estate. Now people can contrary to popular opinion get out of a few tax debts by filing bankruptcy. The rules are that the debt must be for taxes more than three years ago and the returns filed at least 240 days prior to the bankruptcy. If it does not meet those requirements it is non-dischargeable. Also trust fund taxes as we’ve discussed before are non-dischargeable. Further, the IRS will look at things like offers in compromise, installment agreements and putting people in curently non-collectible status based upon their incomes, expenses and assets.
Collections Part Deux
Johnnie owned a convenience store. As a cash and carry business and due to his laxadasical bookkeeping and long hours running the store Johnnie was unable to get his taxes done for 2007. Inertia set in and he didn’t get them done for 2008. In early 2009, he got a letter from the IRS asking for his tax return as did his wife Barbara. In order to fund the business, she closed down her 401(k) plan and took out $100,000 from which $20,000 was withheld. She is 35 years old. She also had income from her employer of $100,000 for which she had federal withholdings of $13,000. She and Johnnie had a mortgage on the house for which they paid $15,000 in interest in 2007 and real estate taxes of $3,000. They have a child together, Rhonda, age 10 who lives with them in their home. Johnnie sees the letters from IRS and takes them to his store, not wanting to disturb Barbara. A few months go by and a certified mail notice comes to the house from the IRS. They have computed he amount due from Barbara to be $50,000 and sent her a bill for $17,000 plus interest and non-filing penalties of another $12,000. They computed no tax for Johnnie since he had no income on the books. Barbara was livid. She and Johnnie went to an accountant and the accountant laid out what he needed from Johnnie and Barbara to prepare a return for 2007, knowing that 2008 still needed to be prepared as well. Johnnie pulled all the cash register receipts and pay stubs (luckily he had been paying the payroll and sales taxes) so he had those records to work from. After a couple of weeks a return was prepared. It showed that instead of owing $17,000 that they only owed $15,000, but with penalties and interest it would be another $11,000 or so. Of course they didn’t have the money. A joint amended return was filed for 2007. After a few months a bill was generated by the IRS showing the amount due to be $24,000. Their accountant had at that point prepared a joint 2008 return showing income tax due for them of $12,000 plus interest and late filing penalties of $6,000. So, they owed $42,000 total to IRS. Their house was under water. The got that bill and called IRS to see what they could do.