When a decedent enters into a contract prior to his death, and it settles after his death, there is no step-up in basis. It is considered income in respect of a decedent. In such a case, the old basis is used and decedent’s estate or heirs pay the capital gains tax.
What are some of the solutions? 1. The Buyer defaults on the contract, the decedent’s family keeps the deposit, and a new contract is entered into. In such a case, the old contract is dead and a new contract with a stepped up basis is done. And to make matters worse, the contract is an assets of the estate and will bear estate taxes (if decedent’s estate is worth more than the exemption equivalent for estate taxes). So, this is a huge problem.
Let’s say, family enters into a binding contract whereby they sell a portion of decedent’s closely held corporation prior to his death to New and give New an option to purchase the rest after the death of the decedent. This would cause income in respect of a decedent and if Decedent was over the exemption equivalent there would be an estate tax as well.
Category Archives: income tax
Back-up Withholding
So, you’re a contractor and you hire a bunch of contractors. You need to get W-9’s from them with their social security numbers or EIN’s. So, you do that, but let’s say, they give you false numbers. When you file their 1099’s, the IRS may contact you saying that you need to back-up withhold 24% from their gross payments.
DON’T IGNORE THAT LETTER. Failure to do that incurs liability for your company to the extent of the back-up withholding. Now if you’re lucky, the offending contractor actually paid their taxes and reported the income. If so, then you have a defense that the IRS cannot collect a tax twice. But if they didn’t you’re likely to face a pretty big liability.
And if these guys want their 24% back, they can always file a tax return and get it back. Most won’t, because 24% is less than what they really owe.
President Biden’s Tax Proposals
President Biden’s tax plan was unveiled on March 9, 2023. In it there were some DOA proposals.
Income Taxes
The budget proposed raising the top personal-income tax rate to 39.6%, from 37%, for Americans earning $400,000 or more. That increase would reverse part of the 2017 Tax Cuts and Jobs Act. This would have the effect of having more taxpayers defer income to avoid hitting the $400,000 per year mark.
Capital gains tax
The President’s plan would raise the federal capital gains tax rate to 39.6% from 20% for households earning more than $1 million. Capital gains rates would not be indexed for inflation on this proposal, thus creating a double whammy for taxpayers in this category. So, if you sell a property that you’ve held in the family for 50 years for a Million Dollars, your rate jumps 19.6%. You’ll see a lot of price manipulation to get around this one including installment sales.
Wealthier investors are also subject to an additional 3.8% tax on long- and short-term capital gains (and other investment income including interest and dividends) that is used to fund ObamaCare. Short-term capital gains on assets sold within a year are typically taxed as ordinary income. Biden also called for increasing the 3.8% ObamaCare tax to 5% for those earning at least $400,000 in an effort to shore up Medicare.
Under the proposal, taxpayers could face a federal rate as high as 44.6% when they sell stocks, properties and other assets and it drives their incomes above $1 Million.
New minimum tax for “Billionaires” (really $100 Millionaires).
The president’s plan calls for a 25% minimum tax rate U.S. households worth more than $100 million. This would seem to call for anyone near $100 Million to have to report the value of their assets annually. A huge undertaking which will make accountants and actuaries very happy.
Corporate stock buyback tax
The President called for quadrupling the 1% levy on corporate stock buybacks that was added to the tax code last year as part of the Inflation Reduction Act. His proposal would increase the tax from 1% to 4% and would allegedly reduce the differential tax treatment between share repurchases and dividends. But given the suggested increase in the Capital gains rates, it actually doesn’t accomplish that and dividends may be more palatable which of course impacts the middle class.
Increase in Corporate tax rates
The President’s proposal would lift the corporate tax rate to 28% from 21%, rolling back a key part of the 2017 tax law changes. The measure also calls to increase taxes U.S. companies owe on their foreign earnings to 21% — nearly double the current 10.5% rate. This could cause divestment of foreign companies by US Companies or spin-offs.
That $7,500 Green Car Credit
The new Inflation Reduction Act EV credit is limited. First, there are income limitations. If you’re single the limit is $150,000 and if you’re married, $300,000. So, if you make more than that, you don’t qualify. Second, the cost of the car cannot exceed $55,000. So much for buying that Tesla and getting a $7,500 rebate. There are some transitional rules. If you had a binding contract to purchase prior to August 17, 2022, you can elect to go under the old rules and get some credit, based upon the old law. Used cars do qualify for a lower credit, so if you make less than the income limits and buy a used car, you get some credit for that. So, be careful when you read the hype for buying a new green car, the devil is in the details.
TEN YEAR REQUIRED MINIMUM DISTRIBUTIONS NEW GUIDANCE
As part of 2017 Tax Act, beneficiaries of inherited IRA’s no longer could take required minimum distributions (RMDs) over their life expectancies. Instead except for spouses and disabled children, they must do so within 10 years. There was a question as to how beneficiaries were to go about removing the funds. Could they wait until the 10th year and remove it all or did they have to take it out periodically. The answer as always is, “it depends”.
If prior to death, the account holder was taking required minimum distributions, then the beneficiaries have to continue taking decedent’s RMDs and close the account in the 10th year. If decedent was taking no RMDs prior to death, then the beneficiary doesn’t have to remove funds until year 10. This means that the money can grow tax deferred creating a larger return over the 10 year period. Unless you have qualified Trust provisions, Trusts must take the funds out within 5 years. So, it is not necessarily good to name your revocable trust as a beneficiary on your IRA.