These Taxing Times

The Internal Revenue Service announced today the tax benefits that will be adjusted for inflation in 2012. Details on these inflation adjustments are in Revenue Procedure 2011-52 which will be published in Internal Revenue Bulletin 2011-45 on November 7, 2011. The Service announced these adjustments in IR-2011-104 which I have summarized below:

Exemptions, Deductions, and Individual Tax Brackets

The value of each personal and dependent exemption, available to most taxpayers, will be $3,800, up $100 from 2011.

The new standard deduction will be $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. The Service said that nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket will be $70,700, up from $69,000 in 2011.

For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.

The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out will be $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts. See the table below:

The $2,500 maximum deduction for interest paid on student loans will begin to phase out for a married taxpayers filing a joint returns at $125,000 and will phase out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges will remain at the 2011 levels

Estate and Gift Exclusions

For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount will be $5,120,000, up from $5,000,000 for calendar year 2011. If the executor chooses to use the special use valuation method for qualified real property for a 2012 estate, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.

The annual exclusion for gifts will remain at $13,000.

After I have reviewed the complete Revenue Procedure, I may post additional items that will be adjusted. In these taxing times, we’ll take all of the benefits we can get!

Ronnie

Copyright 2011, Ronnie C. McClure, PhD, CPA

The Internal Revenue Service last week released Form 8939 (Allocation of Increase in Basis for Property Acquired From a Decedent) and the related instructions. This form and the circumstances surrounding its release were discussed in my posts of September 2 and September 14 below.

As you will remember, the estate tax was to have been repealed for individuals dying in 2010, and the rules allowing a step-up in basis for property acquired from a decedent were to have been replaced with a modified carryover basis regime. The 2010 Tax Relief Act restored the estate tax for individuals dying in 2010 with a $5 million per-person exemption and a maximum rate of 35%. The Act also repealed the modified carryover basis rules for property acquired from a decedent who died in 2010. However, the Act allows estates of individuals dying in 2010 to elect zero estate tax and the modified carryover basis rules that would have applied before they were repealed. The newly released Form 8939 is the vehicle executors use to elect zero estate tax, the modified carryover basis rules, and to allocate a basis increase to certain property acquired from a decedent. This form is due to be filed not later than January 17, 2012. There are no extensions to this date. There are only a few limited circumstances where Service will accept an amended Form 8939. One circumstance is to allocate Spousal Property Basis Increase but only if certain requirements are met, as detailed in the instructions.

Even though an executor may elect out of the estate tax, the generation-skipping transfer (GST) tax provisions continue to apply. The Act, however, provides that the applicable tax rate for each GST occurring during 2010 is zero.

This law, applicable only to estates of decedents dying in 2010, allows the executor to allocate additional basis (Basis Increase) to increase the basis of certain assets that both are acquired from the decedent and are owned by the decedent at death. If the property is acquired from and owned by the decedent, and if the decedent’s basis in the property is less than the property’s fair market value (FMV) on the decedent’s date of death, then the executor generally may allocate Basis Increase to the property, provided that the property’s total basis may not exceed the property’s FMV on the date of death.

The term Basis Increase means the sum of the General Basis Increase (Aggregate Basis Increase and Carryovers/Unrealized Losses Increase) and the Spousal Property Basis Increase. The Aggregate Basis Increase is limited to $1.3 million. In the case of any estate, the aggregate Spousal Property Basis Increase is limited to $3 million. Therefore, the total basis increase allowable is $4.3 million if an estate elects the “no estate tax option” for 2010.

The election is made by filing a timely Form 8939. Generally, once the executor has made the election, it is irrevocable. However, the executor can revoke such an election on a subsequent Form 8939 filed before the due date. Generally, if the executor makes the election, the executor must report all the information required by Form 8939 and its instructions about all property acquired from the decedent other than cash. The executor filing Form 8939 must furnish to each beneficiary of the estate a written statement showing the required information with respect to property acquired from the decedent. Schedule A of Form 8939 should be used to provide this information. Schedule R of Form 8939 is used to allocate the GST exemption. Schedule R-1 is used to inform the trustee of certain trusts of the amount of GST exemption allocated to such trusts. Because the GST tax rate for 2010 is zero, these schedules are not used to compute the GST tax.

As before, I continue to caution that before taking any action with regard to these filing requirements, the reader must consult with knowledgeable tax counsel or refer to Notice 2011-76. The information above is provided to acquaint the reader with this additional guidance from the Internal Revenue Service. If you have additional questions concerning filing requirements for 2010 lifetime gifts or testamentary transfers, contact me at 214.957.3366 or via email at response@phdcpa.com.

Ronnie

Copyright 2011, Ronnie C. McClure, PhD, CPA

The Internal Revenue Service issued new and favorable guidance today on the tax treatment of cellular telephones or other similar telecommunications equipment (hereinafter collectively “cell phones”) that employers provide to their employees (Notice 2011-72).

The Service has finally recognized that many employers provide their employees with cell phones primarily for noncompensatory business reasons. The value of the business use of an employer-provided cell phone is excludable from an employee’s income as a working condition fringe to the extent that, if the employee paid for the use of the cell phone themselves, such payment would be allowable as a trade or business expense deduction for the employee.

Under this new guidance, an employer will be considered to have provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer’s business, other than providing compensation to the employee, for providing the employee with a cell phone. Examples of possible substantial noncompensatory business reasons contained in the Notice are: the employer’s need to contact the employee at all times for work-related emergencies, the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office, and the employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day. A cell phone provided to promote the morale or good will of an employee, to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for noncompensatory business purposes, however.

The Notice provides that, when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the Service will treat the employee’s use of the cell phone for reasons related to the employer’s trade or business as a working condition fringe benefit, the value of which is excludable from the employee’s income. In addition, solely for purposes of determining whether the cell phone constitutes a working condition fringe benefit, the substantiation requirements that the employee would have to meet in order for claim a deduction are deemed to be satisfied. In addition, the Service will treat the value of any personal use of a cell phone provided by the employer primarily for noncompensatory business purposes as excludable from the employee’s income as a de minimis fringe benefit.

The rules of this notice apply to any use of an employer-provided cell phone occurring after December 31, 2009. If you have questions concerning the tax treatment of your employer-provided cell phone, contact me at 214.957.3366 or via email at response@phdcpa.com.

Ronnie

Copyright 2011, Ronnie C. McClure, PhD, CPA

As a further update to my post below dated September 2, the Internal Revenue Service on September 13 extended the due dates of certain forms for estates of decedents who died in calendar year 2010. Because of late 2010 enactment of changes to the estate, gift, and generation-skipping tax system for taxpayers dying in 2010, and the length of time required for the Service to implement the legislative changes and to issue new forms with related instructions, the Service finally concluded that the executor of a 2010 estate may not have sufficient time to make an informed decision as to whether or not to make a decision to elect out of the estate tax and to complete the required filings. Estate tax professionals came to this conclusion a long time ago.

Form 8939

Under previous guidance, Form 8939 (Allocation of Increase in Basis for Property Acquired From a Decedent) was due to be filed not later than November 15, 2011. That date has now been extended until Tuesday, January 17, 2012. Recall that filing Form 8939 is an election out of the estate tax system for 2010, in addition to effecting a limited step-up in basis to assets acquired from a decedent dying in 2010. Because this is a change in the specified due date rather than an extension, an executor does not need to file any statement or to have this new due date apply.

In addition, a previously filed Form 8939 may be amended or revoked on or before January 17, 2012. Generally, no further extensions to file this form, amend, or revoke this form will be granted. Furthermore, the penalty for failure to file information with respect to certain transfers at death and gifts does not apply to the executor of a 2010 estate solely because the Form 8939 is filed after November 15, 2011, but on or before January 17, 2012. Similarly, the same penalty does not apply to the executor of a 2010 estate solely because a statement required to be furnished to beneficiaries is provided after December 15, 2011, but on or before February 17, 2012. Keep in mind, also, that a final Form 8939 and the related instructions still have not been released, but are expected to be released “this fall.”

Form 706

Under previous guidance, for estates greater than $5 million of decedents dying after December 31, 2009 and before December 17, 2010 and not electing out of the estate tax, Form 706 (United States Estate and Generation-Skipping Transfer Tax Return) was due no earlier than Monday, September 17, 2011. The due date for filing an estate tax return for a decedent who died after December 16, 2010, is nine months after the date of the decedent’s death. In addition, any estate or generation-skipping tax was due to be paid on the original due date of the return, without regard to extensions.

Under the new guidance, the Treasury Department and IRS grant the executor of a 2010 estate who files a Form 4768 (Application for Extension of Time to File a Return and/or Pay U.S. Estate and Generation-Skipping Transfer Taxes) by the due date for filing Form 706 both an automatic six-month extension of time to file Form 706 and a six-month extension of time to pay the estate tax. The executor of a 2010 estate is not required to substantiate on the Form 4768 the reason for requesting an extension of time for payment of the estate tax to receive the six-month extension of time to pay the estate tax due. However, interest will accrue on the estate tax liability from the due date of the return, excluding extensions.

The above guidance means that the Service will not impose late filing and late payment penalties on estates of decedents who died after December 31, 2009, and before December 17, 2010, if the estate timely files Form 4768 and then files Form 706 and pays the estate tax by March 19, 2012. In addition, the Service will not impose late filing or late payment penalties on estates of decedents who died after December 16, 2010, and before January 1, 2011, if the estate timely files Form 4768 and then files Form 706 and pays the estate tax within 15 months after the decedent’s date of death.

Generation-Skipping Transfer (GST) Tax

If an executor files Form 8939 on or before January 17, 2012 and allocates the decedent’s available GST exemption (or makes an election under the GST tax) on an attached Schedule R or R-1, the allocation or election will be considered timely and effective as of the decedent’s date of death. Alternatively, automatic allocation rules will apply if the executor timely files Form 8939 without attaching a Schedule R or R-1. If the executor does not file, or timely revokes, Form 8939 the automatic allocation rules will apply unless the executor timely files Form 706 with the Schedule R or R-1attached.

Income Tax Penalty Relief

The new guidance provides special penalty relief to many individuals, estates and trusts that have already filed a 2010 federal income tax return, or obtained an extension and plan to file by the October 17, 2011 extended due date. Late-payment and negligence penalty relief applies to persons inheriting property from a decedent dying in 2010, who then sells the property in 2010 but improperly reports gain or loss because they did not know whether the estate made the carryover basis election.

Caveat

I continue to caution that before taking any action with regard to these filing requirements, the reader must consult with knowledgeable tax counsel or refer to the full, new, Notice 2011-76. The information above is provided to acquaint the reader with this additional guidance from the Internal Revenue Service. I will continue to follow developments in this area and will report release of Form 8939 and the related instructions once the Service makes them available. If you have additional questions concerning filing requirements for 2010 lifetime gifts or testamentary transfers, contact me at 214.957.3366 or via email at response@phdcpa.com.

Ronnie

Copyright 2011, Ronnie C. McClure, PhD, CPA

In an April 4 post, this blog briefly reported on the change in estate tax reporting rules for 2010. Readers unfamiliar with this issue should refer to that post below for background. This post will update and correct the April 4 entry.

On Friday, August 5, the Internal Revenue Service issued guidance (Notice 2011-66) addressing these reporting requirements. More specifically, this Notice addresses the time and manner in which the executor of the estate of a decedent who died in 2010 elects to have the estate tax not apply and to have special carryover basis rules apply to property transferred as a result of the decedent’s death. Form 8939 (Allocation of Increase in Basis for Property Acquired From a Decedent) is to be filed only if an executor elects out of the estate tax for 2010. That means that it is not necessary for the executor of an estate below the $5 million exemption amount to file Form 8939 in order to get a step-up in basis for assets acquired from a decedent dying in 2010.

The Notice also addresses how a donor may elect out of the automatic allocation of generation-skipping transfer (GST) tax exemption to direct skips occurring during 2010. It also clarified the due dates for returns for the taxable year ending December 31, 2010 that report a generation-skipping transfer, that allocate GST exemption, or that opt out of the automatic allocation of GST exemption. In these taxing times, nothing is simple, is it?

This Notice applies to executors of the estates of decedents who died in 2010 and to recipients of property acquired from those decedents, if the executors elect out of the estate tax and thereby elect to have the special carryover basis rules applicable only to 2010 apply. It also applies to donors who made a gift during 2010 that is a generation-skipping transfer or an indirect gift for purposes of the GST tax. Readers may also want to refer to Revenue Procedure 2011-41, also issued August 5, for a safe harbor with regard to the interpretation and application of the carryover basis rules. Even though an executor may elect out of the estate tax for 2010, the GST provisions of the Internal Revenue Code nonetheless continue to apply for 2010. The applicable tax rate for each GST occurring during 2010 is zero, however. That means that even though an estate will not pay GST tax on generation-skipping transfers, executors must still allocate a decedent’s GST exemption among assets transferred.

Under the special carryover basis rules applicable to estates of decedents dying in 2010 and which elect out of the estate tax, there is a “general basis increase” of $1.3 million that may be allocated to property passing to any beneficiary. In addition, there is an additional $3 million basis increase that may be allocated to property passing to the decedent’s surviving spouse. It is these two increases in basis that are reported on Form 8939, in addition to allocation of a decedent’s GST exemption. This is not the end of the story, however. A recipient’s basis in a particular property (including the amount of basis increase allocated to that property) is subject to adjustment upon the examination by the IRS of any tax return reporting a value dependent upon the property’s basis (for example, the property’s depreciation, sale, or other disposition that triggers gain or loss on the property, or otherwise). This fight will go on for years!

The executor of the estate of a decedent who died in 2010 may elect out of the estate tax and choose the special carryover basis option by filing Form 8939 on or before November 15, 2011. Once made, the election is irrevocable with certain, very limited, exceptions. There is generally no extension available for filing this form. The executor must also give the beneficiaries of the estate a statement with information as to the basis of the assets within 30 days after filing Form 8939. Prior filings purporting to make this election must be replaced with a timely filed Form 8939. Note, however, that a final Form 8939 is still not available. The IRS expects to issue a final Form 8939 and the related instructions early this fall. If the executor of a decedent who died in 2010 elects out of the estate tax, the executor allocates that decedent’s available GST exemption by attaching Schedule R of Form 8939 to the Form 8939 for that decedent’s estate. If the Form 8939 is timely filed, this allocation will be considered a timely allocation of the decedent’s GST exemption.

Here’s more “good news.” The due date for filing a return reporting a generation-skipping transfer (direct skip, taxable distribution, or taxable termination, including any election required to be made on such return) that occurred on or after January 1, 2010, through December 16, 2010, is September 19, 2011, including extensions, except in the case of a Schedule R attached to Form 8939, which is due on or before November 15, 2011. To the extent a return relates to an indirect skip, or to a post-December 16, 2010, direct skip, the due date of the return is not extended. Thus, the due date for filing a gift tax return (Form 709) that does not report a GST transfer or that reports a GST transfer (or any election pertaining to such transfer) that occurs on or after December 17, 2010, through December 31, 2010, was April 18, 2011, including extensions. In addition, the due date for filing a Form 709 to elect to treat a trust as a GST trust or to allocate GST exemption to a transfer occurring during 2010 was April 18, 2011, including extensions. If, however, a donor timely filed Form 709 for the taxable year ending December 31, 2010, but failed to allocate GST exemption to a transfer occurring during such year, there is possible relief. Clear as drilling mud!

The reader must understand that this is a very brief summary of a highly technical, 13-page Notice. Before taking any action with regard to these filing requirements, the reader must consult with knowledgeable tax counsel or refer to the full Notice 2011-66 and Revenue Procedure 2011-41. The information above is provided to acquaint the reader with this new guidance from the Internal Revenue Service. I will continue to follow developments in this area and will report release of Form 8939 and the related instructions once the Service makes them available. If you have additional questions concerning filing requirements for 2010 lifetime gifts or testamentary transfers, contact me at 214.957.3366 or via email at response@phdcpa.com

Ronnie

Copyright 2011, Ronnie C. McClure, PhD, CPA

Whether you’re a recent graduate going to college for the first time, a returning student, or the parent of a student, school begins soon and payment deadlines for tuition and other fees are not far behind. The Internal Revenue Service has reminded students or parents paying these expenses to keep receipts and to be aware of some tax benefits that can help offset college costs. The following is a summary of the Service’s release.

Typically, education tax benefits apply to you, your spouse or a dependent for whom you claim an exemption on your tax return. Education these benefits include the following.

American Opportunity Credit. This credit, originally created under the American Recovery and Reinvestment Act, has been extended for an additional two years (2011 and 2012). The credit can be up to $2,500 for each eligible student and is available for the first four years of post-secondary education. Forty percent of this credit is refundable, which means that you may be able to receive a refund of up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 for married couples filing a joint return).

Lifetime Learning Credit. In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, but to claim the credit, your modified adjusted gross income must be below $60,000 ($120,000 if married filing jointly).

Tuition and Fees Deduction. This deduction can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim the tuition and fees deduction for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).

Student loan interest deduction. Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if filing a joint return), you may be able to deduct interest paid on a student loan used for higher education during the year. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

You cannot claim the tuition and fees deduction for the same student in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

If you have questions concerning your deductible or creditable education expenses, contact your tax professional, or contact me at 214-957-3366 or at response@phdcpa.com.

Ronnie

Like you, I was appalled at Congressional behavior over the past several weeks. We shouldn’t have been surprised, however. Congress has behaved this way for the past two years. Although we finally got legislation that purports to reduce the federal deficit by $1 trillion over fiscal years 2012-2021, that’s only part of the story. What we witnessed in this bitter partisan battle is just the start of more Congressional battles that will continue through 2012 (and beyond depending on the outcome of the 2012 elections).

I haven’t seen the text of the Act yet, but here is what I know at this point. The Act creates a Joint Select Committee on Deficit Reduction (JCS). The committee’s charge is to find another $1.5 trillion in deficit reductions. The committee is to “provide recommendations and legislative language that will significantly improve the short-term and long-term fiscal imbalance of the Federal Government.” Everything appears to be on the table, including tax reform (read increase) and entitlement reform (read decrease). The JCS will be comprised of 12 members plus two co-chairs. Three members each will be appointed by Harry Reid, Mitch McConnell, Eric Cantor, and Nancy Pelosi. Reid and John Boehner will each appoint one co-chair. The result will be a highly politically charged group.

The battle begins immediately. Here’s the timetable.

• No later than August 16, 2011 the committee members and co-chairs must be appointed.

• No later than September 16, 2011 the JSC must hold its first meeting.

• No later than October 14, 2011 House and Senate committees may transmit to the JSC their recommendations to meet the JSC goals. You can bet the JSC will be flooded with recommendations.

• No later than November 23, 2011 the JSC must vote on a report of its recommendations, as well as Congressional Budget Office estimates of the recommendations. The JSC report must also contain a statement of the deficit reduction to be achieved over the years 2012 – 2021 and legislative language to support the committee’s recommendations. A majority of the committee members must approve the report, its recommendations, and legislative language. In addition, each committee member and co-chair may file his or her own additional comments within 3 days of the final committee vote on its report.

• No later than December 2, 2011, if a majority of the JSC approves the report and legislative language, the report and recommended language must be submitted to Congress and the President and Vice-President.

• No later than December 23, 2011, if a majority of the JSC approves the report and legislative language, it must be voted on by both the Senate and the House. No amendments may be considered. Merry Christmas!

If a majority of the JSC members fail to approve a report and legislative language, across-the-board spending reductions must be implemented beginning in 2013 (note that this will begin after the 2012 elections). The spending reductions will be split equally between defense and non-defense spending. It is not clear to me what happens if a majority of the JSC members approve a plan, both houses of Congress pass it, but the President vetoes it. Perhaps the across-the-board cuts begin in 2013 as if the JSC failed to approve the plan.

There are a host of tax implications to this process. Some favorable tax provisions are due to expire at the end of 2011. What will become of them? The Bush-era tax cuts and the current estate, gift, and generation-skipping tax provisions are due to expire at the end of 2012. Hide and watch to see if they are extended or made permanent. What an interesting election season we will have in 2012!

I will continue to monitor the outcome of this process and post additional comments as appropriate.

Ronnie

Copyright 2011, Ronnie C. McClure, PhD, CPA

The Internal Revenue Service recently announced that it is revising the optional standard mileage rates for computing the deductible costs of operating an automobile for business, medical, or moving expense purposes and for determining the reimbursed amount of these expenses that is deemed substantiated. This modification results from recent increases in the price of fuel.

The revised standard mileage rates are: (1) business use – 55.5 cents per mile and (2) medical and moving use – 23.5 cents per mile. The mileage rate that applies to the deduction for charitable contributions is fixed by the Internal Revenue Code at 14 cents per mile. The IRS does not have the authority to change this rate.

These revised standard mileage rates apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes on or after July 1, 2011, and to mileage allowances that are paid both (1) to an employee on or after July 1, 2011, and (2) for transportation expenses paid or incurred by the employee on or after July 1, 2011.

The previous standard mileage rates (business – 51 cents per mile and medical and moving use – 19 cents per mile) continue to apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes from January 1, 2011 through June 30, 2011, and to mileage allowances paid (1) to an employee from January 1, 2011 through June 30, 2011, or (2) with respect to transportation expenses paid or incurred by the employee from January 1, 2011 through June 30, 2011.

In addition, the portion of the standard mileage rate treated as depreciation for automobiles a taxpayer uses for business purposes remains at 22 cents per mile. The maximum standard automobile cost that may be used in computing the allowance under a fixed and variable rate (FAVR) plan remains at $26,900 for automobiles (excluding trucks and vans) or $28,200 for trucks and vans.

The Service uses an independent contractor to conduct an annual study of the fixed and variable costs of operating an automobile to determine the standard mileage rates for business, medical, and moving use. In these taxing times, it is gratifying to see that current high fuel costs can be taken into account for at least part of 2011. Regrettably, these higher rates are not effective for the first half of the year when fuel costs began to rise so quickly. If you have questions concerning your deductible automobile expenses, contact your tax professional, or contact me at 214-957-3366 or at response@phdcpa.com.

Ronnie

Copyright 2011, Ronnie C. McClure, PhD, CPA

Executors of estates of persons dying in 2010 are faced with somewhat of a reporting dilemma. For most of 2010, we thought that there was no estate or gift tax for the year. In late 2010, however, Congress reinstated these taxes with a $5 million dollar per-person, portable, exclusion amount. In order to avoid a court challenge to a retroactive change in the law, Congress gave executors the option to choose to apply the “no tax” alternative, with the decedent’s historical basis (with the exception of a $1.3 million step-up for all heirs, plus an additional $3 million step-up for a surviving spouse) passing to the decedent’s heirs, or to elect to have the estate tax apply with the $5 million exclusion and receive a step-up in basis for the decedent’s property. This election is to be made at the time and in the manner prescribed by the Treasury Department. The “estate tax” option will generally be preferred if the estate is below the $5 million exclusion amount.

Historically, if an estate was below the exclusion amount, the estate was not required to file an estate tax return (Form 706), but the estate automatically received the favorable basis “step-up” with no action required by the executor. That has changed for 2010, however.

If the executor elects the “estate tax” option, and the estate is below the $5 million exclusion amount, there is no estate due and an estate tax return is not required to be filed. The executor, however, must still file Form 8939 (Allocation of Increase in Basis for Property Acquired from a Decedent) to step-up the basis of the decedent’s assets. Form 8939 is an informational return that will be used to establish basis for income tax purposes of property acquired from a person who died in 2010. Presumably, if this form is not filed, heirs to an estate will receive only the decedent’s historical basis in the decedent’ assets.

Initially, the due date of Form 8939 was April 18, 2011, or a later date to be specified in regulations issued by the Treasury Department. That due date seemed to be extended until October 17 2011. The Internal Revenue Service recently announced, however, that the due date for Form 8939 is not April 18, but will be announced later after Form 8939 and guidance on how to prepare it is released. The announcement from the Service indicates that forthcoming guidance will also explain the manner in which an executor of an estate may elect to have the estate tax not apply. Form 8939 is not currently available, but will be made available soon after the guidance is issued. Both are expected to be available on the Service’s website, www.IRS.gov. The Service expects that a reasonable period of time for preparation and filing this form will be given between issuance of the guidance and the deadline for filing Form 8939, and for electing to have the estate tax rules not apply. Confusion continues to reign supreme!

I will follow developments in this area and will report release of Form 8939 and the related guidance to you once the Service makes them available. If you have questions about transfer tax options for 2010, contact me at 214.57.3366 or via email at response@phdcpa.com.

Ronnie

Copyright 2011, Ronnie C. McClure, PhD, CPA

The Internal Revenue Service continues to be very concerned with unreported offshore banking and investment accounts. To this end, the Service announced yesterday a special voluntary disclosure initiative designed to bring offshore money back into the US tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through August 31, 2011.

“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing,” said IRS Commissioner Doug Shulman. “This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them.”

The Service’s decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on October 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.

“As I’ve said all along, the goal is to get people back into the US tax system,” Shulman said. “Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”

The new initiative announced yesterday – called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) — includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the August 31, 2011 deadline.

The Service is also making other modifications to the 2011 disclosure initiative. Participants face a 25 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. The Service also created a new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.

The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.

“This is a fair offer for people with offshore accounts who want to get right with the nation’s taxpayers,” Shulman said. “This initiative offers them the chance to get certainty about how their case will be handled. Just as importantly, those who truly come in voluntarily can avoid criminal prosecution as well.” The Service is handling processing of the voluntary disclosures in centralized units to more efficiently process the applications.

The Service will also launch a new section on its website, www.IRS.gov, that includes the full terms and conditions on the 2011 Offshore Voluntary Disclosure Initiative, including an extensive set of questions and answers to help taxpayers and tax professionals. The web site also includes details on how people can make a voluntary disclosure.

In the first voluntary disclosure program in 2009, taxpayers faced up to a 20 percent penalty covering up to a six-year period. Taxpayers came forward with about 15,000 voluntary disclosures in that effort covering banks in more than 60 countries. Shulman said Internal Revenue Service efforts in the international arena will only increase as time goes on.

“Tax secrecy continues to erode,” Shulman said. “We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.”

If you have unreported offshore accounts, I highly recommend that you speak to your tax professional about this new voluntary disclosure program.

Ronnie

Copyright 2011 Ronnie C. McClure, PhD, CPA