Articles Posted in Taxes

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If you are rich enough your estate will pay a 40% tax above the exemption

UNIFIED TAX CONCEPT

Under the federal estate taxes and gift taxes laws, the amount that one gives away during one’s lifetime counts toward the entire exclusion from estate and gift taxes. The lifetime estate and gift tax exclusion is now at $5 million per person indexed for inflation. For  2014 the exclusion is $5,340,000 per person.  There is a federal estate tax of 40% of the net asset value of the estate over 5,340,000. Thus, if a person dying in 2014 has $6,340,000 in net asset value, he would have $1 million taxable and the tax would be $400,000. Under the unified tax concept, the exclusion is reduced for whatever gifts are made over and above the annual gift tax exclusion amount. Thus, one cannot escape estate taxes by giving away once estate prior to death.

REPORTING REQUIREMENTS – Federal Estate Taxes

Federal Estate Taxes – A federal estate tax return, known as form 706, is due nine months after the date of death. That form reports the entire inventory of the persons estate and whatever deductions are allowable to come up with a net taxable amount. If the net amount is under $5,340,000, then there is no tax.  Properties are reported on the form 706 at their date of death values which must be substantiated by appraisals. Because any properties owned by a person at death received a step up in income tax basis to the date of death values, people often file the form 706 for estates that are under the taxable amount just to establish the date of death values.

REPORTING REQUIREMENTS – Federal Gift Taxes

Federal Gift Taxes – A federal gift tax return, known as form 709, is due April 15 of each year to report the gifts of the previous year. There is an annual exclusion from gift tax and gift tax reporting in the amount of $14,000 (this is the 2014 amount which is indexed for inflation) per donor per donee per year. This means that a husband and wife can give $28,000 per year to one child and the under the exclusion. That $28,000 would not count against the $5,340,000 lifetime exemption from estate and gift taxes.  In addition to the annual gift tax exclusion, there is an unlimited gift tax exclusion allowed for amounts paid on behalf of a donee directly to an educational organization, provided such amounts constitute tuition payments. Amounts paid for books, dormitory fees or board on behalf of the donee are not eligible for the unlimited exclusion.  Likewise, amounts paid directly to healthcare providers for medical services on behalf of a donee also qualify for the unlimited gift tax exclusion. Both the medical and tuition exclusions are available without regard to the relationship between the donor nor and donee.  Thus, a grandmother could pay the entire tuition for college of her granddaughter and could also pay the entire tuition for college of neighbor’s daughter and those payments would fall under the annual unlimited gift tax exclusion.

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Gifting before death may cause huge capital gains taxes

INCOME TAX “BASIS” CONCEPT

Under our system of federal and state income tax, if the property is sold before death for more than what was pay for it then there is a capital gain. There are special rates which apply to capital gains the penny upon one’s tax bracket. To compute capital gains, you subtract the income tax basis of the property from the net selling price. The income tax “basis” is what was paid for the property in the first place minus any depreciation and adding any expenditures for capital improvements.

DEATH AFFECTS THE BASIS

Income Tax Basis Increase on Death of an Owner – The basis of property acquired from a deceased person’s estate or trust is generally it’s fair market value on the date of the decedent’s death. Thus, the children who inherit a property from their parents through a trust or through a probate proceeding will have a date of death income tax basis. This is known as the step-up in basis at death.

Reassess Property Tax on Death of an Owner

County assessor will reassess property tax on death of an owner unless prevented

THE PROPERTY TAX SYSTEM

Property taxes are administered by the County in which the real property is located. The County tax assessor determines the amount of property taxes based upon the fair market value of the property at the date of purchase plus a small amount of increase each year is allowed. The county property tax year goes from July 1 through June 30 tax bills are sent out typically in October and are payable in two installments: December 10 for the first installment and April 10 for the second installment.

INCREASE ON CHANGE IN OWNERSHIP

By law the County tax assessor is entitled to reassess the property and increase the taxes to current market value upon a “change in ownership” of a property. Thus, when you buy a house on the open market your property tax bill will be based on the price you paid for the house. However, if you receive a property as a result of an inheritance or a gift there may be exemptions from the change in ownership rules which would prevent the reassessment of taxes.

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