Friday, August 30, 2013

IRS Clarifies What Constitutes a "Lawful Marriage" Following DOMA Decision

In Windsor v. U.S., the U.S. Supreme Court overturned Section 4 of DOMA, which provides that for purposes of federal law marriage is the “legal union between one man and one woman as husband and wife.” Windsor was an estate tax refund case brought by a same-sex taxpayer domiciled in New York. 

The Supreme Court's decision, however, left several questions unanswered.  For example, the Supreme Court did not clarify what constitutes a "lawful marriage" between a same-sex couple. As a result, tax professionals were left guessing as to whether a couple that originally married in one of the thirteen states recognizing same-sex marriages (or in another country that did so) later moved to a state that did not.  Would the place of celebration or the place of domicile control whether a marriage is lawful (particularly in light of the fact that the Supreme Court did not overturn Section 3 of DOMA, which allows each individual state to refuse to recognize same-sex marriages)?  

The IRS recently issued Rev. Rul. 2013-17, which was intended to resolve this issue.  According to the Revenue Ruling, same-sex couples that are legally married in either a domestic or foreign jurisdiction that recognized that marriage will be treated as married for federal tax purposes, regardless of where they later reside.

Tuesday, April 30, 2013

Two Year Asset Protection Trust

The Tennessee legislature recently approved a bill that could potentially make Tennessee’s asset protection trust statute one of the most favorable among U.S. jurisdictions.  The Tennessee Investment Services Act of 2007 generally provides that property transferred to a Tennessee Investment Services Trust (“TIST”) will not be subject to the claims of the transferor’s creditors four years after the property is transferred to the TIST.   HB 0873/SB0713 modifies current law by providing that, for TIST property to be subject to a creditor’s claim against the transferor, the creditor must bring the action within two years after the transfer is made (or six months after the transfer was or could reasonably have been discovered by a creditor whose claim arose prior to the transfer).  The bill was approved by the Senate on April 10, 2013, and was recently approved by the House on April 16, 2013. The bill, which has not been signed by Governor Haslam, is enrolled and ready for signature.  I will provide updates as they are received.

Wednesday, March 27, 2013

Nearly 30% of Estate Tax Returns Audited in 2012

The IRS recently released its “Data Book” for fiscal year 2012.  According to IRS figures (see Table 12), 29.9% of all federal estate tax returns filed in 2012 were examined by the IRS (58.6% for those with gross estates between $5 mil. and $10 mil.; and all returns with gross estates in excess of $10 mil.).  Contrast this figure with the average audit rate for all returns filed, which was less than 1%. There is a lot of interesting information in the Data Book, such as audit rates of individual tax returns with business activities reported versus those without, as well as audit rates across multiple income ranges.  If you are curious about the average audit rate for your individual income tax return or for that of your business, you will likely benefit from reviewing pages 21 through 34 of the Data Book (found here).

* Note: Because returns are often audited years after they are filed, the percentages do not reflect the actual audit rate of 2012 tax returns.  They are simply based on the number of examinations in 2012 relative to the number of tax returns filed in 2012.

Thursday, March 14, 2013

IRS Rescinds Offshore Voluntary Disclosure Program Acceptance

In 2009, the IRS created an Offshore Voluntary Disclosure Program (OVDP) designed to incentivize taxpayers with undisclosed foreign accounts and assets to come forward and disclose those accounts to the IRS (with reduced penalties for the prior nondisclosure). Some taxpayers that were already accepted into the OVDP were recently informed by the IRS that their acceptance has now been rescinded. The full details have not yet been released. Even if legitimate reasons for the rescissions exist, I suspect that the IRS’s actions will hinder the effectiveness of similar initiatives in the future.

Thursday, January 31, 2013

Tax Season Officially Begins

After some delay, tax season officially began yesterday - with several caveats.  Those claiming certain education credits, depreciation deductions, energy credits, and numerous other business related credits  Below, I have reproduced the list of forms that - according to the IRS - will not be available until late-February or early-March.  You can find more information regarding the start of this year's tax seasons, as well as other useful information (such as free file and other related services), by clicking here.

  • Form 3800 General Business Credit
  • Form 4136 Credit for Federal Tax Paid on Fuels
  • Form 4562 Depreciation and Amortization (Including Information on Listed Property)
  • Form 5074 Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands
  • Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations
  • Form 5695 Residential Energy Credits
  • Form 5735 American Samoa Economic Development Credit 
  • Form 5884 Work Opportunity Credit
  • Form 6478 Credit for Alcohol Used as Fuel
  • Form 6765 Credit for Increasing Research Activities
  • Form 8396 Mortgage Interest Credit
  • Form 8582 Passive Activity Loss Limitations
  • Form 8820 Orphan Drug Credit
  • Form 8834 Qualified Plug-in Electric and Electric Vehicle Credit
  • Form 8839 Qualified Adoption Expenses
  • Form 8844 Empowerment Zone and Renewal Community Employment Credit
  • Form 8845 Indian Employment Credit
  • Form 8859 District of Columbia First-Time Homebuyer Credit
  • Form 8864 Biodiesel and Renewable Diesel Fuels Credit
  • Form 8874 New Markets Credits
  • Form 8900 Qualified Railroad Track Maintenance Credit
  • Form 8903 Domestic Production Activities Deduction
  • Form 8908 Energy Efficient Home Credit
  • Form 8909 Energy Efficient Appliance Credit
  • Form 8910 Alternative Motor Vehicle Credit
  • Form 8911 Alternative Fuel Vehicle Refueling Property Credit
  • Form 8912 Credit to Holders of Tax Credit Bonds
  • Form 8923 Mine Rescue Team Training Credit
  • Form 8932 Credit for Employer Differential Wage Payments
  • Form 8936 Qualified Plug-in Electric Drive Motor Vehicle Credit

Thursday, January 17, 2013

Reminder: Deadline to Make Charitable Contributions from IRA

Pardon the extended absence, the past year has been busy in light of the prolonged uncertainty regarding federal estate and gift taxes. Now that Congress has provided taxpayers with a "permanent" solution, I hope to be able to allocate some time to providing readers with tax updates and other tax information.

In this regard, today's post is intended to remind taxpayers ages 70 1/2 or older that they may be eligible to make charitable contributions from their Individual Retirement Accounts through January 31, 2013 and have that contribution count for the 2012 tax year. If you have questions regarding the benefit of doing so, I recommend speaking with your tax professional as soon as possible.

Wednesday, June 6, 2012

Clarifying Tennessee’s Estate vs. Inheritance Tax

As regular readers are aware, the state of Tennessee recently enacted a bill to repeal the inheritance tax gradually over the next few years, until it is finally repealed on January 1, 2016.  That being said, Tennessee’s estate tax remains unchanged.  In this way, you may be a little confused as to what this means for you. The answer is, not much.

An inheritance tax generally refers to a tax on the right to receive property, while an estate tax generally refers to a tax on the privilege of transferring property at death.  The difference for Tennessee residents, really, is mainly semantics.  Although a tax on the right to receive, the Tennessee inheritance tax is primarily paid by a decedent’s estate, which makes it almost identical to an estate tax.  In fact, Tennessee’s inheritance tax shares many similarities with the federal estate tax.  An individual is entitled to a $1 million exemption, similar to the federal estate tax, which currently permits a $5.12 million exemption (scheduled to revert to $1 million in 2013).  The tax rate imposed by the inheritance tax is graduated in much the same manner as the federal estate tax (albeit with lower rates).  The Tennessee inheritance tax also contains many of the same deductions as provided under federal law, such as a marital deduction, charitable deduction, etc.  In sum, the Tennessee inheritance tax is what most people are actually referring to when they say Tennessee “estate” tax. This is the taxing scheme that will be phased out pursuant to recent changes in Tennessee law.

The estate tax, on the other hand, is really just a tax that was enacted by the state to keep money tax money within the state of Tennessee that would be otherwise payable to the federal government .  Under prior federal laws (not in effect at this time), the federal estate tax permitted a credit for state death taxes paid by a decedent’s estate, which reduced the federal estate tax liability of a decedent’s estate.  If a decedent’s estate paid state death taxes equal to that credit (and no more), the decedent’s overall death tax liability (federal and state) would not be any greater than if the state had not imposed any tax at all (because the federal tax of such a decedent would have been reduced dollar-for-dollar by the amount of state death taxes paid).   For this reason, many states, including Tennessee, enacted laws imposing estate taxes on decedents’ estates in an amount equal to the estate tax credit permitted under federal law.  In this way, these states would receive a portion of the taxes that would otherwise be remitted to the federal government without increasing the decedent’s overall tax burden.  The estate tax was not repealed by the Tennessee legislature.

While the estate tax was not repealed , as the above discussion illustrates, it is the “inheritance tax” that actually creates a burden upon the estate’s of Tennessee residents (as well as those non-residents that own Tennessee property), not the estate tax.  Hopefully this information will provide some relief to those of you that were concerned about the fact that Tennessee’s estate tax was not repealed along with the inheritance tax.