TCJA and Estate Planning

Office file folder in a business. Legal will for inheritance

The Tax Cuts and Jobs Act was passed in 2017. The legislation increased the amount that is exempt from federal estate taxation.  Between 2018 and 2025 the amount exempt from taxes is $11,180,000 for singles (more than $22 million for couples) and is adjusted for inflation each year after 2018.  In 2026 the amount will fall back to $5,400,000.  A majority of individuals will never exceed either amount; however, estate planning is more than avoiding estate taxes.  Some decisions about property transfer can have other tax consequences. Changes in tax law can make old estate plans obsolete.

One important element of estate transfer is the “step up” in basis of real estate and other property that has gained value over time.  An acre of ground purchased for $200 (original cost or basis) in 1984 could have a value of $4000 or more in 2019.  If the property were sold it would be subject to capital gains taxes on the $3,800 of appreciated value. If the property is inherited, it passes without taxation and the basis is reset to the market value the day the owner died.  This “stepped-up basis” is a key consideration when decisions are made about gifting property, setting up trusts, and developing other estate transfer plans. Example: suppose you gave your daughter that acre of land today. Upon selling the land, she would owe income tax on the $3800 capital gain; if she had received it as an inheritance after your death, the sale would involve little or no capital gain, saving her the tax bill. 

Transfer of wealth through estate plans has also resulted in new requirements for reporting and keeping records on appreciated property (real estate, stocks, etc.) with a stepped up basis.  New IRS rules define the property subject to appraisal, steps to ensure accuracy, and required reporting to the IRS and beneficiaries.  Executors are responsible for date of death appraisals. Appraisals must be kept by the beneficiaries and used if the property is sold.  It is wise to complete the date of death appraisal promptly; the IRS is more likely to question an appraisal that is completed a long time after the death of the owner. Details are included in IRS Form 706.

Ag Decision Maker is an Iowa State University Extension source of additional estate planning resources and information.  Scroll down the page to find estate planning publications.

 

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Flex Plan vs. Itemizing: Does it matter?

If I offer you an easy and guaranteed way to reduce your income tax bill, are you going to turn me down? Not likely! Surprisingly, though, lots of people do exactly that when they opt out of their employer’s “flex plan” for health care expenses.

With most employers opening up their benefits enrollment period in the weeks ahead, now is the time to consider flex plan enrollment for next year. The first step is to estimate how much you will likely spend on qualified health care expenses during the year. I’ll use myself as an example: I know that I spend a fixed amount each month on routine prescriptions; I also know that there’s a co-pay for my annual health exam and for the lab work that goes with it; in addition, I know I’m due for a new pair of glasses next year. When I add all that up, I can be pretty sure I will have at least $600 in medical expenses for 2018. Your situation will be different, of course: you’ll need to consider predictable health expenses for all members of your family.

With my $600 prediction in mind, I’m going to have $50/month taken out of my paycheck (tax-free) and placed in a flex account. Then when I have medical expenses, I’ll be reimbursed from that account. Why go to that trouble? Because I’m guaranteed to avoid income taxes on that $600 of my income. That will save me at least $120 on federal and state income taxes (most middle income folks can expect to pay 10-15% federal and 5-8% Iowa tax rates). Note: a few years ago, when my children were still part of my tax picture, my flex amount and tax savings was noticeably larger!

Some people may say “Oh, that’s too much trouble — I’ll just itemize my tax deductions, and that will give the same benefit.” I hate to break it to you, but the truth is it probably won’t work out that way. Why? Two reasons:

  • Many Americans don’t have enough deductions to make it worth itemizing. They’re better off with the standard deduction.
  • Even those who do itemize deductions probably don’t have enough medical expenses to itemize them. In general, medical expenses are only deductible above an amount equal to 10% of your income; if income is $50,000/year, the first $5,000 of medical expenses cannot be deducted. Even even if that person had $5,100 in medical expenses, she could only deduct $100. By contrast, using a flex account guarantees the set-aside amount will be tax-exempt.

That’s the case for me: I itemize deductions, but I have never had high enough medical bills to itemize them — not even the year I broke my ankle. Using my flex plan is my only reliable way of getting tax benefits for some of my health expenses. Of course, most years something unexpected occurs, and I spend more than the amount I set aside in my flex account. But I’m glad to save the $120 I’ll be saving. How much could you save?

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Do you need a health insurance exemption?

Please PayIf you didn’t have health insurance coverage for any portion of 2014, you may encounter a surprise on your income tax return.  Americans are now required to carry health coverage, unless they qualify for an exemption.  Those who did not will face a fee, called the “Individual Shared Responsibility Payment.”

There are two kinds of exemptions; some can be handled directly on your tax return, while others require application and approval.  That approval process can involve a 2-3 week waiting period, so now is a good time to get going on it if you haven’t already done so.

Exemptions which can be handled directly on your tax return include:

  1. Income-based exemptions (i.e. if your income is low enough that the law agrees that you can’t afford health insurance).
  2. Only a short gap in coverage (less than 3 months)
  3. Not lawfully present in the United States
  4. Member of a health-care sharing ministry
  5. Member of a Federally-recognized Indian tribe
  6. Incarceration
  7. If you had coverage beginning on or before May 1, 2014, you have an automatic exemption for the months before that. NOTE: this exemption is unique to 2014, because the open enrollment period was extended until March 31.  The same exemption will not be available in future years
  8. Employer coverage with a non-calendar plan year, so you were not able to join your employer plan until, for example, July 1.  This exemption is available only in 2014.

Exemptions requiring application and approval.  You need to apply for these exemptions through the health insurance marketplace (www.healthcare.gov), and if you are approved, you will be issued an Exemption Certificate Number which must be added to the tax return.

  1. Hardship exemptions.   Even if your income appeared to be high enough that you could afford insurance, the marketplace may grant you an exemption if you faced certain hardships, such as homelessness or eviction, domestic violence, large medical expenses, disaster, and others.
  2. Religious objections.  If you are a member of a recognized religious sect whose members object to insurance, you may apply for an exemption.
  3. AmeriCorps coverage available to those serving in AmeriCorps, VISTA, or NCCC.

The list above is not 100% comprehensive, nor does it give all the details.  If you (or someone you know) were uninsured for part of 2014, I recommend you go to www.healthcare.gov/exemptions to find out if you qualify for an exemption.

At that link, you will also find information about the fee for being uninsured.  Although the fee for 2014 will be fairly small, it will go up in 2015, and again in 2016, so now is the time to consider enrolling in health insurance.  Go to www.healthcare.gov for details.

~Barb

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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If you got married this year…

wedding ringsIf you got married this year, or are going to get married this year, congratulations!

During the past months your mind may have been occupied with details of wedding, honeymoon, housing decisions, moving, or other events.  In the midst of those big events, it’s easy for some small-but-important details to be overlooked.  Remember to:

Notify Social Security and get a new Social Security card  if your name changed.  If you don’t, you’ll run into problems when it’s time to file your tax return!  (I speak from personal experience on this…)

Check your tax withholdings to be sure you are having the right income tax amount taken out of your paycheck.  Your filing status and total income will be different on this year’s tax return, and if you are having too much or too little taken out of your paychecks then problems can result.  The IRS Withholding Calculator is an easy tool to make sure you are on track.

Notify www.healthcare.gov   If you purchased health insurance in the new Marketplace, log in to your www.healthcare.gov account and let them know of the change in your marital status, household size, and income.  Changes in income and family size will affect the amount of “premium tax credit” which you receive toward your health insurance premiums.

Best wishes for “happily ever after.”  ~Barb

NOTE: the IRS has more info for newlyweds, including you tube videos and podcasts.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Lesson from Tax Season: Withholdings

IRS logo 2To mark the end of tax-filing season, I want to remind everyone: Make sure you are having enough withheld from your paycheck for federal and state income taxes!

As a volunteer  with VITA (the Volunteer Income Tax Assistance program), I saw several people this year who needed to make large payments with their tax return.  In one case, an employer had restructured, and the employee hadn’t noticed that her payroll withholdings changed.  In other cases they got a new job and didn’t filled out their paperwork properly.  Or their income had gone up, but they didn’t increase withholdings accordingly.

Owing a little money with your tax return isn’t a problem.  In fact, many people see it as the ideal scenario.
But you’ll face real problems if you owe substantial amounts:

  • You need to come up with the money (one couple owed nearly $3,000 for state and federal).  That may create debt – it can even start a downward spiral where you’re behind on your bills and building credit card debt too.
  • You’ll probably be charged a penalty and interest for not paying as you go — the law requires that we pay our income taxes throughout the year, not just at the end of the year.

Even if tax season is over, that doesn’t mean you should stop paying attention to your tax situation.  It’s a year-round task, especially when your family or income changes.

~Barb

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Tax Withholding

The more taxes I prepare at the volunteer sites the more I realize that people often make mistakes when it comes to filling out their W-4. This is the document employers use to determine your tax withholding. Extreme examples have included one single individual who was claiming 9 dependents and another who indicated they were tax exempt for a salary of $20,000.  Tax exempt status is only allowed if all your withholding is returned to you in your tax refund, and expect the same to occur in the new year.  Dependents cannot claim tax exempt status if they expect earnings that exceed $1000.

Under-withholding results in tax penalties, and over-withholding results in delayed income that could pay monthly expenses. It’s a delicate balance keeping just the right amount withheld from your paycheck.  Employers seldom question or check what their employees select.

You can change your W-4 at any time. You are allowed to claim yourself and individuals who live with you and depend upon you for their financial support once.  A dual income family must decide who will claim the eligible dependents; for example, the husband might use one child and wife the other; or husband taking both children and wife only claiming herself, etc. 

If you have cash income, or other income that isn’t subject to withholding, you can make estimated tax payments or decrease your exemptions if you have employment where income is subject to withholding.  If you typically receive a large refund each year consider adding an eligible exemption and give yourself a larger paycheck throughout the year. ~Joyce

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Cancelled Debt

When is income not really income?

Last week I visited with a colleague who pays attention to finances and likes to pass useful information on to others.  As he was telling me about his 6-month-old grandchild, he mentioned that his kids had been left with a substantial out-of-pocket medical bill.  They were making payments faithfully, but then the collection agency offered a deal:  if they would pay half of the $5,000 bill right now, the collectors would forgive the other half of the debt, and the bill would be considered paid in full.

The opportunity to help his kids save $2500 was too good to pass up, so the dad loaned them the money.  They’ll still need to pay him back, but now they don’t have that outstanding medical debt and the collection agency nagging at them.

The dad (my colleague) was pleased that he had been able to help them in this way, and understandably so.  But there was one thing that he and his kids did NOT know:  the $2500 debt that was forgiven will be considered “income” by the IRS.  It’s like the collection agency paid that couple $2500 to pay their bill now rather than waiting.  They will issue an official Form 1099-C showing Cancellation of Debt = $2500.  In most cases, that will be taxable income.

I’m not saying they shouldn’t have taken the deal.  They come out way ahead financially, and will also have much less stress in their monthly budget.  It’s just important for consumers to know that when debt is cancelled, that counts as income in the eys of the IRS — so they are prepared for it when tax time comes.  ~Barb

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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