The Dirty Dozen – according to the IRS

The IRS has released its list of the Dirty Dozen Tax Scams to watch for when preparing and filing returns for 2011. “Illegal scams can lead to significant penalties and interest and possible criminal prosecution,” according to the IRS website. The list is published as a way of increasing public awareness and cautioning people to be on the look-out.

While identity theft and phishing top the listing, of particular interest are these two items:

• Abuse of Charitable Organizations and Deductions, and
• Misuse of Trusts

Intentional abuse of 501(c)(3) organizations includes: arrangements that improperly shield income or assets; attempts to maintain control over donated assets or the income from donated assets; over-valuing non-cash assets; arrangements to buy back the donated asset at a time and price set by the donor; and inaccurate appraisals.

Misuse of trusts include: questionable deductions of personal expenses, and promises of reduced income, estate, and/or gift tax.

IRS personnel have witnessed an increase in the abuse and misuse of these entities. Organizations should be aware of the possible motives behind some donor objectives and strive to not be complicit in such activities. Penalties and the damage to the organization’s reputation might not be worth whatever temporary benefit received.

See the full listing here.

Opportunities to Achieve Efficient Wealth Transfer in 2011 & 2012

Valuation NewsFlash: Gift and estate planning opportunities for business owners from Congress

With the passage of the new 2010 Tax Relief Act, Congress just made it easier for business owners intending to make a substantial wealth transfer.  Given the current political environment, this is the prime time to take advantage of this opportunity, because the law might get changed without much advance notice.

The 2010 Tax Relief Act has increased the lifetime gift exemption cap to $5M from $1M, but just for 2011 and 2012. In the past, business owners structuring a major wealth transfer to their children often ran into the problem of not having enough lifetime gift exemption… and business owners were generally reluctant to pay gift tax on such a transfer. The increased lifetime exemption cap provides business owners with a great (albeit temporary) opportunity to reduce the size of their estates.

Also of note… Although restrictions on the use of common valuation discounts in valuing business interests have been proposed recently by legislators, the 2010 Tax Relief Act contains no such provisions.

As always, a properly executed estate planning strategy involving transfers of business ownership interests will require an objective and well-supported valuation analysis. For information about how Aronson’s Forensic & Valuation Services Group can provide assistance in this area, please contact Stuart Rosenberg or Bill Foote at 301.231.6200.

Give to the Kids and Get a Tax Break Too!

 Although people cannot control the timing of death to take advantage of the new estate tax law changes, they can surely control the timing of making gifts to children and/or grandchildren.  The way the new Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 works makes gifting between now and the end of 2012 both exciting and challenging and may require some creative planning and quick actions before year-end (only three days left!).  Below are a few important features in the new estate and gift tax law:

•  The new law confirms that there is no GST tax on gifts to grandchildren in 2010.  That means unlimited GST exemption in 2010.
• Starting in 2011, the GST tax will come back at a 35% rate and the GST exemption will be at $5 M only.  
• The gift tax exemption in 2010 is still capped at $1 M but it will increase to $5 M in 2011.
• The gift tax rate for 2010, 2011, and 2012 is all the same at 35%.

 As you can see, the tax result would be quite different if you were to make large gifts to children and/or grandchildren in 2010 v. 2011.

The Tentative Deal on Taxes

President Obama and the GOP reached a tentative deal on taxes last night.  This agreement will still need to pass through Congress and is being touted as a framework; however, it has some welcome news.  Below are the main points :  

• Extension of the Bush tax cuts for 2 years;
• Re-establishment of the estate tax rate of 35% for estates over $5m (Note:  Consensus is that this will likely be increased to 45% as the proposal works through Congress);
• Reduction of the FICA tax due by employees from 6.2% to 4.2%.  This effectively acts as an economic stimulus since working Americans will receive a larger net income on their paychecks;

• Extension of unemployment benefits for the long-term unemployed.

Important Tax Information