January 26, 2020

Wealth Matters: The End of a Decade of Uncertainty Over Gift and Estate Taxes

For estate and gift taxes in particular, all but the richest of the rich will probably be able to protect their holdings from taxes, now that Congress has permanently set the estate and gift tax exemptions at $5 million (a level that will rise with inflation.)

“You could say this eliminates the estate tax for 99 percent of the population, though I’ve seen figures that say 99.7 or 99.8,” said Rich Behrendt, director of estate planning at the financial services firm Baird and a former inspector for the Internal Revenue Service. “From a policy point of view, the estate tax is not there for raising revenue. It’s there for a check on the massive concentration of wealth in a few hands, and it will still accomplish that.”

And while Congress also agreed to increase tax rates on dividends and capital gains to 20 percent from 15 percent for top earners — in addition to the 3.8 percent Medicare surcharge on such earnings — the rates are still far lower than those on their ordinary income. For the earners at the very top, whose income comes mostly from their portfolios of investments, and not a paycheck like most of the rest of us, this is a good deal.

The estate tax, once an arcane assessment, has been in flux and attracting significant attention since 2001. That was when the exemption per person for the estate tax began to rise gradually from $675,000, with a 55 percent tax for anything above that amount, to $3.5 million in 2009 with a 45 percent tax rate for estates larger than that. Estate plans were written to account for the predictable increases in exemptions.

Then in 2010, contrary to what every accountant and tax lawyer I spoke to at the time believed would happen, the estate tax disappeared. Congress and President Obama could not reach an agreement on the tax. So that year, for the first time since 1916, Americans who died were not subject to a federal estate tax. (Their estates still paid state estate taxes, where they existed, and other taxes, including capital gains, on the value of the assets transferred.)

At the end of 2010, President Obama and House Speaker John A. Boehner reached an agreement that was just as unlikely as the estate tax expiring in the first place: the new exemption was $5 million, indexed to inflation, with a 35 percent tax rate on any amount over that, and it would last for two years. The taxes and exemptions for gifts made during someone’s lifetime to children and grandchildren were also raised to the same level, from $1 million and a 55 percent tax above that.

As I have written many times, this was a far better rate and exemption than anyone expected. It also created a deadline of Dec. 31, 2012, for people who could make a major gift up to the exemption level or above the amount and pay the low gift tax.

Using the gift exemption was enticing because it meant those assets would appreciate outside of the estate of the person making the gift. Even paying the tax became attractive to the very rich because of how estate and gift taxes are levied. Take, for example, someone who has used up his exemption and wants to give an heir $1 million. The amount it would take to accomplish this differs depending on when it is given. In life, it would cost $1.4 million because the 40 percent gift tax is paid like a sales tax. If it was given after death, the estate would have to set aside about $1.65 million after the 40 percent estate tax was deducted. But this presented a conundrum: while it may make perfect sense to give away a lot of money during your lifetime and save on estate taxes, it means ceding control of cash, securities or shares now. What if you end up needing them? It wasn’t an easy decision, and it led to a fourth-quarter rush.

As of this week, this is no longer an issue. The estate and gift tax exemptions are permanently set at the same $5 million level, indexed for inflation, and the tax rate above that exemption is 40 percent, up from 35 percent. With indexing, the exemption is already about $5.25 million per person — double for a couple — and it will rise at a rate that means most Americans will continue to avoid paying any federal estate tax.

Article source: http://www.nytimes.com/2013/01/05/your-money/fiscal-deal-ends-decade-of-uncertainty-over-gift-and-estate-taxes.html?partner=rss&emc=rss

I.R.S. Ends Exemptions For 275,000 Nonprofits

The I.R.S. announced on Wednesday that it had revoked the tax exemptions of 275,000 nonprofit organizations after they did not meet legal requirements to file annual tax forms.

The action shrinks the nation’s growing nonprofit sector by roughly 17 percent, to about 1.3 million charities, trade associations, membership groups and labor unions.

Lois Lerner, director of the division of the Internal Revenue Service that oversees tax-exempt groups, said the agency believed most of the organizations on the list were defunct, though there was really no way to know because so many of them simply could not be reached.

“In many cases, we didn’t have a good address because the last one was many years old and they hadn’t had to file since then because they weren’t big enough,” Ms. Lerner said.

Leaders of several nonprofit groups predicted disruptions and nasty surprises as a result of the I.R.S. action, but most said it was necessary.

“In the long run, it is going to be a good thing because academics, researchers, policy makers and others will have more accurate data on the nonprofit sector,” said Tim Delaney, chief executive of the National Council of Nonprofits, a trade association.

Until a change in federal law in 2006, only organizations with annual revenue of $25,000 or more — roughly one-third of the 1.6 million nonprofit groups — were required to file.

That law, the Pension Protection Act, required all organizations to file returns, but because it was embedded in 393 pages of a law that otherwise dealt with pension issues, many nonprofit groups did not know that.

When the deadline for complying with the law came last year, the I.R.S. realized as many as one-quarter of all nonprofit groups on the rolls, including charities as well as labor unions, membership organizations, trade associations and others, stood to lose their exemptions.

The agency issued a reprieve and redoubled its efforts to alert nonprofit groups of the responsibility to file. It reached out to state nonprofit associations and umbrella groups, asking for their help in getting out the word about the new requirement, and made a big push to get local news media to report on it. “I spoke to a different TV station every 15 minutes for an entire day,” Ms. Lerner said. She said the impact of that effort and others was “quite big,” with many groups taking advantage of a program that helped them avoid revocation if they complied by Oct. 15, 2010.

The Urban Institute’s National Center for Charitable Statistics analyzed the list of delinquent nonprofit filers that the I.R.S. released last year. Roughly 90 percent of them had never filed a tax return, said Katie L. Roeger, assistant program director at the center, suggesting that they had never raised $25,000 in a year.

About one-quarter of them got tax exemptions before 1980, she said, and may have gone out of business without telling the I.R.S.

“A lot of these organizations are in human services or community improvement,” Ms. Roeger said. “Things like local sports and recreation clubs, country clubs, amateur sports.”

Most of a dozen calls made to groups on the list ended at disconnection recordings. Gary Spiers, president of the Pasadena Roving Archers, a group in Pasadena, Calif., that is on the list, said in an e-mail that it had filed a tax form reflecting the year that ended in July 2010.

No one answered at the Alliance of Polish Clubs in the U.S.A. in Chicago, another group on the list, but its Web site carries a news release for the 13th Annual Queen of the Polish Constitution Day Parade on April 15.

“We know there will be some that still didn’t get the message that they needed to file,” Ms. Lerner said.

The I.R.S. has created a process for nonprofit groups with annual revenue less than $25,000 that find themselves on the list and wish to reapply for tax exemption, including a reduced fee of $100.

Article source: http://feeds.nytimes.com/click.phdo?i=91de44177c38a4dfb6c0e6e5690150ec