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Estate Income Tax Savings- March 2022 Deadline to Reduce 2021 Taxes

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March 6, 2022 Deadline to Reduce Estate & Trust Income Taxes 

If you are the executor of an estate or the trustee of a trust, you should know that  egregious high income tax rates apply to estates and trusts at very low levels of income.  Despite the new tax act, in 2021, for estates and trusts, a 37% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $13,051 of income. That’s not very high.   For example, let’s say an estate has income of $213,051. The tax on the $200,000 (income in excess of the $13,051 threshold), at 40% equals a tax of $80,000. Ouch!

Suggestions?

There is hope!  Estates and trusts only pay tax on what’s not distributed. Distributions lower the income tax for the trust and at the same time increase the recipient’s personal income tax. However, individuals do not pay the highest rates unless they are wealthy. In our example, if there are four beneficiaries and each receives $50,000 (one-fourth of the $200,000) many individuals will only pay 10% – 24% on that $50,000 instead of 40%.  Potential tax saving could range from $32,000 to $60,000 depending on the individual tax bracket of each beneficiary.

What Can I Do Now?

It’s not too late. There’s a rule allowing distributions made in the first 65 days of the next year to be treated as if made in the preceding year. A special election must be made on the Fiduciary Income Tax Return.  This year’s deadline is  March 6, 2022. 

Are there Other Factors to Consider?

Yes.  In addition to financial considerations, there are other factors to keep in mind.  If a beneficiary is not financially savy and cannot manage money, or has a drug habit or is mentally unstable, you may not want to distribute the funds. These factors may outweigh the potential tax savings of larger distributions from a Trust or Estate.

Please contact a tax professional at Urbach & Avraham, CPAs for assistance with making distributions or any other tax related questions about managing a trust or estate.

 

NJ Death Taxes are not Dead

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As of Jan. 1, 2018, NJ repealed its long-standing estate tax. Now, even out-of staters with beach houses no longer are subject to the NJ estate tax.

When Aunt Em passed away, you as the favorite niece expect to inherit without any NJ death tax. Don’t think that the wicked witch is dead.

The inheritance tax in NJ is alive and kicking. This tax has different rates depending on who the beneficiaries are.

Is anyone exempt from this inheritance tax? Immediate family members, who are Class A beneficiaries, can inherit without paying the tax. Class A beneficiaries include spouses, parents, grandparents and descendants- children, grandchildren and great-grandchildren of the deceased.

What are the rates? For assets passing to Class C beneficiaries the rate is 11% to 16% for amounts in excess of $25,000. This class of beneficiaries includes siblings, and the spouse, widow or widower of a child of the decedent. For assets passing to all other beneficiaries (Class D beneficiaries-nieces, nephews, sisters and brothers-in-law, cousins, etc.) the inheritance tax rate is 15% to 16%.

Any surprise situations? Frequently there are unusual situations which unexpectedly trigger the NJ Inheritance Tax. Uncle Henry, a widower, leaves all his assets to his children. No NJ Inheritance tax- right? Read the Will carefully. Henry had been living with his girlfriend in recent years and left her the right to remain in his home for two years after his passing. This right to live in the home is called a life estate. It is an asset subject to NJ inheritance tax in this case because the recipient, his girlfriend, is a Class D beneficiary.

Grandpa Zeke was widowed and remarried. He leaves all his assets to his grandchildren and to the grandchildren of his second wife. Step-children are Class A beneficiaries and exempt from the inheritance tax. However, step-grandchildren are not Class A beneficiaries but rather Class D and subject to the tax.

How is the tax paid? The NJ Inheritance Tax Return, Form IT-R for residents or Form IT-NR for non-residents, must be filed with the state and the tax paid within eight months after the decedent’s date of death. The state automatically places liens against a decedent’s property until inheritance taxes are paid, or it is established that the recipient of the property is exempt.

Need estate tax planning? We work with many qualified estate tax attorneys who are wizards in estate taxation and can assist you in estate planning. Our CPA firm prepares NJ Inheritance Tax Returns for resident and non-resident decedents and assists executors in filing timely and paying the lowest tax possible.

 

Paid the NJ Exit Tax on Sale of Real Estate? You Can Recoup Your Money

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The New Jersey “Exit Tax”, which became law in 2007, requires the real estate seller to file a GIT/REP form

Exiting NJ?

(Gross Income Tax form) in order to record a Deed for  the transfer of his property.

When a non-resident sells property, New Jersey will withhold this income tax in the amount of either 8.97 percent of the profit or 2 percent of the total selling price, whichever is higher. Therefore, even if the property is sold at a loss, tax must be withheld to fulfill the two percent requirement.

What Can I do?

It’s important to realize that while the Exit Tax requires a substantial withholding, it doesn’t have any impact on the actual tax liability. If the seller files a NJ tax return he is refunded the difference between what was withheld and what is owed. This recovery can be very significant when one factors in the selling costs and original purchase price, both of which reduce the taxable gain.

Estates Should Pay Special Attention

The recovery is often even greater in the case of real estate sold by an estate, as there is a step up in cost basis which would typically minimize a gain on the sale, often resulting in full recovery of the entire withholding. To quickly expedite the recovery of the excess withholding, it would be prudent to timely file Form NJ1040 NR (individual) or NJ1041 (estate/fiduciary).

How do I know if I am considered a “non-resident”?

So who’s considered a “resident” and who’s a “non-resident” with regard to this tax? The law defines a resident taxpayer as one of the following:

  • An individual who is and intends to continue to maintain a permanent place of abode (home, residence) in New Jersey on/after the day of transfer
  • An estate established under the laws of New Jersey
  • A trust established under the laws of New Jersey

A nonresident is simply defined as “any taxpayer that does not meet the definition of resident taxpayer.”

Estate with unfiled tax returns?

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Executor of estate with unfiled tax returns?

An Executor’s job is overwhelming with many responsibilities. Among the first tasks an Executor should do is to verify if the decedent was up to date on his individual income tax returns, Form 1040. All outstanding tax returns should be filed, including one for the year in which the decedent passed away.

It’s absolutely critical that you file for all past years, for several good reasons

  • The estate may incur interest and penalties for late filings
  • The estate may lose a refund (you can claim a refund for up to three years after the return due date).
  • The estate can deduct the balance due for prior taxes on the US Form 706 Estate Tax Return or on State estate tax returns

Steep penalties? Don’t Panic!

Was the decedent or his family member extremely ill or disabled? Did he suffer severe hardships due to natural disasters? If he didn’t file because of hardships, we at Urbach & Avraham, CPAs can assist you in requesting an abatement from the IRS of penalties imposed due to the late filing.

Review of prior years’ taxes

Careful review should be done of prior years’ tax returns. Executors should search for the following items:

  • If returns were prepared by the individual who passed away when he was ill or elderly, these returns may have substantial mistakes or omissions and need to be amended
  • The returns are a source of information about the assets of the decedents. They can be helpful in identifying bank and brokerage accounts and real estate holdings of the decedent.
  • Most of the carry-forward losses and credits from a decedent’s final tax return do not carry over to the estate income tax returns. However, a few tax attributes do carry over, such as the basis in non-deductible IRAs from Form 8606. Some attributes carry over to the estate income tax returns and some to the beneficiaries’ own income tax returns.

Fiduciary income tax returns

The estate must also file Form 1041, Fiduciary Income Tax Return, for all years in which there was income in excess of $600. Income may be from interest, dividends, sales of securities, withdrawals from pension plans, or sale of real estate. If you as executor failed to file for several years, every effort should be made to catch up on delinquent filings. You may be held personally liable for late penalties imposed.

File It ASAP

As soon as you realize that there is a past-due tax return, you should prepare and file it.

If the estate doesn’t have the liquid cash to pay the balance when you file, you can ask for an additional 60-120 days to fulfill the financial obligation. If that’s not enough time and/or you’re going to need to pay in installments, you can apply for an IRS Payment Plan.

What If You Don’t File?

The IRS may file a substitute return for the decedent. If this happens, he may not get all of the deductions and credits that he should. We advise you to still file a tax return that includes everything, even if the IRS already prepared a substitute return. The IRS usually adjusts the return they created to reflect credits, deductions, and exemptions when they’re made aware of them.

The IRS will notify you if they file a substitute return. If you don’t’ file or submit a petition to Tax Court, the IRS will proceed with its proposed assessment, which will trigger a tax bill. Failure to pay it will result in the account going into the collection process. This can include the filing of a federal tax lien or a levy on the estate bank account.

If prior year information is required, we can assist you in obtaining IRS transcripts. These transcripts provide all sources of payors of wages, interest, dividends, pensions and proceeds from sale of securities and real estate.

At Urbach & Avraham, CPAS, we encourage you to contact us if you’re concerned about a return that wasn’t filed. We can help you understand what your options are and how to proceed. We can assist you in abating penalties and obtaining IRS Transcripts if necessary. We can also help with tax planning for the estate, so you don’t have to deal with a past-due return again.

 

One Month Left to Reduce 2019 Estate & Trust Income Taxes

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If you are the executor of an estate or the trustee of a trust, you should know that egregiously high income tax rates apply to estates and trusts at very low levels of income.  Despite the new tax act, in 2019, for estates and trusts, a 37% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $12,750 of income. That’s not very high.   For example, let’s say an estate has income of $212,750. The tax on the $200,000 (income in excess of the $12,750 threshold), at 40% equals a tax of $80,000. Ouch!

 

Help! Is there any hope?

Yes, the estate and trust only pays tax on what’s not distributed. Distributions lower the income tax for the trust and at the same time increase the recipient’s personal income tax. However, individuals do not pay the highest rates unless they are wealthy. In our example, if there are four beneficiaries and each receives $50,000 (one-fourth of the $200,000) many individuals will only pay 10% – 24% on that $50,000 instead of 40%.  Potential tax saving could range from $32,000 to $60,000 depending on the individual tax bracket of each beneficiary.

 

Is there anything I can do?

It’s not too late. There’s a rule allowing distributions made in the first 65 days of the next year to be treated as if made in the preceding year. A special election must be made on the Fiduciary Income Tax Return.  This year’s deadline is  March 5, 2020 (one day earlier than usual this year because of the leap year). Executors and trustees should act soon to take advantage of this opportunity for substantial tax savings.

 

Please contact us for assistance with making distributions or any other tax related questions about managing a trust or estate.