Gifts As A Part Of Your Estate Planning

For anyone with a potentially sizeable estate, it is worthwhile making plans to minimize the future tax burden. One way to accomplish that is to give gifts to your children while you are still alive that would otherwise be passed through your estate. Because the gift is outside the estate, and if it is within the allowable gift amounts, the transfer escapes taxation.

Currently the 2011 allowable gift that is untaxed is $13,000 per donor/recipient combination.

That means that for a family of two parents and two children, if each parent gives each child the $13,000 maximum, they can transfer $26,000 per child for a total of $52,000. If either or both of the children are married themselves, each parent can also give an equal amount to the son or daughter in law. Further if there are grandchildren, they can also give to them. As you can see, for a large family the gift process can easily add up to a significant amount. And this process can occur every year.

In addition to the $13,000 exclusion, a gift can be made to pay college tuition or medical expenses. If a child or a grandchild is in college, for example, a gift may be made that pays the tuition over and above the $13,000 exclusion.

In any one of those gifts, if the amount exceeds the $13,000 limitation, the extra amount is counted towards the lifetime limit for each donor which is $5,000,000 per donor for 2011, up from $1,000,000 in 2010. No tax is collected at the time of a gift which is within the lifetime limit, but a tax return for the extra amount is required. While no tax may be ultimately collected, it will be applied during the calculations for the donor’s estate and a tax may be due then.

Taxation is an issue that is in the news today, with the potential for future unfavorable changes in the tax code. Since the more liberal gift tax rules might only be available in 2011, now is the time to act.

Obviously, the donor will not want to make a large sum of cash available to a family member that is incapable of the judgment necessary to invest the funds. Separate arrangements should be made with a trusted advisor.

Tax and estate planning requires qualified advice and counsel.  The professionals at The Shafer Group are a Colorado Springs tax planning group of accounting experts, and we can advise you on how to maximize the benefit from this tax issue.  Call us at (719) 487-1200 or send us an email at info@theshafergroup.net　

When To Sell A Real Estate Investment

•  Are the fundamentals still right?
•  Could you leverage an investment into something larger or more likely to expand?
•  Is there a tax implication?

Fundamentals

Every real estate investment is subject to the old maxim “location, location, location”. Do you hold a real estate investment where the surrounding neighborhood has deteriorated? Do you see upcoming changes that will make your location less attractive? Or is the growth in your city simply headed in some other direction?

If any of these conditions could have an impact on the value of your investment, now is the time to really evaluate the long term potential.

Selling an investment in a location that is not as likely to perform over the next decade or two may be the correct current action.

 Leverage

If you own a Colorado Springs real estate investment where your equity is well more than 50%, selling the property and swapping it into a more valuable parcel with a larger mortgage could be the way to make the most from your investment. A $1 million property could become a $2 million dollar property that has a larger upside growth potential. This approach can take advantage of the Section 1031 property exchange rules to defer capital gains tax.

On the other side of that strategy, if you are approaching retirement, and want to have a property that has positive cash flow with less management required, selling a property with substantial equity, and buying a smaller place with cash could provide a cash flow that will help with your everyday bills.

Tax Implications

If you have equity in a property and are able to take advantage of the current capital gains tax rules, you may be able to sell and use the cash with little or no tax obligation. You could even swap into another property at an increased basis that will save you tax dollars in the future.

 If you have any questions, give us a call and we can give you our best advice.

Deferring Capital Gains with Real Estate Swaps

Do you have a real estate investment that you want to sell?  But you are worried that the capital gains tax on the transaction will be prohibitive. A 1031 tax swap could be a cost saving strategy.

 A 1031 tax swap is a real estate transaction which allows you to sell an investment real estate property and buy another investment property while transferring all of the tax obligations from the old property into the new property. In essence, it allows you to defer capital gains tax.

There are, of course, a number of rules related to the transaction. We are tax planning experts here in Colorado Springs, and can advise you on the details. But here are some of the rules:

• The new property must be “like kind”, which means it has to be another investment property.
•  If the purchase price of the new property is lower than the sale price of the old, you lose some of the benefit.  
• The amount of indebtedness must be the same or more – i.e. your mortgage on the new property must be at least the amount of the mortgage on the old property.  
• You must use an intermediary to satisfy the legal requirements.

Why would you want to undertake this type of transaction?  

• It may be that the old property requires too much management time, and you want to find a place that is a little less demanding.  
• An older property may be more fully depreciated and with a reduced cost basis selling outright would have such significant tax implications that you would not realize enough from a simple sales transaction.  
• You may want to free up some money for investments in a different locale.  
• You may want more leverage on a new place.  

If you have an investment that has little mortgage debt, you can use the equity in the old property to arrange a more expensive new property with a larger mortgage.  For example, a $500K building with no mortgage could become a $1 million building with a $500K mortgage.  More valuable buildings will generally appreciate more just because of the numbers.

Tax swaps are a valuable tool for tax planners, but any action requires some well thought out strategy.　 We here at The Shafer Group are a Colorado Springs tax planning group of professional financial experts, and we can help and advise you how to maximize the benefit from this tax issue.　 Call us at (719) 487-1200 or send us an email at info@theshafergroup.net

Can You Use a Tax Swap to Buy a Retirement Home?

Capital Gains Rates for 2011 – 2012

When the congress passed the tax bill in December, they extended the lower tax rates on capital gains through the end of 2012.

For most assets which you have owned for one year or more and disposed of before the end of 2012, the maximum federal capital gains tax rate is 15%.  If highest tax bracket that you pay is 15% or less, some or all of your capital gains tax will be zero.  How much capital gains tax you will pay depends on your income.

After 2012 the capital gains tax rate will return to 20%, so planning now to take advantage of the current rates is key.  And there is a Colorado capital gains tax that could run as much as 4.63% which you will need to take into account.

This presents some interesting tax planning questions for your family.  If you are retired, for example, you could consider selling appreciated assets, pay little or no capital gain tax, and re-invest the proceeds elsewhere.  In effect, that increases your cost basis for a saving in a future transaction while continuing an investment program that can show appreciation.

Or you could simply sell an appreciated asset, pay little or no capital gain tax and keep the funds available for your personal use.

Another option if you have parents that are in a lower tax bracket, and if you are assisting them in any way, is to gift them the appreciated asset.  They would carry your cost basis and could sell with little or no capital gain tax.

Keep in mind that you could benefit in both 2011 and 2012, so now is the time to talk to us, we are expert at Colorado Springs tax planning.

While the concepts here are simple, any action requires some well thought out planning.  We here at The Shafer Group are a Colorado Springs estate planning group of professional financial experts, and we can help and advise you how to maximize the benefit from this tax issue.  Call us at (719) 487-1200 or send us an email at info@theshafergroup.net

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INNOCENT SPOUSE RELIEF

Types of Innocent Spouse Relief

Are you a married or formerly married taxpayer whose spouse or former spouse has given you an unexpected gift – an income tax liability from a previous tax year? You may want to contact your local Colorado Springs accountant to see if you qualify for relief of this income tax liability under innocent spouse rules.

Normally, when a joint income tax return is filed, the law makes both the taxpayer and the spouse responsible for the entire tax liability, even if you later divorce. However, in some cases, a spouse or former spouse will be relieved of the tax, interest, and penalties on a joint tax return under three types of relief available to married persons who filed joint returns.

1. General relief available to all filers;
2. Separate liability relief available to joint filers who are treated as no longer married; and
3. Equitable relief for taxpayers who do not qualify for the other two types of relief.

General relief is available when there is an understatement of tax regardless of whether the couple is still married and living together, is separated, divorced, or one spouse is deceased at the time of the request. An understatement of tax exists when there is a difference between the tax calculated on a tax return and the tax that should have been shown on the return. If innocent spouse relief is granted, the requesting spouse may also be entitled to a refund of any amount of the tax liability previously paid by the requesting spouse. The qualifications for general relief are complex so please contact your local Colorado Springs CPA for help on seeing if you qualify for this type of relief.

Separate liability relief is available to spouses who are divorced, legally separated, or living apart and it allocates the tax liability stemming from an understatement of tax between the electing spouse and the other spouse. If successful, the electing spouse is able to limit his or her liability to the portion of an assessed deficiency properly allocable to him or her. Please consult with a Colorado Springs certified public accountant to see if you meet the criteria for this type of innocent spouse relief.

 Equitable innocent spouse relief may be available to a spouse who is otherwise ineligible for the other forms of relief. The typical situations unique to this type of relief involve the underpayment of tax rather than a dispute about the amount of tax liability for the year. An underpayment of tax occurs when the requesting spouse and the nonrequesting spouse report an item correctly on an original or amended return but are unable to pay the tax resulting from such item. Under this relief, either money for payment of taxes reported on a return never reaches the IRS because the nonrequesting spouse misappropriated the funds for his or her personal use or the nonrequesting spouse cannot pay for an unpaid liability that arises out of that spouse’s income. This relief may also be granted in addition to other innocent spouse relief, for example, when the requesting spouse seeks to be relieved from and underpayment of tax and not just an understatement of tax. Your Colorado Springs CPA can help you apply your circumstances to this type of relief to see if you qualify for equitable relief.

Procedures for Seeking Innocent Spouse Relief

A spouse or former spouse seeking innocent spouse relief must first file Form 8857, Request for Innocent Spouse Relief. The filing must take place no later than two years after the IRS commences collection activities (consult with your Colorado Springs CPA for details) and provides that spouse with notice of innocent spouse rights. The requesting spouse may request one, two, or all three types of innocent spouse relief in one request. Once the requesting spouse files a Form 8857, the IRS must send a notice to the nonrequesting spouse’s last known address that informs the nonrequesting spouse of the claim for relief. This notice gives the nonrequesting spouse the opportunity to submit information for the IRS to consider in making its determination. Further, filing for innocent spouse relief puts an immediate halt on federal and state collection activities.

Before making any decisions related to seeking innocent spouse relief, please take the time to check with your Colorado Springs accountant and trusted Colorado Springs business advisors  The Shafer Group.  Your Colorado Springs tax planning and potential relief of a tax liability you are not responsible for are too important to not discuss further with a Colorado Springs accountant at The Shafer Group.