Americans give freely to support the causes they value, from churches, education, and the arts to medical research. Fortunately, current tax laws encourage and even reward philanthropy. Beyond the basic tax deductions for charitable giving, setting up one or both of the following types of trusts could provide financial advantages in addition to the personal satisfaction that comes from giving.
Charitable Remainder Trust
When money, securities, property, or other assets are placed in a properly structured charitable remainder trust, the donor or a beneficiary receives income for a specific term or for life. When the trust expires, the designated charity receives the assets that remain.
For the donor, there are several potential tax benefits: (1) Assets placed in the trust may be partially deductible for income tax purposes. (2) At death, trust assets are not subject to estate taxes because they are no longer part of the donor’s taxable estate. (3) Any appreciated assets in the trust are also exempt from current capital gains tax.
Charitable Lead Trust
A charitable lead trust is an estate conservation tool that uses the donor’s assets to provide income for a charity during the donor’s lifetime and then transfers the remaining assets to the donor’s heirs when he or she dies. This type of trust could potentially reduce the estate tax due upon death, most notably on highly appreciated assets, because they are not subject to current capital gains tax.
Keep in mind that donations to both types of charitable trusts are irrevocable. This means that the assets cannot be withdrawn once the trust is formed. Also bear in mind that not all charitable organizations are able to use all possible gifts. It is prudent to check first. The type of organization selected can also affect the tax benefits that may be received.
When structured properly, these tools could possibly be used to benefit the charities of your choice and also help to reduce your tax obligations at the same time.
The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
Wednesday, August 12, 2009
What Is a Required Minimum Distribution?
A required minimum distribution (RMD) is the annual amount that must be withdrawn from a traditional IRA or a qualified retirement plan [such as a 401(k), 403(b), and Keogh] after the account owner reaches the age of 70½. The last date allowed for the first withdrawal is April 1 following the year in which the owner reaches age 70½.* Some employer plans may allow still-employed account owners to delay distributions until they stop working, even if they are older than 70½. RMDs are designed to ensure that owners of tax-deferred retirement accounts do not defer taxes on their retirement accounts indefinitely.
You are allowed to begin taking penalty-free distributions from tax-deferred retirement accounts after age 59½, but you must begin taking them after reaching age 70½. If you delay your first distribution to April 1 following the year in which you turn 70½, you must take another distribution that year. Annual RMDs must be taken each subsequent year prior to December 31.
The RMD amount depends on your age, the value of the account, and your life expectancy. You can use the IRS Uniform Lifetime Table (or the Joint and Last Survivor Table, in certain circumstances) to determine your life expectancy. To calculate your RMD, divide the value of your account balance at the end of the previous year by the number of years you’re expected to live, based on the numbers in the IRS table. You must calculate RMDs for each account that you own. If you do not take RMDs, then you may be subject to a 50% federal income tax penalty on the amount that should have been withdrawn.
Remember that distributions from tax-deferred retirement plans are subject to ordinary income tax.
Waiting until the April 1 deadline in the year after reaching age 70½ is a one-time option and requires that you take two RMDs in the same tax year. If these distributions are large, this method could push you into a higher tax bracket. It may be wise to plan ahead for RMDs to determine the best time to begin taking them.
*The Worker, Retiree, and Employer Recovery Act of 2008 suspends required minimum distributions for the 2009 tax year.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
You are allowed to begin taking penalty-free distributions from tax-deferred retirement accounts after age 59½, but you must begin taking them after reaching age 70½. If you delay your first distribution to April 1 following the year in which you turn 70½, you must take another distribution that year. Annual RMDs must be taken each subsequent year prior to December 31.
The RMD amount depends on your age, the value of the account, and your life expectancy. You can use the IRS Uniform Lifetime Table (or the Joint and Last Survivor Table, in certain circumstances) to determine your life expectancy. To calculate your RMD, divide the value of your account balance at the end of the previous year by the number of years you’re expected to live, based on the numbers in the IRS table. You must calculate RMDs for each account that you own. If you do not take RMDs, then you may be subject to a 50% federal income tax penalty on the amount that should have been withdrawn.
Remember that distributions from tax-deferred retirement plans are subject to ordinary income tax.
Waiting until the April 1 deadline in the year after reaching age 70½ is a one-time option and requires that you take two RMDs in the same tax year. If these distributions are large, this method could push you into a higher tax bracket. It may be wise to plan ahead for RMDs to determine the best time to begin taking them.
*The Worker, Retiree, and Employer Recovery Act of 2008 suspends required minimum distributions for the 2009 tax year.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
Tuesday, August 11, 2009
Is the Estate Tax Going to Be Repealed?
The short-term answer is “yes.” The Economic Growth and Tax Relief Reconciliation Act of 2001 made sweeping changes to the federal estate tax and eliminated the tax entirely in 2010.
However, because the tax legislation is scheduled to expire after December 31, 2010, the federal estate tax will return to its original 50 percent maximum rate in 2011 unless Congress acts to make the repeal permanent.
Estate taxes are levied by the federal government and several states on any property that passes from the dead to the living. All estate assets are subject to federal estate taxes. However, the applicable credit shelters a portion of an estate from federal estate taxes.
The following table illustrates changes to the applicable credit and the top federal estate tax rate from 2002 through 2011.
Year
Applicable Credit
Top Estate Tax Rate
2002
$1 million
50%
2003
$1 million
49%
2004
$1.5 million
48%
2005
$1.5 million
47%
2006
$2 million
46%
2007
$2 million
45%
2008
$2 million
45%
2009
$3.5 million
45%
2010
Tax repealed
0%
2011
$1 million
50%
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
However, because the tax legislation is scheduled to expire after December 31, 2010, the federal estate tax will return to its original 50 percent maximum rate in 2011 unless Congress acts to make the repeal permanent.
Estate taxes are levied by the federal government and several states on any property that passes from the dead to the living. All estate assets are subject to federal estate taxes. However, the applicable credit shelters a portion of an estate from federal estate taxes.
The following table illustrates changes to the applicable credit and the top federal estate tax rate from 2002 through 2011.
Year
Applicable Credit
Top Estate Tax Rate
2002
$1 million
50%
2003
$1 million
49%
2004
$1.5 million
48%
2005
$1.5 million
47%
2006
$2 million
46%
2007
$2 million
45%
2008
$2 million
45%
2009
$3.5 million
45%
2010
Tax repealed
0%
2011
$1 million
50%
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
How Much Money Can I Put into My IRA or Employer-Sponsored Retirement Plan?
All types of IRAs and employer-sponsored retirement plans are subject to annual contribution limits set by the federal government. The limits are generally adjusted periodically to compensate for inflation and the increase in the cost of living.
IRAs
For the 2009 tax year, you can contribute up to $5,000 to all IRAs combined (starting in 2009, the limit will be adjusted for inflation annually). For instance, if you have a traditional IRA as well as a Roth IRA, you can only contribute a total of the annual limit in one year, not the annual limit to each.
If you are age 50 or older, you can also make an annual $1,000 “catch-up” contribution.
Employer-Sponsored Retirement Plans
Employer-sponsored retirement plans, such as 401(k)s and 403(b)s, have a 2009 contribution limit of $16,500; individuals aged 50 and older can contribute an extra $5,500 as a catch-up contribution.
If you are currently contributing to an IRA or an employer-sponsored retirement plan, it may be wise to check the contribution limit each year in order to put aside as much as possible.
Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if taken prior to reaching age 59½. If you participate in both a traditional IRA and an employer-sponsored plan, your IRA contributions may or may not be tax deductible, depending on your adjusted gross income.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
IRAs
For the 2009 tax year, you can contribute up to $5,000 to all IRAs combined (starting in 2009, the limit will be adjusted for inflation annually). For instance, if you have a traditional IRA as well as a Roth IRA, you can only contribute a total of the annual limit in one year, not the annual limit to each.
If you are age 50 or older, you can also make an annual $1,000 “catch-up” contribution.
Employer-Sponsored Retirement Plans
Employer-sponsored retirement plans, such as 401(k)s and 403(b)s, have a 2009 contribution limit of $16,500; individuals aged 50 and older can contribute an extra $5,500 as a catch-up contribution.
If you are currently contributing to an IRA or an employer-sponsored retirement plan, it may be wise to check the contribution limit each year in order to put aside as much as possible.
Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if taken prior to reaching age 59½. If you participate in both a traditional IRA and an employer-sponsored plan, your IRA contributions may or may not be tax deductible, depending on your adjusted gross income.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
Monday, August 10, 2009
What Is the Gift Tax?
The federal gift tax applies to gifts of property or money while the donor is living. The federal estate tax, on the other hand, applies to property conveyed to others (with the exception of a spouse) after a person’s death.
The gift tax applies only to the donor. The recipient is under no obligation to pay the gift tax, although other taxes, such as income tax, may apply. The federal estate tax affects the estate of the deceased and can reduce the amount available to heirs.
In theory, any gift is taxable, but there are several notable exceptions. For example, gifts of tuition or medical expenses that you pay directly to a medical or educational institution for someone else are not considered taxable. Gifts to a spouse who is a U.S. citizen, gifts to a qualified charitable organization, and gifts to a political organization are also not subject to the gift tax.
You are not required to file a gift tax return unless any single gift exceeds the annual exclusion amount for that calendar year. The exclusion amount ($13,000 in 2009), is indexed annually for inflation. A separate exclusion is applied for each recipient. In addition, gifts from spouses are treated separately; so together, each spouse can gift an amount up to the annual exclusion amount to the same person.
Gift taxes are determined by calculating the tax on all gifts made within the tax year that are above the annual exclusion amount, and then adding that amount to all the gift taxes from gifts above the exclusion limit from previous years. This number is then applied toward an individual’s lifetime applicable exclusion amount. If the cumulative sum exceeds the lifetime exclusion, you may owe gift taxes.
For gift tax purposes in 2009, the applicable credit is $345,800 and the applicable exclusion amount is $1 million. These amounts are higher for the estate tax.
According to the IRS, most gifts are not subject to the gift tax, and only about 2% of estates are subject to the estate tax.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
The gift tax applies only to the donor. The recipient is under no obligation to pay the gift tax, although other taxes, such as income tax, may apply. The federal estate tax affects the estate of the deceased and can reduce the amount available to heirs.
In theory, any gift is taxable, but there are several notable exceptions. For example, gifts of tuition or medical expenses that you pay directly to a medical or educational institution for someone else are not considered taxable. Gifts to a spouse who is a U.S. citizen, gifts to a qualified charitable organization, and gifts to a political organization are also not subject to the gift tax.
You are not required to file a gift tax return unless any single gift exceeds the annual exclusion amount for that calendar year. The exclusion amount ($13,000 in 2009), is indexed annually for inflation. A separate exclusion is applied for each recipient. In addition, gifts from spouses are treated separately; so together, each spouse can gift an amount up to the annual exclusion amount to the same person.
Gift taxes are determined by calculating the tax on all gifts made within the tax year that are above the annual exclusion amount, and then adding that amount to all the gift taxes from gifts above the exclusion limit from previous years. This number is then applied toward an individual’s lifetime applicable exclusion amount. If the cumulative sum exceeds the lifetime exclusion, you may owe gift taxes.
For gift tax purposes in 2009, the applicable credit is $345,800 and the applicable exclusion amount is $1 million. These amounts are higher for the estate tax.
According to the IRS, most gifts are not subject to the gift tax, and only about 2% of estates are subject to the estate tax.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
What Is the Estate Tax?
The estate tax is a tax on property that transfers to others upon your death. Estate taxes are due on the total value of your estate — your home, stocks, bonds, life insurance, and other assets of value. Everything you own, whatever the form of ownership, regardless of whether the assets have been through probate, is subject to estate taxes.
Also referred to as the “death tax,” the estate tax was first enacted in this country with the Stamp Act of 1797 to help pay for naval rearmament. After several repeals and reinstatements, the Revenue Act of 1917 put the current estate tax into place. Despite its long history, this tax remains controversial.
By working in much the same way as marginal income tax brackets, estate taxes claim a graduated percentage of the total value of your estate. For estates of greater value, the percentage amount due in taxes is generally higher.
The IRS calculates the estate tax due on your gross taxable estate by adding the value of your assets and then subtracting any applicable exemptions.
The most common exception to the federal estate tax is the unlimited marital deduction. The government exempts all transfers of wealth between a husband and wife from federal estate and gift taxes, regardless of the size of the estate. Of course, the surviving spouse must be a U.S. citizen to qualify for this exemption. When the surviving spouse dies, the estate will be subject to estate taxes and, unless the appropriate preparations have been made, only the surviving spouse’s applicable credit can be used. Other exemptions include mortgage and other debt, administration expenses of the estate, and losses during estate administration.
The Economic Growth and Tax Relief Reconciliation Act of 2001 made sweeping changes to the federal estate tax. It established a schedule that loweredthe top estate tax rate and raised the applicable credit amount gradually over several years. In 2010, the federal estate tax is scheduled to be repealed. However, because of the tax law’s sunset provision, the federal estate tax will return in 2011 at its previous maximum level unless Congress votes to permanently repeal the tax. (See the table for applicable credit amounts and top estate tax rates.)
Year
Applicable Credit
Top Estate Tax Rate
2006
$2 million
46%
2007
$2 million
45%
2008
$2 million
45%
2009
$3.5 million
45%
2010
Tax repealed
0%
2011
$1 million
50%
Check with your tax advisor to be sure that your estate is protected as much as possible from estate taxes upon your death.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
Also referred to as the “death tax,” the estate tax was first enacted in this country with the Stamp Act of 1797 to help pay for naval rearmament. After several repeals and reinstatements, the Revenue Act of 1917 put the current estate tax into place. Despite its long history, this tax remains controversial.
By working in much the same way as marginal income tax brackets, estate taxes claim a graduated percentage of the total value of your estate. For estates of greater value, the percentage amount due in taxes is generally higher.
The IRS calculates the estate tax due on your gross taxable estate by adding the value of your assets and then subtracting any applicable exemptions.
The most common exception to the federal estate tax is the unlimited marital deduction. The government exempts all transfers of wealth between a husband and wife from federal estate and gift taxes, regardless of the size of the estate. Of course, the surviving spouse must be a U.S. citizen to qualify for this exemption. When the surviving spouse dies, the estate will be subject to estate taxes and, unless the appropriate preparations have been made, only the surviving spouse’s applicable credit can be used. Other exemptions include mortgage and other debt, administration expenses of the estate, and losses during estate administration.
The Economic Growth and Tax Relief Reconciliation Act of 2001 made sweeping changes to the federal estate tax. It established a schedule that loweredthe top estate tax rate and raised the applicable credit amount gradually over several years. In 2010, the federal estate tax is scheduled to be repealed. However, because of the tax law’s sunset provision, the federal estate tax will return in 2011 at its previous maximum level unless Congress votes to permanently repeal the tax. (See the table for applicable credit amounts and top estate tax rates.)
Year
Applicable Credit
Top Estate Tax Rate
2006
$2 million
46%
2007
$2 million
45%
2008
$2 million
45%
2009
$3.5 million
45%
2010
Tax repealed
0%
2011
$1 million
50%
Check with your tax advisor to be sure that your estate is protected as much as possible from estate taxes upon your death.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
Friday, August 7, 2009
What Are the Tax Benefits of Charitable Trusts?
Americans give freely to support the causes they value, from churches, education, and the arts to medical research. Fortunately, current tax laws encourage and even reward philanthropy. Beyond the basic tax deductions for charitable giving, setting up one or both of the following types of trusts could provide financial advantages in addition to the personal satisfaction that comes from giving.
Charitable Remainder Trust
When money, securities, property, or other assets are placed in a properly structured charitable remainder trust, the donor or a beneficiary receives income for a specific term or for life. When the trust expires, the designated charity receives the assets that remain.
For the donor, there are several potential tax benefits: (1) Assets placed in the trust may be partially deductible for income tax purposes. (2) At death, trust assets are not subject to estate taxes because they are no longer part of the donor’s taxable estate. (3) Any appreciated assets in the trust are also exempt from current capital gains tax.
Charitable Lead Trust
A charitable lead trust is an estate conservation tool that uses the donor’s assets to provide income for a charity during the donor’s lifetime and then transfers the remaining assets to the donor’s heirs when he or she dies. This type of trust could potentially reduce the estate tax due upon death, most notably on highly appreciated assets, because they are not subject to current capital gains tax.
Keep in mind that donations to both types of charitable trusts are irrevocable. This means that the assets cannot be withdrawn once the trust is formed. Also bear in mind that not all charitable organizations are able to use all possible gifts. It is prudent to check first. The type of organization selected can also affect the tax benefits that may be received.
When structured properly, these tools could possibly be used to benefit the charities of your choice and also help to reduce your tax obligations at the same time.
The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
Charitable Remainder Trust
When money, securities, property, or other assets are placed in a properly structured charitable remainder trust, the donor or a beneficiary receives income for a specific term or for life. When the trust expires, the designated charity receives the assets that remain.
For the donor, there are several potential tax benefits: (1) Assets placed in the trust may be partially deductible for income tax purposes. (2) At death, trust assets are not subject to estate taxes because they are no longer part of the donor’s taxable estate. (3) Any appreciated assets in the trust are also exempt from current capital gains tax.
Charitable Lead Trust
A charitable lead trust is an estate conservation tool that uses the donor’s assets to provide income for a charity during the donor’s lifetime and then transfers the remaining assets to the donor’s heirs when he or she dies. This type of trust could potentially reduce the estate tax due upon death, most notably on highly appreciated assets, because they are not subject to current capital gains tax.
Keep in mind that donations to both types of charitable trusts are irrevocable. This means that the assets cannot be withdrawn once the trust is formed. Also bear in mind that not all charitable organizations are able to use all possible gifts. It is prudent to check first. The type of organization selected can also affect the tax benefits that may be received.
When structured properly, these tools could possibly be used to benefit the charities of your choice and also help to reduce your tax obligations at the same time.
The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
Subscribe to:
Posts (Atom)
