Despite your position on the current President, his signing of the new tax bill (“TCJA”) provides some distinct perks in the realm of estate planning.
Here are a few of the distinct perks in the realm of estate planning:
South Carolina doesn’t have an estate tax, so our clients only have to concern themselves with the federal estate tax. Although the TCJA does not eliminate federal estate, gift, and generation-skipping transfer (GST) taxes, it almost doubled the exemption. This means that an individual can now pass $10 million (indexed for inflation) through their estate without paying federal estate taxes. Married couples get to double the exemption to $20 million+. WOW! And so you don’t have to Google “indexed for inflation” we can go ahead and report that the 2018 actual amount is $11,210,00 per individual or $22,420,000 per couple. As has been the case in prior years, the unused exemption of the first spouse to die still can be “ported” to the surviving spouse. For those with estates exceeding this amount (yes, we’re jealous), the maximum tax rate remains at 40%.
On a practical level, what does this mean for our clients? It means less than 1% of Americans will ever pay an estate tax. With the exemption set this high, the vast majority of our clients are in the clear (for now). The exemption sunsets after 2025. However, those with significant family wealth or closely held businesses that could exceed the exemption need to prepare as a 40% loss could be devastating.
As we mentioned above, the new law also doubles the lifetime gift tax exemption. Originally enacted to prevent taxpayers from gifting their entire estate before death to avoid estate taxes, it makes sense that these exemptions go hand-in-hand. This means you can give your assets away during your lifetime without fear of tax consequences as long as the cumulative value of the gifts don’t exceed the $11,210,000 exemption.
ANNUAL GIFT TAX EXCLUSION:
If you aren’t aware of the gift tax exclusion, it’s the law that allows you to give away money to as many people as you wish without those gifts counting towards the lifetime exemption we just discussed. This change isn’t dramatic but it’s still an increase. The annual exclusion for gifts increases to $15,000 this year (up from $14,000 in 2017). This amount remains subject to an inflation adjustment as well.
STEPPED UP BASIS:
In more good news, the TCJA did not change the law regarding basis step-up at death. In my opinion, this impacts more of our estates than any of the items discussed above because it helps almost everyone. If you’re not familiar with a basis step-up at death, it’s worth discussing with your CPA or Estate Planning Attorney as understanding how this works might help you decide which assets to gift or sell before death and which to pass through your estate. More on that in a later post.
If you have any questions about other aspects of TCJA, please contact your CPA. If you need more information on how this specifically impacts your estate plan, please schedule a free estate planning consult with us so we can address your unique needs.
The decorations are down and most of the resolutions have been forgotten. What next? Tax time! Here is some very worthwhile information for our clients age 50+ from our friends at Jarrard, Nowell And Russell:
Everyone wants to save money on their taxes, and older Americans are no exception. If you’re age 50 or older, here are seven tax tips that could help you do just that.
1. Standard Deduction for Seniors.
If you and/or your spouse are 65 years old or older and you do not itemize your deductions, you can take advantage of a higher standard deduction amount. There is an additional increase in the standard deduction if either you or your spouse is blind.
2. Credit for the Elderly or Disabled.
If you and/or your spouse are either 65 years or older–or under age 65 years old and are permanently and totally disabled–you may be able to take the Credit for Elderly or Disabled. The Credit is based on your age, filing status, and income and you must file using Form 1040 or Form 1040A to receive the Credit for the Elderly or Disabled. You cannot get the Credit for the Elderly or Disabled if you file using Form 1040EZ.
You may only take the credit if you meet the following requirements:
In 2016 your income on Form 1040 line 38 must be less than $17,500 ($20,000 if married filing jointly and only one spouse qualifies), $25,000 (married filing jointly and both qualify), or $12,500 (married filing separately and lived apart from your spouse for the entire year).
The non-taxable part of your Social Security or other nontaxable pensions, annuities or disability income is less than $5,000 (single, head of household, or qualifying widow/er with dependent child); $5,000 (married filing jointly and only one spouse qualifies); $7,500 (married filing jointly and both qualify); or $3,750 (married filing separately and lived apart from your spouse the entire year).
3. Medical and Dental Expenses Deduction.
Starting in 2013, the amount of allowable medical expenses taxpayers must exceed before claiming medical expense deductions is 10 percent of adjusted gross income (AGI).
However, for tax years 2013 to 2016, the AGI threshold is still 7.5 percent of your AGI if you or your spouse is age 65 or older. You can only claim your medical and dental expenses if you itemize deductions on your federal tax return. You can’t claim these expenses if you take the standard deduction. You can include only the expenses you paid in 2016. If you paid by check, the day you mailed or delivered the check is usually considered the date of payment.
4. Retirement account limits increase.
Once you reach age 50, you are eligible to contribute (and defer paying tax on) up to $24,000 in 2017 (same as 2016). The amount includes the additional $6,000 “catch up” contribution for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan.
5. Early Withdrawal penalty eliminated.
If you withdraw money from an IRA account before age 59 1/2 you generally must pay a 10 percent penalty (there are exceptions–call for details); however, once you reach age 59 1/2, there is no longer a penalty for early withdrawal. Furthermore, if you leave or are terminated from your job at age 55 or older (age 50 for public safety employees), you may withdraw money from a 401(k) without penalty–but you still have to pay tax on the additional income. To complicate matters, money withdrawn from an IRA is not exempt from the penalty.
6. Social Security Benefits.
Americans can sign up for social security benefits as early as age 62–or wait to receive full benefits at age 66 or 67 (depending on your full retirement age). For some older Americans however, social security benefits may be taxable. How much of your income is taxed depends on the amount of your benefits plus any other income you receive. Generally, the more income you have coming in, the more likely it is that a portion of your social security benefits will be taxed. Therefore, when preparing your return, it is advisable to be especially careful when calculating the taxable amount of your Social Security.
7. Higher Income Tax Filing Threshold.
Taxpayers who are 65 and older are allowed an income of $1,550 more ($1,250 married filing jointly) in 2016 before they need to file an income tax return. In other words, older taxpayers age 65 and older with income of $11,850 ($23,100 married filing jointly) or less may not need to file a tax return.
Don’t hesitate to call the office (Jarrard, Nowell and Russell at 843.723.2768) if you have any questions about these and other tax deductions and credits available for older Americans.
**2018 UPDATE: Please note that the TCJA of 2017 changed many of the tax laws discussed above. Please see our more recent posts for updated information on the current federal estate tax exemptions, etc. **
Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes.”
As April 15th draws near, the law offices of Provence Messervy and the CPA firm of Jarrard, Nowell & Russell often find ourselves answering questions about death and taxes in South Carolina.
Here are three (3) common questions we receive and their answers:
1. Does South Carolina have estate taxes or inheritance taxes?
First, it’s important to understand the difference in these two types of taxes. Estate tax is a tax levied on the net value of the estate before it’s distributed to the heirs. An inheritance tax is a tax imposed on the people who inherit from an estate.
Residents of South Carolina have cause to celebrate when it comes to these taxes because South Carolina does not impose either tax. That being said, there are two areas where you need to be careful. First, if you inherit from someone who lived in an estate that DOES impose inheritance tax, you may receive a bill from that state. The states that impose this tax do not do so in the same manner, so it’s wise to consult with your tax professional in advance if you expect to receive this type of inheritance.
Second, the absence of a South Carolina estate tax doesn’t mean you are exempt from the federal tax. This leads to our second common question.
2. Do I still have to pay federal estate taxes if I live in a state with no estate taxes?
Yes. Living in a state that doesn’t impose these taxes does not exempt you from paying the federal government. However, there is good news in this regard. In 2016, an estate is not taxable at the federal level unless its value exceeds $5,000,000.00. For this reason, very few estates in South Carolina are forced to deal with any tax at all. However, if you are the Personal Representative of an estate valued in excess of $5,000,000,00, you need to contact both an accountant and probate attorney for advice. Similarly, if you believe your personal net worth exceeds this amount, it’s a wise investment to make sure your estate plan minimizes these taxes where allowable.
3. If there are no inheritance taxes in South Carolina, why do I have to pay income tax on the retirement accounts I received?
While it’s true that South Carolina residents don’t pay income tax on MOST inherited assets, there are exceptions to every rule. While inherited property is not considered “ordinary income” by the IRS, one exception is certain retirement accounts that were funded with pre-tax dollars. Income tax must be paid at the time these type of funds are distributed to the beneficiaries.
In conclusion, just remember not to let taxes sneak up on you. Talk to your estate planning attorney or a qualified CPA in advance about minimizing taxes at your death and preparing for any taxes you may pay as a result of an inheritance.
*Note: Thanks to Jarrard, Nowell & Russell for co-authoring this post with us and for always making themselves available to assist our clients.*
April 5, 2016 at 10:59 AM
Just wanted to point out that in 2011 the $5,000,000 estate tax exemption was indexed for inflation. For the year 2016, the exemption is $5,450,000.
Tiffany Provence says:
April 5, 2016 at 11:33 AM
Thanks for the comment and update!
March 26, 2017 at 11:35 AM
How is the decease’s debt handled as it will be handled first before distribution of funds? Question #2: What should be looked out for if a settlement was entered prior to Probate between would be beneficiaries?
Tiffany Provence says:
March 26, 2017 at 11:42 AM
I would encourage you to read the blog posts on this site about creditor’s claims as it helps explain how they are handled (there is a statutory priority) and how a good probate attorney will negotiate them down or do away with them completely. As for your second question, I’m not sure what you are referring to. Please provide more details and I’m happy to respond. I need to know if there is a will or this is an intestate estate, I need to know your role in the estate (beneficiary or PR or both) and I need to know what type of “settlement” we are talking about. A settlement usually refers to an agreement with an outside party resulting from a law suit as where I think you might be referring to a family settlement agreement whereby beneficiaries are agreeing to certain terms and transactions in the estate.
April 6, 2017 at 2:15 PM
My grandmother died intestate, we sold her house while in probate and 3/4 of the proceeds went to her estate. It was well over a year, the probate is closed and funds are available for distribution. My grandmother was 80+ retired and was not required to file income taxes. However, as the PR do I need to file federal income taxes for her or for the estate?
Also, what about SC state taxes? Because of the house sale the estate gained about 300K but I can not determine if I need to file taxes and what type of taxes to file. She lived in SC, but I live in VA so I am trying to navigate the SC law. thank you!
Tiffany Provence says:
April 6, 2017 at 10:00 PM
Thanks so much for reading our blog and posting your question. Unfortunately, we do not have a CPA on staff to answer your question and as lawyers we don’t give tax advice. We have all of our Personal Representatives review their tax obligations with their accountant, the Decedent’s accountant or an accountant we refer them to. I would highly recommend you have this issue reviewed by a qualified CPA before disbursing funds to protect yourself as Personal Representative. Should you need a referral, please let us know and we will gladly offer you the names given to our clients.
Years ago, there was a booth at a local festival with a banner that said “Ask me how to avoid probate!” At the time, I was elected as a Probate Judge so naturally I approached the booth and asked “So, how do I avoid probate?” The salesman (who turned out to be part of a pre-paid legal services business) immediately started his sales pitch about creating trusts and family partnerships to avoid probate. In reality it wasn’t probate he was trying to avoid, it was the IRS. I didn’t interrupt but realized that even this man, whose job it was to sell estate-planning tools, didn’t really understand what “probate” actually is.
Probate is not taxes, it’s not intestacy, it’s not the process by which the government takes your assets. Most simply put, the term “probate” is used to describe all aspects of administering the estate of someone who has passed away. A deceased person can’t own assets. I know . . . shocking, but true. You literally can’t take it with you. Because of this there must be a process of determining what assets the deceased owned and transferring them to the appropriate person. That process is “probate.” Therefore, at the end of the day there is only one way to avoid “probate” at death – die owning absolutely nothing.
Since most of us will (hopefully) own something after spending the bulk of our life working, the process of probate becomes a necessity. This necessity is handled by the Probate Court. This court is not responsible for collecting taxes nor is it something to be avoided. In fact, the entire purpose of this court is to ensure that a deceased person’s assets are properly managed for the protection of both the creditors and the heirs of the deceased. They do this by providing two functions.
First, the Probate Court handles the legal process of administering the estate. They ensure a Personal Representative (also often called a PR, Executor or Administrator) is properly appointed, they assist this person in understanding the rules and requirements of serving in this capacity, and they manage the files of the deceased to make sure that all interested parties are treated fairly. They do not actually hold the assets, collect taxes or distribute the property; they simply ensure it’s done correctly. The file they maintain serves as the last public record of the affairs of the decedent’s finances, property and heirs.
The second function performed by this court is the judicial function. Many, if not most, estates never come before the Probate Judge. However, in those estates where a dispute arises, the Probate Court provides the opportunity for the interested parties to be heard and the matter to be resolved. This might occur early in the estate (such as a dispute over who should serve as the Personal Representative), during the administration of the estate (a dispute between a creditor and the estate), or at the end of the estate (an heir upset about the items they did or didn’t receive).
The jurisdiction of the Probate Court (which includes disputes that arise in trusts as well) is beyond the scope of this post, but it’s important to know (as the salesman clearly did not) that no matter how you decide to transfer your assets at your death, it’s likely that “probate” will be involved. Now avoiding the IRS, that’s an entirely different topic!