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Payroll Tax Proposals Debated
The White House and Senate Democrats have proposed the Middle Class Tax Act of 2011 with a reduction in payroll taxes for 2012. The Social Security tax of 6.2% would be reduced to 3.1% for the year. This could save families approximately $1,500 in take-home pay.
Businesses would also benefit with the same reduction on the first $5 million in taxable payroll. This provision may benefit 98% of U.S. businesses.
The White House proposes paying for this provision through a surtax on adjusted gross incomes in excess of $1 million. Single persons and couples with incomes over that amount would pay a 3.25% surtax on the excess income.
Senate Minority Leader Mitch McConnell (R-KY) responded on November 29 with a Republican bill. His plan would extend the current reduction from 6.2% to 4.2% for employees during 2012.
McConnell proposes three different methods to cover the costs of his bill. First, there would be a three year pay freeze on salaries of both Congress and all federal civil servants. Second, as federal workers retired, for every three retirees, only one replacement worker would be hired. This will continue until the federal work force has been reduced by 10%.
Third, individuals with million dollar plus incomes still qualify for Medicare and unemployment benefits. McConnell proposes requiring those individuals to pay their full premium for Medicare and to no longer be qualified for unemployment benefits.
Editor's Note: Senate Majority Leader Harry Reid (D-NV) indicated that he and Sen. McConnell will meet to negotiate over the differences in the bills. Both Reid and McConnell are hopeful that a compromise bill can be passed by mid-December. McConnell stated, "In all likelihood, we will agree to continue the current payroll tax relief for another year."
In Estate of Jane H. Gudie v. Commissioner; 137 T.C. No.13; No. 4089-10 (29 Nov 2011), the Tax Court determined that a niece was a statutory executor and that a notice of deficiency was properly sent.
Decedent Jane Gudie created the "Jane Henger Gudie Living Trust" on July 17, 1991. On January 19, 1999, she appointed niece Mary Norberg as co-trustee. The two trust beneficiaries were Norberg and niece Patricia Lane. Upon the demise of Gudie, both would act as successor trustees.
On February 9, 1999, Gudie and the nieces created a private annuity agreement that was transferred in exchange for a $3 million note by each niece. The annuity payment was deferred for four years until 2003 and would commence on February 9 of that year at $937,483 per year.
On February 9, 2003, the agreement was rolled over into a new agreement with a four year deferral. Ms. Gudie passed away on June 14, 2006 and no payments were ever made under the agreement.
Norberg continued to serve as trustee of the living trust but refused formal appointment by the California court as executrix. She did sign IRS Form 706 and submitted a timely return. However, the return claimed a deduction of $8.6 million for the notes to the two nieces and stated that there was no federal estate tax payable. Each niece received an inheritance of approximately $3.4 million.
The IRS audited the return and issued an initial deficiency that was later increased to $4,972,876.30. In addition, the IRS assessed an accuracy-related penalty of $994,575.76.
The court noted that it would need to determine whether there was jurisdiction to resolve the contested IRS deficiency. Ms. Norberg claimed that the notice was improperly issued because she was not a fiduciary as required by Sec. 6212(b)(3). Norberg claimed that the failure of the California court to make a formal appointment of her as executrix invalidated the notice to her.
The Tax Court noted that Norberg had actual or constructive receipt of the trust property. Under Sec. 2203, a person with actual or constructive possession qualifies as the executor without formal appointment.
Norberg also signed an IRS Form 706 Estate Tax Return. She did not give the IRS a notice of termination and responded to the notice of deficiency. Therefore, the Tax Court is deemed to have jurisdiction over the matter.
Editor's Note: This appears to be a "bad facts" case because no payments were ever made on the claimed private annuity. Given these facts, it is understandable that Norberg hoped to avoid a trial in Tax Court on the merits.
The IRS recently released Publication 950, Introduction to Estate Gift Taxes. It provides a very general overview for the public and many professional advisors with respect to estate and gift taxes. The publication is a useful and concise description of the changes that apply in 2012.
1. Unified Credit – The unified credit on the basic exclusion for 2012 will be $1,772,800. This will exempt an estate of $5,120,000 from tax.
2. DSUE Amount – Under the principal of marital portability, the basic exclusion amount of $1,772,800 may be augmented by the unused exclusion amount of the last deceased spouse who passes away in 2011 or 2012.
3. Gift Annual Exclusion – The annual exclusion for present interest gifts for 2012 will be $13,000. The exclusion will not apply for gifts of a future interest.
4. Permitted Gifts – There are several categories of gifts that are permitted without payment of gift tax. These include an unlimited transfer for outright gifts to spouse, gifts to a qualified charitable organization, payments of tuition to an educational institution, or payments of qualified medical expenses to a hospital or other medical institution.
5. Gift Splitting – If one spouse of a married couple makes a gift to an individual, the two may file an IRS Form 709 Gift Tax Return and report one-half of the gift.
6. Gift Tax Unified Credit – The gift tax return will require determining taxable gifts and then a reduction by the unified credit. After adding up the amount of the gifts and reducing the amount by a marital deduction, charitable deductions, educational exclusions or medical exclusions, the $13,000 annual exclusion is applied first. This is a per-donor, per-donee exclusion. The remaining amount will be covered by the unified credit. If the full amount of unified credit is exceeded, then gift tax at a rate of 35% will be applicable on the excess.
7. Gift Tax Return Filing – The gift tax return is generally required if there are gifts to a non-spouse that are over the annual exclusion, a married couple are splitting gifts, there is a gift of a future interest or there is a gift to a spouse of an interest in property that will be ended by a future event.
8. Gross Estate – The gross estate generally includes all probate and non-probate assets owned at death. Life insurance payable to the estate or owned by the decedent is included. Most annuities and some property transferred within three years of death are also included.
9. Estate Deductions – On the estate tax return, the executor may deduct funeral expenses, last medical expenses, debts, the marital and charitable deduction and the state death tax deduction. The balance will be subject to the unified credit for the applicable exclusion amount. Any excess estate value over the applicable $5.12 million exclusion in 2012 may be subject to tax at 35%.
10. Filing IRS Form 706 – An estate tax return will be required if the estate exceeds the applicable exclusion amount of $5,120,000 in 2012. It also is required in order to preserve a deceased spousal unused exclusion amount. Therefore, many married couples with fairly modest estates may choose to file IRS Form 706 when the first spouse passes away.
11. Generation Skipping Transfer Tax (GSTT) – An additional transfer tax may be applicable for distributions to a person who is two or more generations below the generation of the donor. A grandchild or great-grandchild is a typical skip person for GSTT purposes. The GSTT of 35% may be applicable if a direct skip, taxable distribution or taxable termination is in excess of the applicable exclusion amount.
12. Income Taxes on an Estate – If an estate has $600 or more of gross income or a beneficiary who is a nonresident alien, then an IRS Form 1041 income tax return is required. In addition, the estate must send Schedule K-1 (Form 1041) to beneficiaries of the estate. These beneficiaries may be required to include income, deductions and credits in their personal IRS Form 1040 Tax Return.
The IRS has announced the Applicable Federal Rate (AFR) for December of 2011. The AFR under Sec. 7520 for the month of December will be 1.6%. The rates for November of 1.4% or October of 1.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.
Businesses would also benefit with the same reduction on the first $5 million in taxable payroll. This provision may benefit 98% of U.S. businesses.
The White House proposes paying for this provision through a surtax on adjusted gross incomes in excess of $1 million. Single persons and couples with incomes over that amount would pay a 3.25% surtax on the excess income.
Senate Minority Leader Mitch McConnell (R-KY) responded on November 29 with a Republican bill. His plan would extend the current reduction from 6.2% to 4.2% for employees during 2012.
McConnell proposes three different methods to cover the costs of his bill. First, there would be a three year pay freeze on salaries of both Congress and all federal civil servants. Second, as federal workers retired, for every three retirees, only one replacement worker would be hired. This will continue until the federal work force has been reduced by 10%.
Third, individuals with million dollar plus incomes still qualify for Medicare and unemployment benefits. McConnell proposes requiring those individuals to pay their full premium for Medicare and to no longer be qualified for unemployment benefits.
Editor's Note: Senate Majority Leader Harry Reid (D-NV) indicated that he and Sen. McConnell will meet to negotiate over the differences in the bills. Both Reid and McConnell are hopeful that a compromise bill can be passed by mid-December. McConnell stated, "In all likelihood, we will agree to continue the current payroll tax relief for another year."
Statutory Executor Must Face Tax Court
In Estate of Jane H. Gudie v. Commissioner; 137 T.C. No.13; No. 4089-10 (29 Nov 2011), the Tax Court determined that a niece was a statutory executor and that a notice of deficiency was properly sent.
Decedent Jane Gudie created the "Jane Henger Gudie Living Trust" on July 17, 1991. On January 19, 1999, she appointed niece Mary Norberg as co-trustee. The two trust beneficiaries were Norberg and niece Patricia Lane. Upon the demise of Gudie, both would act as successor trustees.
On February 9, 1999, Gudie and the nieces created a private annuity agreement that was transferred in exchange for a $3 million note by each niece. The annuity payment was deferred for four years until 2003 and would commence on February 9 of that year at $937,483 per year.
On February 9, 2003, the agreement was rolled over into a new agreement with a four year deferral. Ms. Gudie passed away on June 14, 2006 and no payments were ever made under the agreement.
Norberg continued to serve as trustee of the living trust but refused formal appointment by the California court as executrix. She did sign IRS Form 706 and submitted a timely return. However, the return claimed a deduction of $8.6 million for the notes to the two nieces and stated that there was no federal estate tax payable. Each niece received an inheritance of approximately $3.4 million.
The IRS audited the return and issued an initial deficiency that was later increased to $4,972,876.30. In addition, the IRS assessed an accuracy-related penalty of $994,575.76.
The court noted that it would need to determine whether there was jurisdiction to resolve the contested IRS deficiency. Ms. Norberg claimed that the notice was improperly issued because she was not a fiduciary as required by Sec. 6212(b)(3). Norberg claimed that the failure of the California court to make a formal appointment of her as executrix invalidated the notice to her.
The Tax Court noted that Norberg had actual or constructive receipt of the trust property. Under Sec. 2203, a person with actual or constructive possession qualifies as the executor without formal appointment.
Norberg also signed an IRS Form 706 Estate Tax Return. She did not give the IRS a notice of termination and responded to the notice of deficiency. Therefore, the Tax Court is deemed to have jurisdiction over the matter.
Editor's Note: This appears to be a "bad facts" case because no payments were ever made on the claimed private annuity. Given these facts, it is understandable that Norberg hoped to avoid a trial in Tax Court on the merits.
IRS Publication 950 on Estate and Gift Taxes
The IRS recently released Publication 950, Introduction to Estate Gift Taxes. It provides a very general overview for the public and many professional advisors with respect to estate and gift taxes. The publication is a useful and concise description of the changes that apply in 2012.
1. Unified Credit – The unified credit on the basic exclusion for 2012 will be $1,772,800. This will exempt an estate of $5,120,000 from tax.
2. DSUE Amount – Under the principal of marital portability, the basic exclusion amount of $1,772,800 may be augmented by the unused exclusion amount of the last deceased spouse who passes away in 2011 or 2012.
3. Gift Annual Exclusion – The annual exclusion for present interest gifts for 2012 will be $13,000. The exclusion will not apply for gifts of a future interest.
4. Permitted Gifts – There are several categories of gifts that are permitted without payment of gift tax. These include an unlimited transfer for outright gifts to spouse, gifts to a qualified charitable organization, payments of tuition to an educational institution, or payments of qualified medical expenses to a hospital or other medical institution.
5. Gift Splitting – If one spouse of a married couple makes a gift to an individual, the two may file an IRS Form 709 Gift Tax Return and report one-half of the gift.
6. Gift Tax Unified Credit – The gift tax return will require determining taxable gifts and then a reduction by the unified credit. After adding up the amount of the gifts and reducing the amount by a marital deduction, charitable deductions, educational exclusions or medical exclusions, the $13,000 annual exclusion is applied first. This is a per-donor, per-donee exclusion. The remaining amount will be covered by the unified credit. If the full amount of unified credit is exceeded, then gift tax at a rate of 35% will be applicable on the excess.
7. Gift Tax Return Filing – The gift tax return is generally required if there are gifts to a non-spouse that are over the annual exclusion, a married couple are splitting gifts, there is a gift of a future interest or there is a gift to a spouse of an interest in property that will be ended by a future event.
8. Gross Estate – The gross estate generally includes all probate and non-probate assets owned at death. Life insurance payable to the estate or owned by the decedent is included. Most annuities and some property transferred within three years of death are also included.
9. Estate Deductions – On the estate tax return, the executor may deduct funeral expenses, last medical expenses, debts, the marital and charitable deduction and the state death tax deduction. The balance will be subject to the unified credit for the applicable exclusion amount. Any excess estate value over the applicable $5.12 million exclusion in 2012 may be subject to tax at 35%.
10. Filing IRS Form 706 – An estate tax return will be required if the estate exceeds the applicable exclusion amount of $5,120,000 in 2012. It also is required in order to preserve a deceased spousal unused exclusion amount. Therefore, many married couples with fairly modest estates may choose to file IRS Form 706 when the first spouse passes away.
11. Generation Skipping Transfer Tax (GSTT) – An additional transfer tax may be applicable for distributions to a person who is two or more generations below the generation of the donor. A grandchild or great-grandchild is a typical skip person for GSTT purposes. The GSTT of 35% may be applicable if a direct skip, taxable distribution or taxable termination is in excess of the applicable exclusion amount.
12. Income Taxes on an Estate – If an estate has $600 or more of gross income or a beneficiary who is a nonresident alien, then an IRS Form 1041 income tax return is required. In addition, the estate must send Schedule K-1 (Form 1041) to beneficiaries of the estate. These beneficiaries may be required to include income, deductions and credits in their personal IRS Form 1040 Tax Return.
Applicable Federal Rate of 1.6% for December – Rev. Rul. 2011-31; 2011-49 IRB 1 (17 Nov. 2011)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2011. The AFR under Sec. 7520 for the month of December will be 1.6%. The rates for November of 1.4% or October of 1.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.
Published December 2, 2011
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