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To file or not to file a gift tax return, that is the question
If you made gifts last year you may be wondering if you need to file a gift tax return. The short answer: There are many situations when it’s necessary (or desirable) to file Form 709 — “United States Gift (and Generation-Skipping Transfer) Tax Return” — even if you’re not liable for any gift tax. Let’s take a closer look at the reasons why.
What gifts are considered nontaxable?
The federal gift tax regime begins with the assumption that all transfers of property by gifts (including below-market sales or loans) are taxable. It then sets forth several exceptions. Nontaxable transfers that need not be reported on Form 709 include:
Gifts of present interests within the annual exclusion amount ($17,000 per donee in 2023, up from $16,000 in 2022),
Direct payments of qualifying medical or educational expenses on behalf of an individual,
Gifts to political organizations and certain tax-exempt organizations,
Deductible charitable gifts,
Gifts to one’s U.S.-citizen spouse, either outright or to a trust that meets certain requirements, and
Gifts to one’s noncitizen spouse within a special annual exclusion amount ($175,000 in 2023, up from $164,000 in 2022).
If all your gifts for the year fall into these categories, no gift tax return is required. But gifts that don’t meet these requirements are generally considered taxable — and must be reported on Form 709 — even if they’re shielded from tax by the federal gift and estate tax exemption ($12.92 million in 2023, up from $12.06 million in 2022).
Are there tax traps to be aware of?
If you make gifts during the year, consider whether you’re required to file Form 709. And watch out for these common traps:
Future interests. The $17,000 annual exclusion applies only to present interests, such as outright gifts. Gifts of future interests, such as transfers to a trust for a donee’s benefit, aren’t covered, so you’re required to report them on Form 709 even if they’re less than $17,000 in 2023 ($16,000 in 2022).
Spousal gifts. As previously noted, gifts to a U.S.-citizen spouse need not be reported on Form 709. However, if you make a gift to a trust for your spouse’s benefit, the trust must 1) provide that your spouse is entitled to all the trust’s income for life, payable at least annually, 2) give your spouse a general power of appointment over its assets and 3) not be subject to any other person’s power of appointment. Otherwise, the gift must be reported.
Gift splitting. Spouses may elect to split a gift to a child or other donee, so that each spouse is deemed to have made one-half of the gift, even if one spouse wrote the check. This allows married couples to combine their annual exclusions and give up to $34,000 for 2023 (up from $32,000 for 2022) to each donee. To make the election, the donor spouse must file Form 709, and the other spouse must sign a consent or, in some cases, file a separate gift tax return. Keep in mind that, once you make this election, you and your spouse must split all gifts to third parties during the year.
The deadline to file Form 709 for 2022 is April 18. Please contact us if you’re unsure of whether you need to file a gift tax return this year.
© 2023
Provide your heirs the option of creating an inheritor’s trust
Even though it may not be top of mind when you’re developing or revising your estate plan, it’s important to consider how bequeathing assets to your family might affect them. Why? Because when your heirs receive their inheritance, it becomes part of their own taxable estates. Giving a loved one permission to create an inheritor’s trust can help avoid this outcome.
The trust in action
In a nutshell, an inheritor’s trust allows your loved one to receive the inheritance in trust, rather than as an outright gift or bequest. Thus, the assets are kept out of his or her own taxable estate. Having assets pass directly to a trust benefiting an heir not only protects the assets from being included in the heir’s taxable estate, but also shields them from other creditor claims, such as those arising from a lawsuit or a divorce.
Because the trust, rather than your family member, legally owns the inheritance, and because the trust isn’t funded by the heir, the inheritance is protected. The reason is because everything you gift or bequeath to the trust (including growth and income from the trust) is owned by the trust, and therefore can’t be treated as community property. An inheritor’s trust can’t replace a prenuptial or postnuptial agreement, but it can provide a significant level of asset protection in the event of divorce.
With an inheritor’s trust, your heir can also realize wealth building opportunities. If you fund an inheritor’s trust before you die, your loved one can use a portion of the money to, for example, start a new business. A prefunded inheritor’s trust can also own the general partnership interest in a limited partnership or the voting interest in a limited liability company or corporation. If you decide to fund the trust now, your initial gift to the trust can be as little or as much as you like.
Talk to your heirs first
As you draft or revise your estate plan and consider who to pass your assets to, it’s a good idea to talk to family members first. Determine if they would accept the bequests and then inform them of their option of creating an inheritor’s trust. Turn to us to help determine whether an inheritor’s trust is right for your situation.
© 2023
Reading the tea leaves: Potential tax legislation in the new Congress
The 2022 mid-term election has shifted the scales in Washington, D.C., with the Democrats no longer controlling both houses of Congress. While it remains to be seen if — and when — any tax-related legislation can muster the requisite bipartisan support, a review of certain provisions in existing laws may provide an indication of the many areas ripe for action in the next two years.
Retirement catch-ups at risk
The SECURE 2.0 Act, enacted at the tail end of 2022, reportedly includes a technical drafting error that jeopardizes the abilities of taxpayers to make catch-up contributions to their pre-tax or Roth retirement accounts. According to the American Association of Pension Professionals and Actuaries, under the existing statutory language, no participants will be able to make such contributions beginning in 2024.
The American Retirement Association has brought the issue to the attention of the U.S. Department of Treasury and the Joint Committee on Taxation (JCT), a nonpartisan congressional committee that assists with federal tax legislation. While the JCT has apparently acknowledged that the language does appear to be a drafting error, a timely correction is far from guaranteed.
Indeed, such “technical corrections” legislation once passed Congress routinely. However, it has proven more challenging in the political climate of the last decade or so. For example, it took three years for Congress to pass minor corrections to the first SECURE Act. And a glitch in the Tax Cuts and Jobs Act of 2017 (TCJA) affecting eligibility for bonus depreciation wasn’t corrected until the CARES Act became law in 2020.
Expiring tax provisions
Tax-related legislation often includes so-called “sunset” dates — the dates tax provisions will expire, absent congressional action. For example, the Consolidated Appropriations Act, enacted in 2021, boosted the allowable deduction for business meals from 50% to 100% for 2021 and 2022. In 2023, the deduction limit returned to 50%.
A JCT report released in January 2023 highlights numerous significant provisions that are scheduled to expire in coming years without congressional action to extend them. For example, several tax credits related to renewable and alternative energy will expire at the end of 2024.
But 2026 is the year when some of the most wide-reaching and particularly valuable provisions — many of them created or modified by the TCJA — are set to disappear. They include:
Lower individual tax rates,
Enhancements to the Child Tax Credit (CTC),
Health insurance premium tax credit enhancements,
The New Markets Tax Credit,
The employer credit for paid family and medical leave,
The Work Opportunity Tax Credit,
The increase in the exemption amount and phaseout threshold for the alternative minimum tax,
The increase in the standard deduction,
The suspension of the miscellaneous itemized deduction,
The suspension of the limit on itemized deductions,
The income exclusion for employer payments of student loans,
The suspension of the deduction for personal exemptions,
The limit on the deduction for qualified residence interest,
The suspension of the deduction for home equity interest,
The limit on the deduction for state and local taxes,
The qualified business income deduction,
The deduction percentages for foreign-derived intangible income and global intangible low-taxed income,
Empowerment zone tax incentives, and
The increase in the federal gift and estate tax exemption.
At the end of 2026, bonus depreciation also is slated for elimination. In fact, the allowable deduction already has dropped from 100% to 80% of the cost of qualified assets in 2023. The limit will drop by 20% each year until vanishing in 2027.
Expired tax provisions
Several notable provisions expired or changed at the end of 2021, despite chatter in Washington about the possibility of extensions. For example, as of 2022, taxpayers can no longer deduct Section 174 research and experimentation expenses, including software development costs, in the year incurred. Rather, they must amortize these expenses over five years (or 15 years if incurred outside of the United States). In addition, the calculation of adjusted taxable income for purposes of the limit on the business interest deduction has changed, potentially reducing the allowable deduction for some taxpayers.
Individuals also saw the end of several tax provisions at the end of 2021, including the:
CTC expansions created by the American Rescue Plan for some taxpayers,
Expanded child and dependent care credit,
Increased income exclusion for employer-provided dependent care assistance,
Treatment of mortgage insurance premiums as deductible mortgage interest,
Charitable contribution deduction for non-itemizers, and
Increased percentage limits for charitable contributions of cash.
It’s possible that some of these could be included in any “extender” legislation Congress might consider this year or next.
The FairTax Act
Unlikely to see much progress, however, is the proposed FairTax Act. Although it has the support of a group of U.S. House Republicans, GOP House Speaker Kevin McCarthy has stated that he doesn’t support the legislation.
The bill would eliminate most federal taxes — including individual and corporate income, capital gains, payroll and estate taxes — as well as the IRS. It would replace the taxes with a 23% federal sales tax on goods and services, which couldn’t be offset by deductions or tax credits. The plan has been around for two decades and has yet to garner a floor vote, an indicator of its odds this time around — especially with Democrats in control of the U.S. Senate.
Ear to the ground
Congress may not feel a sense of urgency to address tax provisions that aren’t set to expire for three years, but the catch-up contribution error would have substantial repercussions for many taxpayers in less than a year. We’ll let you know if lawmakers take action on this or any other important tax matters that could affect you.
© 2023
Look to a SWOT analysis to make better HR decisions
Many business owners spend most of their time developing strategic plans, overseeing day-to-day operations and, of course, putting out fires. Yet an underlying source of both opportunity and trouble can be human resources (HR).
Think about it: The performance of your HR department determines who works for you, how well employees are supported, and to what extent the business complies with laws and regulations pertaining to employment and benefits.
One way to ensure that your strategic HR decisions are likely to yield positive, cost-effective results is to apply a strengths, weaknesses, opportunities and threats (SWOT) analysis.
Strengths and weaknesses
When used for general strategic planning, a SWOT analysis typically begins by identifying strengths — usually competitive advantages or core competencies that generate value, such as a strong sales force or exceptional quality of products or services.
Next, you pinpoint weaknesses. These are factors that limit business performance, which are often revealed in comparison with competitors. General examples include a negative brand image because of a recent controversy or an inferior reputation for customer service.
When applying a SWOT analysis to HR, think about that department’s core competencies. These include filling open positions, administering benefits, and supporting employees who need help or are in crisis. What are its strengths? What are its weaknesses?
You can use various HR metrics to put a finer point on these relatively broad questions. For example, calculate “time to hire” to determine how long it’s taking to fill open positions and “early turnover” to see how many new hires you’re losing in the first year of employment.
External conditions
The next step in a typical SWOT analysis is identifying opportunities and threats. Opportunities are favorable external conditions that could generate a worthwhile return if the business acts on them. Threats are external factors that could inhibit performance or undermine strategic objectives.
When differentiating strengths from opportunities, or weaknesses from threats, ask yourself whether an issue would exist if your company didn’t. If the answer is yes, the issue is external and, therefore, an opportunity or threat. Examples include changes in hiring demographics or government regulations regarding benefits.
How to apply it
Let’s say you determine, by benchmarking yourself against similar businesses, that “time to hire” is a strength. This means that your HR staff is skilled at placing targeted, effectively worded ads; working well with recruiters; and interacting in a timely, efficient and positive manner with applicants.
In today’s environment, a strong hiring mechanism is undoubtedly a competitive advantage. If hiring and retention are weaknesses, however, you could be headed toward a crisis if you lose too many employees — particularly in today’s tight job market.
Opportunities and threats are important as well. For example, if your company seeks to strengthen employee retention through expanded benefits, you’ll need to anticipate the opportunities and challenges for your HR staff. You may need to invest in training and upskilling to make sure that they can effectively communicate with employees about the broader package and administer the specific benefits therein.
And there are likely external threats to consider. For example, an aggressive competitor may begin poaching your employees. Evolving tax regulations and compliance requirements for health and retirement benefits could catch your HR staff off-guard if they’re unaware of the changes.
Advisable and feasible
Sometimes business owners assume that HR will run itself while they dedicate themselves to growing the company. But the truth is that HR departments need to set strategic goals, just like the business does. A SWOT analysis can help ensure that these goals are advisable and feasible.
© 2023
Is your revocable trust fully funded?
A revocable trust — sometimes known as a “living trust” — can provide significant benefits. They include the ability to avoid probate of the assets the trust holds and facilitating management of your assets in the event you become incapacitated. To obtain these benefits, however, you must fund the trust — that is, transfer title of assets to the trust or designate the trust as the beneficiary of retirement accounts or insurance policies.
Inventory your assets
To the extent that a revocable trust isn’t funded — for example, if you acquire new assets but fail to transfer title to the trust or name it as the beneficiary — those assets may be subject to probate and will be beyond the trust’s control in the event you become incapacitated.
To avoid this result, periodically take inventory of your assets. This can better ensure that your trust is fully funded.
Max out FDIC insurance coverage
Another important reason to fund your trust is the ability to maximize FDIC insurance coverage. Generally, individuals enjoy FDIC insurance protection on bank deposits up to $250,000.
But with a properly structured revocable trust account, it’s possible to increase that protection to as much as $250,000 per beneficiary. So, for example, if your revocable trust names five beneficiaries, a bank account in the trust’s name is eligible for FDIC insurance coverage up to $250,000 per beneficiary, or $1.25 million ($2.5 million for jointly owned accounts).
Note that FDIC insurance is provided on a per-institution basis, so coverage can be multiplied by opening similarly structured accounts at several different banks. FDIC rules regarding revocable trust accounts are complex, especially when a trust has more than five beneficiaries, so talk to us to maximize insurance coverage of your bank deposits.
© 2023
Sailing a steady ship in today’s interesting economy
Business owners: If you’re having trouble reading the U.S. economy, you’re not alone. On the one hand, the January 2023 jobs report revealed that the unemployment rate had fallen to 3.4%, its lowest level in 54 years. And inflation, while still a concern, has moderated in most sectors — staving off fears of a recession in the immediate future.
And yet concern remains about whether the economy will grow or suddenly stall. And the Fed is expected to continue raising interest rates, meaning the battle against inflation is far from won. What can you do, strategically, to neither under- nor overreact to this “interesting” situation? Sail a steady ship.
Save a little, spend a little
In a faltering economy, business owners tend to want to curb spending. Conversely, during boom times, companies are more apt to spend money to seize opportunities. Right now, the best approach may be a little of both.
Enlist employees to help cut expenses that don’t foster your business’s long-term success. Communicate regularly with staff about the need to curb spending and celebrate those who come up with effective cost-control measures.
That said, now isn’t the time to stop investing in new assets, people or technologies if they’re essential to your operations or could sharpen your company’s competitive edge.
Prioritize expenditures
A good exercise to undertake at least annually, if not quarterly, is to make a list of all expenses over the course of a year and separate them into three categories: “must have,” “nice to have” and “don’t need.” Ask your leadership team for input on which expenses should fall under each category.
Another idea for small to midsize businesses: Have a “check-signing social” in which you gather department managers to discuss major cash outlays while you sign checks or otherwise remit payments. An event like this lets managers know that you’re aware of their spending while giving them a chance to explain their rationale for the spending.
Know your suppliers
In tough economic times, businesses must keep a close eye on the stability of suppliers. If a major vendor goes under, you could be left in the lurch.
You might not have to worry quite as much about insolvencies in today’s environment, but don’t let your guard down. Nurturing good relationships with suppliers is particularly vital with supply chain issues continuing to trouble many industries. Maintain strong communication. Every so often, you may want to conduct a supplier audit to collect key data points regarding each one’s performance.
Watch out for fraud
No matter what the state of the economy, dishonest employees and outside criminals may seize the opportunity to commit fraud. Cash and asset misappropriation, as well as outright theft, are among the most prevalent types of “traditional” fraud. Cybercrimes are also increasingly common today. Hackers can steal from you or shut down your operations from hundreds or thousands of miles away.
Reduce typical fraud risks by implementing a solid system of internal accounting controls, such as segregating duties and requiring a second signature on checks over a certain amount. Also, if you’re hiring, conduct thorough background checks within legal parameters. Finally, invest time and money in cybersecurity measures to protect your systems and data.
Good news, bad news
The good news is the U.S. economy has generally rebounded well from the many changes and challenges of the pandemic. The bad news is, no one is completely sure where we’re headed. Our firm can help you gather and analyze the right financial data to make strong strategic decisions.
© 2023
Joint ownership isn’t right for all estate plans
Generally speaking, owning property jointly benefits an estate plan. Indeed, joint ownership offers several advantages for surviving family members. However, there are exceptions and it’s not the solution for all estate planning problems.
2 types of joint ownership for spouses
As the name implies, joint ownership requires interests in property by more than one party. The type of joint ownership depends on the wording of the title to the property.
From a legal standpoint, there may be two main options for married couples:
Joint tenants with rights of survivorship (JTWROS). This is the most common form and often is used for a personal residence or other real estate. With JTWROS, one spouse’s share of the property can be sold without the other spouse’s consent. The property is subject to the reach of creditors of all owners.
Tenancy by the entirety (TBE). In this case, one spouse’s share of the property in some states can’t be sold without the other spouse joining in. But TBE offers more protection from creditors in noncommunity property states if only one spouse is liable for the debt. Currently, a TBE is available in slightly more than half the states.
Property may also be owned as a “tenancy in common.” With this form of ownership, each party has a separate transferable right to the property. Generally, this would apply to co-owners who aren’t married to each other, though in certain situations married couples may opt to be tenants in common.
Joint ownership plusses and minuses
The main estate planning attraction of joint ownership is that the property avoids probate. Probate is the process, based on prevailing state law, whereby a deceased person’s assets are legally transferred to the beneficiaries. Depending on the state, it may be time-consuming or costly — or both — as well as being intrusive. Jointly owned property, however, simply passes to the surviving owner.
Joint ownership is a convenient and inexpensive way to establish ownership rights. But the long-standing legal concept has its drawbacks, too. Some disadvantages of joint ownership relate to potential liability for federal gift and estate tax. Comparable rules may also apply on the state level.
For starters, if parties other than a married couple create joint ownership, it generally triggers a taxable gift, unless each one contributed property to obtain a share of the title. However, for a property interest in securities or a financial account, there’s no taxable gift until the other person actually makes a withdrawal.
Lessons to be learned
Joint ownership can be a valuable estate planning tool, especially because it avoids probate. However, this technique shouldn’t be considered a replacement for a will. We can help you coordinate joint ownership with other aspects of your estate plan.
© 2023
3 ways your business can uncover cost cuts
Every business wants to find them, but they sure don’t make it easy. We’re talking about cost cuts: clear and substantial ways to lower expenses, thereby strengthening cash flow and giving you a better shot at strong profitability.
Obvious places to slash costs — such as wages, benefits, and overhead — often aren’t a viable option because the very stability of your operation may depend on them. But there might be other ways to lower expenses if you dig deeply enough. Here are three ways to perhaps uncover some cost-cutting opportunities.
1. Study your suppliers
Many companies find that just a few of their suppliers account for most of their spending. By identifying these vendors and consolidating spending with them, you may be able to put yourself in a stronger position to negotiate volume discounts. Consolidating your supplier base also tends to streamline the administrative work associated with purchasing.
On a related note, how well do you know your suppliers? One way to ensure you’re working off an abundance of relevant information is to conduct a supplier audit. This is a formal process for collecting key data points regarding a supplier’s performance to manage quality control and ensure you’re getting an acceptable return on investment.
2. Go green
Given the already noticeable effects of climate change, operating an environmentally friendly company has become imperative. But going green can, under the right circumstances, save you money as well.
Refurbished computers or office furniture often can be found at substantial savings compared with their brand-new counterparts. If you no longer need equipment, computing devices, or office furniture, you may be able to sell them to a liquidator or dealer. You’ll not only bring in some money on the sales but also free yourself of the need to store and maintain the items.
In addition, look at your facilities. If you own the property on which you operate, research energy-efficient upgrades to the HVAC and lighting systems. Naturally, making such upgrades will cost you money initially, but you may be able to lower energy costs over the long term. What’s more, you might qualify for tax credits for installing certain items.
3. Explore outsourcing, tech upgrades
Many business owners try to cut costs by doing everything in-house — from accounting to payroll to HR. But if the staffing and expertise just aren’t there, these companies often suffer losses because of mistakes and mismanagement. Although you’ll obviously incur costs when outsourcing, the time and labor it saves you could end up being a net gain.
Carefully chosen and implemented technology upgrades can serve a similar purpose. Many products on the market today are so robust and fully featured, upgrading to them is almost comparable to outsourcing.
Again, you’ll need to spend money in the near term but, eventually, you could lower the cost of doing business. For example, the right customer relationship management system can help you generate sales leads and focus on your most profitable existing customers.
Snip, snip, snip
Lowering expenses is often difficult, but looking for ways to do it is an important activity to undertake regularly. This is particularly true now that inflation is a major factor in the economic landscape. Please contact us for help identifying and lowering your company’s most “cuttable” costs.
© 2023