Tax Implications of a Medicaid Personal Service Contract

personal services contract income is taxable
The money you received from that personal services contract you signed has to be reported to the IRS.

Personal services contracts are very popular in long-term care planning – especially when Medicaid benefits are sought. But they may not be the best solution.

Long-term care in a nursing home (also called a rehabilitation center) is expensive. Many people who are receiving or will be receiving long-term care have little in savings and face impending impoverishment. Medicaid rules allow certain planning measures that may preserve some of the applicant’s assets for his or her family.

One of these measures is known as a personal service or lifetime care contract. This legal contract specifies the compensation a family member will receive in return for providing lifetime personal care and oversight of professional care for the nursing home resident. The Medicaid rules and the family situation will dictate how much compensation can be paid.

In most states, the caretaker is paid in installments as the care is provided. But, in Florida, the caretaker can receive the compensation as a lump sum payment. The caretaker receives the compensation up front, but is legally obligated to provide care for as long as the nursing home resident is alive.

This lump sum payment is considered compensation by the IRS and is taxable income to the caretaker when received.

I’m going to repeat that because it’s so important:

This lump sum payment is considered compensation by the IRS and is taxable income to the caretaker when received.

The Internal Revenue Code § 61 defines gross income as “…all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items…”

Some people think that just because they don’t receive a 1099 or W-2 for certain income, they don’t have to report it on their tax return. Wrong! Just because the IRS may not be notified of the payment doesn’t mean it doesn’t have to be reported. All income – even illegal income – must be reported or you’re committing tax fraud.

If you’ll be receiving compensation due to a personal service contract, be sure to talk to your tax professional before signing the contract because the tax consequences of receiving a lump sum payment may be more detrimental to you than it is beneficial to the potential Medicaid applicant. An Elder Law attorney may be able to provide your family with other alternatives.

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***Want to learn more about how to protect your family from the government, lawsuits, accidental disinheritance, or nursing homes? Click THIS LINK to book a seat at one of our upcoming fun and educational workshops.***

State Taxes on Retirees Differ by Type of Retirement Income

Retirement income taxes due
Every state has its own method of taxing certain types of retirement income.

Did you know that based on the state in which you decide to retire, your state income tax bill could vary by several thousands of dollars? However, it’s not only a state’s tax rate that’s important. In addition, the type of income you get in retirement, frequently has a greater effect on your state tax liability than the tax rate you pay.

That’s because each state has its own method of taxing certain types of retirement income, explains Kiplinger’s article “State Taxes on Retirees Differ by Types of Retirement Income.” The article examines the way in which states tax two common forms of retirement income: Social Security benefits and retirement plan payouts.

First, let’s look at the taxes on Social Security benefits. While the federal government taxes up to 85% of Social Security benefits, most states don’t tax Social Security benefits at all. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don’t tax these benefits because they simply don’t have an income tax. New Hampshire and Tennessee only tax interest and dividends.

Social Security benefits are exempt from tax in the District of Columbia and 28 states (AL, AZ, AR, CA, DE, GA, HI, ID, IL, IN, IA, KY, LA, ME, MD, MA, MI, MS, NJ, NY, NC, OH, OK, OR PA, SC, VA, and WI). The remaining 13 states may tax some of Social Security benefits. New Mexico, Utah, and West Virginia currently tax Social Security benefits to the same extent they are taxed on the federal return. However, West Virginia will begin phasing out its tax on Social Security benefits in 2020. Taxation of Social Security benefits in the remaining states (CO, CT, KS, MN, MO, MT, NE, ND, RI and VT) depends on a person’s income and on your filing status in many instances.

There are also some states that totally exempt Social Security for taxpayers under specific income thresholds. For example, Kansas says that Social Security benefits are completely exempt from state tax, if your federal adjusted gross income (AGI) is $75,000 or less, regardless of your filing status.  Beginning this year in North Dakota, single residents can fully exclude Social Security benefits from state taxable income, if their federal AGI is $50,000 or less. Married North Dakota residents filing a joint return can claim the exclusion with a federal AGI of $100,000 or less. Missouri has partial exemptions for joint filers with federal AGI above $100,000 and all other filers with AGI over $85,000. Missouri taxpayers with income below these thresholds can get a full state tax exemption. The rest of the states have specific formulas for deciding whose Social Security benefits are taxed and to what extent.

State taxation of payouts from retirement plans, such as pensions, IRAs and 401(k)s, can be more complex. The states without an income tax (FL, AK, NV, SD, TX, WA, WY) or that just tax interest and dividends do not tax retirement plan payouts. However, in other states, there are a wide variety of rules. Mississippi and Pennsylvania generally don’t tax any retirement income. However, California, Washington, D.C., Nebraska, and Vermont have slight or no tax breaks for retirement plan payouts. Many of the states in between offer credits or deductions that can run from a few hundred dollars to tens of thousands of dollars. Georgia has the largest tax break with a $65,000 retirement-income exclusion for anyone age 65 and older (couples can shelter up to $130,000).

To make it more complicated, some states differentiate based on the type of retirement plan. Take Kansas, for example. It exempts income from government pensions but taxes private pension payouts. Alabama taxes defined-contribution plan distributions but not private pension payouts.  Beginning this year, North Dakota exempts military retirement pay but not other retirement plan payouts.

But keep in mind that a state’s or city’s property and sales taxes could outweigh any benefit you receive by paying lower or no income taxes. And some states will tax your estate and/or your beneficiaries when you die. If you’re considering moving to another state due to taxes, meet with an experienced tax professional in that state to get a clearer picture of your particular situation.

Reference: Kiplinger (October 28, 2019) “State Taxes on Retirees Differ by Types of Retirement Income”

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Can I Deduct Long-Term Care Expenses on My Tax Return?

Long-term care expenses may be tax deductible
You can deduct unreimbursed costs for long-term care as a medical expense, including eligible expenses for in-home, assisted living and nursing-home services. But certain requirements must be met.

If you need long-term care, you may be able to deduct some of your long-term care expenses on your tax return. If you purchased a long-term-care insurance policy to cover the costs, you may also be able to deduct some of that. Retirement planning entails long-term care, so it’s critical to know how these tax deductions can help offset overall costs.

Kiplinger’s article, “Deduct Expenses for Long-Term Care on Your Tax Return,” explains that you can deduct unreimbursed costs for long-term care as a medical expense, including eligible expenses for in-home, assisted living and nursing-home services. However, certain requirements must be met. The long-term care must be medically necessary and can include preventive, therapeutic, treating, rehabilitative, personal care, or other services. The cost of meals and lodging at an assisted-living facility or nursing home is also included, IF the main reason for being there is to get qualified medical care.

The care must also be for a chronically ill person and given under a care plan prescribed by a licensed health care practitioner. A person is “chronically ill,” if he or she can’t perform at least two activities of daily living—like eating, bathing or dressing—without help for at least 90 days. This condition must be certified in writing within the past year. A person with a severe cognitive impairment is also deemed to be chronically ill, if supervision is needed to protect his or her health and safety.

To claim the deduction, you must itemize deductions on your tax return. Itemized deductions for medical expenses are only allowed to the extent they exceed 10% of your adjusted gross income in 2019. An adult child can claim a medical expense deduction on his own tax return for the cost of a parent’s care, if he can claim the parent as a dependent.

The IRS also permits a limited deduction for certain long-term-care insurance premiums. You must submit an itemized deduction for medical expenses, and only premiums exceeding the 10% of AGI threshold are deductible in 2019. Further, the insurance policy itself must satisfy certain requirements for the premiums to be deductible. For instance, it can only cover long-term-care services. This limitation means the deduction only applies to traditional long-term-care policies, rather than hybrid policies that combine life insurance with long-term-care benefits. The deduction has an age-related cap.

These deductions are typically not useful for people in their fifties or sixties but can be valuable for people in their seventies and older. That’s because income tends to drop in retirement, so the deductions can have a greater overall impact on tax liability. As you age, you’re also more likely to have medical expenses exceeding 10% of AGI. Those deductions could move your total itemized deductions past the standard deduction amount. The chances of satisfying the medical necessity requirements for the care costs deduction also increase with age, and the cap for the premium deduction levels off after age 70.

Reference: Kiplinger (September 4, 2019) “Deduct Expenses for Long-Term Care on Your Tax Return”

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What’s the Difference Between a Quitclaim Deed and a Warranty Deed?

A quitclaim deed provides no protection to the buyer
A quitclaim deed provides no protection to the buyer.

When you buy, sell, or transfer ownership of a property to another, you need to be aware of what type of deed a property has and whether to use a quitclaim deed or a warranty deed when you transfer your interest in a property to someone else.

Bankrate explains in its recent article, “Quitclaim vs. warranty deed: What you need to know,” that a quitclaim deed is a deed that transfers the actual legal rights to a property (if any exist) that the grantor has to another person. That is, without any representation, warranty, or guarantee. A quitclaim deed gives no guarantee of the title status of a property, any liens against it, or any encumbrances. It really means that you get only what a grantor may have—nothing more. Therefore, if the grantor has nothing, you get nothing.

A quitclaim deed may work well if the grantor indeed has the legal rights to a property, and there are no liens.

Quitclaim deeds are used in safer situations where there’s little question about the ownership interest in a property. They can be used when a person is transferring ownership of real estate to family members. However, a warranty deed is generally used in more complex situations, including when someone is getting a mortgage to buy a home.

With a warranty deed, the seller is guaranteeing that she has a legally defensible ownership interest in the property and can transfer her ownership interest to the buyer.

Warranty deeds are the wiser option when you’re purchasing property. Buyers want to be certain that you own the property, so they want you to sign a warranty deed. If you don’t actually own the property, the buyer can sue for a breach of warranty.

If you’re transferring property to your spouse, child, or your revocable trust agreement as part of an estate plan, a quitclaim deed may be just fine because it accomplishes the change of ownership, but you’re not providing any warranty for the transaction.

Generally, all real estate transactions that are arm’s length transactions should use warranty deeds.

Don’t just rely on a simple fill-in-the-blank quitclaim deed. The deed is actually the least of your concerns; transferring real estate has many income tax, estate tax, gift tax, estate planning, and Medicaid planning implications to the grantor and the grantee. Talk with an estate planning or real estate attorney before potentially making a costly mistake.

Reference: Bankrate (September 4, 2019) “Quitclaim vs. warranty deed: What you need to know”

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How Does the IRS Know if I Gift My Grandchildren Money?

IRS gift of money
It’s pretty simple to avoid paying gift tax, so it doesn’t seem worth the risk of getting caught trying to bend the rules.

A recent nj.com recent post asks, “Will the IRS know if I gift money to my grandchildren?” The article explains that federal and state tax agencies do not have any direct way of knowing how much is being gifted. They rely on taxpayers self-reporting gifts. It’s the honor system.

However, the tax authorities may discover this if you or the recipient are audited, if they match transactions reported for certain assets, or when banks report cash transfers in excess of $10,000. Since it’s pretty simple to avoid paying gift tax, it doesn’t seem worth the risk of getting caught trying to skirt the rules. Understanding the gift tax is the best way to avoid issues.

The IRS stipulates that a gift is “the transfer of property by one individual to another, while receiving nothing, or less than full value, in return.” A gift is never taxable to the recipient, so only the person making the gift has to consider the gift tax.

The amount you can give will not be subject to gift tax if the gift amounts are less than the annual and lifetime exemptions. The annual gift exemption is currently $15,000 per recipient, which means that you can give up to $15,000 each year to an unlimited number of people with no reporting requirement at all.

You’re supposed to complete a U.S. Gift Tax Return (IRS Form 709) if you exceed the exemption, but don’t panic. Although you are required to file a gift tax return, it is highly unlikely any gift tax will be due.

That’s because gifts in excess of the annual exemption offset your lifetime exemption ($11,400,000 per person in 2019), before any gift tax is due.

The IRS can impose penalties if you they discover that you failed to file a gift tax return, even if no gift tax was due. Also note that the gift tax is integrated with the estate tax, which applies to amounts transferred upon your death in excess of your remaining lifetime exemption.

If you’re planning on making a gift to help pay another’s college costs or medical expenses, make the payment directly to the educational or healthcare institution because that payment isn’t considered a gift.

Ask your estate planning lawyer about any state gift, estate and inheritance taxes.

Reference: nj.com (October 1, 2019) “Will the IRS know if I gift money to my grandchildren?”

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Savings Bonds Pitfalls

U.S. Savings Bonds
U.S. Savings bonds (War bonds) have been around since 1941. While few people invest in them now, your parents may own them and they can present some problems at death.

Do you or a loved one own savings bonds? If so, you might want to read this article because you may not know about some of the problems they can create.

For younger people who might not know what a savings bond is, it’s a debt instrument secured by the U.S. government. A debt instrument, also known as a bond, is evidence that you loaned the bond issuer money and are entitled to receive interest and, eventually, the return of the money you loaned. These particular bonds are issued in small amounts, from $25 to $10,000 to individuals.

They were first issued in 1941. At that time, they were called “war bonds” and patriotic advertising was used to induce people to buy them. War bonds – bonds issued by the federal government to help pay for wars, have actually been around since the beginning of our country. But, unlike previous wars, after WWII the bonds never went away; they just got a new name. For a long time, they were very popular gifts for birthdays and weddings, and many large employers offered employees the option to buy savings bonds with part of their paychecks. But their popularity has declined over the years.

Savings bonds used to be issued as small paper certificates (actually, they were printed on card stock) which made them easy to give as gifts or to collect in a safe deposit box. But now they are only issued electronically. Savings bonds are very safe because the payment of interest is guaranteed by our federal government. Of course, because they are so safe, the interest rate on them is very low. When a paper savings bond matures, the holder can cash them in at a local bank (called “redeeming”). Taxes on the interest are due in the year the bond is redeemed.

So, many people over the age of 60 have these paper savings bonds lying around – in desk drawers, in safe deposit boxes, under mattresses, or even stuck in books and in other hidey-holes around their homes. They may be registered in the name of one individual, joint with one or more co-owners, or in the name of an individual with a named beneficiary. If a joint owner or beneficiary is alive when an owner dies, there’s no problem. Just submit some paperwork to get the bond re-issued (electronically) in the correct name. But if the bond is only in the deceased person’s name, or everyone named on the bond is deceased, things get a bit trickier.

Treasurydirect.com has all the rules and forms needed, but the bottom line is that the bonds are subject to your state’s probate laws. If no probate for the rest of the estate is needed under state law and the total redemption value of all the bonds is less than $100,000, you can likely work directly with the Treasury Dept. Otherwise, the bonds will go through your state’s probate process.

Most people try to avoid probate, if they can, to make things easier on their loved ones. So, is there a way to avoid a potential probate if someone owns paper savings bonds? Perhaps. But every change to a paper savings bond now requires that the owner open an online account. Many older people aren’t comfortable with this.

To add a beneficiary, paper bonds can be converted to electronic bonds, and a beneficiary can be named once the bond shows up in the online account. To add a joint owner or change the owner to a revocable living trust – same process, except the Treasury Dept. considers that a change of ownership, and the current owner will owe taxes that year on all the interest accrued to the date of the ownership change. The same goes for ownership changes due to divorce.

And here’s the fun part – the IRS requires YOU, the owner, to keep track of all of that because when you do eventually redeem paper bonds where ownership was changed (maybe years ago), the 1099 you receive from the Treasury will show all of the interest from the original issue date to the final redemption date – and the IRS will be looking for the tax due on the entire amount! And do-it-yourself tax preparation programs, such as TurboTax, don’t have the capability to deal with explanations to the IRS about taxes already paid (as I found out the hard way when I did my Mom’s taxes).

The treasurydirect.com website has a ton of useful information and all the forms you’ll need. Savings bonds certainly serve a purpose for risk-averse investors, but just be aware that the paper form of these bonds can create some headaches. Ask your parents now whether they own any savings bonds – and where they are and whose name is on them – so you don’t have a potentially nasty surprise later on.

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Naming a Trust as the Beneficiary of an IRA

IRA beneficiary form
Sometimes naming your trust as the beneficiary of your IRA is a great idea. Sometimes it’s not.

A frequently used strategy to save for retirement is an IRA. This money is saved to fund retirement, but there’s always the possibility that you’ll die before all the money is withdrawn. That means you must plan for what happens to that money after you are gone. Designating a trust as your IRA beneficiary is one option. It provides you with maximum control over the distribution of your assets after you die.

KTVA.com’s recent article, “How to Name a Trust as Beneficiary of an IRA,” discusses some of the important elements of naming a trust as an IRA beneficiary. Naming a trust as a beneficiary requires careful planning, so work with an experienced estate planning attorney.

Naming a trust as the beneficiary of your IRA gives you much more control over the funds because trusts use written instructions for how and when the money should be paid out. Designating a trust as the beneficiary of an IRA also lets you enjoy the tax benefits of an IRA while still maintaining maximum control of funds.

This is also a good move for a person who wants to leave her IRA to a beneficiary who may need some additional direction, like a minor child, a spendthrift child or spouse, or a person with special needs. Naming a trust as your beneficiary also shields the funds from creditors—a great estate planning strategy if your state doesn’t protect inherited IRAs.

However, naming a trust as a beneficiary of your IRA probably isn’t the best choice if you want your retirement savings to go to your spouse. Spouses who inherit IRAs are able to roll the deceased’s IRA into their own IRA account, tax-free. If you want your spouse to inherit your IRA with no strings attached, designate your spouse as the primary beneficiary of your IRA.

There are several requirements that must be met when designating a trust as the beneficiary of your IRA. They include the following:

  • It must be a valid trust under state law;
  • The trust must be irrevocable (or become so upon your death);
  • The trust’s beneficiaries must be individuals; and
  • The trustee must provide a trust document or certified list of beneficiaries to the IRA’s custodian or trustee by October 31st of the year after your death.

However, there are some drawbacks to doing this: the expense of structuring and maintaining the trust and designating a trust as the beneficiary of your IRA are much more complicated than simply naming a beneficiary of your IRA.

You also forfeit the ability for your spouse to roll over the IRA into his own IRA tax-free. This cancels out some of the tax benefits, because if you didn’t designate a trust as the beneficiary—and the IRA funds just rolled over—the tax-advantaged account would grow more quickly. But it also prevents your spouse from naming his new spouse or lover as the beneficiary on what used to be your IRA.

Keep in mind that just because a trust is named as the beneficiary of an IRA doesn’t mean the assets are transferred to the trust—they shouldn’t be. Instead, they should remain in the IRA to take advantage of the account’s tax benefits until distribution of the assets begins.

To set up a trust as the beneficiary of your IRA, you’ll need the help of a qualified estate planning attorney. Mistakes can be costly.

Reference: KTVA.com (July 15, 2019) “How to Name a Trust as Beneficiary of an IRA”

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Roth IRA Tips and Tricks

Roth IRA
Roth IRAs are powerful tools in your retirement planning arsenal.

There’s a lot that most people don’t know about Roth IRAs, as detailed in the article “9 Surprising Facts About Roth IRAs” from the balance. Some of them may surprise you.

Roth IRA contributions can be used for emergencies. In a perfect world, no one would ever need to use retirement money for anything but retirement, but because Roth contributions are not deductible, they can be withdrawn at any time, for any reason, without taxes or penalties. A Roth IRA can serve as an emergency fund. However, it needs to be noted that the funds you can withdraw do not include amounts that were converted to a Roth IRA or investment gains. Therefore, if you put $5,000 into a Roth IRA that grew to $6,000, you may only withdraw the $5,000 without taxes and penalties.

You might be able to use a non-deductible IRA to fund a Roth. If you make over a certain limit, you can’t contribute to a Roth IRA—or can you? Some people who keep other retirement money inside qualified retirement accounts are permitted to make a non-deductible IRA contribution every year and then convert that into a Roth. This is sometimes called the “backdoor Roth.” However, you’ll need to be careful, and you may need help. In some cases, you can even roll a self-directed IRA back into a company plan, so in future years you could use the backdoor Roth strategy without having to pay taxes on the converted amount. Get a professional to help you with this: mistakes can be expensive!

You may roll after-tax 401(k) contributions into a Roth IRA. Many employer plans let you make after-tax contributions and then, at retirement, these after-tax contributions can be rolled into a Roth IRA. Any investment gain on the after-tax contributions can’t go into the Roth, but the contributions can.

Roth IRAs have no RMDs (Required Minimum Distributions). There aren’t any age requirements for when you take money out, so there are no delayed tax bombs lurking. However, non-spouse heirs will have to take required distributions from an inherited Roth. The nice thing: they will be tax free.

You can contribute to both a SIMPLE IRA and a Roth IRA. As long as your income is within the Roth IRA limits, then you can contribute to both the SIMPLE and the Roth. The contributions to the SIMPLE IRA will be deductible, the Roth contributions will not be. This dual funding strategy lets you reduce taxable income now and have funds in the Roth accumulate for tax-free benefits in retirement. For the self-employed person, who is diligent about saving for retirement, this is a good plan.

Your employer plan may allow Roth contributions. Many 401(k) plans let you make Roth contributions. They are called “designated Roth accounts.” Check with your HR department to see if their plan let you choose which type of contribution to make. Some may be all or nothing, while others let you do some of each.

Age is not the key factor in determining whether or not to use a Roth IRA. The primary deciding factor here is your income bracket, your tax rate now and your expected tax rate during retirement. If your expected tax rate during retirement will be lower, the deductible contributions may be better. If your tax rate during retirement is going to be the same or higher in retirement, which is often the case for people with large IRAs or 401(k)s, then a Roth IRA may make a lot of sense, regardless of your age.

You might be able to make a spousal Roth contribution. Even if your spouse has no earned income, as long as you have an earned income, you can make an IRA contribution on their behalf. Many couples can double their tax favored retirement account savings by doing this.

Be careful about Roth conversions. As stated previously, mistakes here can become expensive, so don’t rely on online Roth calculators to manage conversions. Talk with an experienced professional who can help make sure that your numbers and your strategy fits with your personal retirement scenario. Every person and every situation is different, so planning needs to be specific to your needs.

Reference: the balance (August 13, 2019) “9 Surprising Facts About Roth IRAs”

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New Income Tax Form Designed for Seniors

IRS Form 1040
The IRS has created a new Form 1040 for seniors.

There’s a new tax form designed with seniors in mind. The IRS released a draft form of the 1040-SR, “U.S. Tax Return for Seniors,” says Kiplinger in its article, “IRS Releases Draft Form of New 1040 Tailored for Seniors.”

This form was created by the 2018 Bipartisan Budget Act. One of its provisions required the development of a tax return that would be easy for seniors to use. The form will highlight retirement income streams and other tax benefits for seniors. Taxpayers age 65 and older can use this form to file their 2019 tax returns.

It’s designed off the regular 1040, and the IRS says it uses all the same schedules, instructions, and attachments. Taxpayers who use tax software to file may not even notice the difference.

However, for taxpayers who still complete paper tax forms, the new form will be friendlier to aging eyes. The font is bigger, and the shading on the regular 1040 has been removed to improve the contrast and increase legibility.

One important feature of the new tax form is the addition of a standard deduction chart. The form lists the standard deduction amounts, including the extra standard deduction amount for which taxpayers age 65 and older qualify. This way, seniors don’t have to search around for the information. The chart also makes it simpler for seniors to take advantage of the full standard deduction for which they’re eligible, especially for those who may not even be aware of the extra amount for which they qualify.

The tax form has lines for specific retirement income streams, like Social Security benefits, IRA distributions, and pensions, as well as earned income from work.

The draft form will be finalized later this year.

Reference: Kiplinger (July 12, 2019) “IRS Releases Draft Form of New 1040 Tailored for Seniors”

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Filing Estate Taxes for a Deceased Family Member

Filing personal and estate tax returns is one of the executors jobs.
Filing personal and estate tax returns is one of the executor’s most important jobs.

If you’re the executor (or personal representative) of a loved one’s estate, and they were well-off, you’ll be dealing with several tax issues. The article “How to file a loved one’s taxes after they’ve passed away” from Market Watch gives a general overview of the decedent’s potential tax liabilities.

Winding down the financial aspects of the estate is one of the tasks done by the executor. The executor is identified in the decedent’s Will or appointed by a judge. If the decedent had a revocable living trust or an irrevocable trust, the trust document names a trustee who works in conjunction with the executor.

The executor is responsible for filing the federal income tax returns for the decedent’s personal income (Form 1040) as well as for the income generated by the estate or trust (Form 1041). The estate’s first federal income tax year starts immediately after the date of death. The tax year-end date can be December 31 or the end of any other month that results in a first tax year of 12 months or less. The IRS form 1041 is used for estates and trusts and the estate income tax return is due on the 15th day of the fourth month after the tax year-end.

For example, if a person dies in 2019 and the executor chooses December 31 as the tax year-end, the estate tax return would be due April 15, 2020. An extension is available, but it’s only for five and a half months. In this example, the due date could be extended to September 30.

There’s no need to file a Form 1041 if all of the decedent’s income-producing assets are directly distributed to the spouse or other heirs and, thus, bypass probate. This is the case when property is owned as joint tenants with right of survivorship, as well as with IRAs and retirement plan accounts and life insurance proceeds with designated beneficiaries.

Unless the estate is valued at more than $11.4 million in 2019, no federal estate tax (also known as the “death tax”) will be due.

But the executor needs to find out if the decedent made any large gifts before death. That means gifts larger than $15,000 in 2018-2019 to a single person, $14,000 for gifts in 2013-2017; $13,000 in 2009-2012, $12,000 for 2006-2008; $11,000 for 2002-2005 and $10,000 for 2001 and earlier. If these gifts were made, the excess over the applicable threshold for the year of the gift must be added back to the estate to see if the federal estate tax exemption has been surpassed. Check with the estate attorney or tax professional to ensure that this is handled correctly.

The unlimited marital deduction permits any amount of assets to be passed to a spouse – as long as the decedent was married to a U.S. citizen. However, the surviving spouse will need expert estate planning to pass the family’s wealth to the next generation, without a large tax liability.

While the taxes and tax planning are more complex when significant assets and estate taxes are involved, estate planning is perhaps even more important for those with modest assets as there is a greater need to protect the family and less room for error. An estate planning attorney can strategically plan to protect family assets even when the assets are not so grand.

Reference: Market Watch (June 17, 2019) “How to file a loved one’s taxes after they’ve passed away”

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