tstewartlaw.com - Stewart Law, P.A.

What Is The Exemption Amount For Couples?

$22.8 Million is probably not a fair approximation of the exclusion amount couples have to protect property from the estate tax. For this to be true, both spouses would need to die before 2026. Otherwise, the language of the Internal Revenue Code appears to make clear that the survivor has at most only two times the then-current exclusion (i.e., after 2026 this is $5 Million X 2 = $10 Million [adjusted for inflation]). One consequence of this is that if you are a surviving spouse who had transferred to them the decedent spouse’s full exclusion, you should consider making additional gifts during your lifetime to reduce this amount (by up to one-half) to avoid losing it.

* Intended as general guidance only and not as legal advice.

Does Your Rental Real Estate Activity Qualify for the 20% Sec. 199A Deduction?

By now, you’ve likely heard that certain businesses can qualify for a 20% income deduction under the new tax law. This is true for an “active trade or business.”

Earlier this year the IRS issued a proposed safe harbor setting out how rental real estate activities can qualify as an active trade or business for the 20% business deduction. By safe harbor, we mean rules that should work, but taxpayers can still use case law to show their activities qualify as an active trade or business. In other words, this safe harbor can allow you to reduce the effective rate on the taxable income of your rental real estate business from 37% to 29.6%.

Here are the requirements to qualify for the safe harbor:

Maintain separate books and records for the income and expenses of each enterprise. You can elect to treat each property as a separate enterprise or all similar properties as a single enterprise, subject to some exceptions.
Keep contemporaneous records (e.g., time reports) for all services performed for tax years beginning January 1, 2019.
Perform 250 or more hours of rental services. The services can be performed by owners, employees, agents and independent contractors, which may include management and maintenance companies who provide the contemporaneous records. “Rental services” do not include activities such as arranging for financing; reviewing financial statements; or traveling to or from the real estate. “Rental services” do include negotiating and executing leases; collecting rent; daily operation, maintenance and repair; and supervision of employees and independent contractors.

That said, here’s who can’t qualify:

A. Taxpayers who rent under triple net leases, meaning those where the tenant pays taxes, fees, insurance and maintenance. It includes cases where the tenant is required to pay common area maintenance expenses.

B. Taxpayers who rent under triple net leases, meaning those where the tenant pays taxes, fees, insurance and maintenance. It includes cases where the tenant is required to pay common area maintenance expenses.

In summary, if you’d like to take advantage of the safe harbor and secure the lower tax rate, convert triple net leases and make sure enough time is spent on the right services at the property. To discuss your situation, or for further details, please contact us and speak with one of our attorneys.

** The information contained in this communication is not intended to constitute legal, accounting or tax advice.

4 Ideas for Deferring Taxable Income to Next Year

Deferring taxable income to a later year is often an effective strategy for paying less in income taxes and keeping more of your wealth working for you. For example, if you are organized as an S Corporation or Partnership for income tax purposes and anticipate being in the same or a higher tax bracket in 2018 than in 2019, then you may benefit from deferring income into 2019.

Here are four ways you might achieve this:

(1) Cash Method of Accounting

The Tax Cuts and Jobs Act (TCJA) expanded the number of businesses that can use the cash method of accounting. This can be important for you because often you are better able to accelerate deductions and defer income by adopting the cash (versus accrual) method of accounting. It’s not too late to implement this idea because an automatic change to the cash method can be made by the due date of the tax return including extensions. Who can make this change? Sole proprietors, partnerships, and S corporations can change to the cash method of accounting without regard to their average annual gross receipts so long as inventories are not a material income-producing factor. C corporations (or partnerships with a C corporation partner) with average annual gross receipts of $25 million or less for the prior three taxable years can make an automatic change to the cash method.

(2) Delay Billing

If you are on the cash method, delay year-end billing to clients so that payments are not received until 2019.

(3) Installment Sales

Generally, a sale occurs when you transfer property. If a gain will be realized on the sale, income recognition will normally be deferred under the installment method until payments are received, so long as one payment is received in the year after the sale. So if you are expecting to sell property prior to the end of 2018, and it makes economic sense, consider selling the property and report the gain under the installment method to defer payments (and tax) until next year or later.

(4) Interest and Dividends

Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. Unless you have constructive receipt of dividends before year-end, they will not be taxed to you in 2018 (exceptions may apply if you have control over when dividends are paid to you.)

If you’d like to further discuss any of these or other tax savings ideas, please call and speak with one of our attorneys.

** The information contained in this communication is not intended to constitute legal, accounting or tax advice.

Small Business End-Of-Year Checklist

The end of year is a busy time for many reasons. Travel plans, holiday hosting, and family visits tend to keep your calendar packed. But as a small business owner you have additional obligations that need to be addressed. The end of year is a perfect time to assess your current business, make some decisions, and set some overall goals to ensure you start the New Year off right. When 2019 rolls around be sure you took the time to self-assess with this Checklist:

( ) December is not too late to make a number of moves that can lower your income tax bill. Consult with your advisor team about important income and deduction items as well as new structures that you may want in place for 2019.

( ) Take the time to express gratitude to the folks who made positive differences for you this past year.

( ) As you review your financial results for 2018, it’s a great time to set goals for 2019 and make an actionable plan that will help you start achieving these objectives right away.

* Intended as general guidance only and not as legal advice.

What Is My Role As An Executor/Administrator?

We are often asked: “I’ve been named as Executor in my mother’s Will. What does an Executor of an estate do?” First, for terminology, an Executor in certain cases can be referred to as an Administrator, but the role is very similar so we’ll combine all the terms under Personal Representative, or “PR” for short. The main responsibility of a PR is settling the estate of a decedent, but you may be wondering what it actually takes to settle an estate.

Below is a brief synopsis of some key PR duties:

(1) Locate the Will.

The most important document the PR should locate is the original Will. The Will specifies how the decedent’s assets should be distributed to the beneficiaries.

(2) Gather Assets.

The PR should gather all asset information including, but not limited to, account statements, vehicle information, listing of tangible personal property, and Shareholder Agreements or Operating Agreements. This information will assist the PR in determining the classes of assets and the value of the estate. It also allows the PR to determine if it is necessary to probate the estate with the Clerk of Court. It is at this point that we recommend PRs seek legal counsel.

(3) File Court Documents.

If it is determined that probate is necessary, the PR will file the original Will, death certificate and initial paperwork with the Clerk of Court to open the estate. The probate process involves several filings with the Court including a 90 Day Inventory and Annual/Final Account.

(4) Notice to Creditors.

As required by statute, the PR should publish a Notice to Creditors with an approved local publication. Creditors of the decedent will have a set timeframe within which to present their claim for payment and the end of this period can be referred to as the Claims Bar Date. Claims received should normally not be paid until after the Claims Bar Date. The statutes set forth the order for claims to be paid and it can be very important for PRs to follow these rules to avoid personal liability for estate debts.

(5) Taxes.

The PR should work with an accountant to prepare and sign the decedent’s final individual income tax return and estate tax returns (estate income and estate and gift tax returns, as applicable).

(6) Distribute Assets.

Once all expenses and claims have been paid, the PR should distribute estate assets according to the terms of the Will.

(7) Close Estate.

After all of the estate assets have been distributed, the estate file should be closed with the Court.

An important area of our practice is guiding clients through their appointment as PR. We understand how much responsibility is given to these individuals and we strive to make it as easy as possible along the way. If you have had a loved one pass and need assistance through the process or would like more details about the PR role, please contact us to speak with one of our attorneys.

* Intended as general guidance only and not as legal advice.

Three Reasons To Talk To Your Kids About Your Estate Plan

Have you been avoiding the “uncomfortable” topic of your estate plan with your children? You want to do what is best for your children but perhaps you are legitimately concerned that your children are too young or busy, the conversation will be perceived as morbid or will not deliver the message you intend, or you just think it is too personal or confusing to discuss. For these and many other reasons, it is certainly an easy discussion to put off. However, with the holidays and plenty of family time approaching, we want to review three important reasons to take the plunge and have this critical conversation.

1. It’s Practical.

Put simply, if you want things done according to plan, you need to communicate the plan. Most children we speak with do actually want to know about their parents’ arrangements and wishes so they can help carry them out. Even if you choose not to share the financial details, at a minimum, we recommend discussing two basic things with your children. First, tell them the location of and how to get access to your important documents. Second, tell them the people on your “team” (e.g. financial advisor, accountant, attorney) that they should contact immediately after your death. This may seem obvious but preparing them for the actions they will need to take at your death will alleviate unnecessary stress for them during the emotional time immediately after.

2. Providing the “Why”.

Although your estate plan documents detail what goes where, they usually do not explain why. For example, unequal distributions or receipt of large sums or complex assets may be confusing to your children without the proper context or instructions. Communicating with your kids now, either one-on-one or in a family meeting can help to avoid confusion or hurt feelings after your death. It is also a great opportunity to share your values with the next generation so that they can continue your legacy. If you cannot find the courage for a conversation, at least consider writing your wishes and objectives in a non-binding letter format to keep with your other important papers.

3. A Teachable Moment.

As a parent, you have been given the privilege of leading your children by example. If you discuss the importance of estate planning with them now, you can teach them not only what you have learned about the process but also emphasize why it is critical for them to undertake as well. In addition, recognize that your estate plan may impact the planning that your children implement for their own families.

Don’t keep your kids in the dark or let the opportunity to communicate the plan, your “why”, and the importance of the process slip by. It can be as simple as starting with “I know you might think of this as an uncomfortable topic, but it is important to discuss it so you are prepared.” In addition, our attorneys have experience planning and conducting family meetings and would be happy to help you start the conversation by arranging one or more meetings at your request.

* Intended as general guidance only and not as legal advice.