March 2016 Planning Pointers

Here are a few helpful tax planning tips.

Making the Most of Your Charitable Gifts

Clients often ask: How do I make the best use of my gifts to charity?

Although the simplest and most common way to give to charity is to write a check, there are more tax efficient ways to give. For larger gifts (say $500 or more), consider using appreciated stock to make your gift. The stock cannot be owned in an IRA or other retirement plan. Using stock that you purchased more than one year before the charitable gift is made provides a significant tax benefit.

Let’s look at an example.

A charitable donation of $1,000 cash is helpful. If you are in a combined federal and state marginal tax bracket of 33%, your cash gift provides a deduction of $1,000 for a tax savings of $333. In effect, the gift only “costs” you $667 ($1,000 given less the tax savings you realize).

Consider a better alternative. You donate to charity shares of XYZ Company currently worth $1,000 that you bought five years ago for $250. Same as with the cash gift, you deduct $1,000 on your tax return, saving you $333 in taxes. But the gift only cost you the $250 that you spent to purchase the shares. Your tax savings from the gift exceed your original cost, so one might argue you made money on the gift!

Note that the same benefit does not exist if you first sell the shares, and then donate the proceeds to charity. In that case, you will incur tax on the gain (the difference between market value and your cost basis). By instead donating the actual shares, you completely and permanently avoid paying tax on the gain!

It’s typically a simple matter to contact your financial advisor for instructions to accomplish this kind of gift. A little extra effort may be worth a lot!

Changes to Federal Estate Tax Reporting

Form 8971

For all required U.S. estate tax returns (Form 706 and Form 706-NA) filed after July 31, 2015, executors are now also required to file Form 8971, “Information Regarding Beneficiaries Acquiring Property From a Decedent.” The form reports to the IRS and to each beneficiary of the estate detailed information on assets received and the basis attached to each asset. The purpose of the reporting is to ensure that the values reported on the estate tax return properly represent the cost basis used by the beneficiaries on their future income tax returns. Form 8971 is required regardless of whether the estate has zero estate tax liability thanks to the marital or charitable deduction. It remains unknown whether Form 8971 must be filed for estates below the exemption amount filing an estate tax return simply to claim the portability election. Proposed regulations are expected to be issued any day now and we hope that question will be resolved.

Generally, Form 8971 must be filed within 30 days from the due of the estate tax return including extensions. Because additional guidance on the reporting is still outstanding the IRS has extended the deadline until March 31, 2016 for all Forms 8971 that would be otherwise due before then.

An executor may be subject to penalties for failure to file the required information return with the IRS and provide the statements to the beneficiaries. The penalties can be quite severe if it is found that the executor intentionally disregarded the filing requirement – up to 10% of the estate value subject to the reporting requirement. A beneficiary who reports a higher basis than that used in the estate tax reporting may be subject to accuracy-related penalties on underpayments.

Note that this new requirement is consistent with other recent IRS efforts to shift the administrative burden of tracking cost basis to parties that are deemed to be in the best position to do so. Gift tax returns include a section for reporting the donor’s cost basis in assets gifted to donees. In recent years, brokers have been charged with reporting cost basis of securities to recipients on Forms 1099-B, while in the past, they were only required to provide proceeds.

Estate Tax Closing Letters

For all estate tax returns filed on or after June 1, 2015, federal estate tax closing letters will be issued only upon request of the taxpayer. Closing letters are issued by the IRS or state taxing authorities to confirm that the government has accepted the return as filed or as adjusted. Generally, an estate cannot be closed without receipt of these letters. The IRS instructs taxpayers and tax professionals to wait at least four months after filing the federal estate tax return to request the letter. To request a closing letter or inquire about the status of the return, call (866) 699-4083 and be prepared to provide the following information about the decedent:

  • Name
  • Social security number
  • Date of death

For returns filed after January 1, 2015 and before June 1, 2015 there was a transition period in place. A closing letter was only issued if the return was required to be filed because the filing threshold was exceeded or the threshold was not exceeded but a portability election was at issue. If you await such a closing letter, it may be worth following up with the IRS directly.

Maine Estate Tax Law Change

Effective January 1, 2016 the Maine estate tax exemption now matches the federal estate tax exemption amount. It’s important to note, however, that Maine estate tax law does not mirror federal law in all manner. In particular, Maine does not adhere to the federal concept of portability, which refers to a person’s ability to use their deceased spouse’s unused estate tax exemption.

Individuals may want to revisit their estate tax plans and simplify documents containing certain techniques that were warranted solely for tax purposes. Of utmost import, each individual’s unique personal and family interests must be considered. An estate planning conversation with your advisors will take into account both tax and non-tax concerns.

For questions about these topics or other matters, please contact Jean McDevitt, tax principal and private client services lead, at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.