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January 28, 2015

Happy 2015!


I know. I missed 2014. Nope – I haven’t retired yet. I can’t, as evidenced by the fact that I just made another tuition payment, albeit my FINAL ONE!!! Upon self-reflection and casual comments from Terry, I do believe that I am getting a tad bit more like Walter Matthau’s character in Grumpy Old Men! So why was there no “tax letter” in 2014? I simply didn’t feel that it was necessary to report the obvious – room temperature IQ running rampant within the Administration, absolute dysfunction and gridlock in Congress and chaos at the IRS. However, I was jerked out of my funk by the POTUS last Tuesday night during the State of the Union address and find myself again writing my annual “tax update” letter.


While I realize that you can’t fix stupid, I find it necessary to comment on a couple of the tax reform suggestions made by the POTUS:


1.         Raise the capital gains tax rate to 28% (31.8% with the Obamacare 3.8% surtax). He claims this is merely going back to Reagan’s capital gains rate – but forgets to add that Reagan also lowered the income tax rate from 50% to 28%.


2.         Increase the amount of several refundable tax credits – you know the credits where the government actually pays money out. Specifically, he is proposing a $500 credit for married couples where both spouses work, as well as increasing the benefits under the Earned Income Credit – the single most abused tax credit ever!


3.         Exempt student loan forgiveness (after 20 years) from taxation. Stated differently, the POTUS wants students to borrow for education, pay it back annually at no more than 10% of their discretionary income and, after 20 years, the remaining balance is written off without any tax forgiveness income! Wonder if he would consider creating a tax credit for those of us that actually paid 100% of our educational loans (including interest) and did so in a timely manner!


4.         Tax the income earned by a 529 Education Plan when the funds are pulled out to pay for higher education expenses (tuition, books, room/board, etc.), thereby defeating the purpose of 529 Plans. Under the proposal, existing 529 Plans (including the 529 Plans he established for his daughters) would be “grandfathered” and exempt from taxation. What a stupid proposal, as 529 Plans are funded with “annual exclusion gifts” (currently $14,000/person/year) and smart tax planners can figure out other ways to fund educational expenses! Obviously, the POTUS was attempting to generate tax revenue to help fund his $50 Billion educational incentive program. Both the R’s and the D’s (including Nancy Pelosi) voiced strong opposition. The Wall Street Journal reported last night that the POTUS had withdrawn this proposal. I am certain that his decision was based upon sound tax policy and had absolutely nothing to do with the fact that Ms. Pelosi was a passenger on Air Force One during its recent trip to India. WOW – I can understand why the POTUS changed his mind – it’s called a 15-hour flight with Nancy Pelosi!


5.         My favorite proposal by the POTUS is his suggestion to eliminate the step-up in the basis of an asset on death, thereby imposing a capital gains tax on the later sale of the asset by that “trust fund,” uber rich, spoiled, worthless child of the deceased individual. Good grief Charlie Brown – an attempt to eliminate the only benefit in dying! To refer to this as “closing a trust fund loophole” defies logic. Apparently, the POTUS was not taught to do tax research when he attended harvard. Otherwise, he would have realized that the step-up in the basis of inherited property can be found as far back in Section 113(a)(5) of the Internal Revenue Code of 1939! Barry – can’t blame this “trust fund loophole” on Reagan or either Bush. Let me think, who was the POTUS in 1939??? FYI – this was tried in the 1970s and created such an administrative nightmare that it was retroactively repealed.


6.         Now, a word on the tragic mess at the IRS. I believe that our tax system based upon voluntary compliance is in real trouble. This Country needs an efficient, effective administrative agency that will enforce the tax laws fairly and collect tax receipts. What we don’t need is a bureaucratic maze full of retirement age, don’t give a s#%& union employees that are poorly trained, under-educated and without adequate computer technology to perform at a high level. What we need is a system that is staffed with employees from the top down that work for us, not employees that feel that it is their right to jack around taxpayers and, once they get called on the carpet, take the 5th! Simply stated, I behave that way in representing a client before the IRS and I stand a pretty good chance of losing my ability to practice before the IRS. A serious top to bottom house-cleaning must occur at the IRS and it needs to be re-tooled, adequately funded (hello Congress!) and re-staffed with well-trained tax professionals. Doubt anyone in DC has the intestinal fortitude to tackle this mess. What good does tax simplification do if the infrastructure is not in place to implement it?


7.         And finally, my thoughts for 2015:


a.         If your Will contains a “Family Trust,” it needs to be re-done. Now that the estate tax exemption amount is transferrable between spouses, a Family Trust is probably not necessary/useful. However, income tax issues are now a critical factor in estate planning and must be considered.


b.         Inherited IRAs are no longer exempt from the claims of the recipient’s creditors. Therefore, if your children are currently the ultimate beneficiaries of your IRA, then your Will needs to be changed to ensure that a trust (rather than the child) is the ultimate beneficiary of your IRA.


c.         Generation Skipping Transfer Trusts for children (as opposed to leaving assets outright to children) provide excellent vehicles to protect a child’s inheritance from his/her creditors, including marital problems.


d.         The 3.8% Obamacare surtax on net investment income (rents, royalties, interest, dividends and net capital gains) is alive and well. It will continue to impact investment decisions in 2015. Remember, this is not an “income tax,” and the statutory language for this surtax is in a separate Internal Revenue Code Section – which will make it very easy for Congress to increase the tax rate (3.8%) without “raising” income taxes!


e.         The estate tax exemption amount for 2015 is $5.43 million/person. Therefore, a married couple may pass $10.86 million estate tax-free. Be careful on gifting as it is no longer as necessary to make annual exclusion gifts ($14,000/person/year) to children/grandchildren. Regardless of what the POTUS says, I am still a fan of 529 Plans for funding educational costs of grandchildren! I also remain a big fan of level-term life insurance, especially on the “lesser/non-earning” spouse.


f.          The capital gains tax rate is now effectively 23.8%. If you are contemplating a large sale (business, building, land, etc.), advance tax planning is a must. Like-kind exchanges work well for real estate – remember that you have 45 days from the closing of the first sale to identify the replacement property, and 180 days from the closing of the first sale to close on the replacement property.


g.         Individual reporting requirements under the Affordable Care Act (bet it would still be referred to as “Obamacare” if it were more popular) will be required on your 2014 Form 1040. I am confident that the IRS has figured out how to collect the penalty from individuals that don’t have medical coverage, even though the Internal Revenue Code makes the penalty statutorily uncollectible!


h.         I seriously doubt that there will be any meaningful tax reform in 2015 – certainly none in 2016, as it will be an election year. Therefore, 39.6% plus add-ons will be the top individual income tax rate in 2015. Regrettably, the corporate tax rate remains one of the highest (if not the highest) in the world! I will keep you posted if there are any meaningful changes.  FYI – This will be a nasty tax filing season. Don’t blame your CPA – blame Washington – both Congress and the POTUS.


i.          Do not overlook the management and distribution of your “digital estate.” Make sure that a very trusted person can actually access all of your on-line accounts (investment, credit card, social media, etc.) if something were to happen to you.


If you wish to update your estate planning documents, Renee and/or I will be happy to chat with you. I hope that 2015 treats you well and that you have a happy, healthy and prosperous year.





P.S.   We live in a great country. I am a proud “vet” and my professional education (for which I am most grateful) was made possible because of my time in the military. The lack of leadership and the silly partisan politics in DC is getting old. That being said, if I offended anyone with any of my comments, I will be happy to remove your name from my mailing list.


P.S.S.  Remember to keep the men and women in our military as well as our law enforcement officers/fire fighters, etc. in your thoughts and prayers. Without their selfless service, we would be in a real mess.




November 6, 2012, has come and gone, leaving most of us wondering what on earth just happened and more importantly what is in store for our great country. I believe that President Obama didn’t win the election; instead, Mr. Romney lost it. He along with the Republican leadership in the House and Senate took their collective eyes off the political ball and handed the election to the D’s. While Obama gets a “do-over”, he must deal with a very divided electorate.


Enough political commentary; the Obama victory leaves us with:


a) Obamacare is here to stay. The greatest healthcare delivery system in the world will now be controlled by the Government. The single-payer system will become a reality.

b) Dodd-Frank is here to stay. The Government will have a much greater say in how U.S. businesses operate.

c) Taxes will go up.

d) Gridlock in Washington remains alive and well.


The following Income/Estate Tax Rates (2012 and 2013) are on the books today. Subject to a lame duck season miracle, THIS IS WHAT WILL HAPPEN ON JANUARY 1, 2013!!!!!!!.

1.         Top Income Tax Rates

 2012                         2013

a.         Wages & Self-Employment Income          35%                   39.6% + .9%

   Additional Medicare Tax 

           (MAGI over $250,000)

b.         Dividends                                                 15%                        39.6% 

   (MAGI over $250,000)

    (Hello tax exempt income!)

c.         Capital Gains                                             15%                          20%


d.      Net Investment Income                                      3.8% Affordable Care Act

(rents, royalties, dividends,                         Surtax on the lesser of: (i) net

interest, annuities (not IRA’s), passive         investment income, or (ii) the

income and net gain from the sale or         excess of MAGI over $250,000

disposition of property)

e.     Payroll Tax (FICA)                                        4.2%                         6.2%

        MAGI= Modified Adjusted Gross Income.  $250,000 represents  the married filing joint amount.


2.         Estate and Gift Tax Exclusions and Rates


Gift                       Estate                        GST                             Tax

Year       Exclusion             Exclusion                   Exclusion                    Rate

 2012      $5.12M                 $5.12M-gifts               $5.12M-gifts                 35%

 2013     $1.0M                  $1.0M-gifts               $1.0M-gifts                 55%


3.         Planning Opportunities to Consider NOW!    


a.         Harvest Capital Gains in 2012!  Sell capital assets (gains), elect out of installment gain treatment, and think very hard before you do a 1031 exchange in 2012.


b.         Accelerate income into 2012 and defer expenses (losses) into 2013.


c.         Consider large gifts to children (in GST Trusts). Gift interests in Family Limited Partnerships before     12/31/12. Especially useful if assets are likely to appreciate. To accomplish this, you will need to create the GST Trust and have the partnership interest appraised. This takes time!


d.         Sell assets to children (in GST Trusts). Interest rates are at historically low rates as are some asset values (especially real estate). Elect out of Installment Gain Treatment (accelerate Capital Gains into 2012).


e.         Make annual exclusion gifts ($13,000/person/year) and pay medical expenses and tuition only payments, directly to the provider of the services (doctor/hospital/educational institution). The $13,000 is increased to $14,000 on January 1, 2013.


f.          Consider converting an IRA to a Roth IRA.


If we may be of assistance, please feel free to contact Renee, Don or me. January 1, 2013 will be here before you know it!




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