Jarvis Law Office

Ohio Estate Planning Lawyer Explains the Top Four Tax Deductions for Senior Citizens

Retirement years are all about making sure you have enough money to live a comfortable life while also having access to “rainy day funds” to take care of any unforeseen financial difficulties that may arise. That’s why it’s so important to take advantage of the tax deductions that are available for senior citizens, since these deductions can maximize the amount of money you have to use in your retirement. The following are the top four tax deductions for senior citizens:

Medical Expenses

One of the biggest expenses for senior citizens is medical care, which is why the deductions associated with medical expenses can be a huge help come tax time. Medical and dental expenses that are more than 10% of your adjusted gross income are deductible, meaning any expenses related to health care services, doctor visits, medications, and medical devices.

 

Business Expenses

Retirement businesses are a common way for senior citizens to continue to earn income after their main career has ended. Any necessary and ordinary expenses incurred while running your retirement business may be claimed as a deduction, including the purchase of business equipment, a vehicle used for business purposes, and business travel.

 

Investments and Expenses

Interest, capital gains, and dividends from your investments are generally taxed at a lower rate than normal income and are not subject to Medicare or Social Security taxes. Additionally, any fees spent for investment advice or accountant services can be itemized as long as they exceed 2% of your adjusted gross income. These fees include legal, financial planning, and accounting fees, online investment services fees, and even investment newsletter subscriptions.

 

The Standard Deduction

The standard deduction is sometimes overlooked as a great tax deduction for senior citizens, especially if they are no longer itemizing deductions. Senior citizens (in this case, anyone who is age 65 or older by December 31^st) are entitled to a higher standard deduction than others, so it’s worth considering if the standard deduction is right for you. In addition, the standard deduction can be claimed on a joint return if at least one spouse is over age 65.

If you would like to get more information about tax deductions for senior citizens, or if you’d like to review your current finances and how they work with your future plans, please contact our office at 877-653-3450 to schedule a complimentary initial consultation.

The IRS Fight with Jackson Estate Goes On and On

Michael Jackson died in 2009 and after all these years, the battle goes on between the entertainer’s estate and the IRS on calculating his worth, according to Bloomberg in "Michael Jackson Is Worth More Than Ever, and the IRS Wants Its Cut."

Jackson’s estate, executed by his longtime friend and attorney, is engaged in a lengthy battle with the IRS over the value of the estate. The Michael Jackson Trust is currently believed to be worth about $1 billion, but it is not certain how much of that value can be attributed to events during Jackson's lifetime, as opposed to events after his death.

The central issue in the dispute is how much Jackson's image rights and music rights were worth at the moment of his death. As you may recall, the singer had been disgraced by high-profile scandals, including allegations of child sexual abuse. Because of Jackson's negative image at the time, his estate values his likeness at $2,105.

Not so fast.

The IRS points out that immediately upon his passing, Jackson's image was resurrected and his music began selling again. The IRS uses this to place a value of Jackson's likeness at the moment of his death at $434 million. Obviously, the two sides to the dispute are not even in the same ballpark, or even on the same continent.

It seems inevitable that this dispute will eventually have to be settled by the courts. Estate attorneys will watch closely,  since any ruling will determine how celebrity images will be treated for estate tax purposes in the future.

Reference: Bloomberg (Feb. 1, 2017) "Michael Jackson Is Worth More Than Ever, and the IRS Wants Its Cut."

No More Stretch IRAs?

The Senate Finance Committee has voted to eliminate stretch IRAs by making all taxes due within five years of inheritance, according to Financial Advisor in "Stretch IRA: Are Its Days Numbered?"

Under present law, a non-spouse may inherit an IRA account and stretch out the taxes owed for their lifetimes. However, Congress, which has attempted to eliminate the stretch IRA in the past, has now seen the possibility of passage after the Senate committee voted to eliminate it.

The legislation is unlikely to pass on its own, but it still stands a good chance of becoming law as part of a larger tax overhaul that Republicans in Congress are expected to propose. For that overhaul to work, the Republicans hope it can be presented as revenue neutral overall.

They want to have any tax cuts paid for by raising other revenue, cutting spending or covered through expected financial growth. Although the revenue consequences of eliminating stretch IRAs are disputed, some believe it could bring in billions more per year. As a result, it is likely to be included as a way to help pay for other tax cuts.

An estate planning attorney can guide you through the process of creating an estate plan that meets your unique needs.

Reference: Financial Advisor (Dec. 23, 2016) "Stretch IRA: Are Its Days Numbered?"

IRS Targets Break for Transfers within Family Businesses

Bloomberg recently published an article covering restrictions proposed by the IRS on the transfer of ownership within a family business in “IRS PROPOSES NEW REGULATIONS FOR §2704 — A BETTER MOUSE TRAP?”

Because many family-owned businesses place restrictions on who and when shares can be sold, tax benefits have been available because it is sometimes difficult to find outside buyers.

It is assumed that any purchaser would want a discount. This could be taken into account when transferring between family members as well. For gift and estate tax purposes the shares can be valued at less than market value.

This is known as a “discounted” value.

For the last decade the IRS has wanted to do away with this discounted value or to at least lower the discount amount. Previously, the agency has asked Congress to act, but now the agency is proposing new regulations to take care of it without congressional action.

Experts are divided about the effectiveness of the new regulations.

What the IRS has proposed is extraordinarily complex, even for an agency known for its complex regulations. The courts will also eventually have to decide whether the regulations are appropriate.

An estate planning attorney can guide you on the rules and regulations involved with selling shares in a family business.

Reference: Bloomberg (Aug. 19, 2016) “IRS PROPOSES NEW REGULATIONS FOR §2704 — A BETTER MOUSE TRAP?”

Increased Taxation for the Rich Draws Mixed Responses

Gallup recently conducted a survey of support by Americans for some of the proposals made by Republican Presidential candidates and found mixed results as revealed in "Americans React to Presidential Candidates' Tax Proposals."

Both Donald Trump and Ted Cruz have proposed eliminating the federal estate tax. According to the survey, the majority of Americans agree.

A total of 54% of respondents said that they agree with the proposal. Only 19% disagreed. The remainder responded that they did not know enough about the issue to have an opinion. As the estate tax only applies to a very small percentage of Americans this could be taken as an indication that the majority of Americans want to lower taxes on the wealthy.

However, only one other tax reform proposal also received support from a majority of those surveyed. A total of 63% agreed with Donald Trump's proposal to close most tax loopholes and deductions available to the very rich.

What this means about attitudes toward taxes on the wealthy in the U.S. is unclear.

A future survey is planned to survey opinions about the Democratic candidates' positions that could clear things up. However, it does appear to be good news for opponents of the estate tax. Republicans have wanted to do so for a long time and all of their candidates are in agreement on the issue. Both remaining Democrats want to increase the estate tax.

However, the issue doesn't seem to be on the front burner for the voting public.

Reference: Gallup (March 17, 2016) "Americans React to Presidential Candidates' Tax Proposals."

Social Security Benefits Can Be Taxed

As My San Antonio explains in "Will I Pay Taxes on My Social Security Benefits?" many Americans are surprised to learn that they can be taxed on their Social Security retirement benefits. People believe the money they receive was already taxed when they paid into the system.

As a result, taxing it again amounts to double taxation but the federal government views it differently.

The total amount most people pay into the system equals 15% of the total value of lifetime benefits. As a result, up to 85% of Social Security benefits can be taxed and it will not be double taxation.

But not everyone is required to pay federal income taxes on their benefits. It depends on the other income a person makes.

The basic rules are as follows:

• Single people whose total incomes are between $25,000 and $34,000 may have 50% of their Social Security benefits taxed. A total of 85% of benefits may be taxed for people making more than $34,000.
• Married people filing jointly may have up to 50% of their benefits taxed if their combined income is between $32,000 and $44,000. Up to 85% of benefits could be taxed for couples with higher incomes.
• The government is direct when it comes to married people who file separately. They are almost certain to pay taxes on their Social Security benefits.

Social Security benefits also face state income taxes in 13 states.

Reference: My San Antonio (March 20, 2016) "Will I Pay Taxes on My Social Security Benefits?"

States Evaluate Importance of Estate Taxes

A dilemma has been presented to state governments facing revenue declines. They can raise tax revenue by taxing the estates of the wealthy but they then risk their own residents relocating to more lenient states before they pass away.

When such citizens move away that means these state governments with estate taxes do not receive income or capital gains taxes from those wealthy people. In the end, such states must determine which taxes are more important to them and their budgets.

Kiplinger's Personal Finance reports in "More States Giving Heirs a Break on Estate Taxes" that the majority of states have chosen to keep their citizens rather than impose an estate tax.

So, how many states still have an estate tax? At present, this number includes only 14 states and the District of Columbia. Tennessee is the latest state to do away with its estate tax and six other states have increased their estate tax exemptions recently.

Although it might be tempting to say this trend is clear evidence that estate tax revenue is not as important as other revenue, there probably is not enough definitive evidence to make that claim. The political controversy surrounding the estate tax might play some role in this trend amongst the states.

It will be worth watching if the states still imposing the tax continue to face pressure to repeal it to keep the wealthy from fleeing to other states in their retirement years.

An estate planning attorney could be helpful in guiding you through these important issues.

Reference: Kiplinger's Personal Finance (February 2016) "More States Giving Heirs a Break on Estate Taxes"

IRS Changes Policy on Identity Theft

It is difficult to imagine but it is possible to file your tax return only to learn from the IRS that a tax return has already been processed under your name and Social Security number. It is a growing problem and a problem that has proven difficult to resolve.

Identity thieves who are able to get some basic information about a person will rush to file a fraudulent tax return before the victim does in the hopes that the IRS will send a refund to the thief. The victim then has a mess to sort out and needs to figure out what happened. This can be exceedingly difficult for the victim and even more difficult for those filing returns on the behalf of others, such as executors and guardians.

In the past, the IRS has not helped matters too much as the victim was not able to get a copy of the fraudulent tax return. However, as reported by the Wills, Trusts & Estates Prof Blog in "IRS Will Now Offer A Copy Of Fraudulently Filed Tax Returns To Identity Theft Victims," the IRS has changed its policy.

Now victims and their authorized representatives can get a copy of the return, which should help in figuring out what happened. The fraudulent return will be redacted pursuant to federal privacy laws, but not to an extent that would make viewing the return worthless.

It is wise to seek out a professional rather than handle it yourself if you have been a victim of a tax scam. And, you certainly shouldn't try to handle such a problem on your own if you are an executor or guardian.

Reference: Wills, Trusts & Estates Prof Blog (Nov. 30, 2015) "IRS Will Now Offer A Copy Of Fraudulently Filed Tax Returns To Identity Theft Victims"

Common Estate Planning Mistakes That Should be Easy to Avoid

The fix to one of the most common estate planning mistakes is relatively easy to address, according to "How to Avoid the Most Common Estate Planning Mistake," which appears on the financial website thestreet.com.

When you change the beneficiary on a retirement account, the update can be as easy as filling out a form. But it's the communication with your heirs that's key, especially since estate planning isn't the most enjoyable topic to discuss.

Surprises are what cause hurt feelings and even litigation. As a result, you need to figure out a way to explain the estate planning changes to your children or heirs. The starting point to any successful estate plan is a will, which is a legal document that details which heirs are to receive which assets or properties you own.

Online programs can be helpful, but user error is typically how things go wrong when drafting wills without the help of an attorney.

Another factor is taxes. A person who has a total estate of less than $5.45 million in 2016 won't pay any federal estate tax, but above that, it's a 40% flat rate (the threshold for the federal estate tax was raised a bit for 2016 from $5.43 million in 2015.).

All the same, federal estate taxes generally won't be a concern for most Americans because one would need an estate worth over $5.45 million in order for the federal estate tax to apply.

Each of us has a lifetime exemption up to that threshold. However, you should keep in mind that individual states have different thresholds. For example, some states have thresholds that are only in the six figures, which may affect more people.

Talk to a qualified estate planning attorney to draft your comprehensive estate plan. Don't be tempted to go to the Internet and try it yourself.

Reference: thestreet.com (October 31, 2015) "How to Avoid the Most Common Estate Planning Mistake"

What You'll Need to Know In Case You Become Uber Wealthy

Before we get to the fascinating details reported in The Wall Street Journal's "When the Superrich Die, Here's What's in Their Wallets," we need to cover a few basics. The information reported in the data sample comes from returns filed in 2014; in other words, from estates of people who died in 2013. And it should be noted that the estate tax applied to estates of individuals over $5.25 million and a top rate of 40%.

The most important thing to remember about the estate tax is that it really doesn't apply to most folks, just to a few of the very rich. Congress increased the exemption and indexed it to inflation, ensuring that almost all of the 2.6 million people a year who die in the U.S. need not worry about estate tax. That leaves just the very wealthiest in the country.

Fewer than 12,000 estate tax returns were filed in 2014—more than 50% of those didn't yield any tax for the federal government.

The data showed that the uber-wealthy don't provide much information about the ways they shift assets out of their ownership or the planning maneuvers that can decrease the size of estates prior to death. Those who died with more than $50 million (the top tier) were heavily invested in stock and closely held businesses.

Those who were rich enough to file an estate tax return–but not at the very top–relied much more heavily on retirement accounts like 401k's and real estate. The types of assets change as people get wealthier. The merely rich have houses, cash, farms and retirement accounts. The very rich have bonds and real estate. But the very, very rich own art and stocks of businesses which they often want to pass to future generations.

The richest people pass on smaller shares of their estates to their heirs and it's not merely due to the fact that more of their wealth is subject to taxation. They tend to have bigger debts and make bigger charitable contributions. Charities collected $18.4 billion from bequests from the returns filed in 2014, with 58% of that coming from just 1.4% of estate tax returns.

Whether you're "uber-rich" or just getting by, you can truly benefit from a discussion with a qualified estate planning attorney.

Reference: Wall Street Journal (October 30, 2015) "When the Superrich Die, Here's What's in Their Wallets"