Estate Tax-Federal Estate Tax

Anytime you have a home or property you will pay real estate tax. Real estate tax is estimated based on your home value. For instance, if you purchase a home and the property is worth $10,000 but you pay $20,000 for the home, thus this additional balance is your equity.

In some areas, you pay taxes in the winter and spring months. Some cities charge city taxes and state taxes for property. In addition, the real estate tax estimate is based on the current market price also. For this reason, you want to find deductibles to save money on home taxes.

If you purchased a home and lived there a couple of years, you have an invested property. The interest that you pay toward the property will not qualify you for interest deduction on your real estate tax. On the other hand, you may have tax deductibles under the itemized returns.

The purpose of bringing this up is to let you know that you may have real estate tax options available to you for saving money. Many people do not realize this. Renters get money back from the government all the time for paying rent each month. Thus, like renters homeowners have return options also. Check these options carefully.

Moreover, check your options, since you may have deductible choices on your equity interest dues. Check under the itemized deduction options to learn more.

You will find that you may have options for taking out loans over home improvement. If you recently were accepted for a line of credit or a home improvement loan, look under the itemized deductions to see if you have options for tax returns. Tax options are available for second mortgages, etc. You can also find help for particular issues. For instance, if you recently lost your home because of flood, fire, or your home was damaged, thus you may have an option to file claims. You may find a big real estate tax relief by searching through the theft, fire, and disaster category on your tax forms. Usually, you will need tax form 1040X.

To learn more about real estate tax visit the real estate sites online. Here you will find helpful information, calculators and other valuable tools to help you save money. Many sites post information about real estate tax deductibles, so see what you qualify for by visiting now.



By: Martin Lukac

About the Author:

Grady Twedt

Geirach

As published in The Naperville Sun – November 16, 2008

The economy is in a temporary mess with home prices diminishing and the stock and bond market falling. Yet, for anyone with a federal estate tax issue potentially at his or her death, this is a good time to give as many assets as one can. This is one of the best opportunities to transfer wealth to younger generations, without incurring the federal estate tax in the process.

The federal system for estates and gifts is a combined system. A person is able to give an annual gift of $12,000 per donee (or $24,000 if that person’s spouse shares the gift). If the value of the gift exceeds the $12,000 amount, the portion above that amount uses up part of the lifetime exemption amount.

In 2001, Congress had changed the law in this area, which increased the amount that an individual could leave to someone other than their spouse without incurring the federal estate taxes. This amount is $2 million today, which is scheduled to increase to $3.5 million in 2009.

The federal estate tax, according to the 2001 law, is scheduled to disappear in 2010 (estates will not receive the stepped-up basis of fair market value as of date of death, and thus pay capital gains taxes instead), and will reappear in 2011 with a $1 million amount. There is also one additional rule in which you cannot give more than $1 million during your lifetime without incurring a tax on the gift.

This is the current state of the law, which will be changed by the new Congress when they are sworn in next year. During the political campaign, both candidates stated they wished to leave this lifetime exemption at a higher amount than $1 million. President-elect Barack Obama said he wished to make the lifetime exemption at $3.5 million and leave the tax rate at the current rate of 45 percent.

As no tax professionals believe the federal estate tax system will be abolished anytime soon, most planning involves the transfer or gift of property from one generation to the next with the least tax cost. Because of the temporary diminished prices on stocks, bonds and real estate, this is a great time to consider making gifts of those assets, which will allow the recipient of the gift to enjoy the rebound in price when it occurs.

Another thing you can do is to pay the tuition and medical bills for your children or grandchildren with no tax consequences to federal gift or estate taxes.

In addition, as the interest rates are down now, this makes many other techniques in giving more to your heirs much more attractive. It is more appealing now to use family loans, grantor retained annuity trusts, an intentionally defective grantor trust or a charitable lead trust, which will allow you to give more to your heirs than you would have been able to when rates were higher. These tax techniques rely on an interest rate that the government sets monthly, called the applicable federal rate, which is set lower than the rates that you might see for a 30-year mortgage.

Because of the above, there are great opportunities to transfer your wealth to the next generation. If you are one of the people who may otherwise have to pay federal estate taxes at your death, consider contacting your estate planning attorney to determine your best course of action to limit your exposure to this tax.

Denice Gierach is a lawyer and owner of The Gierach Law Firm in Naperville. She is a certified public accountant and has a master’s degree in management. She may be reached at deniceg@gierachlawfirm.com or 630-756-1160.



By: Denice Gierach

About the Author:

Stacee Thoms

There are many reasons that make an estate plan very important. When you are unable to take decisions regarding your healthcare due to illness or accident there needs to be someone who can legally take such decisions on your behalf. Alternatively, if you require long-term care, which is not covered by medical insurance, you have to make alternative arrangements beforehand. There may be many responsibilities that would need to be performed in case of your incapacity or death. Your estate plan can cover all arrangements in case of the above-mentioned eventualities. To find out how it can do this, read on.

a) Planning for incapacity:- It is important to have arrangements that can ensure that you are taken care of in the event of your incapacity. To do this

. Make a living will:- This legal instrument documents your intentions about using life-sustaining measures when you are in a state of terminal illness. It expressly states your wish in this regard and acts as a bar for anyone to speak on your behalf.

. Prepare a health care power of attorney:- This document is to authorize a specific person to decide upon your healthcare measures when you fall in an unconscious or vegetative state or are unable to take your own health care decisions on account of any other reason(s). Laws in all states are not uniform on this issue but many state laws can permit you to include instructions about continuing or withholding life-sustaining care in this document.

. Buy Insurance for long-term care:- As things presently stand, health insurance does not cover the cost of long-term care. As such, in case when such care becomes necessary it is your spouse or other family members who have to foot the bill. The remedy is to take out a long-term insurance policy.

. Form a revocable living trust:- A revocable living trust will enable you to appoint a trustee who can succeed you in order to manage the trust when you cannot do this due to injury or illness/death and avoid any probate court guardianship issues.

. Create a durable power of attorney:- This a legal document that lets you appoint an ‘attorney-in-fact’ or ‘agent’ who can perform various responsibilities on your behalf. There are many responsibilities involving banking transactions, safety deposit boxes, insurance claim settlements, filing of tax returns, matters related to government benefits, purchase, sale and management of real estate etc. that have legal implications. The durable power of attorney will vest your agent with authority to carry out all the work on your behalf, legally.

b) Avoiding probate:- You can avoid you heirs going through harrowing probate proceedings, which are also very costly and can consume a big part of your estate in legal costs and fees. ‘Transfer on death accounts’ avoid probate proceedings letting you maintain sole ownership of assets as long as you are alive. Designate beneficiaries for annuities, individual retirement accounts, life insurance, and retirement plans. Note that these designations have precedence over other claims arising out of trusts, wills etc. Revocable living trusts also help avoiding probates as your trustee takes charge to manage/distribute your property in accordance to your wishes in the event of your death or incapacity. Titling your assets as ‘joint ownership with rights of survivorship’ can also avoid probate.

c) Forming charitable trusts or making gifts to charity:- Depending on your goals, you can make gifts of IRAs, retirement plans, annuities, make charity a beneficiary to life insurance benefits or establish a charitable trust(s). There are ways through which you can avoid estate tax, capital gains tax, get a reduction on income tax payable etc. along with receiving lifetime income from assets that are to be distributed to charity after your death.

d) Avoiding estate tax burden:- Form other trusts to eliminate/mitigate estate tax payable by your heirs:- You can form bypass trusts, A/B trusts or other types of trusts to ensure that your heirs are not burdened by avoidable estate taxes. Your estate tax consultant will be able to guide you how to go about this.



By: Kris Koonar

About the Author:

Mariam Quiel

There must be some reason that the rich keep getting richer.  Think about it-generations upon generations have managed to pass their wealth on to their progeny.  The Rockefeller and Kennedy families have done it.  The Gates and Buffet and Trump families will do it.  If you have survived this market, and made any money at all in it, you have got to start thinking about how to pass it on to your next generation.  Sure, the government needs money too, but don’t let them take all of yours through an estate tax.  Take these steps now to preserve your estate tomorrow.

As you start to plan your estate transference, you are taking the right first step.  Read and learn as much as you possibly can about estate tax and passing wealth on.  You will likely find confusing, or even conflicting information.  Write it down, and research.  Ask questions.  You can never learn too much about this topic; estate tax can be very interesting when studied in depth.

Have you been the beneficiary of estate transference?  Did you inherit property, stocks, cash, a business, or other assets?  Was that process a wealth building exercise for you?  Then talk to the person or people responsible for executing the estate and estate tax.  Find out what they did, and how the process was planned out.  If you inherited an estate (or, more likely parts of an estate) that did not go well, or where you ended up owing money instead of making money, ask questions about that process too.  Where did it go well?  Where did it run off the rails?  Where would the executor, or the original estate planner, make changes to the plan or its execution?  Start talking now.  If one of your family members is working on an estate transference plan, talk to them about how their plan will deal with the issue of estate tax.  You both may learn something.

Thus armed with the information you have learned so far, you can start planning your own estate, with the estate tax and its rules firmly planted and well understood.  Your next step is to start thinking about how you would distribute your assets.  Consider the case of the Buffet and Gates.  These men started with a small fortune, turned it into an enormous fortune, and are passing on only a small fortune to their next generations.  Enough to live comfortably on, but if the next Gates generation wants to count itself among the richest people in the world; they will have to earn most of it themselves.  Gates, like Buffet, is dedicating the bulk of his fortune to philanthropic causes.   Will you follow in their footsteps?  How much of your estate should be passed to your family versus passed to a charity or a church?  Don’t make a decision just yet, but start to frame the conversation.

Finally, discuss your thoughts with the people you are considering passing your estate to.  They likely know their own situation better than you do.  They will know how an estate tax will impact them.



By: Otto Ruebsamen

About the Author:

Adrian Brunzel

US laws heavily tax the estate of a deceased person if the value of the estate exceeds certain limits. For the year 2007 and 2008 this limit is fixed at $2 million. 2009 will see this limit climbing to $3.5 million. The rate of taxation for the amount above the exemption limit is a flat 45%. Every dollar above the limit will lose 45 cents to estate taxes.

There are many ways to avoid or mitigate estate taxes. Transferring property through gifts is one of them. As a general rule, all gifts excluding certain exceptions are subject to gift tax. The exceptions for are :-

Gifts made to ones spouse

Gifts to political organizations for their use

Gifts to charities.

Gifts to cover someones tuition or medical expenses paid directly to an educational institution or medical service provider.

Gifts up to $12000 to a person in one calendar year. This is known as Annual Exclusion.

The lifetime exclusion limit for each taxpayer is $1million. Therefore, any number of $12000 gifts would remain non-taxable even if made in one calendar year but to different persons. You can lower the size of your estate during your lifetime through gifts to escape the estate tax net.

Gifts can be used in estate tax planning by using the annual gift exclusion. Although the annual exclusion limit of $12000 may not appear to be much on the face of it, it can serve to substantially lower the estate size over a period of time. Let us examine how it can do this.

You give $12000 dollars each year to a son/daughter/any other person and pay no tax. In this case, no gift tax return is to be filed. If married, the amount doubles as your spouse is entitled to make a non-taxable gift of a similar amount. This amounts to $24000 a year to a married couple. Now for a person with four children, who receive similar gifts, the amount would total to $96000 every year. When the children are married and the spouses also receive similar gifts the amount of the total non-taxable gift in a year comes to $192,000. This way over a period of five years, one can make TAX FREE transfer of wealth from the estate and lower its taxable value by a figure close to $1Million!

Considering this $1million to be above the estate tax exemption limit, at present rates it would attract an estate tax of $450,000 if allowed to pass on to heirs by inheritance after death.

As already discussed, a married couple can make tax-free gifts of $24000 each calendar year. Even when the gift amount is not evenly contributed by them, they can still make a taxless gift up to that amount by taking advantage of the gift splitting provision.

Both partners must agree to take advantage of gift splitting and each will have to file a gift tax return by filling form 709. Both returns need to be filed even when Below the Exemption Limit Share of one partner does not require a return to be filed in the usual course. Let us examine how this works.

A married couple A and B together gift a total of $39000 to two persons. A gifts $21000 to his nephew C and B gifts $18000 to her niece D. Both gifts are above $12000 and liable for gift tax.

By filling Form 709 for Gift Splitting, As $21000 is treated as being given in equal amounts of $10,500 both to C and D which is within exemption limits. Similarly, Bs $18000 is again treated as being given in equal amounts of $9,000 each to C and D that is within exemption limits. This way a substantial gift tax that would otherwise have been payable on both the gifts is saved through gift splitting.

You can also make gifts without any limits to your spouse without any tax being applicable. This would lower your estate tax liability and can even eliminate it if it can lower the size of your estate to that extent. However, the amount would be taxable in the estate of your spouse on his/her death if the estate were larger than the exemption limit unless suitable plans are implemented before the second death to take care of applicable estate taxes. Other non-taxable gifts mention earlier can also help reduce estate taxes through proper use.



By: Kris Koonar

About the Author:

Elwood Rados

It is always beneficial during tax season to own real estate, which gives you many annual deductions. If you purchased residential real estate during this year, however, you can look forward to even more generous savings at tax time.

Mortgage Interest

Though there are several real estate deductions you will be able to take this tax year, the largest is the interest you paid on your mortgage. According to Kiplinger’s (August 31, 2006), you may write off up to $1 million in mortgage interest for your primary or secondary home (does not apply to third home real estate, unless it is a business or rental property). This can be an enormous tax savings, especially within the first years of ownership with most of your monthly payments going to interest.

Property Taxes

Each year, you may deduct the property taxes you paid. If you recently purchased your home real estate, you also may deduct any taxes the seller paid in advance that were applied to your property tax debt. This applies even if you did not reimburse the seller for these real estate taxes.

Points Paid for Mortgage

Even if the seller paid your points, you may deduct them on your tax return within the year of purchase of the real estate. Each point is worth one percent of the real estate mortgage. For a loan principal of $250,000, you may deduct $2,500 for each point. For a loan face value of $500,000, you may deduct $5,000 per point.

If you refinanced your real estate, you also may deduct these points paid. However, the deduction must be spread over the life of the loan. If you sell the real estate or pay off the loan early, then the remaining deduction may be taken within the year of sale or loan payoff.

Home Equity Debt

You are allowed to deduct up to $100,000 of home equity debt each year, regardless for what you used the money. This makes home equity loans low-interest alternatives for purchasing cars, paying student tuition, underwriting your dream vacation, and so on.

Home Business Use Deductions

If you run a business out of your home or use the real estate for business purposes, such as rental property, you have many deductions for the use of this space. For home offices, the percentage of space you actually use may incur the same percentage in deductions for mortgage payments, utilities and home insurance. Improvements made to accommodate the business, such as bringing the real estate up to standard as rental property or installing a private bathroom when renting out a room, may qualify for a deduction against your profits.

Property Damage

If you incurred uninsured real estate damage due to a qualifying disaster (especially within a presidential declared disaster area), you may qualify for a tax deduction. There are limitations, however, and the deduction generally must be taken within the year the disaster occurred.

What You Cannot Deduct

If you recently purchased or sold real estate, you incurred many costs but not all may be deducted from your taxes. Examples of nondeductible expenses are closing costs, major home improvements to attain a higher sales price, title insurance, appraisal and inspection fees, or attorney fees.

Don’t forget, deductions that lower your federal tax debt also decrease your state tax obligation! As with all financial advice, always check with a qualified accounting professional.



By: John Harris

About the Author:

Bud Caradine

Estate tax is a Federal tax levied on a decedent’s distribution of possessions to heirs identified by state law or will. Yet, the percentage of estates which are subject to the tax is very minuscule. The IRS reported that just over 2 percent of people who died in 2001 were subject to the estate tax.

 

When inaugurated, one of President Bush’s concerns was to phase out the estate tax, which resulted in the 2001 bill, reducing estate taxes. The Economic Growth and Tax Relief Reconciliation Act of 2001 generated a $1.35 trillion tax cut for the wealthy. By 2009, estates exceeding $3.5 million will be taxed phase out completely by 2010. For this reason, some have called the 2001 tax cut the “Paris Hilton Benefit Act.” Yet, Congress’s 2011 decision, whether to continue taxing estates, has become a heated topic in Washington. By analyzing the pros and cons behind repealing the estate tax, as well as a short insight into the gift tax, a better understanding of favoring or neglecting estate tax may be established and clearly evaluated.

 

Abolishing the estate tax decreases government revenues over ten years by $745 billion after 2011. Over these 10 years, the government will also lose $225 billion of interest from these funds; the total loss to the government is estimated to be $1 trillion. This deficit is catastrophic because it affects not only federal debt, but the funding of services for U.S taxpayers. Thus, tax cuts for multimillion dollar estates places further financial stress on healthcare, education, local homeland security, and Social Security. Another incentive to act in opposition of the repeal involves charities and foundations; such foundations include universities, museums, and churches which benefit from donations and inheritances. This being said, many high-income individuals bypass the estate tax by donating a great deal to charitable groups and nonprofit organizations. Repealing the estate tax would reduce this drive. According to the Congressional Budget Office, the repeal of the estate tax would decrease charitable bequests by 16 to 28 percent.

 

Small businesses and family owned farms applaud the termination of the tax in order to be tax free when passing down the business to next generations. Another change hurting small businesses is that as the estate tax is phased out, the step-up in basis will disappear as well. The step-up basis is the readjustment, upon inheritance, of the value of an appreciated asset for tax purposes. This change in step-up basis can negatively affect small business owners and farmers because a considerable amount of their wealth is in business asset form.

 

While discussing matters of the estate tax, it is also important to recognize the estate tax’s brother, the gift tax. The purpose of the gift tax is simple: if gifts were made throughout the entirety of one’s life, it would be possible to escape the estate tax completely. Gift and estate taxes coincide because gift transfers can greatly impact estate taxes. An example of gift taxes influencing estate taxes involves unified transfer tax credits. This tax credit establishes the amount of wealth which can be transferred between parties without incurring tax consequences. The two types of credits include the first which is available for taxable gifts and the second is available for transfers by death. For Federal income tax purposes, the unified tax credit can be exhausted only once (excluding exceptions). This being said, if the unified tax credit is used for gift purposes, it ceases to exist for estate tax purposes and vice versa.

 

If the estate tax is repealed taxpayers would more than likely see a change in the tax system. For example, Canada repealed its estate tax system in 1971. Today, a Canadian resident is considered to have immediately disposed of his or her assets prior to death. Thus, estates are subject to triggering capital gains tax on such assets at death under Canadian income tax. Compared to the United States, Canada has a significant increase in its capital gains tax, totaling 38.5% tax rate. The reason for such a high capital gains tax rate could be because of the termination of the estate tax. As a result, the United States might see similar capital gains tax consequences if the estate tax is repealed.

 

Today the estate tax has formed into a moral argument because it moderates the expanding gap between the wealthy and the poor. Revenues from the tax would help present more opportunity for those not inheriting riches. Some politicians want to keep the tax in order to force the rich to pay, while others would like to repeal it to save certain groups (farmers, small businesses owners, etc.) from its hardships. If Congress does not take action on the estate tax in 2010, the tax is kept relevant on January 1, 2011 with $1million exemption and a 55 percent tax rate. However, economic and political conditions will dictate the projections of the estate tax come 2011. Regardless of the debate among politicians, if the estate tax is repealed, another tax will most likely take its place. These pros and cons illustrate the difficultness for the United States government to repeal or sustain the estate tax for the year 2011.

 



By: Greg Suhocki

About the Author:

Bruna Carstens