PRESIDENT PROPOSES GIFT LIMIT CHANGES
If you are fortunate enough financially to be able to make significant gifts to family members and others, you may want to pay attention to the changes in gift tax law being proposed by the President. For a number of years, the amount of tax-free gifts one could make was limited to an annual per-recipient amount of $14,000 and an additional lifetime amount of $1 million dollars. Those rules were liberalized beginning in 2010, when the gift and estate tax limits were unified so that the estate tax exclusion could be used for a combination of taxable gifts and estate tax exclusions. This currently permits gifts to the estate tax exemption limit of $5.34 million for 2014 without incurring any gift tax. But, gifts in excess of the annual $14,000 limit are not without future estate tax implications, because a gift that exceeds the annual per-recipient exclusion reduces the estate tax exemption by the excess amount of that gift. So, current gifts could cause the taxable estate of the gift-giver to be higher, and taxed at rates substantially higher than normal income tax rates when he or she passes away. The President’s estate and gift tax proposal would, beginning in 2018, return the estate, generation-skipping transfer (GST), and gift tax exemption and rates to the 2009 levels. Thus, the top tax rate would be 45%, up from the current 40%, and the exclusion amount would be $3.5 million for estate and GST taxes, nearly $2 million less than the current exclusion amount. In addition, the lifetime exclusion for gifts would return to $1 million. The proposal makes no changes to the amount of the annual gifting limit. Even though 2018 is over three years away and there are no assurances that the President’s proposal will actually become law, its potential impact on gift-giving should be considered in one’s long-term gift planning.
IRS REINTERPRETS THE IRA ROLLOVER LIMITATION
There is a rule that allows taxpayers to take money out of their IRA and avoid paying income tax and the 10% early distribution penalty so long as they return that money to their IRA account within 60 days. However, tax law limits the number of rollovers to one per year. In the past, the IRS has taken a liberal view toward the one-per-year limit by allowing one rollover per IRA account each year. In other words, if you have three separate IRA accounts, you can apply the 60-day rollover rule to each IRA account. But, a recent Tax Court case ruled that the once-per-year rollover applied to the aggregate of all of the taxpayer’s IRA accounts, meaning all of a taxpayer’s IRAs are treated as one, for the purposes of applying the once-a-year rollover limitation. The IRS has announced it will adopt the Tax Court’s ruling, meaning that a person cannot make an IRA-to-IRA rollover if he or she made such a rollover involving any of their IRAs in the preceding one-year period. Since both the IRS’s proposed regulations and Publication 590 currently permit one rollover per account, the IRS is extending transitional relief and will not apply the interpretation to the rollover rule to any rollover that involves an IRA distribution occurring before January 1, 2015. These actions by the IRS will not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another because such a transfer is not a rollover and, therefore, is not subject to the one-per-year rollover limitation. Taxpayers that might be considering utilizing the 60-day rollover rule should be cautious about possibly violating the once-per-year rollover rule.
INCORRECT ESTIMATES WILL CHANGE YOUR ASSISTANCE
If you are signed up for health insurance through a health insurance marketplace, you may have qualified for the premium assistance tax credit. This credit can provide financial assistance to help you pay for your health insurance premiums. Individuals and families that qualify for the credit are given the choice to receive the credit in advance to reduce the insurance premiums during the year, or they can pay the full insurance premiums and get the credit when they file their tax return the next year. If you chose to take the advance credit (premium subsidy), you should be aware that the credit on which the subsidy is based was determined using estimated household income and family size for the year. If your estimated household income and family size are different from the actual amounts reported when you file your 2014 return next year, the following will happen: 1) if you overstated your income or family size and you received some premium subsidies based on an advanced credit that was less than you were entitled to, you will receive credit for the difference on your 2014 tax return; or 2) if you understated your income or family size and you received premium subsidies based on an advanced credit that was more than you were entitled to, you will have to pay back some or all of the difference on your 2014 return. A taxpayer’s family size is the number of individuals for whom the taxpayer is allowed an exemption deduction for the tax year. For example, if you are married and filing jointly with two dependent children, your family size would be four. The term “household income” includes the modified adjusted gross income (MAGI) of the taxpayer plus the sum of MAGIs of all individuals taken into account when determining the taxpayer’s family size and who had to file a tax return. MAGI is generally the same as your income unless you have certain adjustments. For example, say you are filing jointly with your spouse and only you work and make $40,000 per year. You also claim your two kids as dependents and one of them has a part-time job and made $9,000 for the year. You have no adjustments to reduce your income, so your household income would be $49,000. Your child’s income is included in your household income because making $9,000 would have required the child to file a tax return. If you had not included your child’s income in your household income, the advance credit, and the corresponding premium subsidy, would be more than you were entitled to and you may have to pay part of it back. That is why, if you decided to get the credit in advance, it’s important to report any changes in your situation to the marketplace throughout the year. Reporting these changes at once will help you get the proper type and amount of financial assistance, so you can avoid getting too much or too little in advance.
