Estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones during your lifetime. To spare your family from guessing what you want done, and to ensure that your wishes are carried out, put your wishes in writing. Generally, that means executing two documents:

1. A living will. This document expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests and pain medication. It also specifies the situations in which these procedures should be used or withheld.

A living will may contain a “do not resuscitate” order, which instructs medical personnel not to perform CPR in the event of cardiac arrest.

2. A health care power of attorney (HCPA). This document authorizes a surrogate — your spouse, child or another trusted representative — to make medical decisions on your behalf if you’re unable to do so. An HCPA is generally broader than a living will, though there may be some overlap.

An HCPA might authorize your surrogate to make medical decisions that don’t conflict with your living will. These might include consent for medical treatment, placement in a nursing home or other facility, or authorization to employ or discontinue life-prolonging measures.

It’s a good idea to have both a living will and an HCPA or, if allowed by state law, a single document that combines the two. Contact us with your questions regarding these or other aspects of the estate planning process.

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With the holidays and year-end approaching, you might be considering making gifts of stock or cash to family members and loved ones. By using your annual exclusion, those gifts — within generous limits — can reduce the size of your taxable estate. For 2022, the annual gift exclusion is $16,000. 

This covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer a total of $48,000 to them every year free of federal gift taxes. If these are the only gifts made in a year, there’s no need to file a federal gift tax return. If an annual gift exceeds $16,000 per person, only the amount that exceeds $16,000 is a taxable gift. In addition, even taxable gifts may result in no gift tax liability thanks to the unified credit.

Note: Gifts made to a spouse aren’t covered here, because these gifts are free of gift tax under separate marital deduction rules.

Married taxpayers and gift splitting

If you’re married, a gift made during a year can be treated as split between you and your spouse, even if only one of you gives the gift. That means, by gift splitting, a married couple can use their two exclusions to give a recipient up to $32,000 a year.  For example, a married couple with three married children can transfer a total of $192,000 each year to their children and the children’s spouses ($32,000 for each of six recipients).

Because more than $16,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $32,000 exclusion covers total gifts. If gift splitting is involved, both spouses must consent to it and that consent should be indicated on each gift tax return (or returns) that each spouse files.

Have you made gifts to one individual that exceed $16,000 within a year?  If so, we can prepare a gift tax return (or returns) for you.

Sidebar: 

“Unified” credit for taxable gifts

Gifts that are taxable because they aren’t covered by the annual exclusion may still not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $12.06 million for 2022.  The amount of the credit you use against a tax liability reduces or eliminates the credit available for use against the federal estate tax upon your death.

Gifts made directly to an educational institution to pay tuition or to a health care provider to pay for medical expenses on behalf of someone else do not count towards the exclusion. For example, you can pay $20,000 directly to your grandson’s college for his tuition this year, plus still give him a direct cash gift of up to $16,000.

Annual gifts reduce the taxable value of your estate. While the estate and gift exemption amount is historically high right now, it’s scheduled to fall in 2026 to around $8 million, depending on inflation. Congress could act to extend it or could make other changes to estate tax laws. Making large tax-free gifts could help insulate you against any later reduction in the unified federal estate and gift tax exemption.

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Many rules can potentially apply to the sale of business property, but what are the tax consequences? For simplicity, let’s assume that the property you want to sell is depreciable property used in your business and you’ve held it for more than a year. (Different rules apply based on property type, such as property held for sale to customers, intellectual property, low-income housing, and farming or livestock property.)

General rules

Under the Internal Revenue Code, your gains and losses from sales of business property are netted against each other. The net gain or loss qualifies for tax treatment as follows:

1. If the netting process results in a net gain, then long-term capital gain treatment results, subject to “recapture” rules discussed below. This treatment is generally more favorable than ordinary income treatment.
2. If the netting of gains and losses results in a net loss, that loss is fully deductible against ordinary income (so, none of the rules that limit the deductibility of capital losses apply).

Recapture rules

The availability of long-term capital gain treatment for business property net gain is limited by recapture rules. Recapture rules specify that amounts are treated as ordinary income rather than capital gain because of previous ordinary loss or deduction treatment for these amounts (such as depreciation, for example).

There’s a special recapture rule that applies only to business property. Under this rule, to the extent you’ve had a business property net loss within the previous five years, any business property net gain is treated as ordinary income, not as long-term capital gain.

More tax code details

Here are some more details about two types of property:

Section 1245 property. This is all depreciable personal property, tangible or intangible, and certain depreciable real property (usually, real property with specific functions). If you sell this property, you must recapture your gain as ordinary income to the extent of your earlier depreciation deductions on the asset.  

Section 1250 property. This type of property generally includes buildings and their structural components. If you sell such property that was placed in service after 1986, none of the long-term capital gain attributable to depreciation deductions will be subject to depreciation recapture.  (Additional rules apply for Section 1250 property placed in service before 1987.)

However, for most noncorporate taxpayers, the gain attributable to depreciation deductions up to the amount of the business property net gain will be taxed at no higher than 28.8% (as reduced by the business property recapture rule above). That’s 25% adjusted for the 3.8% net investment income tax, rather than the maximum 23.8% rate (20% adjusted for the 3.8% net investment income tax) that generally applies to long-term capital gains of noncorporate taxpayers.

Proceed with caution

As you can see, the tax treatment of the sale of business assets can be complex. Contact us for help with specific transactions or additional questions.

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Even though COVID-19 remains a concern, many people have started traveling again — and are planning to take trips during the holiday season. Unfortunately, as travel demand has increased, so has travel-related fraud.

For example, some fraud perpetrators posing as airline employees call would-be victims to try to elicit credit card numbers. Other scam artists send phishing emails that appear to offer cheap seats or rooms. And there are plenty of fake websites masquerading as legitimate travel companies.

Be alert for fraud

As you plan your next trip, take these steps:

Ignore unsolicited communications. If you receive an email, text, flyer or telemarketing call with a travel bargain, it’s probably smart to ignore it. Afraid of missing out on a deal? Directly contact the airline, hotel or rental car company featured in the promotion.

Book with established companies. Whether traveling for business or pleasure, make reservations with companies whose names you know. If you’re booking with a new service provider, read online reviews by fellow travelers. Some review platforms allow you to search using keywords, others identify keywords frequently used by reviewers and allow you to filter for those reviews. Also, perform an online search with the name of the company and words such as “fraud” or “scam.”

Watch out for lodging scams. Many travelers use online property marketplaces to find lodging. But you need to scrutinize listings. Some fraud perpetrators post ads for nonexistent properties with enticing, below-market rates. If a “property owner” asks you to move the conversation off the site to avoid fees, refuse the request. Reputable platforms provide some protections, such as insurance in the event the transaction results in fraud. They also include credit card protection.

Work with trusted services. If you travel frequently or don’t have time to research trips, consider engaging a travel advisor or travel agent. These professionals maintain close working relationships with legitimate companies, know about the latest deals, may be able to provide insider tips about your destination and can make reservations for you.

Follow your instincts

Before booking your vacation or business trip, scrutinize it for signs of fraud. If you doubt the legitimacy of a service provider or are suspicious of individuals involved in a transaction, go with your instincts and look elsewhere. Safe travel requires diligence before your journey begins.

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A Health Savings Account (HSA) coupled with a high-deductible health plan can be a powerful tool for funding medical expenses on a tax-advantaged basis. For 2022, individuals with self-only coverage can make tax-deductible contributions to an HSA of up to $3,650 ($7,300 for family coverage). These limits are increased by $1,000 for individuals aged 55 or older.

When an employer establishes an HSA and contributes on an employee’s behalf, the employer gets the tax deduction. And the employer’s contribution isn’t considered taxable compensation for the employee.

Accountholders can withdraw funds tax-free to pay qualified medical expenses. Once you reach age 65, you can withdraw funds penalty-free for any purpose (though if the funds aren’t used for qualified medical expenses, they’ll be subject to tax).

But there’s also a “hidden” advantage of HSAs that many people overlook: These accounts can play a helpful role in your estate plan. HSAs have an advantage over traditional IRAs and 401(k) plans in that they’re not subject to required minimum distributions at age 72. This means, to the extent you don’t use the account for medical expenses, the account can continue growing on a tax-deferred basis indefinitely — providing valuable future benefits for your loved ones.

If your spouse inherits the account, it will be treated as his or her own HSA. If someone else inherits it, the HSA will terminate and the recipient will be taxed on its value, less any qualified medical expenses of the decedent paid by the transferee within one year after the date of death.

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If you’re fortunate enough to own a vacation home, you may want to rent it out when you’re not using it. But how might that affect your taxes?

The answer lies in keeping good records. Before you post the “for rent” sign, consider how many days you, your relatives (even if they pay market rent) and nonrelatives use the home if market rent isn’t charged.

Under 15 days

In the right circumstances, renting the property out can produce revenue and significant tax benefits. If the property is rented out for less than 15 days during the year, it’s not treated as “rental property,” and the rent you collect isn’t included in your taxable income at all. On the other hand, you can only deduct (as itemized deductions) property taxes and mortgage interest — no other operating costs or depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you rent the property out for more than 14 days, you must include the rent received in income. However, you can deduct part of your operating expenses and depreciation, subject to certain rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, 75% of the use is rental (90 out of 120 total use days).

You may allocate to rental 75% of your costs such as maintenance, utilities and insurance, plus 75% of your depreciation allowance, interest and taxes for the property. The personal use portion of taxes is separately deductible as an itemized deduction. The personal use part of interest on a second home is also deductible (if eligible) where the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.

Claiming a loss

If the expenses exceed the income, you may be able to claim a rental loss (subject to the passive activity rules), depending on how many days you use the house for personal purposes. Here’s the test: If you use it personally for more than the greater of 14 days or 10% of the rental days, you’re using it “too much” and can’t claim your loss. In this case, you can still use your deductions to wipe out rental income, but you can’t create a loss. Deductions you can’t use are carried forward and may be usable in future years. If you’re limited to using deductions only up to the rental income amount, you must use the deductions allocated to the rental portion in this order: 1) interest and taxes, 2) operating costs 3) depreciation.

If you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim the loss. (The loss is “passive” and may be limited under passive loss rules.)

Planning ahead

These are the basic rules. There may be other rules if you’re considered a small landlord or real estate professional. Contact us if you have questions. We can help plan your vacation home use to achieve optimal tax results.

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A check kiting scheme relies on “float” time, which is the period between when a check is deposited and when the bank collects the funds on the check. Some banks accept check deposits and release funds immediately, in the interest of good customer service. That’s similar to providing accountholders with interest-free loans.

In recent years, the float time has narrowed, but there’s still opportunity to capitalize on that delay and some unethical businesses take advantage of that time. Check kiting schemes typically involve two or more banks, though some schemes can involve multiple accounts at one bank if there’s a lag in how the institution processes checks. The perpetrator’s goal is to falsely inflate the balance of a checking account so that written checks that otherwise would bounce, clear.

Strategies for grounding the kite

Check kiting is a federal crime that can lead to up to 30 years in federal prison, plus hefty fines. Even if a bank doesn’t press charges, it may close the account and report the incident to ChexSystems (similar to a credit bureau), making it difficult to open a new business account.

Here are five strategies your organization can implement to keep people from using your company’s accounts for check kiting:

1. Educate employees about bank fraud.Describe the types of transactions that qualify as bank fraud and their red flags. That makes workers aware of suspicious activities and demonstrates management’s commitment to preventing fraud.
2. Rotate key accounting roles.Segregate accounting duties. Rotate tasks among staffers ifpossible to help uncover ongoing schemes and limit opportunities to steal.
3. Reconcile bank accounts daily.Make sure someone trustworthy, who isn’t involved in issuing payments, reconciles every company bank account.
4. Maintain control of paper checks.Store blank checks in a locked cabinet or safe and periodically inventory the blank check stock. Also limit who’s allowed to order new ones.
5. Go digital.The most effective way to prevent most check fraud is to stop using paper checks altogether. Consider replacing them with ACH payments or another form of electronic payments.

Tighten up

Check kiting is relatively easy to perpetrate, particularly if your company isn’t vigilant about its check stock and bank account activity. For help tightening your internal controls, contact us.

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If you’re planning to sell capital assets at a loss to offset gains you realized during the year, beware of the “wash sale” rule. Under this tax rule, selling stock or securities for a loss and buying back substantially identical stock shares or securities within 30 days before or after the sale date means the loss can’t be claimed for tax purposes.

The rule

The wash sale rule is designed to prevent taxpayers from benefiting from a loss without actually parting with ownership. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. (If you participate in dividend reinvestment plans, the wash sale rule may be inadvertently triggered when dividends are reinvested under the plan, if you’ve separately sold some of the same stock at a loss within the 30-day period.)

Although the loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock to increase its tax basis for future disposition. So, the disallowed amount can be claimed when the new stock is finally disposed of (other than in a wash sale).

An example

Assume you buy 500 shares of XYZ Inc. for $10,000 and sell them on November 5 for $3,000. On November 29, you buy 500 shares of XYZ again for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.

If only a portion of the stock sold is repurchased, only that portion of the loss is disallowed. In the example above, if 60% of the shares sold were bought back, you’d be able to claim 40% of the loss on the sale. The remaining loss would be disallowed and added to your cost of the repurchased shares.

No surprises

The wash sale rule can deliver a nasty surprise at tax time. Contact us with questions.

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The term “sandwich generation” was originally coined to describe baby boomers caught between caring for their aging parents and their children. These days the term applies to whichever generation is grappling with the problem. If you’re in the middle of the sandwich, it may be time for some honest discussions with the other parties about pressing issues.

It’s a good idea to start the talks with the “bottom” of the sandwich: your children. Assuming they’re still in their formative years, make them your top priority. At this stage, you’ll still have most of the control over decisions that affect their lives. These involve personal choices that are different for every family.

The “top” half of the sandwich can be more problematic. Depending on their health status, finances and other factors, your parents may not welcome assistance. They may be dismissive of your concerns and may display attitudes ranging from cooperative to highly resistant.

To initiate a family meeting, invite all the key players — your parents, siblings, their spouses if appropriate and, possibly, others. Generally, it’s best to hold such a meeting face-to-face.  But if distance or other factors make this unrealistic, an online video chat might work as well.

What should you discuss? Cover the entire tax and financial planning gamut. The dialogue should be frank and honest. Many issues can be sensitive and emotions may run high. So be prepared for some handwringing or pushback.

You may find that one session isn’t enough to accomplish your objectives. In fact, you might discover a need to include additional family members to resolve the issues. You may even want to broaden the circle to include your CPA or attorney.

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October 17 – Personal federal income tax returns for 2021 that received an automatic extension must be filed today and any tax, interest and penalties due must be paid.

• The Financial Crimes Enforcement Network (FinCEN) Form 114 “Report of Foreign Bank and Financial Accounts” (also known as the “FBAR”) must be filed by today, if not filed already, for offshore bank account reporting. (This report received an automatic extension to today if not filed by the original due date of April 18^th.)
• If an extension was obtained, calendar-year C corporations should file their 2021 Form 1120 by this date.
• If the monthly deposit rule applies, employers must deposit the tax for payments in September for Social Security, Medicare, withheld income tax and nonpayroll withholding.

October 31 – Employers must file Form 941 for the third quarter (November 10 if all taxes are deposited in full and on time).  Also, employers must deposit FUTA taxes owed through September if the liability is more than $500.

November 15 – If an extension was obtained, calendar-year tax exempt organizations should file their 2021 returns. If the monthly deposit rule applies, employers must deposit the tax for payments in October for Social Security, Medicare, withheld income tax and nonpayroll withholding.

December 15 – Fourth quarter 2022 estimated tax payments are due for calendar-year corporations. If the monthly deposit rule applies, employers must deposit the tax for payments in November for Social Security, Medicare, withheld income tax and nonpayroll withholding.