Taxes

Are you nervous to open the envelope to review the contents? Before your blood pressure rises, take a breath and consider these things to do as suggested by the IRS:

Individual Taxpayers: Seven Things to Do When an IRS Letter Arrives

The IRS mails millions of letters to taxpayers every year for many reasons. Here are seven simple suggestions on how individuals can handle a letter or notice from the IRS:

1. Don’t panic. Simply responding will take care of most IRS letters and notices.
2. Read the entire letter carefully. Most letters deal with a specific issue and provide specific instructions on what to do.
3. Compare it with the tax return. If a letter indicates a changed or corrected tax return, the taxpayer should review the information and compare it with their original return.
4. Only reply if necessary. There is usually no need to reply to a letter unless specifically instructed to do so, or to make a payment.
5. Respond timely. Taxpayers should respond to a letter with which they do not agree. They should mail a letter explaining why they disagree. They should mail their response to the address listed at the bottom of the letter. The taxpayer should include information and documents for the IRS to consider. The taxpayer should allow at least 30 days for a response.

When a specific date is listed in the letter, there are two main reasons taxpayers should respond by that date:

• To minimize additional interest and penalty charges.
• To preserve appeal rights if the taxpayers doesn’t agree.

6. Don’t call. For most letters, there is no need to call the IRS or make an appointment at a taxpayer assistance center. If a call seems necessary, the taxpayer can use the phone number in the upper right-hand corner of the letter. They should have a copy of the tax return and letter on hand when calling.
7. Keep the letter. A taxpayer should keep copies of any IRS letters or notices received with their tax records.

KEEP BREATHING – IT MAY NOT BE AS BAD AS YOU THINK!

TIS the holiday shopping season and you are surfing the internet for the perfect gifts.  You have a few minutes while waiting somewhere so you take advantage of free wi-fi.  You found the perfect gift on a website you haven’t visited before and set up an account.  But WAIT, are you going to get more than that perfect gift?  Is your personal information vulnerable on the free wi-fi?  Here are some tips from the IRS to help keep your data safe:

During the holiday shopping season, shoppers are looking for the perfect gifts. At the same time, criminals are looking for sensitive data. This data includes credit card numbers, financial accounts and Social Security numbers. Cybercriminals can use this information to file a fraudulent tax return.

This tip is part of National Tax Security Awareness Week. The IRS is partnering with state tax agencies, the tax industry and groups across the country to remind people about the importance of data protection.

Anyone with an online presence can do a few simple things to protect their identity and personal information. Following these eight steps can also help taxpayers protect their tax return and refund in 2018:

• Shop at familiar online retailers. Generally, sites with an “s” in “https” at the start of the URL are secure. Users can also look for the “lock” icon in your browser’s URL bar. That said, some criminals may get a security certificate, so the “s” may not always mean a site is legitimate.
• Avoid unprotected Wi-Fi. Users should not do online financial transactions when using unprotected public Wi-Fi. Unprotected public Wi-Fi hotspots may allow thieves to view transactions.
• Learn to recognize and avoid phishing emails that pose as a trusted source. These emails can come from a source that looks like a legitimate bank or even the IRS. These emails may include a link that takes the user to a fake website. From there, the thieves can steal usernames and passwords.
• Keep a clean machine. This includes computers, phones and tablets. Users should install security software to protect against malware that may steal data. This software also protects against viruses that may damage files.
• Use passwords that are strong, long and unique. Experts suggest a minimum of 10 characters. Use a combination of letters, numbers and special characters. Use a different password for each account.
• Use multi-factor authentication when available. Some financial institutions, email providers and social media sites allow users to set their accounts for multi-factor authentication. This means users may need a security code, usually sent as a text to their mobile phone, in addition to a username and password.
• Sign up for account alerts. Some financial institutions will send email or text alerts to an account holder when there is a withdrawal or change to their accounts. Generally, people can check their account profile to see what added protections may be available.
• Encrypt sensitive data and protect it with a password. People who keep financial records, tax returns or any personal information on their computer should protect this data. Users should also back up important data to an external source. When disposing of a computer, mobile phone or tablet, people should make sure they wipe the hard drive of all information before trashing.

The IRS has experienced more and more potential harm being caused to taxpayers by the sophisticated individuals who have nothing better to do than find ways to scam people.  The following is information published by the IRS to help individuals become more aware of potential threats:

The IRS reminds people to be on the lookout for new, sophisticated email phishing scams. These scams not only endanger someone’s personal information, but they can also affect a taxpayer’s refund in 2018.

This tip is part of National Tax Security Awareness Week. The IRS is partnering with state tax agencies, the tax industry and groups across the country to remind people about the importance of data protection.

Phishing attacks use email or malicious websites to get personal information from the user. In many cases, the criminal fools someone into believing the phishing email is from someone they trust. The emails often have the look and feel of authentic communications. These targeted messages can trick even the most cautious person into doing something that may compromise data.

People should be vigilant and skeptical. Even if the email is from a known source, people should use caution because cybercrooks are very good at mimicking trusted businesses, friends and family.

Here are six examples of email phishing scams:

• Emails requesting personal information. The thief might ask for bank account numbers, passwords, credit cards and Social Security numbers. This is the most common way thieves steal data.
• An email urgently warning the recipient to update online financial accounts at a hyperlink provided in the email. The link goes to a fake site.
• A message with an email address spoofing a familiar address to look like trusted businesses, friends and family. The fake address has a slight change in text, such as name@example.com vs narne@example.com. Merely changing the “m” to an “r” and “n” can trick people.
• Emails saying the recipient has a tax refund waiting at the IRS or that the IRS needs information about insurance policies. The IRS doesn’t initiate spontaneous contact with taxpayers by email to request personal or financial information.
• The message has hyperlinks that take someone to a fake site. In one example, the email says: “Following recent calculations, we notice that you are eligible to receive a tax refund. In order to start the refund procedure, please visit this link and follow the steps required.” The link goes to a fake site. The IRS doesn’t send emails asking for refund verification.
• The message includes a PDF attachment that may download malware or viruses. Never open an attachment from a suspicious email address.

BE AWARE – PROTECT YOURSELF AND YOUR INFORMATION!

The last few months have brought dramatic changes in the taxation of an individual’s assets upon his or her death. For many, there will no longer be any need to plan for the minimization of death taxes.

Residents of the State of New Jersey are subject to three death taxes: (1) the federal estate tax, (2) the New Jersey estate tax, and (3) the New Jersey Transfer inheritance tax. Residents of the Commonwealth of Pennsylvania are subject to the federal estate tax and their own version of the inheritance tax. Practically speaking Pennsylvania does not have an estate tax, as its law provides that it would absorb any credit, or sponge tax, allowed from the federal estate tax, but that concept has been repealed for years.

In 2017, the New Jersey Estate tax exemption will increase to $2,000,000. In 2018, the New Jersey estate tax will be no more.

In 2017, the exemption from the federal estate tax will increase to $5,490,000 per person, and, if portability is properly used, $10,980,000 per couple. Although the intentions of an incoming president are not always translated into legislative action, President-Elect Trump seeks to eliminate the federal estate tax altogether. With Republicans controlling both the House and the Senate, that objective may well be realized. In exchange for repealing this tax, the step-up in basis for capital assets would be eliminated for estate assets in excess of $10,000,000.

The gift tax exemption will remain at $14,000 per person per year.

There is no adjustment from either New Jersey or Pennsylvania for its inheritance taxes. Both remain alive and well.

Christopher C. Economaki, a widower, died on September 28, 2012. He was survived by his two daughters, Christine and Corinne. Christine was named as Executor of his estate.

Christopher’s Will poured over into a Trust. The Trust left a $215,000 bequest to Christine to adjust for a comparable annuity distribution to Corinne. The balance was to be divided in proportions among his daughters and Christine’s two children.

However, Christopher left virtually no distributable estate in probate estate or trust. Although he amassed millions of dollars of assets over his life, he made substantial gifts to his family after his wife died in 2008. Upon his death, his assets consisted primarily of an annuity worth $4,292,800 as well as several life insurance policies and an IRA of modest values. These assets passed to his daughters and Christine’s two children. The only significant asset to pass through his estate and trust was the obligation under a promissory note, with a 5 year term, executed by Christine and delivered to Christopher in April 2010 – coincidentally in the amount of $215,000.

Per Christine’s accountant, the various federal and state estate and gift taxes totaled $1,895,955. Because there was no liquid asset to pay the taxes, Christine proposed that the she and her sister contribute $731,982 each, and that her daughters contribute $192,995.50 each to pay these obligations. Corinne contributed $649,858 and Christine sued her for the balance of $82,024.

Corinne contended that estate assets should be the first source of funds to pay the taxes owed by the estate, and that repayment of the $215,000 loan by Christine would be this source. Christine argued that she forgave or canceled the note by waiving the specific bequest of $215,000 in the Trust. Both sides moved for summary judgment. The trial court agreed with Corinne and its decision was upheld by the Appellate Court (Riedl v. Economaki, 2016 N.J. Super. Unpub. LEXIS 2169 (App. Div. Sept. 30, 2016)).

In making its decision, the Court cited the language in the Trust which mandated that all taxes and debts be paid from the trust estate. The Court rejected Christine’s argument that such taxes should be apportioned, as the language of the trust prevails. The Court further held that if Christine had repaid the Note, $215,000 would be available to pay taxes prior to seeking contributions from other beneficiaries.

In making its decision, the Court rejected Christine’s argument that she could offset her debt to her father by waiving her specific bequest. As it strongly stated, the taxes, debts and administrative expenses of an estate must be paid before the enjoyment of any bequest. To try to offset the two was deemed an unacceptable manner of handling these obligations.

In all the Court’s decision is significant in two regards. First, it affirms that a will or trust containing language that mandates the manner in which estate taxes are paid can supersede the state statute that prorates these obligations in the absence of such language. Second, debts of estate beneficiaries are clearly assets of an estate, and they cannot be forgiven especially when such forbearance would thwart the rights of taxing authorities or creditors.

On Friday, September 30, after two failed attempts, the third time was the charm for lawmakers from both sides of the aisle when they reached a deal, giving the NJ estate tax its own death sentence. Under the deal, on January 1, 2017, the exemption from this tax will increase from $675,000 to $2,000,000. On January 1, 2018, the New Jersey estate tax will be phased out completely. An official vote in the Assembly and Senate is anticipated for Wednesday, October 5, 2016. Lawmakers are confident that there is easily enough support for the deal to pass.

The phase out of the NJ estate tax was a concession in a larger bill to replenish the state’s Transportation Trust Fund. The bill will increase the tax on gasoline while lowering the sales tax from 7% to 6.875% in 2017 and to 6.625% in 2018. Other concessions were made for retirees, veterans and the working poor.

On its face, the elimination of the estate tax is cause for celebration. NJ is in the minority of states which impose such a tax and its exemption has been far lower than most states, which have exemptions in excess of $1,000,000. Moreover, the deal will eliminate the angst which families who pay a tax on money which has already been taxed during lifetime when it was earned.

On the other hand, the cost to eliminate this tax is enormous. New Jersey has a debt in excess of $10 billion dollars. Yet it is going to eliminate a source of revenue which can provide between $300 million to $500 million per year according to various research groups. Although it is hard to argue the idea of eliminating the tax, one can question doing so with such a large deficit and no plan to replace the revenue. The increased gas tax is earmarked for roads and bridges only.

To get a sense of the practical impact of this bill, let’s take a look at its real impact on the taxpayer. At this time, gas prices in New Jersey are slightly less than $2 per gallon. So if consumers buy 50 gallons of gas, and are currently paying $100, they will be paying an extra $11.50 at the pump. If consumers are spending $100 on goods subject to a sales tax, their tax will be reduced from $7.00 to $6.63 – a savings of 37 cents. Arguably, it is hard to find the tradeoff for the taxpayer here.

In the meantime, NJ has the fifth highest income tax burden with a top rate of 8.97%. When factoring in property and other taxes, the average burden to the taxpayer is 12.3% of income earned. This ranks New Jersey as the second worst state in which to live as to taxation. The increase in the gas tax will certainly not help this ranking.

Joseph Rendeiro died on December 3, 2006. His Last Will and Testament, dated June 2, 2006, left a specific bequest of $10,000 to his granddaughter, Jessica Fagin, a $25,000 bequest to his sister, Mary Pereira, and the rest of his $2,218,733.66 estate to his son-in-law, Peter De Rosa who was also named Executor of the estate.

Jessica Fagin filed an action in the probate court seeking to set aside the Will on the grounds that the Will was the product of undue influence exerted by De Rosa and that her grandfather was not mentally competent when he signed the Will. In 2008, the matter was mediated and the parties reached an agreement whereby Jessica would receive $400,000 rather than $10,000.

In June 2009, De Rosa filed a New Jersey Inheritance Tax return and paid $178,925.57 plus interest. The return was rejected by the State which assessed the tax at $239,279.22. De Rosa had asserted that the tax due to the State should be calculated in a manner which incorporated the settlement with Fagin.

Fagin, as a granddaughter, was a Class A beneficiary and exempt from the inheritance tax. De Rosa, was a Class C beneficiary, who was subject to a tax calculated at rates ranging from 11% to 16%. De Rosa argued that the tax should be assessed in a manner reflecting the actual distribution. The State maintained that the tax to be assessed is calculated solely by the terms of the Will and shall not be altered by a settlement.

The Appellate Court agreed with the State. In De Rosa v. State of New Jersey (Docket No.: A-2995-14T1, Decided July 19, 2016), the Court maintained the standard set forth in Pope v. Kingsley, 40 N.J. 168, 174 (1963), that held that the inheritance tax must be calculated in accordance with the distribution made in a Will and not by the terms of a settlement.
The takeaway from this case is that settlements of contested probate matters should be undertaken with the knowledge that taxes will be assessed at the rates imposed as a result of the Will and that cannot be negotiated away. Thus, in determining whether a settlement is appropriate, a calculation of tax liabilities should be undertaken prior to reaching an agreement.

Years ago, there were a series of commercials in which ordinary folks would go into operating rooms to perform surgeries, fly helicopters and ride bulls.  Of course, they would have no training or qualifications.  Yet when asked if they were a doctor or a pilot, etc, they would also respond, “No, but I did spend last night at a Holiday Inn Express!”  It was catchy and I’m sure good marketing.  However, living in the do it yourself age can come with many risks.

In 2007, C.W. began residing in a nursing home in Union County.  On or before March 1, 2008, she transferred virtually her entire estate worth $863,935.11 to her children.  On March 11, 2008, she applied for Medicaid before the Union County Board of Social Services.  Her application was denied, and she was assessed a penalty of ineligibility for Medicaid benefits of ten year, four months and thirteen days.

Her children transferred back $234,600 in cash as well as the home back to C.W.  Both sources of assets were used to pay for her care.  On January 29, 2013, C.W. reapplied for Medicaid benefits and sought to have the original penalty of ineligibility reduced by the amount of assets returned.  However, the Appellate Division of the New Jersey Superior Court said this plan of action was insufficient and upheld the denial of the new application of C.W.

In a stirring decision, C.W. v. Div. of Medical Assistance and Health Servs. (Aug. 31, 2015 #22-2-7790), the Court held that once a penalty period is set it cannot be reduced unless and only if the entire amount of assets were transferred back to the gifting party.

This case highlights the need to avoid what is now being commonly referred to as “do it yourself” Medicaid planning.  With the amount of assets which were available to be transferred, the maximum period of ineligibility should not have exceeded the five year lookback.  This case emphasizes the need to hold off on applying for Medicaid until the look-back period has expired.

What is not reported but which may have also occurred is the tax ramifications upon the family.  When assets are transferred, income taxes may be unnecessarily imposed if there are tax deferred income products such as IRAs and annuities.  If capital assets such as real estate and stock are transferred, a carry over basis may result which will lead to often avoidable payments of capital gains tax by the recipients.  In all, the case reinforces the need to undertake Medicaid planning underneath an interdisciplinary backdrop which interweaves public benefits law, income tax regulations and capital gains principles.  As the State of New Jersey becomes ever more aggressive in its interpretation of Medicaid law, gifting and planning must be done within competent guidelines.

Mike and Hillary have been married for many years.  Although Hillary thought the marriage was wonderful, she found out that Mike’s feelings were not mutual when he died.  Two weeks after the funeral, she received a letter from an attorney representing the estate, Travis Tanner, enclosing a copy of the Will.  Mike’s will left nothing of his $7,500,000 estate for Hillary, but rather divided his estate between his nieces and nephews as well as his secretary, Floozy.

Emotionally and financially devastated, she went to a renowned litigator, Harvey Spector, to take care of her.  In the course of his representation, he went to the local probate court and successfully reached a settlement whereby Hillary would get $2,500,000 of the estate.  As part of the agreement, it was agreed that Harvey’s firm would prepare the amendments to the necessary death tax returns which had been previously been filed by taxes.

Harvey transferred the file to his partner, Louis Litt, to handle the tax issues.  Louis filed an amended federal estate tax return with the IRS.  Because the amount paid to Hillary was exempt due to the unlimited marital deduction, there was no tax due and refund of $1,035,000 was received.

Louis filed amended inheritance and estate tax returns with the State of New Jersey.  Because the State collects the higher of the two taxes, and because the tax rate for the nieces, nephews and Floozy ranged between 15-16%, no estate tax was due, as the rates for that tax were significantly lower.  At the initial filing, this tax was $1,155,000.  Because these individuals took a pro rata reduction to make the settlement work, and because a spouse is a Class A beneficiary, who owes no inheritance tax, Louis requested that the tax be reduced to $770,000 and that a refund of $385,000 be issued.

Louis’ request was denied and the amended return was rejected.  Louis filed an action in tax court.  Louis lost.

In essence, a federal estate tax return will acknowledge a settlement.  However, the Division of Taxation in New Jersey does not and they hold only to the terms of the original will.

This position was reaffirmed in De Rosa v. Director, Div. of Taxation, Tax Ct. (Bianco, J.T.C.).  It upholds the provisions of N.J.S.A. 54:34-1 which was initially upheld by the New Jersey Supreme Court in Pope v. Kingsley, 40 N.J. 168 (1963).

Moral of the story:  settlements can be good.  However, one needs to understand the tax impact or lack thereof on same.