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Trusts, Estates and Succession

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Are You Separating From Or Divorcing Your Spouse (Or Thinking About It)?

There are special considerations for people who are in this unfortunate situation.  Not only is their relationship changed, but the tax status is affected as well. 

Important things to consider or do:

  • Update your withholding with your employer by filing a new Form W-4. 
  • If you are receiving or negotiating spousal support (alimony or other payments from your spouse), this will determine the income taxability of the same.  There may be a need to increase your withholding or to begin making estimated payments.  If you need guidance on this, check with your tax preparer or visit irs.gov and use the tax withholding estimator tool. 
  • If you are the paying spouse, there may be deductions allowed for payments described above.  Here again, check with your tax preparer or visit irs.gov and search the type of payment you are making to help determine deductibility. 
  • The date of such an arrangement for payments by either the paying spouse or the receiving spouse can have an impact on whether the payments are taxable or deductible.
  • If there are children in the relationship, determine who will claim a dependent child.  Both parents are not entitled to claim the same child. 
  • Child support payments are usually not reportable, nor are they a deduction.
  • Have property transfers taken place as a result of the separation/divorce?  These transfers could impact income taxes.

The above list is just a few of the considerations to be made.  However, one of the most important considerations is to determine each spouse’s FILING STATUS.  Just because two people are no longer considering themselves as being married does not justify them to select SINGLE as their filing status.  In the eyes of the IRS, the only two ways two people who have filed a Married Filing Joint return in the past to change their filing status to Single is by way of the death of one of the spouses or by a Court decree or separate agreement before the Court.  If divorcing couples are waiting for a decree of divorce from the Court and December 31 passes, they are still considered legally married in the eyes of the taxing authorities. 

The What Is My Filing Status tool on IRS.gov can help to determine what your filing status is.  Keep in mind that by selecting the filing status of:

  • Married filing jointly – the combined income of both the husband and the wife as well as the combined allowable expenses are reported. 
  • Married filing separately – each spouse files a separate return reporting their own income and deductions.  Bear in mind that both spouses must use the same method of deductions – either standard or itemized.
  • Head of household may provide for separated people if certain qualifications are met with regard to the estranged spouse not living in the home during the last six months of the year, payment of the cost of keeping up the home, and if the home was considered the main home of the children

Many details can impact your income taxes, so do your research or work with your tax preparer for the knowledge needed for your particular situation.

IRS Update on Processing of Income Tax Returns

The IRS provided an update last week on the status of the processing of income tax returns as follows:

  •  All paper and electronic individual returns received prior to January, 2022 that were free of errors and did not require further review have now been processed.
  • Of the 8.7 million unprocessed individual returns filed in 2022, 1.7 million of them require attention to correct errors or special handling.  The remaining 7 million are paper returns waiting to be processed. 

Wow, 7 million paper returns – not something to happen quickly.  But, the good news is that if you are entitled to a refund and haven’t received it, it will come eventually. 

If you want to check the status of your refund, go to IRS.gov and the Where’s My Refund section.  You can track whether your return has been reviewed and approved, if a refund has been issued (important if you are expecting a check, so that if you haven’t received the check you can follow up), or if your refund is among the 7 million returns yet to be processed. 

Bottom line – file electronically when possible!  Refunds come quicker.

So You Can’t Live At Home Anymore…

Planning for contingencies is typically one of our least favorite things to do.  The onset of the pandemic changed that for many but still there are things we procrastinate with, such as planning for the later years in life.  Many a client over the years has told me they simply can’t move out of their home because “their garage is packed to the rafters” or the “attic will take them years to clear out”.

Trouble is, you cannot plan for every possibility incident to aging.  A sudden onset illness or health crisis can result in the immediate need to re-think your living arrangements.  At that point, the decision-making might be out of your hands.  If left in the hands of children or fiduciaries, those persons are left struggling with the question of what would you want.  As among children, this can result in disagreements, ill-will and in the worst cases, legal disputes.

So, while I would never force someone to clean the attic or garage (except for maybe my own spouse), I would suggest that you ask yourself “what if” and make some decisions.  To that end, the menu of alternatives is diverse.  Every few miles you will see a senior living opportunity: over 55 communities, senior apartment complexes, assisted living and different care communities.  When thinking about this, consider what you really want.  Moreover, consider what options you can afford and what options your family may provide.

Some of the relevant issues that warrant contemplation in this scenario are:

  1. Do you want to go from one free-standing home to another in an over 55 community wherein you have to maintain the yard, roof and all that comes with home ownership?
  2. Is it better to rent? 
  3. Could/should you move in with a child and would such move include an improvement to their residence to make your residency more palatable and comfortable for all? 
  4. If you move in with a child, how does that impact your estate and the potential inheritance for your other children?  
  5. What happens if you are hospitalized and need interim help for a period of time?
  6. Did your past service in the armed forces afford you any opportunities or was your tenure as a volunteer emergency worker sufficient to entitle you to a valuable benefit insofar as long term care costs are concerned?

Of all the residential settings outside of a family home for those dependent on others for care or who do not wish to depend on family to provide care, a continuing care retirement community is often a better solution.  A CCRC offers a range of health care services for its residents, including sub-acute care which is often needed on an interim basis post illness or hospitalization as we age.

Moreover, a CCRC will typically provide quality residential and social opportunities to maintain a quality of life for the aging.  With a CCRC, as a resident’s need for care increases, the services provided correspondingly increase.  

Each one of us is different and unique.  What worked for your neighbor, sibling or friend might not be a good fit for you.  So, even if you procrastinate on cleaning the attic or garage and put off moving, at least consider what you would want for yourself and make a plan.  That way, your family or fiduciaries are simply carrying out your wishes instead of arguing among themselves and possibly souring relations.

A Few Highlights of the Recently Signed Reconciliation Bill

The news has been filled with talk about the Reconciliation Bill known as the Inflation Reduction Act of 2022 that was recently signed into law.  As is common with most bills, they are lengthy (this one being more than 300 pages) and contain many provisions that are not highlighted and therefore are overlooked.  To keep things simple, I will highlight a few of the changes recently enacted: 

  • There are some changes for corporations with regard to alternative minimum tax as well as stock repurchases. 
  • The IRS has received an increased budget.  The IRS has a budget set by Congress and acts as a collector of taxes on behalf of the U.S. government.  Their budget has been slashed in recent years which has led to job cuts affecting taxpayer service.  An increase in their budget will enable them to close the “tax gap” which is the difference between what taxes should be collected and what taxes are actually collected.  With increased resources, it is hoped that the collection of billions of dollars in uncollected taxes could help to leverage lower taxpayer bills. 
  • A major portion of the Act is devoted to incentives for green energy.  Credits for electric vehicles and residential energy property are provided for as well as credit for the production of clean electricity.  Entities involved in the production of clean electricity can receive certain credits due to meeting workforce and wage requirements in construction or operation of the facility. 
  • Residential Energy Incentives for energy efficient windows and doors and certain HVAC systems and heat pumps are available.
  • Purchase of both plug-in electric vehicles and fuel cell vehicles are eligible for credit.  This credit has certain limitations such as income and manufacturer’s suggested retail price.  New as well as previously-owned clean vehicles can be considered for these credits. 
  • Also included in the Act are new or extended/modified credits with regard to alternative fuels, efficient homes, biofuels, zero-emission nuclear power facility credit for energy produced, credit for sustainable aviation fuel and production of clean hydrogen.

We can only hope that some of these changes may help consumers to benefit in the long run. 

Scheduled 2025 Tax Changes

The 2017 Tax Cuts and Jobs Act are set to expire in 2025 and it is not too early to start thinking about those changes and how the expiration of the same may affect you. 

Many Americans have become complacent with the federal tax exclusions being in the $12 million range this year and think that they don’t have to worry about federal estate taxes.  But, they may be failing to keep in mind that the federal tax exclusion is set to sunset back to the amount of $5,450,000 (the 2017 amount) for decedents dying on or after January 1, 2026.  That’s quite a difference and may impact many more individuals.  All assets owned by the decedent either individually or jointly are considered in determining federal estate tax liability.  With life insurance, retirement account and homes, it is not difficult to exceed that amount. 

Further, if you are fortunate to have built significant wealth that could result in estate taxes, the gifting of assets could be a tax planning strategy to consider. 

Estate planning is very individualized and can be worth the significant tax savings which could be had.  However, effective estate planning does not happen overnight.  There are meetings with your team – financial, legal, accountant – to gather information and to strategize the best plan for you.  Then there is the drafting of documents and review of the same before they are signed.  And lastly, it may be necessary to change beneficiary designations, retitle assets, reallocate assets, etc. all of which take time.  This last step is often forgotten about and while the best plan for you that was put together by your team was with the goal of saving taxes, without the action needed in the last step, the plan will not be effective. 

Why leave your hard-earned or inherited assets to be unnecessarily taxed.  Act now.  Tax laws can be changed anytime and while we know what is set to change for 2026, one does not have a crystal ball to know what changes could happen prior to that date. 

Retirement Accounts and Second Marriages

Are you on spouse number 2 or 3 and you have a retirement account?  If so, there are certain things to keep in mind. 

First of all, if you have had your estate planning completed by an estate planner or have a financial advisor/planner, you have most likely addressed this issue. But if you are not certain, be proactive and look into the issue as this area requires special considerations.  Think about these scenarios:

  1. You and your present spouse (not your first spouse) may desire that each of your respective children benefit from the retirement funds you have accumulated. 
  • You may wish to benefit your current spouse from your retirement assets but don’t want to disinherit your children from a prior marriage/relationship.
  • You have a former spouse listed as the beneficiary of your retirement account and have never changed the beneficiary designation to reflect the parties you wish to benefit.

Each of the three scenarios have their own considerations. 

In situation 1 above, there may be federal laws in place that would prevent the distribution of your retirement assets to your children rather than to your current spouse.  Certain types of plans have mandatory distribution clauses that go to the surviving spouse.  If it is your desire to benefit respective spouse’s children, you must seek the guidance from your estate planner or financial advisor/planner as to whether there is a method to carry out this intent.

As for situation 2 above, a trust can most likely accomplish your desire to benefit your spouse for their lifetime with the remaining retirement assets passing to your children upon your spouse’s death.  This is something that your estate planner can draft for you.

Finally, situation 3, in which if the proper steps are not taken before your passing, your former spouse just might inherit.  Some states have laws that disinherit former spouses, but others do not afford that protection.  Since this varies by state, you should make certain that you address this with your estate planner. 

A proactive step you can take is to obtain a designation of beneficiary confirmation from the retirement plan administrator or, if it is an IRA, from the financial institution holding the account.  This will enable you to confirm the beneficiary and determine if any changes are necessary.  If you find that changes are in order and tackle the changes on your own, you should keep a copy of the new beneficiary designation you submit. If you submit the same by USPS, then send it by certified mail, return receipt requested.  Regardless of how the beneficiary designation is submitted, do so in a way that you get a receipt for the submission.  It is also advisable that you ask for confirmation of the change of beneficiary to be placed in your records.

Are You Challenged To Unwind?

As we enter August, have you taken time away from your profession this summer – or I will give you – this calendar year?  Do you find it hard to unwind, to disconnect?  In our world today, it is a temptation to be continuously connected to email, texts, to our phones. 

Let’s forget the pandemic as best as we can and not blame Covid for not taking time off.  So, let’s be honest with ourselves – have we taken time off?   And now, a harder question – WHY NOT? 

We need to take a lesson from Europeans who believe in taking a “holiday.”  Some places even close down so that employees are forced to take time off.  The norm is at least 20 days per year.  The US is the only advanced economy that does not guarantee employees a paid vacation. 

So, you have paid time off through your employer. What are your reasons for not taking it (even if for a staycation)?  Are you fearful of being replaced; that a co-worker will resent you for taking the time; that if you are out of the office, you cannot meet your responsibilities?  Whatever your reason – which are really excuses – YOU need to take time off and disconnect. 

Professionals have difficulty in taking time off.  We know what is on our TO DO list, what is expected of us, what upcoming deadlines we could be looking at, and on and on and on.  This list could go on considerably.  We are living in a world of the expectation of always being available, immediate responses to calls, emails and texts.

If time off was to be taken, would it be considered being selfish in light of what is on that TO DO list?  NO!  Quite to the contrary.  We all need to rejuvenate, to get refreshed in order to avoid burn out. 

Taking time off can be doable.  If planning to take time off, set expectations to your co-workers as to what your availability will be – sporadic, once a day, etc.  Give advance notice to your co-workers as well as to your clients/customers.  Acknowledge that the world is not going to end if you are taking well-deserved time off.  Be proactive and use out-of-office announcements to reduce the expectations of those trying to reach you. 

Perhaps you are not working and are retired.  Are you feeling challenged to unwind, to plan a vacation for some or all of the above reasons modified for your individual situation?  Take the above suggestions in consideration. 

We all need time to unwind in our own special ways.  I often tell caregivers that they have to take care of themselves as they will not be beneficial to anyone if they are under the weather.  The same goes for our careers.  Take care of yourself and unwind. 

Income Tax Return for a Deceased Taxpayer

Are you aware that a final Form 1040 should be filed for a deceased taxpayer? 

Usually, the surviving spouse or the estate representative files a final individual income tax return for the deceased taxpayer. 

If there is a surviving spouse, the return is filed with the same filing status as prior returns were filed.  The surviving spouse benefits from the full exemption/deduction of the deceased spouse regardless of when during the year the death occurred.  A notation is made on the return of the date of death.

If there is no surviving spouse, the estate representative files a return for the time the decedent was alive during the tax year.  If the decedent died on June 5, for example, all income received by the decedent from January 1 to June 5 should be reported on the final individual income tax return.  All income earned after June 5 should be reported on a fiduciary income tax return – Form 1041. 

If the decedent is entitled to a refund of an overpayment of tax, Form 1310 must be completed and filed by the estate representative.  However, if the decedent is survived by a spouse, this form may not be required. 

In addition to filing a decedent’s final Form 1040, IRS Form 56 – Notice Concerning Fiduciary Relationship should be filed.  The filing of this Form notifies the IRS of the passing of the taxpayer and states the information for the party who is handling the affairs of the decedent.  If this Form is not filed, there is no defense if the IRS should mail any type of notice to the deceased taxpayer which is not received and therefore the required action not taken. 

The death of a taxpayer does not grant any special filing or payment deadlines.  If it is determined that the final tax return cannot be completed and filed by the income tax deadline, then an extension can be requested.  Please note that this extension is an extension to file but not an extension of time to pay any taxes due. 

Year-Round Tax Planning

Tax season is pretty much history unless your returns are on extension.  For most people, once our tax returns are filed, we tend to not give them another thought until the beginning of the next year. 

To minimize your tax liability, you need to think about taxes all year round.  Thinking about deductions and credits will help in this regard.  Waiting until you are ready to prepare and file your taxes could result in your not taking full advantage of allowable credits and deductions. 

Here are some things to consider:

  • Standard or itemized deductions – which is better?  Well, it depends upon your situation.  And, you may not know which is most beneficial until your taxes are prepared.  So, it is helpful to accumulate information throughout the year for:
    • Medical expenses – doctors, dentists, eyeglasses/contacts, hearing aids, physical therapy, medications, medical devices, etc.
    • Medical insurance premiums include long-term care premiums
    • Property taxes
    • Charitable contributions both cash and in kind.  If you donate goods to a charity, keep the receipt and a description of what you donated.  (During the past couple of years, a credit for those taking the standard deduction has been allowed in a limited amount.  However, you are required to have receipts to support even those deductions.)
    • Mortgage interest
  • Credits don’t just include the amount of taxes you have paid in throughout the year.  There are credits for:
    • Child care
    • Elderly care
    • Learning
    • Child tax
    • Earned income tax credit
    • Recovery rebate credit

These credits and deductions can reduce taxes owed or boost the amount of your refund.  Some of the tax credits are refundable, which means that if you are eligible, you can get money refunded even if you don’t owe any taxes. 

Remember, to properly claim these credits and deductions, you MUST have records to show your eligibility.  So, don’t just think about income taxes during tax season. Keep them in mind all year long. 

An Overview of the IRS’s 2022 Dirty Dozen Tax Scams

(Straight from the IRS)

Compiled annually, the Dirty Dozen lists a variety of common scams that taxpayers can encounter anytime. The IRS warns taxpayers, tax professionals and financial institutions to beware of these scams. This year’s list is divided into five groups. Here’s an overview of the top twelve tax scams of 2022.

Potentially abusive arrangements
The 2022 Dirty Dozen begins with four transactions that are wrongfully promoted and will likely attract additional agency compliance efforts in the future. Those four abusive transactions involve charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance, and monetized installment sales.

Pandemic-related scams
The IRS reminds taxpayers that criminals still use the COVID-19 pandemic to steal people’s money and identity with phishing emails, social media posts, phone calls, and text messages.
All these efforts can lead to sensitive personal information being stolen, and scammers using this to try filing a fraudulent tax return as well as harming victims in other ways. Some of the scams people should continue to be on the lookout for include Economic Impact Payment and tax refund scams, unemployment fraud leading to inaccurate taxpayer 1099-Gs, fake employment offers on social media, and fake charities that steal taxpayers’ money.

Offer in Compromise “mills”
Offer in Compromise or OIC “mills,” make outlandish claims, usually in local advertising, about how they can settle a person’s tax debt for pennies on the dollar. Often, the reality is that taxpayers pay the OIC mill a fee to get the same deal they could have gotten on their own by working directly with the IRS. These “mills” are a problem all year long, but they tend to be more visible right after the filing season ends and taxpayers are trying to resolve their tax issues perhaps after receiving a balance due notice in the mail.

Suspicious communications
Every form of suspicious communication is designed to trick, surprise, or scare someone into responding before thinking. Criminals use a variety of communications to lure potential victims. The IRS warns taxpayers to be on the lookout for suspicious activity across four common forms of communication: email, social media, telephone, and text messages. Victims are tricked into providing sensitive personal financial information, money, or other information. This information can be used to file false tax returns and tap into financial accounts, among other schemes.

Spear phishing attacks
Spear phishing scams target individuals or groups. Criminals try to steal client data and tax preparers’ identities to file fraudulent tax returns for refunds. Spear phishing can be tailored to attack any type of business or organization, so everyone needs to be skeptical of emails requesting financial or personal information.

A recent spear phishing email used the IRS logo and a variety of subject lines such as “Action Required: Your account has now been put on hold” to steal tax professionals’ software preparation credentials. The scam email contains a link that if clicked will send users to a website that shows the logos of several popular tax software preparation providers. Clicking on one of these logos will prompt a request for tax preparer account credentials. The IRS warns tax pros not to respond or take any of the steps outlined in the email. The IRS has observed similar spear phishing emails claiming to be from “tax preparation application providers.”

The list is not a legal document or a literal listing of agency enforcement priorities. It is designed to raise awareness among a variety of audiences that may not always be aware of developments involving tax administration.

Share this tip on social media — #IRSTaxTip: An Overview of the IRS’s 2022 Dirty Dozen Tax Scams. https://go.usa.gov/xJ7KK

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