Tag Archive for: tax planning

The IRS has recently issued guidance on the so-called portability election and the applicable estate and gift tax exclusion amount. As a surviving spouse, this guidance may impact your estate planning opportunities.

In general, the estate tax is imposed on a decedent’s gross estate as increased by the decedents’ taxable lifetime gifts, and reduced by any allowable estate tax deductions, such as the charitable or marital deduction.

In addition, the estate of every decedent is allowed a credit (the “applicable credit amount”) in determining the amount of estate tax due. The applicable credit amount effectively acts to exclude a certain amount of property from the estate tax (the “applicable exclusion amount”). With proper planning a married couple could take advantage of the applicable exclusion amount in each of their respective estates. However, prior to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) it was possible for a married couple to waste the applicable exclusion amount of the first spouse to die. Consequently, the 2010 Tax Relief act introduced the concept of “portability” with respect to the unused portion of the applicable exclusion amount of a predeceased spouse, referred to as the deceased spousal unused exclusion amount (DSUEA).

For estates of decedents dying after 2010, the applicable exclusion amount is equal to the sum of the basic exclusion amount and any available DSUEA, if previously elected. The basic exclusion amount is $5 million, which is adjusted for inflation beginning in 2012. A “portability election” passes along a decedent’s unused estate and gift tax exclusion amount to a surviving spouse.

The IRS guidance discusses the following:

  1. the estate and gift tax applicable exclusion amount, in general;
  1. the requirements for electing portability of any DSUEA to the surviving spouse; and
  1. the applicable rules for the use of the DSUEA by the surviving spouse.

It should be noted that as is the case for other changes made to the estate and gift tax rules by the Economic Growth and Tax Relief Reconciliation Act of 2001, and the 2010 Tax Relief Act, the concept of “portability” of a deceased spouse’s unused exclusion amount will end for the estates of decedents dying after December 31, 2012, unless Congress acts to extend this provision.

Regardless, the estate tax return on which the portability election is made must be filed within the time prescribed by law. In that way, the surviving spouse can take advantage of the DSUEA, should the portability provision be extended.

The IRS guidance explains the requirements for what is considered to be a “complete and properly-prepared return.” If the return is being filed only for the purpose of electing portability, the executor does not have to report the value of certain property qualifying for the marital or charitable deduction. The total value of the gross estate must be estimated based on a determination made with good faith and due diligence regarding the value of all assets includable in the gross estate.

If the executor does not wish to make the portability election, regulations require the executor to make an affirmative statement on the estate tax return indicating this to be the case. When no return is required to be filed for the decedent’s estate, not filing a timely filed return will be considered to be an affirmative statement of the decision not to make a portability election. With certain limited exceptions, only the executor of the estate is allowed to file the estate tax return and make the portability election.

IRS guidance also clarifies the computation of the DSUEA in certain circumstances and addresses the use of the DSUEA by the surviving spouse, including:

  1. the date the DSUEA may be taken into account by the surviving spouse;
  2. the last deceased spouse limitation on the DSUEA available to a surviving spouse; and
  3. the DSUEA available in the case of multiple spouses and previously applied DSUEA.

The portability election should be reviewed as part of your overall estate planning. We are available to discuss all of your options.

An S-corporation, such as yours, is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, all income is passed through to your shareholders and taxed at their individual tax rates. However, unlike a C corporation, an S corporation’s income is taxable to the shareholders when it is earned whether or not the corporation distributes the income. Because an S corporation has a unique tax structure that directly impacts shareholders, it is important for you to understand the S corporation distribution and loss limitations, as well as how and when items of income and expense are taxed, before developing your overall tax plan.

In addition, some S corporation income and expense items are subject to special rules and separate identification for tax purposes. Examples of separately stated items that could affect a shareholder’s tax liability include charitable contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and net income or loss related to rental real estate activities.

These items, as well as income and losses, are passed through to the shareholder on a pro rata basis, which means that the amount passed through to each shareholder is dependent upon that shareholder’s stock ownership percentage. However, a shareholder’s portion of the losses and deductions may only be used to offset income from other sources to the extent that the total does not exceed the basis of the shareholder’s stock and the basis of any debt owed to the shareholder by the corporation. The S corporation losses and deductions are also subject to the passive-activity rules.

Other key points to consider when developing your comprehensive tax strategy include:

the availability of the Code Sec. 179 deduction at the corporate and shareholder level;

  1. reporting requirements for the domestic production activities deduction;
  2. the tax treatment of fringe benefits;
  3. below-market loans between shareholders and S corporations; and
  4. IRS scrutiny of distributions to shareholders who have not received compensation.

We can assist you in identifying and maximizing the potential tax savings. Please call our office at (310) 691-5040 or (818) 691-1234 or e-mail us at info@originsgroup.com to arrange an appointment.