Some key numbers:
For tax year 2022, the top tax rate remains 37% for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly).
The standard deduction for married couples filing jointly for tax year 2022 rises to $25,900 up $800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, up $400, and for heads of households, the standard deduction will be $19,400 for tax year 2022, up $600.
Estates of decedents who die during 2022 have a basic exclusion amount of $12,060,000, up from a total of $11,700,000 for estates of decedents who died in 2021.
The annual exclusion for gifts increases to $16,000 for calendar year 2022, up from $15,000 for calendar year 2021.
The estate basic exclusion is also the gift tax lifetime exclusion. The inflation increase will allow taxpayers who have maxed out their tax-free giving to top it off with another $360,000 of gifts on top of their annual exclusion gifts next year.
Related: Estate Planning is More Than Just Tax Planning
2022 Tax Brackets - Erica York, Tax Policy Blog. "The Tax Cuts and Jobs Act of 2017 (TCJA) includes a 20 percent deduction for pass-through businesses. Limits on the deduction begin phasing in for taxpayers with income above $170,050 (or $340,100 for joint filers) in 2022 (Table 7)."
Betting the House on Congress, Taxes, Baseball, COVID, and SALT - Doug Sword, Tax Notes ($):
There’s a 58 percent chance the House will pass a reconciliation bill by November 22, a 52 percent chance the Senate will pass it by December 20, but just a 30 percent chance the year-end bill will raise the state and local tax deduction cap.
That’s according to Kalshi, a New York-based company that bills itself as the “first federally regulated exchange dedicated to trading directly on the outcome of events.”
These seem like fair odds to me. I think there is a lot of motivation to pass the reconciliation bill, and the recent House passage gives it some life. It's fair to say that the odds of passage are slightly better than even this year, but they are a long way from certain.
Further Reading: The Politics of Political Prediction Markets - Justin Wolfers, Freakonomics.com.
Pelosi Checks Representative Hinting At Deal On Carbon Tax - Kevin Pinner, Law360 Tax Authority ($):
Pelosi, D-Calif., and Rep. Earl Blumenauer, D-Ore., spoke at a news conference as part of the U.S. congressional delegation to the 2021 United Nations Climate Change Conference in Glasgow, Scotland. After Pelosi gave the floor to Blumenauer to address a question, he confirmed that Democrats "continue to have" a deal on imposing a carbon tax "on the table."
After his remarks, Pelosi said: "I'm completely unaware of any deal on carbon tax. But I do know that it is something that is talked about and may be an option for the future. It is not in our legislation now."
A carbon tax would be a double win in a way for Democrats. It could raise revenue needed to offset the big spending plans in the budget bill, and it it would add credence to claims that the bill fights climate change. The politics probably don't work.
Democrats at odds over SALT changes - Naomi Jagoda, The Hill. "The left-leaning Institute on Taxation and Economic Policy released an analysis finding that the House proposal would provide more of its benefits to households in the top 1 percent of income than the Senate one. The think tank also estimated that the Senate proposal would be less expensive in the near-term."
Today, I want to provide information on limitations TAS [Taxpayer Advocate Service] is facing in assisting individual and business taxpayers who have filed amended tax returns and are waiting for the IRS to process them. We know many individuals and businesses are frustrated by the delays, particularly those awaiting refunds.
As of October 30, 2021, the IRS had a backlog of over 2.7 million unprocessed amended returns. The IRS is processing these returns in the order received, and the current processing time posted on its operational page is more than 20 weeks. Our cases indicate that the processing time is considerably longer than 20 weeks, and as such, I have made the difficult decision to suspend accepting cases where the sole issue involves the processing of amended returns until the IRS is able to work through its backlog. We are also analyzing the upcoming filing season and expect to issue revised guidance for original filed returns.
Under our current procedures, TAS does not accept cases in which we cannot meaningfully expedite or improve case resolution for taxpayers. Amended returns fall into this category. Due to the broad impact of COVID-19, the IRS has faced significant challenges in all its return processing operations. Unfortunately, until the IRS processes a tax return, TAS cannot assist the taxpayer. For that reason, TAS will not accept new cases solely involving the processing of an individual or business amended return. TAS will continue to monitor IRS developments in amended return processing and will reevaluate this determination as the situation changes.
No matter how badly you could use that amended return refund, you'll just have to wait.
Open an account for tax refund direct deposit before next filing season - Kay Bell, Don't Mess With Taxes:
Most taxpayers who received refunds — and yes, I know a whole lot of y'all are still waiting for your money from Uncle Sam — also got them electronically. Of the more than 128 million refunds the IRS issued by late October, more than 112 million, or just more than 87 percent, were directly deposited.
Options for unbanked: Again, delivering refunds this way is easier and faster for the IRS and taxpayers. But not every person has a bank account to which the IRS can directly deliver tax refunds.
The post has useful guidance for the unbanked.
Hey Siri, Are You Recording My Client Information? - Mary Katherine Browne, Tax Notes ($):
Tax professionals conducting business from home could inadvertently allow virtual assistants like Alexa, Siri, Cortana, and Google Nest to collect sensitive taxpayer information and lead to potential ethics concerns, an IRS official has warned.
Digital assistants have been transforming the way we live, having the ability to answer questions, conduct research, schedule appointments, and even shop for us. However, the technology behind them means that companies like Amazon and Google may be listening in, even when we don’t want them to.
You didn't hear that, Siri.
The Foreign Investment in Real Property Tax Act (“FIRPTA”) - Jason Freeman, Freeman Law. "The Foreign Investment in Real Property Tax Act (“FIRPTA”) authorizes the IRS to tax foreign persons on the sale or disposition of a U.S. real property interest (“USRPI”). FIRPTA generally imposes a withholding obligation on the purchaser of a USRPI. That is, the purchaser is required to withhold tax on the payment for the property, although withholding may be reduced under certain circumstances."
This makes it very important for real estate buyers to find out whether they are buying from a foreign person before close, or they may get stuck with the withholding.
Judge Denies Stimulus Payments To Citizen Children With Undocumented Parents- Peter Reilly, Forbes. "Judge Paul W. Grimm of the United States District Court of Maryland, an Obama appointee, issued an opinion in R.V. et al v. Steven L. Mnuchin et al. Since the parties largely agree on the material facts - The parents do not have social security numbers and the kids do."
Keeping your story straight. There has been a flurry of estate tax planning this summer and fall as Congress has considered (and so far rejected) unfavorable changes in the estate tax rules. A Tax Court opinion issued yesterday reminds us that you can't be too careful in executing estate planning moves.
A California man with "an $80 million portfolio of real estate" set up a family LLC and a "Dynasty Trust" for the benefit of his children and grandchildren. In 2013, 49% of the LLC was transferred ot the Dynasty Trust. The man filed a gift tax return showing that he had gifted about 8% of the LLC to the Dynasty Trust. The rest of the gift - 41% of the LLC was treated as given to his spouse. The 8% interest was valued at $1,031,822.
The IRS felt otherwise, saying the spouse never really owned the 41% percent. The IRS said the entire 49% was properly valued at $8,421,000 and assessed a $1,154,000 deficiency as a result:
Respondent contends that petitioner made a taxable gift to the Dynasty Trust of a 49% class B member interest in the LLC, including an indirect gift of the 40.95% class B member interest that he purportedly transferred to Mrs. Petitioner and that she purportedly re-transferred to the Dynasty Trust a day later. Although respondent determined in the notice of deficiency that the fair market value of the 49% class B member interest (the subject interest) was $8,180,000, in this proceeding he contends, on the basis of his expert's report and testimony, that the fair market value of the subject interest was actually $8,421,000.
Tax Court Judge Thornton explains the benefit of running the gift through the spouse:
...the transactions in question were part of a prearranged plan to transfer ownership of 49% of the LLC class B member interests to the Dynasty Trust while using [the spouse's] estate and gift tax exemption."
Unfortunately, the paperwork didn't quite tell that story, according to the opinion (name of taxpayer is changed to "petitioner; emphasis added"):
The record does not suggest that petitioner, in his dual roles as trustee of the Petitioner Family Trust and as manager of the LLC, gave express or implied consent for the admission of Mrs. Petitioner as a member in disregard of the operating agreement's restrictions. To the contrary, the record shows that on April [*25] 15, 2013 — a day after he purportedly transferred the LLC member interests to Mrs. Petitioner — petitioner executed an amendment to the LLC operating agreement (providing for guaranteed payments to himself) which identified the Petitioner Family Trust as the LLC's “SOLE MEMBER”.
The transfer documents themselves didn't help much, as they were undated - "unlike all the other operating agreement amendments in the record." They were purportedly made on April 14, 2013 to the spouse and April 15 from the spouse to the trust. Yet the appraisal on which the gifts were purportedly based was dated in August 2013. The judge found that a problem. "Given that this date is more than four months after the stated effective dates of the purported transfers of the LLC membership interests to both Mrs. Petitioner and the Dynasty Trust, as a practical matter there was never a time when Mrs. Petitioner would have been able to effectively exercise any ownership rights with respect to any LLC membership interests."
Another key document failed to mention the spousal gift, per the opinion:
Finally, the LLC's 2013 partnership return reported that in 2013 the only partners were petitioner with a 51% interest (ostensibly by virtue of his role as trustee of the Petitioner Family Trust) and the Petitioner Family Trust with a 49% interest. The LLC did not report Mrs. Petitioner as being a partner at any time.
So, paperwork problems:
- Signing as "sole member" after the date of the purported spousal gift.
- Undated transfer documents
- Appraisal date inconsistent with the purported gift date
- Failure to provide spouse a K-1 for a year in which she supposedly owned an partnership interest for a day.
The moral: Maybe none of these paperwork problems would alone have been fatal to the taxpayer argument. Together, they may have been deadly. As Peter Reilly's 4th Law of Tax Planning states, "Execution isn't everything but it's a lot."
The consolation: For a taxpayer with an $80 million estate planning problem, paying gift tax may be a smart tax move, as painful as it may seem at the time. While estate tax is imposed on the entire estate - including the part that goes to the IRS - gift tax is computed only on the amount that goes to the heirs. The gift tax paid is never subject to either gift or estate tax. As a result, gift taxes are actually cheaper than estate taxes.
Cite: T.C. Memo 2021-127.
11th month, 11th day, 11th hour. From History.com:
Veterans Day originated as “Armistice Day” on November 11, 1919, the first anniversary of the end of World War I. Congress passed a resolution in 1926 for an annual observance, and November 11 became a national holiday beginning in 1938. Unlike Memorial Day, Veterans Day pays tribute to all American veterans—living or dead—but especially gives thanks to living veterans who served their country honorably during war or peacetime.
Wikipedia has thorough coverage of the original Armistice. "Fighting continued up to 11 a.m. of the 11 November 1918, with 2,738 men dying on the last day of the war."