1. Important Foreign Account Disclosure Requirements2. California Estimated Tax Requirements
3. Planning for capital goods purchases in light of the Small Business Jobs Act and the Tax Relief Act of 2010
4. Estate, Gift & GST Tax Changes
1. Foreign Account Disclosure Requirements:
T D F 90-22.1 (commonly referred to as the "FBAR") is not a tax form, but is instead a disclosure report to be filed with the Treasury Department by June 30th. The FBAR is not new, but the instructions for the form were revised in late 2008 and the Treasury Department has provided informal guidance suggesting that the filing may be applicable to ownership interests in private investment funds.
The FBAR is required to be filed by a US person if the person has either an ownership interest in OR signature authority over a foreign financial account with an aggregate value exceeding $10,000 at any time during the preceding calendar year.
According to the FBAR instructions, a foreign financial account includes bank accounts, securities accounts, and other types of financial accounts located in a foreign country. Thus, even if the account is with a US bank or broker, if the account is located in a foreign country branch, it is a foreign financial account.
The FAQ and late filing address can be found at www.irs.gov/pub/irs-news/faqs.pdf.
New additional disclosure requirement: FORM 8938
IRS Releases Guidance on Foreign Financial Asset Reporting- Form 8938
WASHINGTON - The Internal Revenue Service in coming days will release a new information reporting form that taxpayers will use starting this coming tax filing season to report specified foreign financial assets for tax year 2011.
Form 8938 (Statement of Specified Foreign Financial Assets) will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply.
The Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory.
Determining the reporting thresholds that applies to you.
Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax yea
Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the
tax year
The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
Instructions for Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted, and what information must be provided.
Form 8938 is not required of individuals who do not have an income tax return filing requirement.
The new Form 8938 filing requirement does not replace or otherwise affect a taxpayers obligation to file an FBAR (Report of Foreign Bank and Financial Accounts). For more go to the FBAR page on this website.
Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. Special statute of limitation rules apply to Form 8938, which are also explained in the instructions.
Form 8938, the forms instructions, regulations implementing this new foreign asset reporting, and other information to help taxpayers determine if they are required to file Form 8938 can be found on the FATCA page of irs.gov.
See TD 9567.
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2. California Estimated Tax Requirements:
If your adjusted gross income is over $1 million, you will no longer be able to use the safe harbor method of paying 100% (or 110% in some cases) of what you owed the year before. Instead, you must pay at least 90% of what you'll owe this year in order to avoid underpayment penalties.
California also changed its estimated payment rules for 2010 and beyond. Instead of equal quarterly payments of 25%, California requires front-loaded payments (40% for the first quarter, 30% second quarter, 0 for the third quarter and 30% for the fourth quarter).
Requirement to transfer funds electronically: If your California estimated quarterly payment exceeds $20,000 or your tax liability is greater than $80,000 all payments must be remitted electronically. The penalty for failure to pay your tax electronically is 1% of the payment.
3. Planning for capital goods purchases in light of the Small Business Jobs Act and the Tax Relief Act of 2010
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provides 100 percent depreciation bonus for capital investments placed in service after September 8, 2010 through December 31, 2011. For equipment placed in service after December 31, 2011 and through December 31, 2012, the bill provides for 50 percent depreciation bonus. .
The new law also extends Sec. 179 expensing for taxable years beginning in 2012. In 2012, a taxpayer may expense up to $125,000 of the cost of qualifying property placed in service for the year (phase-out threshold of $500,000), indexed for inflation.
Note: The Small Business Jobs Act, which increased Sec. 179 expensing levels to $500,000 (phase-out threshold amount is $2 million) for the taxable years beginning in 2010 and 2011, still applies.
Increased Exemption and Reduced Top Rate
The 2010 Tax Relief Act lowers estate and GST taxes for 2011 and 2012 by increasing the exemption amount (technically, the applicable exclusion amount) from $1 million to $5 million (as indexed after 2011) and reducing the top rate from 55% to 35%. ( Code Sec. 2010(c) , as amended by Act Sec. 302(a)) The $5 million exemption is per person. Thus, there is a $10 million exemption for a married couple. Plus, as explained below, there is a new portability feature for married couples.
Modified Carryover Basis Rules Generally Repealed
The 2010 Tax Relief Act generally repeals the modified carryover basis rules that, under EGTRRA, would apply only for purposes of determining basis in property acquired from a decedent who dies in 2010. Under the Act, a recipient of property acquired from a decedent who dies after Dec. 31, 2009 generally will receive fair market value (i.e., stepped up) basis under the rules applicable to assets acquired from decedents who died in 2009. (Act Sec. 301) However, if an executor chooses no estate tax for a decedent dying in 2010, the modified carryover basis rules apply, as discussed below.
Special Choice for 2010 Decedents
The 2010 Tax Relief Act allows estates of decedents dying in 2010 to choose between (1) estate tax (based on a $5 million exemption and 35% top rate) and a step-up in basis, or (2) no estate tax and modified carryover basis. (Act Sec. 301(c)) In technical terms, the Act achieves this choice by making the estate tax and basis changes effective retroactively for estates of decedents dying after 2009 (Act Sec. 301(a)), but allowing the opt-out choice for estates of decedents dying in 2010. (Act Sec. 301(c))
The election will have no effect on the continued applicability of the GST tax. In addition, in applying the definition of transferor in Code Sec. 2652(a)(1) , the determination of whether any property is subject to the estate tax is made without regard to whether an election is made.
IRS is to determine the time and manner for making the election. Once made, the election is revocable only with IRS consent. (Act. Sec. 301(b), Committee Report)
Under the 2010 Tax Relief Act, for gifts made in 2010, the exemption is $1 million and the gift tax rate is 35%. For gifts made after Dec. 31, 2010, the gift tax is reunified with the estate tax, with an applicable exclusion amount of $5 million and a top estate and gift tax rate of 35%. (Act 301(b), and Code Sec. 2505(a) , as amended by Act Sec. 302(b))
The Act also makes clarifying changes to how gift taxes are taken into account in the mechanism for computing estate and gift taxes. Under pre-Act law, the gift tax on taxable transfers for a year is determined by computing a tentative tax on the cumulative value of current year transfers and all gifts made by a decedent after Dec. 31, '76, and subtracting from the tentative tax the amount of gift tax that would have been paid by the decedent on taxable gifts after Dec. 31, '76 if the tax rate schedule in effect in the current year had been in effect on the date of the prior-year gifts. Under the Act, for purposes of determining the amount of gift tax that would have been paid on one or more prior year gifts, the estate tax rates in effect under Code Sec. 2001(c) at the time of the decedent's death are used to compute both (1) the gift tax imposed with respect to such gifts, and (2) the unified credit allowed against such gifts. ( Code Sec. 2001(b)(2) , as amended by, and Code Sec. 2001(g) , as added by, Act Sec. 302(d))
Under the 2010 Tax Relief Act, the GST exemption for decedents dying or gifts made after Dec. 31, 2009 and before Jan. 1, 2011 is equal to the applicable exclusion amount for estate tax purposes (e.g., $5 million). Therefore, up to $5 million in GST tax exemption may be allocated to a trust created or funded during 2010. Although the GST tax is applicable in 2010, the GST tax rate for transfers made during 2010 is 0%. (Act Sec. 302(c)) The GST tax exemption for decedents dying or gifts made after Dec. 31, 2010 is equal to the basic exclusion amount (a new concept arising under the portability feature, discussed below) for estate tax purposes (e.g., $5 million, as indexed). ( Code Sec. 2631(c) , as amended by Act Sec. 303(b)(2)) The GST tax rate for transfers made in 2011 and 2012 is 35%. (Act Sec. 301, Act Sec. 302)
The Act extends the EGTRRA modifications to the rules regarding various technical aspects of the GST tax. (Act Secs. 101(a) and 301(a), Committee Report)
Under the 2010 Tax Relief Act, any exemption that remains unused as of the death of a spouse who dies after Dec. 31, 2010 (the deceased spousal unused exclusion amount) is generally available for use by the surviving spouse, as an addition to the surviving spouse's exemption. A surviving spouse may use the predeceased spousal carryover amount in addition to his or her own $5 million exclusion for taxable transfers made during life or at death. ( Code Sec. 2010(c) , as amended by Act Sec. 303(a)) In technical terms, the Act achieves this result for decedents dying and gifts made after 2010 by defining the applicable exclusion amount as the basic exclusion amount ($5 million for 2011, as indexed) plus the deceased spousal unused exclusion amount. ( Code Sec. 2010(c)(2) , as amended by Act Sec. 303(a))
If a surviving spouse is predeceased by more than one spouse, the amount of unused exclusion that is available for use by such surviving spouse is limited to the lesser of $5 million or the unused exclusion of the last deceased spouse. ( Code Sec. 2010(c)(4) , as amended by Act Sec. 303(a))
A deceased spousal unused exclusion amount is available to a surviving spouse only if an election is made on a timely filed estate tax return (including extensions) of the predeceased spouse on which such amount is computed, regardless of whether the estate of the predeceased spouse otherwise must file an estate tax return. In addition, notwithstanding the statute of limitations for assessing estate or gift tax with respect to a predeceased spouse, IRS may examine the return of a predeceased spouse for purposes of determining the deceased spousal unused exclusion amount available for use by the surviving spouse. ( Code Sec. 2010(c)(5) , as amended by Act Sec. 303(a))
Under the 2010 Tax Relief Act, the sunset of the EGTRRA estate, gift, and GST tax provisions, which was scheduled to apply to the estates of decedents dying, gifts made, or generation-skipping transfers made after Dec. 31, 2010, is extended to apply to estates of decedents dying, gifts made, or generation skipping transfers made after Dec. 31, 2012. The EGTRRA sunset, as extended by the Act, applies to the amendments made by the Act. Therefore, neither the EGTRRA rules nor the new 2010 Tax Relief Act rules will apply to estates of decedents dying, gifts made, or generation-skipping transfers made after Dec. 31, 2012.