There are a number of different taxes that come into play in the context of estate planning. Along with estate taxes, inheritance taxes, and income taxes, there’s one form of tax that’s relatively new: the Generation Skipping Transfer Tax, or Generation Skipping Tax (GST). Here’s how it works.

Double Taxation

Estate taxes can be a huge concern, especially for the affluent. The estate tax system is set up to tax each generation’s wealth. So, when you leave your children an inheritance, and your estate is large enough, the money you leave behind is taxed. Then, when your children pass away, leaving an inheritance to your grandchildren, estate taxes are assessed everything they pass on – the funds they’ve inherited as well as wealth they’ve earned (again, assuming they leave behind a large enough estate).

It didn’t take too long for people who were subject to the estate tax to view the system as double-taxing their wealth: first, when a parent handed assets down to their children, and again when those inherited assets passed from children to grandchildren. It used to be that one way to get around this was to give an inheritance directly to your grandchildren, skipping a generation by bypassing your children.

Closing a Loophole

In 1986, Congress decided to close this loophole by implementing the GST. It’s a tax that’s assessed separately from and in addition to the estate tax, and it applies to transfers that skip one or more generations. If you leave assets to family, this means transfers to your grandchildren, great-grandchildren, or younger generations may be subject to the tax. If you leave assets to someone outside your family, the GST applies to assets passed down to someone who is at least 37 ½ years younger than you.

The Current Rules

For 2011 and 2012, the GST applies to generation-skipping transfers of more than$5 million. However, this number is only temporary. If Congress doesn’t extend the current exemption or otherwise change the rules, the GST will apply to transfers of more than $1 million starting in 2013.

If you’re concerned about the impact of taxes on your estate, talk to an experienced estate planning attorney. You’ll learn a variety of methods for minimizing your tax burden.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

When you own a life insurance policy, the value of that policy is included in your estate for federal estate tax purposes. This isn’t a problem (at least through the end of 2012) if the value of your taxable estate is less than $5 million. However, if the value of your life insurance policy, coupled with the values of all your other combined assets, pushes your taxable estate past the $5 million mark, you could end up with an estate tax bill at your death.

One strategy for reducing or eliminating the amount of estate tax that will be due when you pass away is to remove your life insurance policy from your taxable estate. There are a few methods for accomplishing this, and some people mistakenly think that one effective method is to transfer your life insurance policy to your revocable living trust. Why won’t this work?

In order to have a life insurance policy excluded from your taxable estate, you have to transfer it in such a way as to remove all incidents of ownership. This means that you – as owner or as trustee – can’t retain any rights to modify or control the policy. When you transfer the policy to your revocable living trust, you as trustee still have control over the policy, so you haven’t removed your incidents of ownership over the policy. This means the IRS still counts the policy as belonging to you when you pass away.

An example of an effective way to remove a life insurance policy from your taxable estate is to establish an Irrevocable Life Insurance Trust (ILIT) naming another person as trustee, and have the trust purchase a policy of insurance on your life. (You could also establish an ILIT and transfer an existing policy to the trust, but there’s a three-year waiting period between the time the transfer is made and the point at which the IRS no longer considers you the owner of the policy.)

Establishing an Irrevocable Life Insurance Trust that is effective for reducing your estate tax bill can be a complicated matter. Your estate planning attorney can help you determine whether an ILIT is right for you and, if so, he or she can help you establish one.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

According to a recent Moneywatch article, you might want to take another look at your 2010 tax return before you file it away for good – it could contain some valuable lessons for reducing next year’s taxes. For instance:

• Did you get a big refund? A refund of a few thousand dollars or more might seem like a welcome windfall, but it actually represents a year-long loan to Uncle Sam, interest-free. Instead of letting the government use your money all year, it makes sense to put your money to work for you by saving for your kids’ or grandkids’ college expenses, building up your retirement fund, or paying down debt.  This means reducing your withholding through your employer, or cutting back on the estimated tax you pay if you’re self-employed.
• Investing in Mutual Funds? Beware of taxable distributions. Before you invest in a mutual fund, you might want to ask whether the fund company will be making a distribution soon. If a distribution is on the horizon, it may pay to wait to invest until after the distribution is made – this way, you avoid the capital gains tax you’d have to pay on the distribution.
• Do You Keep Good Tax Records? Good recordkeeping (meaning keeping what you need in an organized manner, and tossing what you don’t need) can not only help reduce the time and energy you spend doing your taxes, it can also help to ensure you don’t miss opportunities to reduce your tax bill.

Taking a second look at this year’s tax return can provide you with insights that could save you time, money, and hassle in the coming years.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

The federal gift tax can be a confusing subject – it can be hard to figure out whether a transaction qualifies as a “gift” for IRS purposes, not to mention whether a gift tax return has to be filed or gift tax actually has to be paid for any given transactions or set of transactions. However, there’s one question to which there’s a single, consistent answer: who pays gift tax – the giver or the recipient?

The person who gives a gift is the one who’s responsible for paying any gift tax that might be due.  The recipient is not required to pay gift tax, nor is he or she required to pay income tax on the value of the gift  in the year it’s received. However, from the recipient’s perspective, a gift may give rise to a tax concern down the road.

If a recipient gets property as a gift, and later sells it, then he or she might owe capital gains tax at the time the property is sold. This is tax paid on the difference between the sales price of the property and the recipient’s basis in the property. When it comes to gifts, the recipient’s basis is the amount the donor paid for the gift.

As a simplified example, imagine your grandmother gives you her vacation home, which she bought years ago for $75,000. Regardless of the home’s value, it’s not counted as taxable income to you in the year you receive it. However, imagine you sell the house for $275,000 five years after receiving it. What’s the gain on which you’ll be taxed? It’s the difference between the $275,000 sales price and your grandmother’s original basis of $75,000. So, you’ll pay capital gains tax on $200,000.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

The federal estate tax exemption has been increased to $5 million, at least through the end of next year. This has led many people to breathe a sigh of relief; if your net worth is less than $5 million ($10 million for a married couple), there’s no worry about estate taxes, right? Maybe you should still be concerned.  If you live in Massachusetts, the state estate tax threshold is actually much lower.

Massachusetts assesses estate taxes on the state level, and the state rules differ from the federal rules. If you’re a Massachusetts resident, your individual state estate tax exemption is $1 million. So, as a general rule, anyone who passes away owning more than $1 million in total assets – real estate, cars, retirement and investment accounts, life insurance, etc.  – still needs to worry about estate tax planning.

Without tax planning, here’s what can happen:

Imagine you and your spouse own assets totaling more than a million dollars. If you pass away first, leaving everything to your spouse, no estate tax will be due at your death. This is because of the Marital Deduction, which allows your property to pass to your spouse tax-free. However, this arrangement really only postpones your family’s estate tax bill, rather than eliminating it. When your spouse eventually passes away, the property he or she inherited from you will be included in his or her estate, and if the value of your spouse’s estate exceeds $1 million, estate taxes will be due.

A qualified estate planning attorney can help you understand the impact that estate taxes are likely to have on your loved ones, and can assist you in structuring an estate plan that can minimize or even eliminate your estate tax bill. For instance, by making properly planned gifts during your lifetime, you can reduce your ultimate estate tax burden. And with AB Trust planning, you can ensure that as much of your estate as possible is sheltered from taxes and creditors, and preserved for your children or other loved ones.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

The IRS has introduced one more way to keep up with the status of your tax return, and get tax-related information, from your smart phone. The IRS2Go application is available for iPhone and Android. Here’s where you can get it:

For iPhone and iTouch: You can download the IRS2Go app for free by visiting the iTunes app store.

For Android devices: You can download the app for free from the Android marketplace.

Once you download the app, you can:

Get Daily Tax Tips: When you enter your email address, you’ll get daily tax tips during filing season and periodic tips throughout the rest of the year. What will the tips cover? Topics of general interest such as child tax credits, education credits, the Earned income credit, and free tax help.

Check Your Refund Status: Assuming you’re due a refund and you e-file, the app will let you check your refund status within a few days of filing. If you opt to file a paper return, you’ll be able to check your status after three to four weeks.

Stay Up-to-Date: The application will also let you follow the IRS Twitter news feed (@IRSnews) so that you can stay up-to-date on changes in tax laws and IRS programs.

Of course, you don’t have to use your mobile phone to access IRS information. You can always visit the IRS website at www.irs.gov.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

It seems like the new year just started, but tax season is here once again – this year’s filing deadline is April 18^th.  While you’re preparing to file, don’t forget these sometimes-forgotten deductions and credits:

• Health Insurance Premiums (if You’re Self-Employed). If you’re self-employed and you foot your own health insurance bill, you can not only deduct your premiums on your income tax; this year, you can also claim those premiums as a deduction on your self-employment tax.
• Professional Fees and Continuing Education.  Does your job require that you pay professional dues or attend classes or training sessions to keep up your certification? The fees you pay for these purposes can be deducted, as can subscription or purchase costs for trade journals and books.
• Adoption. If you adopted a child during 2010, you may be eligible for a tax credit of up to $13,170 in adoption expenses. This credit operates as a reimbursement for out-of-pocket fees, so some taxpayers will get a check from the IRS even if they owe no 2010 income tax.  If you’re married filing jointly, the credit phases out once your income exceeds $182,520. 
•  Mileage. If you’ve kept good records, don’t forget to deduct your mileage expenses.  For 2010, the standard rate for charity-associated use of your car is 14 cents per mile. For medical or moving purposes, it’s 16.5 cents per mile, and for business use of your car, you can deduct 50 cents per mile.

This is just a sampling of the deductions and credits available for tax year 2010. Be sure to consult with your tax professional to make sure you’re taking full advantage of all the deductions and credits available to you.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

It’s official – President Obama signed the 2010 Tax Relief Act on December 17^th. Among the many provisions included in the law is a new estate tax rate and exemption amount for 2011 and 2012.

Individuals who pass away during these years can transfer up to $5 million at death, tax-free. Surviving spouses can take advantage of the unused exemption of the first spouse to pass away, which effectively allows married couples to pass on the first $10 million of their wealth free of federal estate taxes (Massachusetts still has estate taxes). For those few individuals who will owe estate tax, the maximum rate will be 35%. Of course, two years from now, the future of the estate tax will once again be up in the air.

You are probably among the vast majority of Americans won’t owe estate taxes in 2011 or 2012, but this doesn’t mean that you don’t need an estate plan.

A common estate planning myth is that minimizing estate taxes is the only reason to plan. This couldn’t be further from the truth. The many non-tax-related reasons for estate planning include:

• Making sure that your assets go to the loved ones of your choice, in the manner and at the time of your choosing.
• Avoiding the time, expense, and other drawbacks of probate.
• Choosing a guardian to care for your young children in the event of your death.
• Selecting people you trust to manage your finances and make medical decisions for you in the event of your mental incapacity.
• Protecting your assets and the inheritances of your loved ones from creditors, lawsuits, and other unpleasant situations.
• Planning for the costs of nursing home care while preserving your savings and your children’s inheritance.

Estate planning is about more than just taxes. It is about preserving your hard-earned wealth, protecting your family, and smoothing life’s difficult transitions.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

As the holidays approach, many peoples’ thoughts turn to spending some time volunteering in the community or making a donation to a local nonprofit. And, while helping out your favorite charity is often reward enough in itself, it’s also a chance to take advantage of a few tax deductions.

Volunteer Work

While you can’t deduct the value of the time and services when you do volunteer work, you can take a deduction for the following expenses associated with your efforts. They might not seem like much, but keep track of your receipts. Over time, even small expenses tend to add up.

• Supplies: If you purchase supplies, like envelopes and stamps for a fundraising campaign or craft supplies for a children’s project, you can deduct their cost.
• Uniform: Do you have to wear a uniform in connection with your volunteer work? If you also had to purchase it yourself, you can take a deduction for the purchase price.
• Mileage: Some local travel expenses, like mileage to and from the location where you volunteer, are deductible. You’ll need to keep a log – for 2010, the IRS rate is 14 cents per mile. Don’t drive a car? Taxi, subway and bus fares are deductible, too.
• Have you hosted a fundraiser for your favorite charity? What about a holiday party? If so, your out-of-pocket expenses for putting on the event can be deducted.

Donating Money

What about making a cash donation? You can take a deduction for a monetary donation to a qualified organization, but there are a few rules to remember.

• A donation is only a donation if you receive nothing in return. So, if you “donate” $200 for an autographed collectible that’s worth $100, you can only take a deduction for $100. How do you know the value of the item you get in return for your donation? If it’s worth more than $75, the charity will tell you.
• You have to have a record of your donation, no matter how small. This means you need to keep a canceled check, a bank statement, or a receipt for every donation you make.
• If you make a contribution of $250 or more, you’ll need to get an acknowledgment – in writing – from the qualified organization. The acknowledgment will need to confirm the amount of your donation and the value of anything you received in return.

For more information about what you can – and can’t – deduct, you can talk to a tax advisor.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.

Like the federal estate tax, the Generation Skipping Tax (also called the GST ), has been repealed for this year, but it’s scheduled to return starting January 1, 2011.

What is it? The best way to explain it is to start with a little background:

Before 1986

It used to be that, if you had a large estate and wanted to avoid paying part of your estate tax bill, you could do so by leaving money to your grandchildren instead of to your children.

You see, if you left your estate to your children, that transfer of property would be taxed. Then, when your children died, leaving the property to their children, the property would again be taxed.

By leaving your property instead to your grandchildren, you could effectively skip one generation’s worth of estate tax.

The GST Tax

In 1986, Congress imposed the Generation Skipping Tax on certain transfers of wealth between a donor and a recipient who is more than one generation away from him or her. Why? To make sure that all transfers of wealth that would otherwise be subject to the estate tax, are, if fact, taxed once per generation.

With the exception of this year, the GST is imposed in addition to any gift taxes or other estate taxes that also might be due in connection with a transfer of property.

So, starting again next year, certain transfers of property to grandchildren or great-grandchildren – or transfers to non-family members who are 37 ½ years or more younger than you – might be subject to GST, in addition to other taxes.

What to Do

The good news is that not all generation skipping transfers are subject to taxation. For example, there’s an annual exemption amount that applies; and certain transfers – like payments of educational or medical expenses that are made directly to providers – aren’t taxable.

Plus, you can reduce your GST bill with a good estate plan.

For more information on the Generation Skipping Tax, and to find out about your tax planning options, you can speak to a qualified estate planning attorney.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.