Tax Obligations for Estate Executors
Oct 21, 2015
The executor of an estate has many ongoing obligations, including filing applicable tax returns. On the federal level, nearly all estates must file a final income-tax return for the decedent. Additionally, the executor may need to file one or more federal income-tax returns and an estate-tax return for the estate. (States have different filing requirements.)
Final Income-tax Return
The executor has the responsibility for filing the final income-tax return (Form 1040). Because most individual taxpayers file on a calendar-year basis, the final tax year will typically cover the period from January 1 through the date of death. The final return is generally due on April 15 of the year following the date of death. An automatic six-month extension may be obtained by filing Form 4868 and paying any tax due with the extension.
The executor may file a joint income-tax return with the decedent’s surviving spouse, provided the spouse has not remarried by year-end. Filing jointly can offer certain tax advantages, but it may not be the best option in all cases.
Estate Income-tax Return
Generally, the executor is required to file an income-tax return (Form 1041) for the estate for each tax year in which the estate has gross income of $600 or more. Because the decedent’s final tax year ends on the date of death, the estate’s first tax year begins the following day. The executor may elect to use a calendar or fiscal year. Careful consideration should be given to this decision because, in some cases, the executor may obtain additional tax deferral for a beneficiary by electing a fiscal year that ends after the close of the beneficiary’s taxable year.
The Estate-tax Return
Because the exclusion amount is quite high — $5.43 million for 2015 — many estates will not owe any federal estate tax. However, if the decedent was married, the executor may want to file an estate-tax return anyway.
The reason: The tax law allows a married person’s executor to make an election to pass the deceased spouse’s unused exclusion amount to the surviving spouse for eventual use on his/her own estate-tax return. Generally, this “portability” election must be made on a timely filed estate-tax return of the first spouse. Therefore, if there is any chance that the surviving spouse’s entire estate (including the amount passed from the first spouse) will exceed his/her individual exclusion amount, the executor for the first spouse will want to file an estate-tax return to make the portability election.
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Ex-Dividend Dates Can Hurt You When Buying Mutual Funds
Oct 13, 2015
Looking to buy mutual funds? Well, over the next few months you will want to be careful when purchasing funds or you could end up paying extra tax on your shares.
When you receive certain distributions from your mutual fund, there are taxes associated. Some of these distributions include capital gains on the sale of holdings within the fund or interest and dividends earned on securities the fund owns. Many mutual funds will be making similar taxable distributions to shareholders n November and December. Even if you do not sell any shares within the year, you will still owe ordinary income and capital-gains tax on distributions as a result of trading within the funds.
Buying a mutual fund just before it declares its distribution may seem like a good idea, but you will want to check the funds ex-dividend date first. The ex-dividend date is the date on or after which new buyers wont receive the upcoming dividend. If you purchase before the ex-dividend date, the share price could drop the amount of the fund distribution and requiring you to pay tax on the full amount.
For example, if you buy 1,000 shares at a net asset value of $30 a share then you will have spent a total of $30,000. If the fund declares a distribution of $2 a share then that will reduce the share price to $28. So you would then owe tax on the $2,000 distribution even if you reinvest your money. If you wait to buy the shares after the ex-dividend date then your $30,000 could buy additional shares at a lower share price of $28 and you would not have to pay tax on it.
If you are interested in buying, you can check the fund’s website for the ex-dividend date and the estimated distribution. It may be a good idea to wait to purchase the funds until after the ex-date to avoid paying a tax bill on what is effectively a return of part of your purchase price.
By: Brittany Jennings, Staff Accountant
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Business Deduction Opportunities: Repair Regulations
Oct 08, 2015
The IRS allows business owners to deduct the ordinary and necessary expenses of operating a business each year. However, business owners also are required to capitalize the costs associated with acquiring, producing, and improving tangible property used in their businesses (such as equipment, supplies, buildings, etc.). As these two rules have often proved difficult to reconcile, the IRS issued new final regulations in 2013 clarifying how the rules apply. Though these regulations are extensive and complex, small business owners should be aware of some of the opportunities they provide.
General Rules
The regulations delineate when you may deduct and when you must capitalize amounts paid to acquire, produce, or improve tangible property. Generally, amounts paid to improve a unit of property must be capitalized, while amounts paid for repairs and maintenance, as well as for materials and supplies consumed during the year, may be deducted.
Safe Harbor for De Minimis Expenditures
Qualifying businesses may elect to use a de minimis safe harbor that allows them to deduct costs incurred to acquire or produce tangible property in amounts of up to either $5,000 or $500 per item or invoice. The higher limit is available for taxpayers with an applicable financial statement (AFS). An AFS can be a certified audited financial statement used for nontax purposes, such as for obtaining credit. If you don’t have an AFS, you may still qualify for the $500 safe harbor if you expense amounts in accordance with a consistent accounting procedure in place at the beginning of the tax year.
Use of the safe harbor does not limit the ability to otherwise deduct amounts paid for incidental materials and supplies or for repairs and maintenance. Rather, it is an administrative convenience to allow expensing of smaller items without analyzing each one under the relevant rules.
Safe Harbor for Routine Maintenance
You may deduct amounts paid for recurring activities that keep your business property in its ordinarily efficient operating condition. For buildings and their systems, you must reasonably expect to perform the maintenance more than once during the 10-year period beginning at the time the property is placed in service. For other property, you must expect to perform the maintenance more than once during the property’s class life used for depreciation purposes.
Safe Harbor for Small Taxpayers
Qualifying small businesses may also deduct the costs of work performed on a building with an unadjusted basis of less than $1 million. To qualify for the safe harbor, the business must have average annual gross receipts of less than $10 million. Additionally, the total amount paid during the taxable year for the building’s repairs, maintenance, and/or improvements may not exceed the lesser of $10,000 or 2% of the unadjusted basis of the eligible building property. The building may be owned or leased.
Additional restrictions may apply for you to qualify for these safe harbors. Contact us if you require assistance regarding how the final regulations apply to you and your business
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Elder Care Tax Breaks
Oct 02, 2015
If you’re paying for the care of an elderly parent or relative, you may be able to take advantage of several tax provisions that could help you recoup some of your expenses.
Dependency Exemption Generally, you may claim a dependency exemption ($4,000 in 2015) for an individual if you provide more than 50% of the individual’s support costs and the individual:
- Lives with you or is related to you
- Does not have gross income exceeding the exemption amount
- Does not file a joint return
- Is a U.S. citizen or a resident of the U.S., Canada, or Mexico
The exemption is phased out for higher income taxpayers.
Medical Expenses
If you pay medical expenses for your dependent parent or other dependent relative, you may include those expenses with your own for tax deduction purposes.* The deduction may also be available if your parent or relative fails to qualify as your dependent because of the gross income and/or the joint return test listed above. Medical expenses include the qualifying long-term care costs of a “chronically ill” individual.
Dependent Care Credit
Additionally, you may be entitled to a tax credit for a portion of any costs you incur for the care of your parent or relative that enables you and your spouse to work. Your parent or relative must live with you and be unable to care for himself/herself.
- Medical expenses are deductible to the extent they exceed 10% of your AGI (or 7.5% of AGI if you or your spouse is 65 or older).
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Could Your Drug Policies Go Up In Smoke?
Sep 30, 2015
On November 3rd, Ohioans will vote on the legalization of medicinal and recreational use of marijuana. However, this proposed amendment is leaving many questions unanswered for Ohio’s employers. One of the biggest questions is whether or not employers can terminate current employees or deny employment to new hires based on a failed drug test. This question was answered by the Colorado Supreme Court on June 15th, 2015.
Brandon Coats, a quadriplegic and former employee of Dish Network, was granted a medical marijuana license by the state of Colorado in 2009 to control violent spasms and seizures caused by a paralyzing car accident when he was a teenager. In 2010, he was terminated for failing a random drug test after using medical marijuana while off-duty. Coats claimed to have been wrongfully terminated based on the Lawful Off-Duty Activities Statute which state employees cannot be discharged based on “lawful” activities performed while off-duty. Coats battled this for five years through trial court, Court of Appeals, and State Supreme Court. However, all three came to the exact same ruling. The statute only applied to activities deemed lawful under both state and federal law. Because the use of marijuana, both recreational and medicinal, is illegal according to federal law, Dish Network had the right to stand by their drug-free workplace policies and terminate Brandon Coats under valid circumstances.
We know going forward this will be an ongoing issue for both employers and employees if this amendment passes. We encourage all employers to review their workplace policies pertaining to both on-duty and off-duty drug use and clarify any language that could present itself as a gray area, should any incidents occur in the future.
By: Halie Baker, Staff Accountant
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