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Our client portal will be unavailable from 9PM MST, April 26 until 9PM MST April 28th due to a scheduled maintenance.
Office alert – Friday March 15th, 2024.
Due to the road conditions, majority of our staff will be working remotely today.
We want you to be safe, we have a drop off at COS on 3rd floor. If you are planning to come by the Denver and Springs office please make contact with your SKR contact first.
Our client portal will be unavailable from 9PM MST, April 26 until 9PM MST April 28th due to a scheduled maintenance.
Office alert – Friday March 15th, 2024.
Due to the road conditions, majority of our staff will be working remotely today.
We want you to be safe, we have a drop off at COS on 3rd floor. If you are planning to come by the Denver and Springs office please make contact with your SKR contact first.
Colorado offers a conservation easement tax credit program that could save you money while at the same time help preserve Colorado’s natural treasures. Landowners who permanently preserve part of their land for agriculture, scenic views or wildlife habitat can generate Colorado income tax credits that can then be sold to taxpayers.
Purchasing these tax credits could be an excellent strategy if you have a Colorado income tax liability of at least $10,000. The tax credit is not a tax deduction, but rather is a dollar-for-dollar reduction of state tax liability.
Landowners who desire to conserve the special qualities of their land — for example, its productive farm soils, scenic beauty or valuable wildlife habitat – can choose to place a conservation easement on all or a portion of it. Conservation easements give people the assurance that the places they love will be protected forever. A conservation easement is a legal agreement that runs with the land, in perpetuity. Conservation easements may or may not allow public access to the protected property. Over two percent of the land in Colorado is protected by conservation easements, including land in every county.
Colorado requires a conservation easement holder (typically a land trust) to have the responsibility of stewardship for the land. Landowners retain full ownership of the land. Once the easement is in place, the landowner receives Colorado conservation easement tax credits which can be used against their Colorado tax liability or sold to a third party.
Individuals and entities with Colorado state income tax liability may purchase tax credits. There is no limit to the amount of tax credits that any individual or entity may purchase.
The major benefit of purchasing conservation easement tax credits is that they can be purchased at a discount, often at a savings of 10-14%. For example, if you have a $100,000 state income tax liability, you can purchase $100,000 worth of tax credits for between $86,000-90,000, thereby saving $10,000-14,000.
Here is an example to illustrate how purchasing conservation easement tax credits could benefit you:
First, it’s good idea to have an idea of what your Colorado tax liability will be for the upcoming year. Your tax advisor can assist you in this.
Secondly, although not a requirement, it is advisable to purchase tax credits through a reputable broker. Brokers know this process intimately and can efficiently guide a buyer through each step. There are some risks involved when purchasing conservation easement tax credits; these can be greatly minimized by using a reputable broker.
A tax credit broker will match you up with a conservation easement seller and will verify the validity of the credits. The broker also prepares the documents to transfer the credits from the seller to the buyer.
In addition to conservation tax credits, Colorado also offers environmental remediation (Brownfield) tax credits and historic preservation tax credits. If you think you have a Colorado tax liability of at least $10,000 and would like more information on tax credits, please contact our office to discuss the details of your specific situation. Tax credits are in high demand and as a result some brokers have waiting lists already forming, so do not hesitate for long.
Until recently, estate planning strategies typically focused on minimizing federal gift and estate taxes, with less regard for income taxes. Today, however, the estate and income tax law landscape is far different. What does this mean for estate planning? For many people — particularly those who expect to have little or no estate tax liability — it means shifting their focus to strategies for reducing income taxes.
For many years, the combination of relatively low estate tax exemption amounts and high marginal rates could easily devour more than half of an estate’s value. Popular estate planning techniques often had income tax implications, but in general any income tax consequences were eclipsed by the estate tax savings.
Now that has changed. For one thing, since 2001, the federal exemption has grown from $675,000 to $5.45 million. And, unlike before 2013, the exemption isn’t scheduled to drop in the future. In fact, it will continue to gradually increase via annual inflation adjustments. Estate tax rates have also decreased significantly, from 55% to 40%. And the 40% rate has no expiration date.
For many people, this new gift and estate tax law regime means federal gift and estate taxes are no longer an issue.
At the same time that potential gift and estate tax liability has disappeared for many, individual income tax rates have increased. In 2001, the top federal income tax rate was 39.1%, substantially lower than the top federal estate tax rate of 55%. Now the top income tax rate has grown to nearly as high as the current top estate tax rate.
Taxpayers with taxable income of more than certain annually adjusted levels (for 2016, $415,050 for single filers, $441,000 for heads of households, and $466,950 for joint filers) are now subject to a 39.6% marginal rate.
Capital gains rates also have increased. Currently, the top rate is 20% (up from 15%) — 23.8% for taxpayers subject to the Affordable Care Act’s 3.8% net investment income tax (NIIT). It applies to certain net investment income — including dividends, taxable interest and capital gains — earned by taxpayers whose modified adjusted gross income tops $200,000 ($250,000 for joint filers, $125,000 for separate filers). The NIIT thresholds aren’t annually adjusted.
Fortunately, many estate planning strategies are available that can help reduce income taxes. Consider the family limited partnership (FLP). A properly structured and operated FLP allows parents to shift income to children or other family members in lower tax brackets by giving them limited partnership interests. But watch out for the kiddie tax, which can undo the benefits of income shifting if you transfer FLP interests to dependent children under the age of 19 (age 24 for certain full-time students).
The heightened importance of income taxes also means that there may be an advantage to holding assets until death rather than giving them away during your life. If you give away an appreciated asset, the recipient takes over your tax basis in the asset, triggering capital gains taxes should he or she turn around and sell it.
When an appreciated asset is inherited, on the other hand, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain. So, from an income tax perspective, there’s an advantage to retaining appreciating assets until death rather than giving them away during your lifetime.
For those with large taxable estates, however, this advantage may be outweighed by estate tax concerns. From an estate tax perspective, it’s preferable to remove appreciating assets from your estate — through outright gifts or contributions to irrevocable trusts — as early as possible. That way, all future appreciation in their value will be shielded from estate tax.
If your net worth is safely within the estate tax exemption, retaining assets until death will minimize the impact of built-in capital gains on your heirs. Alternatively, if you want to share your wealth with your children or other family members, consider using an estate defective trust, which provides current income to your beneficiaries without removing the trust assets from your estate. (See below under “Have your cake and eat it.”)
Higher income taxes can also have a big effect on charitable giving strategies. If your estate plan includes charitable bequests, for example, it makes sense to fund those bequests with assets that otherwise would generate “income in respect of a decedent” (IRD).
IRD is income that a deceased person earned but never received, such as IRA or qualified retirement plan distributions. Unlike other inherited assets, which are income-tax-free to the recipient, IRD assets can trigger a significant tax bill. But you can avoid these taxes by donating the assets to charity.
If your estate is within the exemption, it’s preferable to make charitable gifts during your lifetime. This is because, if you have no estate tax liability, charitable bequests won’t yield any tax benefits. But lifetime donations can generate valuable income tax deductions.
Identifying the right estate planning strategies for you and your family is in part a matter of running the numbers. Projecting your income and estate tax liabilities — including state as well as federal taxes — will help you determine whether it’s better to focus on reducing estate taxes or income taxes.
Have your cake and eat it
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If you’ve been bitten by the net investment income tax (NIIT) in the past three years, you may now be ready to explore strategies that avoid or reduce your exposure. This surtax can affect anyone with consistently high income or with a big one-time shot of income or gain.
Let’s review the basics of the NIIT. Congress passed the 3.8% Medicare surtax on investment income in 2012 to help pay for the Affordable Care Act. The surtax became effective for tax years beginning after December 31, 2012. The NIIT affects taxpayers with modified adjusted gross income (MAGI) above $200,000 for a single person, above $250,000 for a couple, and above $125,000 for a married person filing separately. (MAGI is generally the last number on page 1 of your Form 1040 – your gross income less certain allowable deductions.) Notably, a marriage penalty is built into this surtax and the surtax threshold levels are not indexed for inflation going forward.
The amount of net investment income subject to the NIIT is the lesser of (1) your net investment income or (2) the amount by which MAGI exceeds the threshold discussed above.
What income is subject to the NIIT? Generally net investment income includes the following:
Strategies to Reduce Your Net Investment Income:
Strategies to Reduce Your Modified Adjusted Gross Income:
As you can see, higher income taxpayers with investment income have some planning options when it comes to limiting the impact of the surtax, but in many cases, there may not be a way to avoid it. Bottom line? The NIIT is complex and all strategies should be discussed with your tax and investment advisors before implementation to avoid other unintended tax consequences.
Year-end tax planning this year will be just as complicated as it was last year because of uncertainty surrounding many expired tax breaks for individuals. While Congress mulls legislation to extend (or even make permanent) some expired tax provisions, it’s difficult to predict what will be included in the final bill. Rather than waiting to act until potential legislation is passed, implement these year-end tax planning strategies today because most steps to reduce your 2015 tax bill must be taken before year end.
Individuals often can reduce their tax bills by deferring income to the next year and accelerating deductible expenses into the current year. To defer income, for example, you might ask your employer to pay your year-end bonus in early 2016 rather than in 2015.
And to accelerate deductions, you might pay certain property taxes early or increase your IRA or qualified retirement plan contributions to the extent that they’ll be deductible. Such contributions also provide some planning flexibility because you can make 2015 contributions to IRAs, and certain other retirement plans, after the end of the year.
Remember that, when you use a credit card to pay expenses or make charitable contributions this year, you can deduct them on your 2015 return even if you don’t pay your bill until next year.
Other year-end tax planning strategies to consider include:
Offsetting capital gains. If you’ve sold stocks or other investments at a gain this year — or plan to do so — consider offsetting those gains by selling some poorly performing investments at a loss.
Reducing capital gains is particularly important if you’re subject to the net investment income tax (NIIT), which applies to taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for married couples filing jointly). The NIIT is an additional 3.8% tax on the lesser of 1) your net income from capital gains, dividends, taxable interest and certain other sources, or 2) the amount by which your MAGI exceeds the threshold.
In addition to reducing your net investment income by generating capital losses, you may have opportunities to bring your MAGI below the applicable NIIT threshold by deferring income or accelerating certain deductions.
Charitable giving. If you plan to make charitable donations, consider donating highly appreciated stock or other assets rather than cash. This strategy is particularly effective if you own appreciated stock you’d like to sell but you don’t have any losses to offset the gains.
Donating stock to charity allows you to dispose of the stock without triggering capital gains taxes, while still claiming a charitable deduction. Then you can take the cash you’d planned to donate and reinvest it in other securities.
Monitoring expired tax breaks. Keep an eye on Congress. If certain expired tax breaks are extended before the end of the year, you may have some last-minute planning opportunities. Expired provisions include tax-free IRA distributions to charity for taxpayers age 70½ and older, the deduction for state and local sales taxes, and the above-the-line deduction for qualified tuition and related expenses.
Although not new, uncertainty over expired tax breaks certainly creates some challenges. We can help you to implement the strategies available today and to be in a position to act quickly when tax legislation is signed into law. Call us today to set up a time to begin your year-end tax planning.
A trust is a versatile estate planning tool. It’s a vehicle for transferring wealth to the next generation in a tax-efficient manner. It can also provide incentives for your beneficiaries, serve as a financial “safety net” for your family, protect assets from creditors, achieve your philanthropic goals and leave a lasting legacy.
But no matter how well it’s designed and drafted, a trust won’t reach its full potential unless all of the stakeholders — grantor, trustee and beneficiaries — understand the trust’s goals and their roles in achieving them.
No one understands the goals of a trust better than you, the grantor. But it’s critical that you communicate your goals to your advisors and understand how the trust will achieve them.
You should also educate yourself about the trustee’s duties and responsibilities to ensure that you select the right person for the job. You want to be sure, for example, that your trustee possesses the requisite financial, business, organizational and interpersonal skills.
It’s also important to consider potential conflicts between the trustee and the beneficiaries, particularly if the trustee is a family member. To avoid conflicts and ensure the trustee is qualified, it may be desirable to engage a professional trustee, such as a bank, trust company, attorney or financial advisor.
Once you’ve identified potential trustees, you should educate them about what’s involved so they can make an informed decision about whether to accept the job. Some people, for example, may feel that they’re not qualified to manage investments or that they’re too close to the family to make objective decisions regarding distributions and other matters.
It’s also critical to educate the trustee about what you hope to accomplish with the trust. Although it’s possible to include very specific instructions in the trust document, often trusts are more effective if the trustee has broad discretion in managing and distributing trust assets. Educating the trustee helps ensure that he or she will exercise this discretion with your goals and principles in mind.
Don’t underestimate the importance of educating a trust’s beneficiaries. So long as they’re old enough, they shouldn’t be simply passive recipients of your wealth. Make sure they understand your goals and how the trust will provide financial security for them and their dependents down the road.
This is particularly critical if the trust is required to provide beneficiaries with withdrawal rights in order to qualify contributions for the $14,000 annual gift tax exclusion. Although you can’t ask your beneficiaries to agree not to exercise their withdrawal rights, you should educate them about the long-term benefits of keeping assets in the trust.
Providing beneficiaries with financial training and educating them about their rights will enable them to monitor trust performance (particularly after you’re gone) and, if necessary, replace the trustee. It’s also a good idea to set up periodic meetings between the trustee and beneficiaries to keep the lines of communication open.
A trust is a powerful estate planning tool. But like any other tool, it won’t produce the best results unless all stakeholders learn how to use it properly.
It’s no secret that the cost of a college education continues to soar. Taxpayers with grandchildren often want to help for the education costs of their grandchildren, but it’s important to structure the payments correctly so that they don’t have negative gift and estate tax consequences. This article contains three strategies to help a grandparent pay for the education of a grandchild.
A simple but effective technique is to make tuition payments on behalf of your grandchild. So long as you make the payments directly to the college, they avoid gift and generation-skipping transfer (GST) tax without using up any of your gift or GST tax exclusions or exemptions.
But this technique is available only for tuition, not for other expenses, such as room and board, fees, books and equipment. So it may be desirable to combine it with other techniques.
A disadvantage of direct payments is that, if you wait until the student has tuition bills to pay, there’s a risk that you’ll die before the funds are removed from your estate. Other techniques allow you to set aside funds for future college expenses, shielding those funds from estate taxes.
If your grandchild is planning to apply for financial aid, also be aware that most schools treat direct tuition payments as a “resource” that reduces financial aid awards on a dollar-for-dollar basis.
These trusts offer several important benefits. For example, they can be established for one grandchild or for multiple beneficiaries, and assets contributed to the trust, together with future appreciation, are removed from your taxable estate. In addition, the funds can be used for college expenses or for other purposes.
On the downside, for financial aid purposes a trust is considered the child’s asset, potentially reducing or eliminating the amount of aid available to him or her. So keep this in mind if your grandchild is hoping to qualify for financial aid.
Another potential downside is that trust contributions are considered taxable gifts. But you can reduce or eliminate gift taxes by using your annual exclusion ($14,000 per recipient; $28,000 per recipient for gifts by married couples) or your lifetime exemption ($5.43 million in 2015) to fund the trust. To qualify for the annual exclusion, the beneficiary must receive a present interest. Gifts in trust are generally considered future interests, but you can convert these gifts to present interests by structuring the trust as a Crummey trust.
With a Crummey trust, each time you contribute assets, you must give the beneficiaries a brief window (typically 30 to 60 days) during which they may withdraw the contribution. Curiously, the law doesn’t require that you notify beneficiaries of their withdrawal rights. Notification, however, is typically recommended.
If a Crummey trust is established for a single beneficiary, annual exclusion gifts to the trust are also GST-tax-free.
Contributions to a Sec. 2503(c) minor’s trust qualify as annual exclusion gifts, even though they’re gifts of future interests, provided the trust meets these requirements:
When the beneficiary turns 21, it’s possible to extend the trust by giving the minor the opportunity to withdraw the funds for a limited time (30 days, for example). After that, contributions to the trust no longer qualify for the annual exclusion, unless you’ve designed it to convert to a Crummey trust. Then, so long as you comply with the applicable rules, gifts to the trust will qualify for the annual exclusion.
While this is not an all-inclusive list, these ideas could be beneficial for some taxpayers and their beneficiaries. These ideas offer suggestions for paying the high costs of education while helping to limit a taxpayer’s estate and gift tax exposure.
No matter how much time you invest in designing an estate plan that reflects your wishes, your efforts will be for naught if your family can’t find your documents. Here are several tips for ensuring that critical documents are readily accessible when needed:
Ask your accountant, attorney or other trusted advisor to keep your original will, living trust and other trust documents; and provide your family with his or her contact information. Be aware that it’s not advisable to place your will or living trust in a safe deposit box, however, as state law and bank policy will likely require that you present the original document or a court order to obtain access.
Make it easy for your family or other representatives to find life insurance policies; tax documents; deeds to real property; bank, brokerage, retirement account and credit card statements; stock certificates; and other important documents. Also provide contact information for key advisors, such as real estate attorneys, accountants, brokers and financial advisors.
There are many options for providing your loved ones with access to this information, including:
Consider providing “duplicate originals” or copies of powers of attorney, living wills or health care directives to the people authorized to make decisions on your behalf. You might also ask your physicians to keep duplicate originals or copies with your medical records.