Gifting a Personal Residence – Tax Saver or Tax Folly?

Many people believe that gifting a personal residence to their children will help reduce their estate taxes. However, because the federal estate-tax exclusion amount is currently set so high ($5,340,000 in 2014), very few people can expect to have federally taxable estates. As a result, unless state estate taxes are a concern, the smart tax move may be to keep the home in the estate.

A  Future Sale

The reason: capital gains taxes. When property is sold, the difference between the sale price and the seller\’s \”basis\” is potentially taxable as a capital gain. Basis is usually the property\’s original cost, plus or minus certain adjustments. The higher the basis number, the lower the capital gain.

If an appreciated home is transferred at death, the person who inherits the property receives it with a \”stepped up\” basis equal to the home\’s value at the time of death. This is a much more favorable rule than the one that applies to lifetime gifts of appreciated property. That rule requires that the recipient of the gift take the giftgiver\’s basis.

Example.

Mary purchased a home in 1970 for $25,000. Today it is worth $300,000. If she gives it to her son, David, he will take her cost basis of $25,000, and when he sells the property, he will have to pay capital gains tax on the difference between that cost basis and the sale price. In contrast, if Mary passes the home to David in her will, his basis will be the value on the date of Mary\’s death, so his capital gain will be greatly reduced in the event of a sale.

Another Option

Alternatively, a homeowner might consider making the gift but reserving the right to live in the home for life (a \”life estate\”). While there are drawbacks to this approach, the home\’s value would still be includable in the estate, allowing a basis step-up .

Taking Cash Out of Your Closely Held Corporation

Are you the owner-employee of a private C corporation? How you withdraw profits from your company can make a tax difference.

While you could declare a dividend, that is not always the most tax-efficient strategy. The corporation will not be able to deduct the dividend, and you, as the recipient of the income, will generally pay taxes on the amount you receive
at a rate of 15% (or 20% if you are in the 39.6% ordinary income-tax bracket). If you take additional money out as salary, you will have to pay income taxes on the pay at your top rate, plus both you and the company will have to pay FICA
taxes. Instead, you might want to consider the following alternatives.

Compensation to family members.

The corporation can deduct reasonable compensation paid to your children or other family members for services actually rendered. Your family members would pay income tax on the pay they receive at their own rates, which may be much lower
than yours.

Loans from the corporation.

A loan made to you by the corporation is generally not taxable, provided the loan is properly documented and you make payments of interest and principal in a timely manner.

Fringe benefits.

Certain fringe benefits such as medical benefits, disability insurance, and qualifying group life insurance may be both deductible by the corporation and nontaxable to you. Generally, the company must also provide the benefits to other
company employees on a nondiscriminatory basis .

The general information in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.

Record Number Affected by AMT

According to the IRS,a record 4,248,183 individual income ·tax returns showed an alternative,minimum tax (AMT) liability for tax year 2011. This is more than three times the number of returns paying AMT in 2001 (approximately l.l million), The total amount of AMT payable: $30.5 billion, the highest amount ever.

Audit Reveals Alimony Reporting Discrepancies

A recent audit of 2010 income·lax returns by the Treasury inspector General Tax Administration On (TIGTA) identified a $23 billion gap between alimony deductions claimed and alimony income reported in that year To help close the gap. TIGTA recommended that the IRS revise it\’s procedures to verify that each income-tax return claiming an alimony deduction includes the recipient\’s tax payer identification number (TIN) on the return TlGTA further recommended that the IRS take steps to ensure that returns without valid TINs are accurately assessed with penalties.