IRS simplifies procedure to request relief for late portability elections

Estate tax rules can be tricky for executors, especially when dealing with provisions they may have to face only once in a lifetime. A case in point is the portability of the deceased spousal unused exclusion (DSUE) amount, which, if elected, allows the estate exclusion amount ($5.49 million in 2017) to pass from a deceased spouse to the survivingspouse.

To make the exclusion portable, the executor must timely file an election. What happens if the executor, unaware of the necessity of the election, misses the filing? Fortunately, there may be relief. The rules for applying for this relief have changed again under Rev. Proc. 2017-34.

A brief history of the estate tax exclusion

Few taxes have caused as much debate as the estate tax. For years it has served as a lightning rod for tax reform, with those objecting to it calling it a form of double taxation, while defenders point to the tax revenue it generates and the oversized fortunes that pass from generation to generation.

In an attempt to lessen the blow of the estate tax, Congress long ago added an exclusion, allowing anything below that exclusion amount to be passed down to the next generation tax-free. This compromise has generally worked as long as both sides of the political spectrum were content with the size of the exclusion amount.

That "just right" exclusion amount has been a moving target. The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, P.L. 107-16, put the exemption on a continuing growth chart from 2001 through 2010, when the exclusion amount in effect became unlimited. Then, in 2011, the exclusion was scheduled to drop to $1 million after EGTRRA's sunset.

Neither side of the political spectrum was happy with this cliff, so Congress addressed the issue in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (Tax Relief Act) of 2010, P.L. 111-312. The exclusion amount was set at $5 million plus annual inflation adjustments (after 2011), with the hope that this would prevent future fighting over the exclusion amount.

To make the $5 million exclusion even more palatable to those opposed to the estate tax, Congress temporarily passed, then later made permanent, a provision allowing any unused exclusion of a decedent to pass to a surviving spouse. This portability of the DSUE amount effectively allows a couple to pass up to $10 million (plus inflation) to their heirs tax-free.

Electing portability

Rules regulating exclusion portability to the surviving spouse are found in Sec. 2010(c)(5)(A), which states:

Election required. A deceased spousal unused exclusion amount may not be taken into account by the surviving spouse . . . unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return.

In other words, for DSUE portability to be claimed, the executor must elect portability on the deceased spouse's estate taxreturn.

The IRS, thankfully, has made electing portability easy. If the executor timely files the decedent's Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which generally is due nine months after the decedent's date of death, portability is automatically elected. If a return is timely filed, to decline to make or not be considered to have made a portability election, the executor must make an affirmative statement to that effect on the return or an attachment, which few executors will choose to do.

Extension of the portability election

Executors are most likely to run into problems if Form 706 is not timely filed. Under Regs. Sec. 20.2010-2(a)(1), estates electing portability are considered to be required to file Form 706 under Sec. 6018(a), with a due date of nine months after the decedent's death or the last day of any period covered by an extension obtained under Regs. Secs. 20.6075-1 and 20.6081-1.

The rules for missed elections go down two possible paths. Path A is followed by those who are required to file Form 706 under Sec. 6018(a) without regard to Regs. Sec. 20.2010-2(a)(1). In this situation, no further extension is available under Regs. Sec. 301.9100-3. In other words, if the executor was required to file a Form 706 under Sec. 6018(a) without regard to portability within nine months of the decedent's death (plus any period covered by an extension other than under Regs. Sec. 301.9100-3) but failed to do so, a portability election is not allowed.

Executors who did not timely file a Form 706 and the portability election who were not required to file Form 706 under Sec. 6018(a) may go down Path B, which allows extension relief.

Rev. Proc. 2014-18, issued in February 2014, provided a simplified method for executors on Path B to extend the filing period for portability under Regs. Sec. 301.9100-3 for estates of decedents who died between Dec. 31, 2010, and Dec. 31, 2013, which was available until Dec. 31, 2014. After that, executors seeking relief had to use the letter ruling process. Consequently, the IRS was flooded with private letter ruling requests for portability extension relief, most of which came from executors who did not discover the need to file for the portability election until the surviving spouse passed away. Due to the large influx of letter ruling requests, the IRS again decided to allow a simplified method of extending the election and did so in Rev. Proc. 2017-34, issued in June 2017.

Extensions under the new simplified method

Under Rev. Proc. 2017-34, if an executor missed the original election date and was not required to file Form 706 under Sec. 6018(a) without regard to the portability election, for decedents dying after Dec. 31, 2010, the executor may file a complete and properly prepared Form 706, by Jan. 2, 2018, or the second anniversary of the decedent's death, whichever is later, to obtain an extension of time to elect portability. The return must include a note at the top stating that it is "filed pursuant to Rev. Proc. 2017-34 to elect portability under Sec. 2010(c)(5)(a)." No user fee is required.

Rev. Proc. 2017-34 also notes that this portability extension relief does not extend the period available to the surviving spouse or surviving spouse's estate to claim a credit or refund for the overpayment of taxes under Sec. 6511(a). It also does not extend the time the surviving spouse's estate has to file a Form 706 upon the surviving spouse's death. However, if the claim for credit or refund on the surviving spouse's return is filed within the time required by Sec. 6511(a) in anticipation of the decedent spouse's executor's making a late portability election, it will be considered a protective claim for credit or refund of tax.

If, subsequent to the grant of relief under the simplified method, it is determined that, based on the value of the gross estate and taking into account any taxable gifts, an executor of an estate was required to file an estate tax return for the estate under Sec. 6018(a), the grant of an extension under the simplified method is deemed null and void ab initio.

The takeaway

If the decedent passed away on or after Jan. 1, 2011, and the executor missed electing portability of the DSUE due to not being otherwise required to file a Form 706, extension relief is available under Rev. Proc. 2017-34. However, this relief will soon disappear for estates of decedents who died before Jan. 2, 2016, leaving the private letter ruling process as the only recourse for their executors.

Source: https://www.thetaxadviser.com/

Senate tax reform bill contains more changes

The Senate Finance Committee on Thursday evening approved its version of the Tax Cuts and Jobs Act, sending the bill to the full Senate for debate and a vote. The committee had spent the week amending the bill, and the final version includes some changes beyond those included in the chairman’s mark released on Tuesday. 

The Senate is expected to take up the bill after it returns from its Thanksgiving recess.

Here are notable changes in the final version approved by the Senate Finance Committee.

Individuals

Free File program: The Senate bill would codify and make permanent the IRS’s Free File program.

Whistleblower awards: The Senate bill would provide an above-the-line deduction for attorneys’ fees and court costs paid in connection with any action involving claims under a state false claims act, the SEC whistleblower program, and the Commodity Futures Trading Commission whistleblower program.

The bill would also modify Sec. 7623 to expand the definition of collected proceeds eligible for whistleblower awards.

Carried interests: The Senate bill would impose a three-year holding period requirement before certain partnership interests transferred in connection with the performance of services would qualify for long-term capital gain treatment.

Businesses

Excessive compensation: Sec. 162(m) limits the deductibility of compensation paid to certain covered employees of publicly traded corporations. Current law defines a covered employee as the chief executive officer and the four most highly compensated officers (other than the CEO). The Senate bill would revise the definition of a covered employee under Sec. 162(m) to include both the principal executive officer and the principal financial officer and would reduce the number of other officers included to the three most highly compensated officers for the tax year. The bill would also require that if an individual is a covered employee for any tax year (after 2016), that individual will remain a covered employee for all future years. The bill would also remove current exceptions for commissions and performance-based compensation.

The bill includes a transition rule, so that the proposed changes would not apply to any remuneration under a written binding contract that was in effect on Nov. 2, 2017, and that was not later modified in any material respect.

Dividends paid: Under the Senate bill, corporations that pay dividends would be required to report the total amount of dividends paid during the tax year and the first 2½ months of the succeeding year, effective for tax years beginning after 2018. Corporations would not be allowed to deduct dividends paid when computing taxable income.

Dividends received: The Senate bill would also reduce the current 70% dividends-received deduction to 50% and the 80% dividends-received deduction to 65%.

Net operating losses: The Senate bill would limit the net operating loss deduction to 80% of taxable income (as determined without regard to the deduction). Net operating losses would be allowed to be carried forward indefinitely, but not carried back (except for certain farming losses). This change would apply to tax years beginning after 2022.

Orphan drug credit: The Senate bill would reduce the current Sec. 45C 50% orphan drug credit to 27.5% and would institute reporting requirements similar to the required for the Sec. 48C qualifying advanced energy project credit and the Sec. 48D qualifying therapeutic discovery project credit.

Employer-provided meals: The Senate bill would disallow an employer’s deduction for expenses associated with meals provided for the convenience of the employer on the employer’s business premises, or provided on or near the employer’s business premises through an employer-operated facility that meets certain requirements. However, the final version of the bill delays this change until tax years starting after 2025.

Amortization of research and experimental expenditures: The Senate bill would require specified research or experimental expenditures to be capitalized and amortized over a five-year period, effective for amounts paid or incurred in tax years beginning after 2025. Specified research and experimental expenditures attributable to research conducted outside the United States would be amortized over a 15-year period. The bill would also institute a new reporting requirement, for tax years beginning after 2024.

Exempt organizations

Excise tax on private college investments: Under current law, private colleges and universities are generally treated as public charities rather than private foundations, and thus they are not subject to the Sec. 4940 private foundation excise tax on net investment income. However, the Senate bill would impose a 1.4% excise tax on net investment income of private colleges and universities that have at least 500 students and aggregate assets of at least $250,000 per student. The assets-per-student threshold will be determined by including amounts held by related organizations, but only to assets held by the related organization for the education institution and to investment income that relates to assets held for the institution

Source: https://www.journalofaccountancy.com/

A Detailed Look at Tax Reform: Changes to Deductions and Credits

Tax reform cleared its first major hurdle in Congress on November 16 when the House passed its version of the bill by a 227-to-205 vote mainly along party lines. (No Democrats voted for it.) But the legislation, which would generally be effective for tax years beginning after 2017, still has a long way to go around the track before it hits the finish line.

The bill approved by the House contains many of the measures proposed during the past year by the Trump administration and GOP lawmakers. The following provisions may be of particular interest to your clients.

Individual Tax Provisions

Tax rates: The current tax rate structure of seven brackets would be replaced by just four brackets of 12%, 25%, 35% and 39.6%. (Note that the top rate will remain at 39.6%.)  In addition, a “bubble tax” of 6% would apply to a portion of adjusted gross income (AGI) above $1 million.

Standard deduction: The bill essentially doubles the standard deduction from $6,350 to $12,200 for single filers and from $12,700 to $24,400 for joint filers. Combined with other proposed tax law changes, many more taxpayers will be claiming the standard deduction in lieu of itemizing deductions.

Personal exemptions: Currently, a taxpayer is entitled to claim a personal exemption of $4,050 for himself or herself, a spouse and each qualified dependent. The bill eliminates all personal exemptions.

Itemized deductions: The bill repeals most itemized deductions while preserving tax breaks for charitable donations and disaster-area casualty losses. The deduction for mortgage interest would be reduced to cover $500,000 of acquisition debt, down from $1 million, but interest deductions for existing loans would be grandfathered. The state and local tax deduction, a lightening rod for controversy in high-tax states, would be limited to property taxes of up to $10,000.

Child tax credit: The child tax credit for children under age 17, which is currently $1,000, would be increased to $1,600, subject to certain restrictions. However, the extra $600 would not be refundable, unlike the $1,000 base credit.

Alternative minimum tax: The alternative minimum tax (AMT), which was designed to affect only the wealthiest taxpayers but has been a thorn in the side of millions of others, would be completely repealed.

Family tax credit: The new legislation would create a new $300 nonrefundable tax credit for each taxpayer as well as any non-child dependent such as an older child or an elderly relative. However, the credit would have a short shelf life and would expire after five years.

Recharacterizations: Although most retirement plan rules would remain intact, the House bill repeals the rule allowing a taxpayer to recharacterize a Roth IRA back into a traditional IRA. Typically, recharacterizations are used when the value of the taxpayer’s account drops. 

Business Tax Provisions

Corporate tax rates: One of the main tent poles in the new legislation is a reduction in the top corporate tax rate from 35% to 20%. After much debate, lawmakers made the corporate tax rate permanent.

Repatriation tax: Under the House-approved bill, a one-time tax of 14% would apply to existing foreign profits being held in offshore accounts. In addition, foreign profits invested in non-cash assets offshore would be taxed at the rate of 7%. The law gives companies up to eight years to pay up.

Pass-through entities: Currently, profits funneled through pass-through entities like S corporations and partnerships are taxed at individual tax rates as high as 39.6%. The new bill would limit the top tax rate on these earnings to 25%. It would also provide a lower rate of 9% for businesses earning less than $75,000.

Business deductions and credits: The new bill would add several key tax benefits for businesses while removing certain deductions and credits. For instance, it would effectively allow 100% Section 179 expensing of business property for a five-year period, but repeal the Section 199 manufacturing deduction and Work Opportunity Tax Credit (WOTC).

Finally, the new law would repeal the federal estate tax, a long-time target of GOP legislators, but not in one shot. The repeal would not completely take effect until 2024 and would be combined with a doubling of the estate tax exemption. Under current law, the exemption is $5 million (indexed to $5.49 million in 2017).

It’s still too early for your clients to take action based on these provisions, but the proceedings should continue to be monitored closely. Keep your clients informed about any significant developments.

Source: http://www.cpapracticeadvisor.com/