As tax season approaches, people are looking into decreasing federal estate tax. The November 23, 2011 deadline for the Joint Select Committee on Deficit Reduction (the “Super Committee”) to propose changes to the federal estate, gift and generation-skipping transfer (“GST”) tax passed with no change taken.
Though, change can still happen with the introduction of a new bill that proposes a reduction in the estate, gift and GST tax exemptions to $1,000,000 and a top tax rate of 55%. The bill includes provisions that would affect tax planning. For instance, the bill requires a minimum ten-year term for grantor retained annuity trusts (or “GRATs”), imposes restrictions on particular valuation and minority interest discounts, and limits the duration of specific long-term trusts.
As of December 2011, there was no indication on when the bill will progress further. The federal estate tax laws continue to be unresolved. If Congress does not do anything, in 2013 the estate and gift tax exemptions decrease from $5,000,000, indexed for inflation, to $1,000,000. The top tax rate increase from 35% to 55%. The GST tax exemption decrease from $5,000,000 to around $1,400,000, with a flat rate of 55% versus 35%.
For people who want to take advantage of their current $5,000,000 lifetime gifting exemption, they should make those gifts soon to ensure they happen before any federal tax law changes. This means making gifts outright to individuals, in trust for children and grandchildren, and for married couples, from one spouse in trust for the other spouse and descendants.
Besides federal estate tax concerns, dual citizens or residents may have foreign asset reporting requirements to think of as federal tax payments and filings become due.
U.S. citizens and residents, including people with a green card or meet the physical presence requirements under tax laws, must file returns and pay tax on worldwide income. They must file the Report of Foreign Bank and Financial Accounts (FBAR) to report financial interest in, or signature authority over, foreign financial accounts. They have reporting requirements if they have an interest in foreign entities, such as foreign trusts and corporations.
For U.S. persons, there is a filing requirement for foreign assets. This filing requirement comes from the Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. U.S. taxpayers who hold foreign financial assets with an aggregate value over $50,000 must report certain information about those assets on Form 8938 pending the release of the final Form 8938 and instructions. Form 8938 is to be attached to a person’s annual income tax return. Reporting is required for assets held during the 2011 taxable year.
Failure to file the proper tax forms on time could result in tax penalties. Consult with an experienced New York tax attorney to learn how to timely file tax forms and payments.