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Estate and Gift Law Changes under the 2017 Tax Cuts and Jobs Act

The new legislation signed into law on December 22, 2017 has significant estate planning changes. The federal estate, gift and generation skipping tax exemption amount is now doubled to $11.2 million per person. This exemption is portable between spouses.

The new legislation also increased the annual gift exclusion amount from $14,000 to $15,000 as of January 1, 2018. This exclusion allows individuals to gift up to $15,000 annually to another individual without utilizing any gift tax exemption amounts.

Residents of New York must keep in mind the New York State estate tax laws have not changed. The New York estate tax exemption amount is $5,250,000. If a New York taxable estate is more than 5% over the exemption amount, the exemption is lost as the tax will be on the entire amount of the estate (the New York “cliff”). There is no portability of this exemption between spouses and the New York estate tax rate goes up to a rate of 16%.

It is important that estate planning documents be reviewed to confirm there are not provisions which are no longer wanted. For example, a person may not want to fund a credit shelter trust for the entire federal exemption amount ($11.2 million) and leave nothing for outright distribution to beneficiaries or to a marital trust.

As when there are changes in personal situations, changes in estate tax legislation present a good opportunity to review the appropriateness of estate planning documents.

NEW TAX BILL DRASTICALLY CHANGES TREATMENT OF ALIMONY

For the last seventy-five years, a spouse paying alimony (also known as “maintenance” or “spousal support” in New York and many other jurisdictions) has been able to deduct the alimony award from his or her tax return each year.  Likewise, the spouse receiving the maintenance has the obligation to include the total amount of alimony received as income on his or her tax return.

This has now changed under H.R.1 – An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, otherwise known as the 2017 Tax Bill. Specifically, under Section 11051 of the 2017 Tax Bill, Repeal of Deduction for Alimony Payments, starting in 2019 alimony will no longer be deductible to the payor spouse.  The recipient spouse will no longer pay taxes on the income received as a result of the alimony award.  Importantly for matrimonial practitioners and their clients, this change only affects divorces commenced after December 31, 2018.

At first blush, this change might seem to benefit the recipient spouse, who no longer carries the obligation to pay taxes on the additional income.  Unfortunately, due to progressive marginal tax rates, this change actually reduces the overall “pot” of money available to the family.  For example, if the payor spouse is ordered to pay $60,000.00 per year in alimony, at the highest tax bracket (40%), the effective payment would be $36,000.00 out of pocket (considering the $24,000.00 tax deduction for the payor spouse.)  The recipient spouse, paying 15% in income taxes on the alimony award of $60,000.00, nets $51,000.00.  However, under the 2017 Tax Bill, the court can only order the payor spouse to pay $36,000.00 in alimony to the recipient spouse if the court desires to maintain the same level of out of pocket expenses for the payor.   An award of $60,000.00 could result in an inequitable result to the payor spouse, who now must pay a higher tax burden, in addition to the alimony award.  Continuing our example, if the Court seeks to award the recipient spouse $51,000 (the net result under prior law), the payor spouse’s total out of pocket is $51,000 of after tax income, a $15,000 loss to the family unit.

This change will only add an estimated $6.9 billion dollars in new tax revenue over ten years to the federal government, with some estimating that the tax bill will add up to $1.5 trillion dollars to the deficit in the same time period. The burden now shifts to families, who will lose those previously available funds to distribute between the spouses, as well as to states, which will now need to account for the change when determining maintenance awards.  New York follows a formula to derive the presumptively correct alimony amount. Presumably, this calculation previously took into consideration the tax implications to each spouse; whether this will now be modified depends on our state legislature.  While Governor Cuomo and legislative leaders have been outspoken on SALT deductions, it is unclear if a new alimony formula is currently being discussed or will be implemented by the end of the year.  This change will likely be one of many tax law changes to have an effect on settlement negotiations, where under the previous plan, the appeal of a tax deduction was often an incentive for the payor spouse to reach an agreement.

Accountants and attorneys are still figuring out the ways in which the new tax bill affects our clients.  It will be an interesting year to come.

Review Of Partnership And LLC Operating Agreements Needed Prior To January 1, 2018

In the past partnerships and limited liability companies that have elected to be taxed as partnerships[1]  have rarely faced an Internal Revenue Service (“IRS”) audit. In part, this is because of the administrative burden faced by the IRS in attempting to collect tax resulting from partnership audit adjustments. The current partnership audit scheme requires partnership audit adjustments to flow through to the partners and requires separate collection actions against each individual partner.

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Good and Bad News for Non-residents owing New York Real Estate

The New York Department of Taxation has issued two new tax advisory opinions that have a significant impact on taxpayers who are non-residents of New York State.

We have previously posted information for non-residents.  See Ryan Emery’s posts of April 21, 2015 and March 19, 2014.  This blog reports on very recent developments based on two advisory opinions issued by the New York Department of Taxation on May 15, 2015.

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Bitcoin 101

Over the past year, Bitcoin, a new alternative virtual currency was in the news almost every week. Since its creation in 2009, Bitcoin use has grown exponentially. It now has a presence in nearly every country in the world. Mainstream businesses including Overstock.com and Microsoft have also begun to accept Bitcoin for ordinary transactions.

1. What is Bitcoin?

Bitcoin is a virtual currency that exists on the Internet. Just like the Dollar or the Euro, one can use it to buy goods and services or exchange it for real-world currencies. Some also hold Bitcoins solely as an investment.

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Taxes, Taxes, Taxes…

It’s that time of year again – the April 15 deadline for filing income taxes is less than a month away.  A number of us will be doing the annual scramble to consolidate the information needed to complete the forms/input the data and generate the return(s).  And, of course, while last year’s return is a good reference, this year’s return preparation process will have some new challenges.

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Is your family taking advantage of the New York State Nursing Home Assessment Credit?

New York Public Health Law §2807-d(2)(b) imposes an assessment on New York residential health care facilities of six percent (6%) of the receipts of the residential health care facility. In most cases, the nursing homes pass on this assessment to the residents. This assessment is shown as a separate line item on the nursing home monthly bill.

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