Year End Sale on Gift Tax - The Fine Print

That's right - the gift tax is on sale this year, but the opportunity is closing fast.  You have until December 31, 2010 to act on the biggest gift tax sale I have seen in my years of practice.  But what is the fine print?

  • Each person has a $1 million exemption from gift tax for gifts during their lifetime in excess of the annual exclusion amounts of $13,000 per gift recipient per year. 

 

  • In 2010 only, gifts over $1 million are taxed at 35%.  In 2009 the tax rate was 45% and its scheduled to go up to a maximum rate of 55% in 2011. 

 

  • There is no generation skipping tax on gifts made to grandchildren (or further generations) in 2010.  This creates an opportunity to shift wealth from grandma to grand-kids and leave Uncle Sam out in the cold.

So who is this sale targeted at?  Families where the oldest generation is "set" financially and can afford to give away dollars now, their children are already independently successful and don't "need" mom and dad's money, and the family goal is to maximize the amounts distributed to future generations.

Many families are surprised at the wealth of the oldest generation - those "old fashioned" values of saving dollars, deferred gratification and not buying things you can't afford has lead to large amounts of wealth.  The one year only gift tax sale is worth a family conversation over Thanksgiving to see if planning can be done now to reach the family's goals at a much lower cost. 

Image: Salvatore Vuono / FreeDigitalPhotos.net

Showdown at the OleTax Corral

The people have spoken and the end is drawing near. The people are all of us who exercised our right to vote earlier this month and the end is the end of the tax cuts passed in 2001.  

If Congress does nothing, here is what happens to Income Taxes come January 1, 2011 (courtesy of savingtoinvest.com) :

And Income Taxes are just the beginning:

We have all been enjoying a federal capital gain rate of 15%.  This will go up to 20%.

Dividends have been being taxed at a flat 15% for years now.  In January, dividends will be taxed at earned income rates (see chart above).

The federal estate tax has been absent this year. It returns in 2011 with a $1 million exemption amount per person and a 55% maximum rate.

What will Washington do?  Who knows.  Maybe nothing, maybe something.  My first concern is today in November 15.  With a lame duck Congress, Thanksgiving recess and holiday celebrations on the horizon, how much time is there to do something thoughtful and good?  Tax policy effects everyone and everything.  Its great if you pay less, but the fact is that our government needs money to run, and if it's not coming out of your pocket, it's probably coming out of your other pocket.

Time.com has "The Coming Tax Cut Showdown". Quick summary - everybody wants tax cuts, but they just can't agree who and how.  My fear, the status quo will continue, not because it is good tax policy, but because each side can point to the other and say "I wanted to do something, but he didn't".  Any takers on our elected representatives as a whole stepping outside of politics to just get it done?

Personal Injury Settlements - Taxable or Not?

You've been injured in a car accident. Thank goodness you're OK, but you broke your arm in addition to other bangs, cuts and scrapes and your back still feels out of wack.  You were out of work to recover and then find work to be more difficult.  You settle the case and all the damages you suffered are reduced a an amount of money.  Question - Does the government share in the damages award in the form of taxes?  Well, as with all good lawyers answers, it starts with "it depends".  In short, it depends on if the award you are getting are for the injury you suffered and not loss of economic benefit - such as lost wages when you were out of work that you would have had to pay taxes on had you been there.   Steven Loeb, Esq. of our Tax Department explore that question in detail as a guest blogger.

Under Section 104 of the Internal Revenue Code, certain payments for physical personal injuries are excludable from gross income. In Schleier v. Commissioner, 515 U.S. 323, the United States Supreme Court adopted a two step approach which mandates that: (1) the cause of action must be based upon a tort-type action; and (2) the proceeds must be received on account of personal physical injuries or sickness.

What is difficult is that neither the IRS nor any regulations provide guidance on the term "physical injuries or physical sickness". (Don't you love the law - they give you a rule without a definition)  Even in "proposed" regulations under Section 104 of the Code (IRS proposed these in 2009), there was no specific definition of "physical injury" or "sickness". The case law under Section 104 type matters is being kind "all over the place". What is interesting is that the IRS as well as taken a stand on Section 104. In LTR 200041022, the IRS ruled that damages received by a couple in a settlement with wife's employer for unwanted physical contacts without "any observable bodily harm" were not received on account of physical injuries and were included in gross income. There are additional Memorandums provided by the IRS which address this area of the law including ILM 2008-09001.

The case law is likewise unhelpful in many circumstances. What is important is for any attorney drafting the complaint for damages based out of a Section 104 type case where one is looking for damages resulting from bodily injury to speak with a competent tax attorney well versed in the Section 104 area of the law.

Additionally, taxes are not the only source of deduction to a personal injury award.  It might be appropriate to have the award paid into a Special Needs Trust so as to not be eviscerated by lifetime medical costs.