What is Portability of the Estate Tax Exemption?

What is Portability of the Estate Tax Exemption?

A New Estate Tax Election for Surviving Spouses

Courtesy: Julie Garber, About.com Guide 

See More About: estate taxes estate tax exemption

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 into law. A big part of this new law is modification of the federal estate tax rules, including offering "portability" of the federal estate tax exemption between spouses for the 2011 and 2012 tax years. But what does "portability" of the estate tax exemption mean?

Definition of Portability of the Estate Tax Exemption
In simple terms portability of the federal estate tax exemption between married couples means that if the first spouse dies and doesn't use up all of his or her federal exemption from estate taxes, then the exemption that the deceased spouse didn't use will be transferred to the surviving spouse's exemption so that he or she can use the deceased spouse's unused exemption plus his or her own exemption when the surviving spouse later dies.

Examples of Portability of the Estate Tax Exemption
Some examples using numbers should help to illustrate the concept of portability of the federal estate tax exemption between spouses:

Result Without Portability
Assume Bob and Sue are married and have all of their assets jointly titled and their net worth is $8,000,000, Bob dies first and the federal estate tax exemption is $5,000,000 on the date of his death, and there isn't portability of the estate tax exemption between spouses:
Under these facts, when Bob dies his estate won't need to use any of his $5,000,000 estate tax exemption since all of the assets are jointly titled and the unlimited marital deduction allows Bob to transfer his share of the joint assets to Sue without incurring any federal estate taxes.  Assume that at the time of Sue's later death the federal estate tax exemption is still $5,000,000, the estate tax rate is 35%, and Sue's estate is still worth $8,000,000.  With Bob's $5,000,000 estate tax exemption completely wasted, when Sue later dies she can only pass on $5,000,000 free from federal estate taxes. Thus, Sue's estate will owe about $1,050,000 in estate taxes after her death:
$8,000,000 estate - $5,000,000 exemption = $3,000,000 taxable estate
$3,000,000 taxable estate x 35% estate tax rate = $1,050,000

Result With Portability
Assume Bob and Sue are married and have all of their assets jointly titled and their net worth is $8,000,000, Bob dies first and the federal estate tax exemption is $5,000,000 on the date of Bob's death, and there is portability of the estate tax exemption between spouses:
As above, when Bob dies his estate won't need to use any of his $5,000,000 estate tax exemption since all of the assets are jointly titled and the unlimited marital deduction allows Bob to transfer his share of the joint assets to Sue without incurring any federal estate taxes.  Assume that at the time of Sue's later death the federal estate tax exemption is still $5,000,000, the estate tax rate is 35%, and Sue's estate is still worth $8,000,000.  Enter portability of the estate tax exemption - With full portability of the estate tax exemption between spouses, under these facts Bob's unused $5,000,000 estate tax exemption will be added to Sue's $5,000,000 exemption, in turn giving Sue a $10,000,000 exemption.  Since Sue has "inherited" Bob's unused estate tax exemption and she can pass on $10,000,000 free from federal estate taxes at the time of her death, Sue's $8,000,000 estate won't owe any estate taxes at all:
$8,000,000 estate - $10,000,000 exemption = $0 taxable estate
Thus, portability of the estate tax exemption will save the heirs of Bob and Sue $1,050,000 in estate taxes.

Of course, these examples illustrate how portability of the estate tax exemption between spouses really works in the same way that the AB Trust system works but without the need for setting up AB Trusts.

Understanding Federal Estate Taxes
What is the Federal Estate Tax?
What is the Exemption From Estate Taxes?
Exemption From Estate Taxes: 1997 - 2013

How to succeed Get more sleep

video courtesy: TED

Science Meets Spirituality — The Case Against Divorce Courts, Bruce Peterson

Science Meets Spirituality — The Case Against Divorce Courts
Video Courtesy: Bruce Peterson

Home Office - Depreciation on Form 8829

Home Office - Depreciation on Form 8829

When using the Depreciation of Home Worksheet, Form 8829, for Business use of Home, when the home is sold, the taxpayer(s) must recapture any depreciation previously taken on the Home Office, and this is reported on Form 4797. Very seldom do we recommend using the depreciation option on an 8829. For obvious reasons, the gain is so small for the most part, and the disposition is a pain. It's not like other depreciation where you have to recapture "allowed or allowable". That being said, the correct treatment is disposing of the asset via form 4797. If you have the asset summaries from the previous years you should have all that you need to complete it. Don't forget to pro-rate the selling expense with the cost of the land.

Starting a Business? 10 Steps Every Entrepreneur Needs to Know

Starting a Business? 10 Steps Every Entrepreneur Needs to Know
Courtesy:  Caron Beesley
Created: May 2, 2012, 7:04 am
Updated: May 21, 2012, 6:46 pm
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Starting a business? Confused about the planning, legal and regulatory steps you should follow?  Did you know that home-based businesses are required to hold permits to operate legally in most states? What about incorporation? Many new businesses assume they need to incorporate or become an LLC from the  get-go – but the truth is, more than 70 percent of small businesses are owned by un-incorporated sole proprietors (although even this group is required to register their businesses).  So, variables aside, there are still some fundamental steps that any business needs to follow to get started. SBA has compiled 10 steps that can help you plan, prepare, and manage your business – while taking care of the startup legalities. Not all these steps will apply to all businesses, but working through them will give you a sense of what needs your attention and what you can check off.

Step 1 – Write a Business Plan
Yeah, yeah, you know you should write a business plan whether you need to secure a business loan or not. The thing is, a business plan doesn’t have to be encyclopedic and it doesn’t have to have all the answers. A well-prepared plan – revisited often – will help you steer your business all along its growth curve. Try to think of your business plan as a living, breathing project, not a one-time document. Break it down into mini-plans – one for marketing, one for pricing, one for operations, and so on. Take a look at SBA’s Business Planning Guide for more ideas.

Step 2 – Get Help and Training
Starting a business can be a lonely endeavor, but there are lots of free in-person and online resources that can help advise you as you get started. Check out what‘s offered at your Small Business Development Centers; SCORE (which offers free mentoring services); Women’s Business Centers, or your local SBA office.

Step 3 – Choose Your Business Location
Where you locate your business may be the single most important decision you make. Many factors come into play such as proximity to suppliers, the competition, transportation access, demographics, and zoning regulations. Check out SBA’s Tips for Choosing a Business Location and this blog: How to Choose the Best Location for your Business.

Step 4 - Understand your Financing Options
You may choose to bootstrap, fall back on savings, or even keep a full-time job until your business is profitable, but if you are looking for an external source of financing, these resources explain your options.

Step 5 – Decide on a Business Structure
Going it alone or forming a partnership? Thinking of incorporating? What about an LLC? How you structure your business can reduce your personal liability for business losses and debts. Some choices can give you tax benefits. To help you determine the right structure for your business, here’s an overview of your options and some information on how to file the necessary paperwork in your stateand the tax implications of your decision. You might also want to read:
LLCs Explained: A 101 for Small Business Owners
Should You Incorporate Your Freelance or Consulting Business?
“Working Together” – How to Start and Formalize a Business Partnership

Step 6 – Register Your Business Name (“Doing Business As”)
Registering a “Doing Business As” name or “trade name” is only needed if you name your business something other than your personal name, the names of your partners, or the officially registered name of your LLC or corporation. Here’s how to register your “Doing Business As” name.

Step 7 – Get a Tax ID
Not every business needs a tax ID from the IRS (also known as an “Employer Identification Number” or EIN), but if you have employees, run a business partnership, a corporation or meet certain IRS criteria, you must obtain an EIN from the IRS. You’ll also need to start paying estimated taxes to the IRS; this blog explains more about this process.

Step 8 – Register with Tax Authorities
Employment taxes, sales taxes, and state income taxes are handled at the state-level. Learn more about your state’s tax requirements and how to comply.

Step 9 - Apply for Permits and Licenses
All businesses, even home-based businesses, need a license or permit to operate. This guide explains more and includes a handy “Permit Me” tool that lets you determine what your permit and licensing needs are, based on your zip code and business type.

Step 10 - Hiring Employees
If you’re hiring employees, follow these 10 steps. If you’re working with a contractor or 1099, read 5 Things to Know About Hiring Independent Contractors.

Related Resources
Check out SBA’s Starting and Managing a Business for more tips and guides. About the Author Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

The 5 Most Important Decisions to Make When Starting Your Business

The 5 Most Important Decisions to Make When Starting Your Business

1.  Have a Business Plan

a)      Business plans are used for financing.

b)      They provide a yardstick against which future performance will be measured.

c)      They provide a framework for decision making and coordination of business.

d)     They define the business culture that will be communicated to employees, customers, etc.

2.  Choose the Entity that is Right for You

a)      Sole Proprietorship

b)      Partnership

c)      Corporation

d)     Limited Liability Company (LLC)

3.  Set up a Good Recordkeeping System

a)      Set up a business bank account.

b)      Use a good accounting software program or recordkeeping system.

c)      Keep all receipts relative to the business.

d)     Stay away from cash transactions.

e)      Know the records retention requirements. (attached)

4.  Know Your Filing Requirements and Your Tax Responsibilities

a)      What forms are required and when are they due?

b)      Set up a calendar system to help monitor the due dates.

c)      Learn what taxes are due and how you calculate the amount to pay.

d)     Learn the rules for taking money from your business account.

5.  Engage a Good Banker, Accountant & Attorney

a)      A banker will help you with loans, financing, bank accounts and recordkeeping.

b)      An accountant will help you with your accounting, taxes and filing requirements.

c)      An attorney will help you with all your legal issues and help protect your assets.

Checklist: How to Survive a Tax Audit

Checklist: How to Survive a Tax Audit
Courtesy: Beth Laurence, J.D. 
In an audit, you must convince the IRS that you reported all of your income and were entitled to all credits, deductions, and exemptions.

1. Delay the audit.
Postponing the audit usually works to your advantage. Request more time whenever you need it, to get your records in order or for any other reason. The IRS must complete an audit within three years of the time the tax return is filed, unless the IRS finds tax fraud or a significant underreporting of income.

2. Don't host the audit.
Keep the IRS from holding the audit at your business or home. Instead, go to the IRS or have your tax pro handle it. If you are asked to host an audit at your business premises, consult a tax pro.

3. Have realistic expectations.
Don't expect to come out of the audit without owing something -- the odds are against you. The average adjustment for an office audit (held at the IRS office) is $4,000; the average adjustment for a field audit is $17,000.

4. Be brief.
Give the auditor no more information than she is entitled to, and don't talk any more during the audit than is absolutely necessary. If you have something to hide, don't provide evidence to the auditor, but don't lie either. The adjustments she may make could be less damaging than if you had given her what she asked for. If in doubt, see a tax pro.

5. Don't offer other years' returns.Don't give copies of other years' tax returns to the auditor --if you do and she sees something she doesn't like she will make adjustments in those years too. Don't bring to an audit any documents that do not pertain to the year under audit or were not specifically requested by the audit notice.

6. Reconstruct records.
If you are missing receipts or other documents, you are allowed to reconstruct records. Try to organize all records the auditor might ask for before the audit. Organization can impress an auditor that you are conscientious.

7. Negotiate.
Ask the auditor about disallowances she is considering, and defend your position. Don't try to negotiate the amount of taxes to be paid. Instead,negotiate tax issues -- for example, whether a certain deduction should be allowed. Also, don't negotiate by telling the auditor you can't pay the bill-- that's not the auditor's concern.

8. Know your rights.
Read IRS Publication 1, explaining the Taxpayers' Bill of Rights, prior to your audit. Research tax legal issues by using free IRS publications and commercial tax guides. If you are still unclear about the tax law or how to present your documents to an auditor, consult a tax pro before the audit.

9. Consult a tax pro.
If the subject of tax fraud comes up during an audit, don't try to handle it yourself. At that point, or anytime an audit is not going well, you can demand a recess to consult a tax pro. In addition, you can ask to speak to the auditor's manager if you think the auditor is treating you unfairly.

10. Appeal the result.
When you get the examination report, call the auditor if you don't understand or agree with it. Meet with her or her manager to see if you can reach a compromise. If you can't live with the audit result, you may appeal within the IRS or go on to Tax Court. For more information on appealing on audit, see Pros and Cons of Appealing an IRS Audit.

Courtesy: Beth Laurence, J.D.

Who Should File?

Who Should File?

Even if you are not required to file a tax return, you should if you are eligible to receive a refund. You should file if any of the following are true:

• You had income tax withheld from your pay.
• You made estimated tax payments or had a prior year overpayment applied to this year's tax.
• You qualify for the American Opportunity Credit.
• You qualify for the First-time Homebuyer credit.
• You qualify for a refundable credit for paying alternative minimum tax in a prior year.
• You qualify for the Earned Income Credit.
• You qualify for the Adoption Credit.
• You qualify for the Additional Child Tax Credit.
• You qualify for the Health Coverage Tax Credit.
• You qualify for a credit for federal fuel tax.

Courtesy:  1040.com

Taxpayer Rights During an Audit Examination

Taxpayer Rights During an Audit Examination
Various statutes, including the three Taxpayer Bills of Rights (now part of the Internal Revenue Code), regulations other guidance and the manual provide taxpayers with a number of rights during the audit process. These include:
♦ Right to an explanation of the audit process; (1)
♦ Right that certain information be provided to taxpayers when a Service employee contacts them in any manner; (2)
♦ Right to have the examination at a specified, reasonable time and place for the taxpayer and its advisers; (3)
♦ Right to representation, or to consult an authorized representative, during interviews by the Service; (4)
♦ Right to have communications to all tax practitioners who are authorized to represent the taxpayer before the Service be held confidential; (5)
♦ Right to be notified of the service of a summons on a third party and the opportunity to petition to quash such a summons; (6)
♦ Right to receive advance notice from the Service of its intent to make third-party contacts, and upon request, the right to receive a record of such third-party contacts on a periodic basis; (7)
♦ Right to record any interview with the Service; (8)
♦ Right to freedom from repeat examinations; (9)
♦ Right to present witnesses; (10) and
♦ Right to have an independent Appeals function review the taxpayer's case, including a prohibition of ex parte communications between Appeals officers and other Service employees. (11)
○ All of these Rights are subject to limitations, but most of them are backed up by administrative or judicial remedies available to the taxpayer, such as a cause of action under §7433 for wrongful collection action.
Footnotes:____________________________                                                        .
(1) IRC §7521(b)(1)(A) the Service discharges this obligation by sending Publication 1 with its initial contact letters.
(2) Pub. L No. 105-206, §3705, 1998 Reform Act (off-code provision), 112 Stat. 685
(3) IRC §7605
(4) IRC §7521(b)(2). Representative must be authorized to practice before the Service. Id.; Treasury Dept. Circular No. 230, 31 CFR §10
(5) IRC §7525
(6) IRC §7609
(7) IRC §7602(c); Reg. §301.7602-2
(8) IRC §7521(a)(1); Notice 89-51, 1989-1 CB 691. See also Lit. Guid. Memo GL-17, 2000 TAX NOTES TODAY 97-23 (May 10, 2000)
(9) If a taxpayer has been audited on the same issue(s) in either of the last two preceding years, with little or no resulting change in tax liability, the taxpayer should request, in response to the initial contact from the Service, that these issues be excluded from the Service, that these issues be excluded from the examination or the examination be closed. IRM 4.10.2.4.2; IRM 4.10.2.8.5
(10) Rev. Proc. 68-29, 1968-2 CB 913
(11) Pub. L. No. 105-206, §1001(a)(4), 1998 Reform Act (an off-Code provision), 112 stat. 685 See also Notice 99-50, 1999-2 CB 444; Rev. Proc. 2000-43, 2000-2 CB 404
________________________________
This excerpt was taken from the chapter, "Taking the Mystery Out of Examinations -- the Audit Process," which appears in the 5th Edition of Effectively Representing Your Client Before the IRS: A Practical Manual for the Tax Practitioner With Sample correspondence and Forms. Published by the Section of Taxation of the American Bar Association.

How to Prepare the Income Statement

Income Statement
How to Prepare the Income Statement
Courtesy:  Rosemary Peavler, About.com Guide
The income statement is the small business owner’s profit and loss statement for the business firm. It is one of the four financial statements that business firms usually prepare. It measures the profitability of the firm over a period of time. The income statement below is presented step-by-step so we can look at the profit or loss after each expense is deducted.

Line 1 is the gross revenue or sales figure. This is the total of amount of sales in dollars that the firm has made in 2009.

Line 2 is a $500,000 entry for cost of goods sold. This is the cost specifically associated with units of your product sold. Cost of goods sold is usually your largest expense. Subtract cost of goods sold from gross sales to get gross profit (Line 3). After you get gross profit, you then subtract all of your other expenses from this number in order to generate your net profit.

From the $500,000 gross profit, the next expense you subtract is selling and administration expenses (Line 4). This $250,000 item represents your office expenses and sales commissions.

An important item that will merit more discussion is depreciation expense (Line 5). When you buy a building for your business or equipment, you depreciate it over a period of time. Depreciation is a non-cash expense and serves as a tax shelter so it is shown on the income statement. After subtracting out selling and administrative expenses and depreciation, you arrive at your operating profit (Line 6). Operating profit is also called earnings before interest and taxes (EBIT), which in this case is $170,000.

After you calculate EBIT, the next step is to calculate interest expense. Interest is what you pay on any debt your company has. In order to calculate the interest on debt, you have to know the interest rate you are paying and multiply it by the principal amount of your debt. For this example, the interest amount is assumed at $30,000 and is stated on Line 7.

After subtracting your interest expense from EBIT, you get earnings before taxes on Line 8. Then, you fill in the amount you pay in federal, state, local, and payroll taxes on Line 9. The tax rate, in this example, is 40%. After you subtract that expense, you are finally at the earnings available to your common shareholders, which is stated on Line 10.

If you have investors in your firm or if you take a salary from your firm, Line 11 is where you record the draw or the dividends. Line 12, then, is the firm's net income or what you have left to plow back, or reinvest, into the firm in the form of retained earnings.

This is an example of a very simple income statement. The income statement of your company may be a little more complex and contain more line items. This statement should serve to give you the general idea of how a profit/loss statement, or income statement, works.
Income Statement

XYZ Company
Income Statement
For the Year Ending Dec 2009
1.Sales	$1,000,000
2.Cost of Goods Sold	$500,000
3.Gross Profit	$500,000
4.Selling & Administrative Exp	$250,000
5.Depreciation	$80,000
6.Operating Profit(EBIT)	$170,000
7.Interest	$30,000
8.Earnings Before Taxes	$140,000
9.Taxes(.40)	$56,000
10.Earnings Available to  Common Shareholders
$84,000
11.Dividends or Owner Draw	$20,000
12.Net Income	$64,000