Article Highlights:

Lifetime Exclusion 
Annual Exclusion 
Medical Exception 
Education Exception 
Gifting Techniques 

If you are fortunate enough to have an estate large enough to be subject to the estate tax upon your death, you might be considering ways to give away some of your wealth to your family and loved ones now, thereby reducing the estate tax when you pass on. This tax strategy may be more important this year than it has been in the last few years, because legislation being considered by Congress would reduce the lifetime gift and estate tax exclusion by about half while retaining the annual gifting exclusion. Frequently, taxpayers think that gifts of cash, securities or other assets they give to other individuals are tax-deductible; in turn, the gift recipient sometimes thinks income tax must be paid on the gift received. Nothing can be further from the truth. To fully understand the ramifications of gifting, one needs to realize that gift tax laws are interrelated with estate tax laws, and Uncle Sam does not want you giving away your wealth before you pass away to avoid the estate tax. For individuals who die in 2021, federal law allows $11.7 million (lifetime estate tax exclusion) to pass to your heirs estate-tax free, and any excess amount is subject to an estate tax as high as 40%. If passed, the legislation referenced above would lower the exclusion to $5 million, adjusted for inflation. Amounts you gift in excess of the annual gift tax exclusion amount prior to your death reduce the lifetime estate tax exclusion and will therefore subject more of your estate to taxation.
Example: Jeff gives his daughter $100,000 in 2021. This is $85,000 more than the $15,000 annual gift tax exclusion. Jeff will need to file a gift tax return reporting the gift. The $85,000 excess (and any additional excess amounts from other years) will reduce his estate tax exclusion, whatever amount it may be, in the year he dies.
The law does provide exceptions where gifts can be made without reducing the lifetime exclusion, including the following:

Annual gift exclusion available each year to any number of individuals. The amount is periodically adjusted for inflation, and the amount for 2021 is $15,000 (projected to be $16,000 for 2022). The recipient does not have to be a relative or an audult. Unlimited amounts can be gifted to a U.S. citizen’s spouse. Gifts can be cash or the transfer of real or personal property. 
Directly pay medical expenses. This applies to amounts paid by one individual on behalf of another individual directly to a medical care provider as payment for that medical care. Payments for medical insurance qualify for this exclusion.
Directly pay education expenses. This applies to amounts paid by one individual on behalf of another individual directly to a qualifying educational organization as tuition for that other individual. The tuition can be for any level of schooling—elementary, secondary or post-secondary. Costs of room and board, books, supplies or other similar expenses aren’t eligible as direct payments, nor are contributions to qualified tuition programs (also known as Sec. 529 plans), which have their own gifting rules not covered in this article. 

If the gift giver is married and both spouses agree, gifts to recipients made during a calendar year can be treated as split between the husband and wife, even if only one of them made the cash or property gift. Thus, by using this technique, a married couple can give $30,000 in 2021 to each recipient under the annual limitation discussed previously.Gifting Techniques: High-Wealth Individuals – If you are a high-wealth individual who would like to pass on as much to your heirs as possible while living, without reducing the lifetime exemption, you could directly pay your future heirs’ medical expenses and education expenses in addition to annual gifts of cash or property of up to $15,000 (2021). You may want to do this even if you are not a high-net-worth individual, to avoid having to file a gift tax return. Medical Expenses – Except in rare circumstances, you cannot deduct the medical expenses you pay for another person, and they cannot deduct the expenses either, since they did not pay the expenses. Thus, consider carefully whether to make the gift directly to the individual, subject to the annual limit—which would allow the recipient of your generosity to pay the medical expenses and claim the medical deduction on their tax return—or whether you pay the medical expenses directly. If the medical expenses you want to pay are greater than the annual limit, then you could always gift $15,000 (2021) to the individual and pay the balance directly to the care provider(s) to avoid reducing your lifetime exclusion. Under rare circumstances, the recipient who will benefit from your gifts may qualify as your medical dependent, under which circumstance you would be able to deduct the medical expenses if they were paid directly to the doctor, hospital or other provider. Education Expenses – When you pay the qualified post-secondary education tuition for another individual, it does not mean (as is usually the case for medical expenses) that someone cannot benefit taxwise. Tax law says that whoever claims the student as a dependent is entitled to the American Opportunity Credit or Lifetime Learning Credit for higher education expenses if they otherwise qualify. Gifts of Appreciated Property – Consider replacing your cash gifts with gifts of appreciated property, such as stock for which you have a “paper gain.” When you gift an appreciated asset, the potential gain on the asset transfers to the recipient. This works for individuals, except for children who are subject to the kiddie tax, which requires the child’s income to be taxed at the parent’s tax rate if it is higher than the child’s rate. It also works great for contributions to charitable organizations. Although not subject to the gift tax rules, not only does an appreciated asset gifted to a charity get you out of reporting any gain from the appreciation, but you also get a charitable tax deduction equal to the fair market value (FMV) of the asset. The deduction for these gifts is generally limited to 30% of your adjusted gross income (AGI), but the excess carries over for up to five years of future returns. Keep in mind that to utilize this year’s annual exclusion amount, the gift must be transferred to your designated recipient by December 31, and exclusion amounts not used this year do not carry over to next year. Please call this office if you need assistance with planning your gifting strategies.

Exploring ways to save up for your kid’s higher education? The federal tax code provides two beneficial saving plans that allow tax-free withdrawals for qualified education expenses. Watch the video for details.
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Article Highlights:

Electric Car Credit
Solar Electric Credit
College Student Supplies
Work Equipment
Charitable Gifts
Employee Gifts

Some holiday gifts you provide to members of your family, employees and others may also yield tax benefits—think of it as Santa Claus meets Uncle Sam. Here are some examples: Electric Car Credit* – If you purchase a new electric car as a holiday gift for your spouse or even yourself, you will find that most come not only with a big red bow but also with a tax credit of up to $7,500. To qualify to claim the credit on your 2021 tax return, the vehicle will have to be ‘placed in service’ by December 31, 2021. So merely ordering the vehicle, even if you pay for it when the order is placed, won’t be enough—you will need to receive the car and start using it before New Year’s Day. But if the vehicle is backordered and doesn’t arrive until next year, you would be able to claim the credit on your 2022 tax return. This credit is nonrefundable, meaning it can only offset your actual tax liability and that any excess credit over your tax liability will be lost. There is, however, an exception when the electric vehicle is used partially for business, in which case the portion of the credit allocated to business use will become a general business credit that is carried back one year and then carried forward. Solar Electric Credit* – If you and your spouse or other resident of the home decide to make a gift of a home solar system to each other, you will qualify for a nonrefundable tax credit equal to 26% of the cost of the home’s solar property. If your tax liability is less than the credit, the excess credit can be carried over to a future year. The solar credit is available to any resident of the home who purchases the solar system, even if they do not have an ownership interest in the home. Example: A mother and son live together in a home owned by the mother. The son purchases a solar system for their home; as a result, the son gets the tax credit, since he resides in the home. Caution: To claim a credit for the system’s costs on your 2021 return, the installation must be completed by December 31, 2021.* *Both the electric car credit and the home solar electric credit are included in the Build Back Better Act pending in Congress, which will alter these two credits by providing increased tax benefits. Therefore, it could be appropriate to delay the purchases until 2022. Please call this office in advance of purchasing either for further guidance. College Student Supplies – If you have a spouse or child attending college, the costs of certain course materials qualify for the American Opportunity Tax Credit (AOTC) if the course materials are needed as a condition of enrollment and attendance. Even if too large to be a holiday stocking-stuffer, a computer that is needed as a condition of enrollment and attendance at college would likely be appreciated by the student, and the computer’s cost would qualify for the AOTC of the individual who claims the student as a dependent. Other requirements apply to claim the AOTC; check with this office for details. Work Equipment – If your spouse is self-employed and you purchase tools or electronics used in the spouse’s business, the costs of these items will qualify as a business tax deduction on the return for the year the equipment is put into service. Charitable Gifts – Of course, contributions to qualified charitable organizations can be deducted, provided you itemize your deductions. There is an exception to the requirement to deduct charitable contributions: for 2021, up to $300 ($600 if you file jointly with your spouse) is allowed as a tax deduction even when you don’t itemize. However, this deduction is only available for cash contributions, including those made by check or credit card, and does not apply for contributions to donor-advised funds and private foundations. If you are 72 or older and have not taken your required minimum distribution (RMD) from your IRA account for 2021, you might consider making direct transfers to the charities of your liking, thereby satisfying your RMD requirement while avoiding taxation of the distribution. Contact your IRA custodian or trustee to arrange the transfer. Some words of caution about charitable contributions during the holiday season: When you are shopping at a mall and drop cash into the holiday kettle, you won’t get a receipt for your contribution, and a cash charitable contribution cannot be claimed as an itemized deduction without documentation. The same goes for buying and giving new, unused toys to what have become very popular holiday-toys-for-kids drives. Tip: Save the purchase receipt for the toys and request verification of the contribution from the sponsoring organization. If the drop point is unmanned and it is not possible to obtain a contribution verification from the organization, the IRS allows a deduction of up to $249, provided you document the purchase of what you’ve donated. Also, during the holiday season, all of the scammers climb out from under their rocks and do their best to trick you out of your well-intended contribution dollars. Be cautious, and make sure your contributions are going to legitimate charities. Employee Gifts – It is common practice this time of year for employers to give employees gifts. If the gift is infrequently offered and has a fair market value so low that it is impractical and unreasonable to account for it, the gift’s value would be treated as a de minimis fringe benefit. As such, it would be tax-free to the employee and tax-deductible by the employer. A gift of cash from the employer to the employee, regardless of the amount, is considered additional wages and is subject to employment taxes (FICA) and withholding taxes. Caution: If the gift recipient is a W-2 employee, the employer may not issue them a Form 1099-NEC or 1099-MISC for a holiday gift of cash; the amount must be treated as W-2 income. If an employer gives workers gift certificates, debit cards or similar items that are convertible to cash, their value is considered additional wages, regardless of the amount. However, if the gift is a coupon that is nontransferable and convertible only to a turkey, ham, gift basket or the like at a specified establishment, then the gift coupon would not be treated as a cash equivalent. If you have questions related to the tax benefits associated with holiday gifts, please give this office a call.

December 1 – EmployersDuring December, ask employees whose withholding allowances will be different in 2022 to fill out a new Form W4 or Form W4(SP). December 15 – Social Security, Medicare and Withheld Income Tax If the monthly deposit rule applies, deposit the tax for payments in November.December 15 – Nonpayroll Withholding If the monthly deposit rule applies, deposit the tax for payments in November.December 15 – Corporations The fourth installment of estimated tax for 2021 calendar year corporations is due. December 31 – Delayed Payment of Employer Payroll Taxes from 2020If you as an employer delayed paying 2020 payroll taxes under the CARES Act provision, 50% of your share of the 2020 Social Security tax is due by December 31, 2021, and the remainder is due by December 31, 2022. Any payments or deposits you make before December 31, 2021, are first applied against your payment due on December 31, 2021, and then applied against your payment due on December 31, 2022. December 31 – Last Day to Set Up a Keogh Account for 2021If you are self-employed, December 31 is the last day to set up a Keogh Retirement Account if you plan to make a 2021 contribution. If the institution where you plan to set up the account will not be open for business on the 31st, you will need to establish the plan before the 31st. Note: there are other options such as SEP plans that can be set up after the close of the year. Please call the office to discuss your options.December 31 – Caution! Last Day of the Year If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st.

The end of 2021 is coming. Let’s do a quick recap of tax opportunities you may be missing out on. See our year-end review video for a detailed checklist.
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Article Highlights:

Infrastructure Investment and Jobs Act (IIJA) Signed into Law 
Employee Retention Credit Terminated Early 
Problem for Some Employers 
No Relief Included for Employers Already Claiming the Credit in the 4th Quarter 
Recovery Startup Businesses Still Qualify 

President Biden signed the Infrastructure Investment and Jobs Act (IIJA) into law on November 15, 2021. One of the provisions of that legislation retroactively terminated the employee retention credit (ERC) early. The credit was previously available to eligible employers for wages paid through the end of 2021. Under this change the credit terminates after the third quarter. Although the Senate passed the IIJA well before the 4th quarter of 2021 began, issues in the House caused that chamber’s vote in favor of the Act to be delayed until late in the evening of November 5, 2021, over a month after the 4th quarter began, which has created a problem for employers who, based on prior law, were claiming the ERC for the 4th quarter and were reducing their payroll deposits based upon the ERC. Under the IIJA, employers are not qualified for the credit for wages paid after September 30, and thus employers should have been making their normal payroll deposits during fourth quarter. IIJA includes no provision to deal with employers who were planning to use the ERC to offset payroll taxes. For now, it’s not clear if employers who would have qualified due to the drop in gross receipts tests or full/partial suspension of operations test and reduced their payroll tax deposits prior to passage of the Act will face late deposit penalties for the payroll taxes they failed to deposit. If neither Congress nor the IRS provides relief, employers will not only have to deposit payroll taxes for the 4th quarter they thought were covered by the ERC, they may also be subject to penalties up to 10%. The problems created by this issue may be magnified as some firms had taken advantage of a CARES Act provision allowing the deferral of certain 2020 payroll taxes with the deferred amounts payable in two payments, one by December 31, 2021, and the other by December 31, 2022. This, combined with having to make up for the unpaid 4th quarter 2021 employment taxes, may prove be a heavy burden for smaller employers. Although the ERC and payroll tax deferral was supposedly intended to help small firms struggling because of the COVID pandemic, it may have the opposite effect, by increasing the burden on these financially fragile businesses and perhaps contribute to their demise. There is an exception to the early termination of the ERC that applies to Recovery Startup Businesses that will be allowed to claim the credit through the end of 2021. A recovery startup business is an employer that began carrying on any trade or business after February 15, 2020 and has gross receipts under $1,000,000 for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the employee retention tax credit is determined. Let’s hope the government does the right thing and waives the penalties for the 4th quarter of 2021. Please call this office for further details and assistance with dealing with this issue.