Monday November 19, 2018
Updating Your Estimated Tax Payments
To help taxpayers understand the impact of these changes, the IRS has created a Withholding Calculator on IRS.gov. Acting IRS Commissioner David Kautter encouraged use of the calculator and noted, "Until every employee visits the Withholding Calculator, I am not a happy guy." Kautter hopes to keep promoting the calculator and desires "a couple of hundred million" taxpayers to use it to determine their estimated 2018 taxes.
In IR-2018-138, the Service encouraged taxpayers who make quarterly estimated tax payments to update their plans. Quarterly estimated tax payments for taxpayers who are self-employed, retired or have investment income are due on April 18, June 15, September 17 and January 15, 2019.
Some taxpayers reduced their estimated payment amounts by allocating their 2017 tax refund to their 2018 taxes. Estimated tax payments may be made electronically using IRS Direct Pay or the Treasury Department Electronic Federal Tax Payment System (EFTPS).
Estimated tax payments are generally made in four quarterly amounts. Most taxpayers may avoid a penalty by paying 90% of the tax due on their 2018 return or 100% of their 2017 tax return amount. If a taxpayer's 2017 income was over $150,000, the safe harbor is 110% of the 2017 income tax.
There are exceptions to the underpayment penalty for farmers, fisherman, casualty and disaster victims, the disabled, recent retirees and those who have unusual income amounts during the year. IRS Form 2210 and Pub. 505 offer additional information on estimated payments.
Taxpayers may choose to avoid estimated tax payments by adjusting their withholding exemptions. Taxpayers may increase their tax payments by adjusting IRS Form W-4 Withholding Allowances. This may increase withholding amounts and help avoid any tax penalties.
IRS Permits Basis Adjustment for 1.4% Excise Tax
In Notice 2018-55; 2018-26 IRB 1 (8 Jun 2018), the Service published Proposed Regulations that create a December 31, 2017 basis for asset sales used in calculating the 1.4% excise tax under Sec. 4968(c).
The Tax Cuts and Jobs Act created a new 1.4% excise tax on net investment income for private colleges and universities. The tax is expected to apply to about 40 universities that have over 500 students and $500,000 of endowment per student.
Several provisions apply to the excise tax calculation. Section 4940(c)(1) defines net investment income as gross investment income and capital gain over allowable deductions. Section 4940(c)(2) explains that gross investment income includes interest, dividends, rents, securities, loans payments and royalties. Section 4940(c)(3) permits ordinary and necessary expense deductions applicable to the production or collection of income. Section 4940(c)(4) explains that capital gain or loss is included. The basis under existing law is "not less than the fair market value of such property on December 31, 1969."
Notice 2018-55 permits universities to establish basis as of December 31, 2017. The Notice states, "Similar to the rules found in Section 4940(c), the Treasury Department and the IRS intend to propose regulations stating that, in the case of property held by an applicable educational institution on December 31, 2017, and continuously thereafter to the date of its disposition, basis of such property for determining gains shall be determined to be not less than the fair market value of such property on December 31, 2017."
There will also be a favorable provision on netting capital gains and losses. The Proposed Regulations will permit "overall net losses from sales or other dispositions of property in one related organization (or from the applicable educational institution) will be allowed to offset overall net gains from such sales or other dispositions from other related organizations (or from the applicable educational institution)."
CASE Senior Director for Advocacy Brian Flahaven welcomed the IRS Notice. He stated, "We are pleased that the IRS has announced that private colleges and universities affected by the excise tax can apply stepped-up basis to property sold at gain, which will help limit the amount of funds redirected from scholarships and other charitable purposes to the tax."
Editor's Note: This basis adjustment rule is similar to other types of transition provisions. After major tax legislation is passed, various rules are frequently enacted to enable a smooth transition to the new law. The Proposed Regulations will reduce the taxable gains for university property sales in 2018 and later years.
Estate Planning Reversals
At the American Institute of CPAs Conference in Las Vegas on June 13, Attorney Steven Siegel explained why many counsel are reversing course on prior efforts to create estate valuation discounts.
Under the Tax Cuts and Jobs Act, the estate exemption was substantially increased from $5.6 million to $11.18 million. A couple can pass $22.36 million to family with no transfer tax. Because 99% of estates are no longer subject to transfer tax, future heirs will prefer a higher valuation and a larger basis step-up.
Siegel stated, "If you think about it, everything we have done for the last 25 years is now upside down. I have spent many, many days and hours figuring out ways to reduce people's estates by discounts, by low appraisals, by all kinds of bells and whistles and things that we hope will get through the IRS if we are audited. Now I am trying to undo all of it."
Siegel illustrated this point through an example of a couple who owned a $10 million business. They previously created a family limited partnership (FLP) to reduce the estate valuation amount to $6 million. If the FLP is unchanged, their heirs will not pay estate tax. However, if the heirs subsequently sell the business with a stepped-up basis of $6 million and sale value of $10 million, they may pay state and federal capital gains tax of over $1.4 million.
BNY Mellon Wealth Management Attorney Jeremiah W. Doyle IV agreed with Siegel. Doyle noted, "For people who are ultra-high net worth, you do not have to reverse your thinking. We are doing the same stuff that we always did for them." However, for mid-level estates, Doyle explained that grantor-retained annuity trusts and family limited partnerships "may not work as well if you have a client that is not going to be subject to federal estate tax. You want to get that step-up in basis."
Editor's Note: In the $10 million business example, it is unlikely that the business will grow sufficiently to exceed the couple's $22.36 million transfer tax exemption. For the 90% or more of estates under $10 million, planners are now likely to unwind most valuation discounts strategies. There still may be business and asset-protection reasons to retain some strategies, but the basis step-up will be an important factor in future estate planning.
Applicable Federal Rate of 3.4% for June -- Rev. Rul. 2018-16; 2018-23 IRB 1 (16 May 2018)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2018. The AFR under Section 7520 for the month of June is 3.4%. The rates for May or 3.2% or April of 3.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.