Trusts Pay More Tax than Individuals Beginning in 2013

One of the most common tools used in estate planning is a revocable living trust that splits into one or more irrevocable trusts upon the death of the grantor. Most often, the income earned by these irrevocable trusts is distributed to the income beneficiary during his or her lifetime and is taxed on the income beneficiary’s individual tax return. The problem is that not everything we think of as income is considered trust income. For example, capital gains are generally considered principal and not income.

Who Pays Tax on Trust Income? Income received by the trust is taxed either on the trust return (Form 1041) or on your individual income tax return (Form 1040). In order for you to pay the tax, rather than the trust, the income must be distributed to you. Please see more details about distributions later.

What Governs Taking Trust Distributions? The short answer is that most trust documents provide that income earned by the trust may be distributed to the income beneficiary at least annually. However, some receipts of a trust are considered principal rather than income. Unless the trust documents specifically permit the trustee to allocate these receipts to income, receipts such as capital gains are not permitted to be distributed to an income beneficiary and are taxed on the trust return.

Who Pays the Higher Tax? Prior to The Affordable Health Care Act and The American Taxpayer Relief Act of 2012, it made little difference to the ultimate tax bill whether the income beneficiary or the trust paid taxes. Generally, long-term capital gains and qualified dividends were taxed at 15% regardless of who paid the tax.  With the passage of these two new laws, the question of who pays the tax will become quite significant. Read more

2012 Impact of California’s Prop 30

The people of California have spoken and Proposition 30 passed by a fair margin, roughly 54% to 46%. The question now is, “what does this mean for me?” In summary, Prop 30 means tax increases for all California taxpayers making over $250,000 per year (Single and Married Filing Separate filers) or $500,000 per year (Married Filing Joint and Head of Household filers.)

For Single and Married Filing Separate filers the new rates will be:

• 10.3% for taxable income between $250,001 and $300,000
• 11.3% for taxable income between $300,001 and $500,000
• 12.3% for taxable income above $500,000

For Married Filing Joint and Head of Household filers the new rates will be:

• 10.3% for taxable income between $500,001 and $600,000
• 11.3% for taxable income between $600,001 and $1,000,000
• 12.3% for taxable income above $1,000,000

In addition, the California mental health tax 1% surcharge on income over $1,000,000 remains in effect, so the top rate rises to 13.3% for these high earners.

These tax increases are retroactive to January 1, 2012 so planning now is essential to brace for higher balances due in April. With this new initiative passing combined with looming federal tax increases, planning this November and December is more important than ever! Contact your LMGW tax advisor right away to schedule an appointment.

Bracing yourself for higher taxes

In 2013 a slew of new and increased taxes are set to be unleashed on individual taxpayers. Two of these taxes are the result of the 2010 Health Care legislation and will directly impact many of our clients.

Beginning January 1, 2013 an additional 0.9% Hospital Insurance (HI) tax will be imposed on “high-income” taxpayers who are defined as single individuals with $200,000 or more of wages or self-employed income per year, $250,000 for married filing joint and head of household filing statuses and $125,000 for married filing separate individuals. This tax effectively raises the current employee-portion of the medicare tax from 1.45% to 2.35% for wages or self-employed income earned in excess of the above limitations. The additional tax is required to be withheld when an individual taxpayer’s wages are more than $200,000, but that does not take into account a spouse’s earnings. Situations in which both spouses work but neither reach the $200,000 level individually may find themselves owing an additional 0.9% on their salaries come tax time. An adjustment of current withholding levels may be necessary, especially in dual income households, for taxpayers that may be subject to this additional tax. Read more

IRS Announces Round 3 of OVDI

Yesterday the IRS announced a third round of their highly successful Offshore Voluntary Disclosure Initiative (OVDI) program. The OVDI was highly publicized with the 2009 revelation that several large Swiss banks, including UBS, were going to be cooperating with the IRS in disclosing the names of US citizens and residents holding Swiss bank accounts. Read more

Roth Conversion Planning

With the end of the year coming up it seems appropriate to mention an often overlooked potential planning strategy. For some taxpayers who have very little ordinary income and still have deductions resulting in little to negative taxable income for the year, it may make sense to consider doing a Roth conversion on a portion of any tax-deferred retirement accounts. Read more