Author Archives: Chad Lahrmer CPA

Strategies to Pass on Wealth to Heirs

Strategies to Pass on Wealth to Heirs

Strategies to Pass Wealth to Heirs Individuals with significant assets should take advantage of proven tax strategies such as gifting and direct payments to educational institutions to transfer wealth to heirs tax-free, as well as minimize estate taxes. Additional opportunities are available as well, thanks to low interest rates and a volatile stock market.

Let’s take a look at some of them.

Gifting

The annual gift tax exclusion provides a simple, effective way of cutting estate taxes and shifting income to heirs. For example, in 2021, you can make annual gifts of up to $15,000 ($30,000 for a married couple) to as many donees as you desire. The $15,000 is excluded from the federal gift tax so that you will not incur gift tax liability. Furthermore, each $15,000 you give away during your lifetime reduces your estate for federal estate tax purposes. However, any amounts above this limit will reduce an individual’s federal lifetime exemption and require filing a gift tax return.

Direct Payments

Direct payments for medical or educational purposes indirectly shift income to heirs; however, it only works if the payments are made directly to the qualifying educational institution or medical provider. This strategy allows you to give more than the annual gifting limit of $15,000 per donee. For example, if you’re a grandparent, you can pay tuition directly to your grandchild’s boarding school, college, or university. Room and board, books, supplies, or other nontuition expenses are not covered. Similarly, they can make direct payments to a hospital or medical provider, but medical expenses reimbursed by insurance are not covered, however.

Loans to Family Members

This strategy works by loaning cash to family members at low interest rates, which is then invested with the goal of reaping significant profits down the road. With mid and long-term applicable federal rates (AFR) rates for October 2021, as low as 0.91 and 1.72 percent, respectively, heirs can lock in these rates for many years – three to nine years (mid-term) and nine to more than 20 years (long-term).

Grantor Retained Annuity Trust (GRAT)

Another relatively low-risk strategy is the grantor retained annuity trust (GRAT), where the donor transfers assets to an irrevocable trust and receives an annuity payment back from the trust each year. This strategy enables heirs to profit from their investments long-term if returns are higher than the IRS interest rate. Now that IRS interest rates are so low, this is easier than ever to do. In October 2021, the interest rate used to value certain charitable interests in trusts such as the GRAT is 1.00 percent.

Roth IRA Conversions

Contributions to a traditional IRA are made pre-tax, which means distributions are considered taxable income; however, the tax is paid upfront with a Roth IRA, and distributions are completely exempt from income tax. This feature makes converting a traditional IRA to Roth IRA and rolling it over to an heir an attractive option, especially during a financial crisis. The conversion is treated as a rollover where the trustee of the traditional IRA is directed to transfer an amount from the traditional IRA to the trustee of the Roth IRA. The account owner pays income tax on the amount rolled over in the year the account is converted, which allows the account to accumulate assets tax-free and future distributions are tax-free.

To learn more about these and other tax strategies related to wealth management, please call Lahrmer & Company LLC at (866) 474-1238 or email office@lahrmercpa.com and speak to a tax professional who can assist you.

Defer Capital Gains

Defer Capital Gains Using Like-Kind Exchanges

Defer Capital Gains If you’re a savvy investor, you probably know that you must generally report as income any mutual fund distributions, whether you reinvest them or exchange shares in one fund for shares of another. In other words, you must report and pay any capital gains tax owed.

But if real estate’s your game, did you know that it’s possible to defer capital gains by taking advantage of a tax break that allows you to swap investment property on a tax-deferred basis?

What Is Section 1031?

Named after Section 1031 of the tax code, a like-kind exchange generally applies to real estate and was designed for people who wanted to exchange properties of equal value. If you own land in Montana and trade it for a shopping center in Rhode Island, as long as the values of the two properties are equal, nobody pays capital gains tax even if both properties may have appreciated since they were originally purchased.

Section 1031 transactions don’t have to involve identical types of investment properties. You can swap an apartment building for a shopping center or a piece of undeveloped raw land for an office or building. You can even swap a second home that you rent out for a parking lot.

There’s also no limit as to how many times you can use a Section 1031 exchange. It’s entirely possible to roll over the gain from your investment swaps for many years and avoid paying capital gains tax until a property is finally sold. Keep in mind that gain is deferred but not forgiven in a like-kind exchange, and you must calculate and keep track of your basis in the new property you acquired in the exchange.

Section 1031 is not for personal use. For example, you can’t use it for stocks, bonds, and other securities, or personal property (with limited exceptions such as artwork).

Properties of Unequal Value

Let’s say you have a small piece of property, and you want to trade up for a bigger one by exchanging it with another party. You can make the transaction without having to pay capital gains tax on the difference between the smaller property’s current market value and your lower original cost.

That’s good for you, but the other property owner doesn’t make out so well. Presumably, you will have to pay cash or assume a mortgage on the bigger property to make up the difference in value. In the tax trade, this is referred to as “boot,” and your partner must pay capital gains tax on that part of the transaction.

To avoid that, you could work through an intermediary who is often known as an escrow agent. Instead of a two-way deal involving a one-for-one swap, your transaction becomes a three-way deal.

Your replacement property may come from a third party through the escrow agent. Juggling numerous properties in various combinations, the escrow agent may arrange evenly valued swaps.

Under the right circumstances, you don’t even need to do an equal exchange. You can sell a property at a profit, buy a more expensive one, and defer the tax indefinitely.

You sell a property and have the cash put into an escrow account. Then the escrow agent buys another property that you want. They get the title to the deed and transfers the property to you.

Mortgage and Other Debt

When considering a Section 1031 exchange, it’s important to consider mortgage loans and other debt on the property you are planning to swap. Let’s say you hold a $200,000 mortgage on your existing property but your “new” property only holds a mortgage of $150,000. Even if you’re not receiving cash from the trade, your mortgage liability has decreased by $50,000. In the eyes of the IRS, this is classified as “boot,” and you will still be liable for capital gains tax because it is still treated as “gain.”

Advance Planning Required

A Section 1031 transaction takes planning. You must identify your replacement property within 45 days of selling your estate. Then you must close on that within 180 days. There is no grace period. If your closing gets delayed by a storm or by other unforeseen circumstances, and you cannot close in time, you’re back to a taxable sale.

Find an escrow agent specializing in these types of transactions and contact your accountant to set up the IRS form ahead of time. Some people sell their property, take the cash, and put it in their bank account. They figure that all they have to do is find a new property within 45 days and close within 180 days, but that’s not the case. As soon as “sellers” have cash in their hands or the paperwork isn’t done right, they’ve lost their opportunity to use this provision of the code.

Personal Residences and Vacation Homes

Section 1031 doesn’t apply to personal residences, but the IRS lets you sell your principal residence tax-free as long as the gain is under $250,000 for individuals ($500,000 if you’re married).

Section 1031 exchanges may be used for swapping vacation homes but present a trickier situation. Here’s an example of how this might work. Let’s say you stop going to your condo at the ski resort and instead rent it out to a bona fide tenant for 12 months. In doing so, you’ve effectively converted the condo to an investment property, which you can then swap for another property under the Section 1031 exchange.

However, if you want to use your new property as a vacation home, there’s a catch. You’ll need to comply with a 2008 IRS safe harbor rule that states in each of the 12-month periods following the 1031 exchange, you must rent the dwelling to someone for 14 days (or more) consecutively. In addition, you cannot use the dwelling more than the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented out for at a fair rental price.

You must report a section 1031 exchange to the IRS on Form 8824, Like-Kind Exchanges, and file it with your tax return for the year in which the exchange occurred. If you do not precisely follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

Help is Just a Phone Call Away

While they may seem straightforward, like-kind exchanges can be complicated, and you need to be careful of all kinds of restrictions and pitfalls. If you’re considering a Section 1031 exchange or have any questions, don’t hesitate to call Lahrmer & Company LLC at (866) 474-1238 or email office@lahrmercpa.com for assistance.  

Small Business tips for ensuring financial success

Small Business: Tips for Ensuring Financial Success

Small Business - Ensuring Financial SuccessCan you point your company in the direction of financial success, step on the gas, and then sit back and wait to arrive at your destination? Probably not.

While you may wish it was that easy, the truth is that you can’t let your business run on autopilot and expect good results. Every business owner knows you need to make numerous adjustments along the way. So, how do you handle the array of questions facing you? One way is through cost accounting.

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Verifying Your Identity When Calling The IRS

 

Verifying identity when calling the IRSSometimes, taxpayers need to call the IRS about a tax matter. If this is the case, they should know that IRS phone assistors take great care to only discuss personal information with the taxpayer or someone the taxpayer authorizes to speak on their behalf. As such, the IRS will ask taxpayers and tax professionals to verify their identity when they call.

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Six Things To Know Before You Start a Business

Tips for starting a businessStarting your own business is an exciting prospect, but there is more to it than simply writing a business plan. Understanding the tax responsibilities of starting a business venture can save taxpayers money and help set them up for success. That’s where a tax professional can help. Here is what you need to know before you start a new business:

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What Is a Designated Roth Account?

Roth IRA contributionsMany 401(k) plans allow taxpayers to make Roth contributions as long as the plan has a designated Roth account. Your plan may also allow you to transfer amounts to the designated Roth account in the plan or borrow money.

Check with your employer to find out if your 401(k), 403(b) or 457 governmental plan has a designated Roth account and whether it allows in-plan Roth rollovers or loans.

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Worried after natural disaster strikes

Tax Relief for Those Affected by Natural Disasters

Woman dealing with home emergencyRecovery efforts after natural disasters can be costly. With floods, tornadoes, hurricanes, earthquakes, and other natural disasters affecting so many people throughout the U.S. this year, many have been left wondering how they’re going to pay for the cleanup or when their businesses will be able to reopen. The good news is that there is relief for taxpayers – but only if you meet certain conditions. Let’s take a look:

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Retirement options

Retirement Plan Options For Small Businesses

Retirement options for small businessAccording to the U.S. Small Business Administration, small businesses employ half of all private-sector employees in the United States. However, a majority of small businesses do not offer their workers retirement savings benefits.

If you’re like many other small business owners in the United States, you may be considering the various retirement plan options available for your company.

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Which Educator Expenses Are Tax Deductible?


Educators deduct school supplies
Teachers and other educators should remember that they can deduct certain unreimbursed expenses such as classroom supplies, training, and travel – even when schools switched to hybrid or remote learning models during the pandemic last spring. Deducting these expenses helps reduce the amount of tax owed when filing a tax return.

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