Archive for the ‘Estate Tax and Estate Planning Developments’ category

Is Rental Property Income Eligible for the Pass Through Income Deduction?

February 24, 2019

On January 18, 2019, final regulations and a special notice were published regarding the 20% income tax deduction related to certain pass through income. 

Trade or Business?

The Notice (Notice 2019-07) offers owners of rental real estate an opportunity to benefit from significant deductions related to rental income.  This blog discusses the content of the Notice.

As an appendix to previously posted videos on the pass through income deduction, we posted a video regarding the Notice: 

For the other videos on the pass through deduction, click on this link:  Pass Through Deductions and Other Tax Cuts and Jobs Act Subjects

This blog is to discuss the Notice 2019-07 in more detail. 

It’s not always easy to determine whether your rental real estate activity satisfies the somewhat vague definition of a trade or business so the IRS tried to provide a bright line test (call it a “safe harbor”) for determining whether the deduction will be available to you for the rental income you receive.

The safe harbor is described in Notice 2019-07 in the form of a Proposed Revenue Procedure.  If your rental activity income satisfies the criteria described in the Notice, you can be confident that your rental activity income will qualify for the 20% pass through income deduction under section 199A of the Internal Revenue Code.

The safer harbor provisions apply only to Rental Real Estate Enterprises.  A Rental Real Estate Enterprise is an interest, or multiple interests, in real estate held directly by an individual or Relevant Pass Through Entity (aka “RPE” such as a limited liability company, S corporation or partnership), for the production of rents but the definition excludes triple net leases and interests used to any extent as a personal residence.  Commercial and residential real estate cannot be part of the same Rental Real Estate Enterprise.

For purposes of the 20% deduction that applies to pass through income under Section 199A of the IRC, your Rental Real Estate Enterprise will be deemed a trade or business if certain requirements described in the Notice are satisfied.  Keep in mind that only certain income of a trade or business can qualify for the deduction so this is a key point for income earned through your rental activities.

The Notice says that your rental activity will be treated as a trade or business if (i) you maintain separate books and records for each rental real estate enterprise; (ii) you or your agents devote 250 or more hours per year to rental services with respect to the rental real estate enterprise; and (iii) you keep contemporaneous records related to the rental services. 

The records must include: (i) the hours performed, (ii) a description of the services performed, (iii) dates on which the services were performed, and (iv) who performed the services. 

The requirement that the records must be contemporaneous has been waived for 2018 so, if you do not have good records for 2018, you can try to do the best you can to reconstruct how you performed rental services in 2018.

Some things you do will count as rental services and some things will not.  The Notice includes a specific list of activities that count as rental services.  Here is the list:

  • Advertising to rent or lease property;
  • Negotiating and executing leases;
  • Verifying information in the applications of prospective tenants;
  • Daily operations, maintenance and repairs;
  • Management of real estate;
  • Purchasing materials; and
  • Supervision of employees and independent contractors.

Keep in mind that you will get credit for the time put in by your employees, agents and independent contractors so, if you have others doing the work for you, you should insist that they keep contemporaneous records of the work they do.

Also keep in mind that some of the time devoted to your rental activity will not count as rental services.  The time you or your agents spend traveling from property to property will not count.  Also, time devoted to financial and investment management relating to your real estate rental activities will not count.  Accordingly, the time you spend arranging financing, acquiring property, studying or reviewing financial statements or reports regarding your properties, or planning, managing, or constructing long term capital improvements will not count.

To claim the benefits of the safe harbor, you must file a statement indicating that all the requirements of the Notice have been satisfied. The statement must be signed by the taxpayer or authorized representative and include the following:

“Under penalties of perjury, I (we) declare that I (we) have examined the statement, and, to the best of my (our) knowledge and belief, the statement contains all the relevant facts relating to the revenue procedure, and such facts are true, correct, and complete.”

We are currently working on Section 2 of Part 3 of our video which will cover:

  • Planning to avoid the phase-out zone;
  • Additional planning to maximize pass-through income deductions based on wages and capital expenditures;
  • How transferring business interests to family members and trusts can create additional pass through income deductions; and
  • How converting pass through income to wages can increase pass through deductions.

You can access our playlist of previously posted videos by clicking on this link: Pass Through Deductions and Other Tax Cuts and Jobs Act Subjects.

To subscribe to the YouTube channel click here:  YouTube Channel.

Posted by Richard S. Land on February 24, 2019.

Chipman Mazzucco Emerson
Attorneys at Law

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Seminar Video: Basic Estate Planning and Elder Law in a Nutshell

January 19, 2019

We recently posted to YouTube the video of our annual fall estate planning seminar (held on October 25, 2018). Here is a playlist containing all three segments: Basic Estate Planning and Elder Law in a Nutshell.

Basic Estate Planning and Elder Law in a Nutshell

In Video 1 (Estate Planning for Beginners), Elizabeth J. Hartery covers the basics of Wills, revocable trusts, powers of attorney, conservatorships and health care directives including living wills. Approximately 30 minutes.

In Video 2 (How to Make Certain Your Estate Plan Works as Everything Else Changes), Richard S. Land covers the reasons why an estate planning review might be necessary including new legislation. Approximately 35 minutes.

In Video 3 (Elder Law in a Nutshell), Alyson Marcucio covers the practice of elder law as part of the continuum of planning for the welfare of the family.  In the case of elder law, this means counselling and representing seniors and the disabled as well as their representatives (such as conservators, trustees and agents under a power of attorney) and family members regarding a range of issues including health and personal care, legal capacity, public benefits, special needs, insurance, housing options and more.  Approximately 24 minutes.

We hope these presentations are helpful.

Posted by Richard S. Land on January 19, 2019.

Chipman Mazzucco Emerson
Attorneys at Law

Maximizing Pass-Through Income Deductions (Third Video in a TCJA Series)

December 9, 2018

We recently posted our third video covering the Tax Cuts and Jobs Act provisions that provide a 20% deduction for “pass through income.”  The first two videos (Part 1 and Part 2) covered the rules that apply.

In Part 3 we will be covering planning to optimize the deduction for pass-through income.

Our video posted on December 8, 2018, is the first section of Part 3 and covers planning to maximize deductions by aggregating tax attributes of separate trades or businesses according to proposed regulations which were issued on August 8, 2018. 

The video closes with a discussion on how the rules apply to real estate rental activities.  Can income under a triple net lease qualify for the deduction equal to 20% of pass through income?  Probably not.  Can the lease be tweaked to qualify the rental income for the deduction?  Probably.

Additional sections will be added to Part 3 in the future. 

Watch Section 1 of Part 3 below.

In previous video posts, Part 1 describes how the Tax Cuts and Jobs Act changes the most widely used income tax deductions related to state and local taxes, mortgage interest deductions and personal exemptions.  It also covers how the increased standard deduction and lower rates may make up for lost deductions.

Part 2 explains the income tax deduction available under Internal Revenue Code Section 199A for individuals who receive “pass through income” (aka trades or businesses that generate self-employment income).

As mentioned above,  Section 1 of Part 3 is the first of several sections.  Future sections will cover additional planning opportunities.

We hope these videos are helpful.  Please let us know if you have any questions.

Posted by Richard S. Land on December 9, 2018.

Chipman Mazzucco Emerson
Attorneys at Law

Chipman Mazzucco Announces New Partners, Firm Name and New Location

October 22, 2018

Four luminaries of the local bar have joined us to form a new law firm that will go by Chipman Mazzucco Emerson LLC.  Our annual Estate Planning seminar on October 25 will be your first opportunity to meet them.

Richard L. Emerson, Thomas J. Rickart, and James J. Flaherty, Jr., will become members of the firm, and Frank J. Scinto will become of counsel, as of October 22, 2018.

Jim (in our new Southbury, Connecticut, office) and Dick (in our Danbury office) are well known members of the Connecticut trusts and estates bar and join Chipman Mazzucco’s Richard S. Land, Alyson R. Marcucio and Elizabeth J. Hartery to form one of the deepest pools of experienced and dedicated Trusts and Estates attorneys in Western Connecticut.

Tom joins the commercial real estate department in Danbury and Frank will concentrate on land use and litigation and will divide his time between the Danbury and Southbury offices.

Chipman Mazzucco Emerson LLC now has 11 lawyers engaged in four principal practice areas: business law; civil litigation; commercial real estate and land use; and estate planning, estate administration, and elder law.

Estate Planning for Beginners; Elder Law in a Nutshell; How to Make Certain Your Estate Plan Works as Everything Else Changes

September 30, 2018

FREE Estate Planning Seminar!

October 25, 2018

We invite you to a free seminar on October 25, 2018, at the Ethan Allen Hotel in Danbury, Connecticut (21 Lake Avenue Ext).

Topics: Estate Planning for Beginners and Elder Law in a Nutshell

Including: How to Make Certain Your Estate Plan Works as Everything Else Changes (including Trump Tax Changes)

The presentation will start at 6:30 PM. For more information, click here:  Seminar October 25.

To register, call 203-744-1929 (please provide your email address) or email us at dvv@danburylaw.com.  You also can register here: Seminar Registration.

The presenters and their topics:

Make Certain Your Estate Plan Works as Everything Else Changes

As everything around you changes, you may not recognize the impact the changes have on your estate plan.

Laws change; your health and financial condition change; the health and financial condition of your beneficiaries change; maybe your beneficiary designations change as your assets change; and the fates of the people you are depending on to act as your Executors, Trustees, agents under a power of attorney and health care representatives change.

Attorney Richard S. Land will discuss how to make certain that such changes will not interfere with, or totally disrupt, your estate plan.

Elder Law in a Nutshell

Alyson's Favorite Photo

What is Elder Law and how can an Elder Law attorney help you through the complex issues associated with aging?

The special needs of the elderly are not unique to the elderly, however. Persons of all ages may suffer from chronic conditions resulting in special needs requiring specialized legal help.

Attorney Alyson Marcucio will cover legal issues and solutions related to the special needs of the elderly and all others with special needs.

Estate Planning for Beginners: Features of Wills, Trusts and Powers of Attorney

 

What is the difference between a will and a revocable trust? What are the powers in a Power of Attorney? Do I even need an estate plan?

Attorney Elizabeth J. Hartery will answer those questions and many others in her presentation, which will explain the basic features of wills, trusts, Powers of Attorney, living wills and more.

 

No Admission Charge

Our seminars are always strictly educational and well attended.  Space is limited so please let us know if you plan to attend.

Light snacks, desserts and beverages will be offered.

To register, click on this link: Seminar Registration.

Please join us at the Ethan Allen Hotel (21 Lake Avenue Ext., Danbury, CT) on October 25, 2018.

We look forward to seeing you.

Chipman Mazzucco
Attorneys at Law
44 Old Ridgebury Road
Suite 320
Danbury, CT 06810
203-744-1929

 

Video: Pass Through Deductions and Other Tax Cuts and Jobs Act Subjects

April 29, 2018

On April 28, 2018, we posted to YouTube our video entitled “Pass Through Deductions and Other Tax Cuts and Jobs Act Subjects”.

Part I describes how the Tax Cuts and Jobs Act changes the most widely used income tax deductions related to state and local taxes, mortgage interest deductions and personal exemptions.  It also covers how the increased standard deduction and lower rates may make up for lost deductions.

Part II explains the income tax deduction available under Internal Revenue Code Section 199A for individuals who receive “pass through income” (aka trades or businesses that generate self-employment income”).

We hope these videos are helpful.  Please let us know if you have any questions.

Posted by Richard S. Land on April 29, 2018

Chipman Mazzucco
Attorneys at Law

Good News about Connecticut Estate Taxes (Avoid Accidental Disinheritance of Surviving Spouse)

November 26, 2017

Good News about Connecticut Estate Taxes. Governor Malloy recently signed a new state budget into law, including significant changes to the Connecticut estate tax exemption that will phase in over the next three years.

The current exemption of $2 million will be increased to $2.6 million in 2018; $3.6 million in 2019; and will be set to match the federal estate tax exemption (currently $5.49 million) in 2020 (after Connecticut made the change to its exemption, the federal exemption was increased to $11,000,000; how Connecticut will react is unclear). While this is good news for those who are worried about estate taxes at death, it could also cause unintended consequences for those with a particular kind of estate plan designed to avoid or minimize estate taxes.

Warning for Surviving Spouses! In many cases, the surviving spouse could be disinherited as the estate tax exemption increases over time. Under the terms of many Wills and revocable trust agreements, the increasing estate tax exemption will effectively shift more of the estate away from the surviving spouse and to an “Exemption Trust” or to family members other than the surviving spouse.

The Devil is in the Details. Many married couples in Connecticut, who expected their combined estates to exceed the pre-2018 $2,000,000 estate tax “exemption,” chose an estate plan (an “Exemption Trust Plan”) that distributes a portion of the estate that is equal to the estate tax exemption into a trust (the “Exemption Trust”) for the benefit of the surviving spouse and descendants. Usually, in an Exemption Trust Plan, the remaining assets pass either outright to the surviving spouse or to a “Marital Trust” for the surviving spouse’s benefit.

The Exemption Trust Plan eliminates the estate tax when one spouse passes away with the other spouse surviving. By the time both spouses have passed away, two exemptions ($4,000,000—the exemptions of both husband and wife) have shielded up to $4,000,000 from the Connecticut estate tax.

The Exemption Trust Plan uses a formula based on the size of the exemption available at the time of death. As the exemption increases, more passes to the Exemption Trust leaving less to pass to the surviving spouse. For example, suppose that you chose the Exemption Trust Plan when you prepared your documents many years ago and suppose that, when you pass away, your estate is worth $5 million. If you were to pass away in 2017, that would mean $2,000,000 (the 2017 Connecticut exemption) would go to the Exemption Trust, while the remaining $3,000,000 would go to your surviving spouse, either outright or in trust. However, if you were to pass away in 2020. after the new estate tax exemption reaches its maximum, your entire estate of $5 million would go to the Exemption Trust, with nothing left for the surviving spouse.

Avoid Accidental Disinheritance of Surviving Spouse. This accidental disinheritance of the surviving spouse can be avoided with proper planning. For example, documents could be amended to modify the formula described above, perhaps requiring that a minimum amount will pass to the surviving spouse regardless of the estate tax exemption that would apply at death. This would be particularly helpful in plans where the marital share is supposed to pass outright to the surviving spouse, since it would guarantee some kind of outright gift to the spouse.

If you have an estate plan that could be impacted by these new tax changes, or if you simply have not revisited your estate plan in some time, please contact our office to discuss the best way to take care of your family after you pass away.

Posted November 26, 2017, by Chipman, Mazzucco, Land & Pennarola, LLC.  For a related treatment of the topic see: Video on Basic Estate Planning after ATRA Updated for 2017.


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