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Does your employer provide you with group term life insurance? If so, and if the coverage is higher than $50,000, this employee benefit may create undesirable income tax consequences for you.

Phantom Income

The first $50,000 of group term life insurance coverage that your employer provides is excluded from taxable income and doesn’t add anything to your income tax bill. But the employer-paid cost of group term coverage in excess of $50,000 is taxable income to you. It’s included in the taxable wages reported on your Form W-2 — even though you never actually receive it. In other words, it’s “phantom income.”

You may think of trusts as estate planning tools — vehicles for reducing taxes after your death. While trusts certainly do fill that role, they’re also useful for protecting assets, both now and later. After all, the better protected your assets are, the more you’ll have to pass on to loved ones.

Creditors, former business partners, ex-spouses, “spendthrift” children and tax agencies can all pose risks. Here’s how trusts defend against asset protection challenges.

Tell Creditors “Hands off”

To protect assets, your trust must own them and be irrevocable. This means that you, as the grantor, generally can’t modify or terminate the trust after it has been established. (A “revocable trust,” on the other hand, allows the grantor to make modifications.) Once you transfer assets into an irrevocable trust, you’ve effectively removed your rights of ownership to the assets. Because the property is no longer yours, it’s unavailable to satisfy claims against you.

Service businesses subject to the NYC Unincorporated Business Tax may see a significant reduction in their 2020 UBT liability due to employees and agents working from home outside of New York City. My colleague, Richard Goldstein provides the details here.

COVID-19 is changing the landscape for many schools this fall. But many children and young adults are going back, even if it’s just for online learning, and some parents will be facing tuition bills. If your child has been awarded a scholarship, that’s cause for celebration! But be aware that there may be tax implications.

Scholarships (and fellowships) are generally tax-free for students at elementary, middle and high schools, as well as those attending college, graduate school or accredited vocational schools. It doesn’t matter if the scholarship makes a direct payment to the individual or reduces tuition.

Tuition and Related Expenses

However, for a scholarship to be tax-free, certain conditions must be satisfied.

Nearly everyone owns at least some digital assets, such as online bank and brokerage accounts, bill-paying services, cloud-based document storage, digital music collections, social media accounts, and domain names. But what happens to these assets when you die or if you become incapacitated?

The answer depends on several factors, including the terms of your service agreements with the custodians of digital assets, applicable laws and the terms of your estate plan. To reduce uncertainty, address your digital assets in your estate plan.

Pass on Passwords

The simplest way to provide your family, executor or trustee with access to your digital assets is to leave a list of accounts and login credentials in a safe deposit box or other secure location. The disadvantage of this approach is that you’ll need to revise the list every time you change your password or add a new account. For this reason, consider storing this information using password management software and providing the master password to your representatives.

If you’re planning your estate, or you’ve recently inherited assets, you may be unsure of the “cost” (or “basis”) for tax purposes.

Fair Market Value Rules

Under the fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property equal to its date-of-death value. So, for example, if your grandfather bought ABC Corp. stock in 1935 for $500 and it’s worth $5 million at his death, the basis is stepped up to $5 million in the hands of your grandfather’s heirs — and all of that gain escapes federal income tax forever.

The annual gift tax exclusion allows you to transfer up to $15,000 per beneficiary gift-tax-free for 2020, without tapping your lifetime gift and estate tax exemption. And you can double the exclusion to $30,000 per beneficiary if you elect to split the gifts with your spouse.

It’s important to understand the rules surrounding gift-splitting to avoid unintended — and potentially costly — consequences.

Understanding the Pitfalls

Common mistakes made when splitting gifts include:

Failing to make the election. To elect to split gifts, the donor must file a gift tax return and the nondonor must consent by checking a box on the return and signing it or, if a gift exceeds $30,000, filing his or her own gift tax return. Once you make the election, you must split all gifts to third parties for the year.

State tax planning and the lottery; what does that have to do with me? I buy a ticket, I win, I pay my federal and resident state tax, and I still walk away with a large sum of money, right? Well, yes, but if some states have their way, maybe a little less. If you thought the pandemic was causing odd withholding results, the lottery has been causing problems for some time.

Readers of my blog are well aware of the situation where one can be a dual resident and taxed twice on intangible income. Generally, a nonresident state where you may earn income, taxes you on the income attributable to that state. Your resident state taxes you on worldwide income, which includes the income sourced to the nonresident state and provides a credit for the tax paid to the nonresident state. However, a dual resident with income earned that is not attributable to any state (generally interest and dividends) can end up paying state tax twice since neither “resident” state will provide a credit.

There’s a new IRS form for business taxpayers that pay or receive nonemployee compensation. Beginning with tax year 2020, payers must complete Form 1099-NEC, Nonemployee Compensation, to report any payment of $600 or more to a payee.

Why the new form?

Prior to 2020, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee. These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.

If you have adopted children or unadopted stepchildren, estate planning is critical to ensure that your property is distributed in the way you desire.