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There are several ways to save for your child’s or grandchild’s education, including with a Coverdell Education Savings Account (ESA). Although for federal tax purposes there’s no upfront deduction for contributions made to an ESA, the earnings on the contributions grow tax-free. In addition, no tax is due when the funds in the account are distributed, to the extent the amounts withdrawn don’t exceed the child’s qualified education expenses.

Qualified expenses include higher education tuition, fees, books and room, as well as elementary and secondary school expenses.

Let’s say you’re charitably inclined but have concerns about maintaining a sufficient amount of income to meet your current needs. The good news is that there’s a trust for that: a charitable remainder trust (CRT). This type of trust allows you to support your favorite charity while potentially boosting cash flow, shrinking the size of your taxable estate, and reducing or deferring income taxes.

The CRT in Action

You contribute stock or other assets to an irrevocable trust that provides you — and, if you desire, your spouse — with an income stream for life or for a term of up to 20 years. (You can name a noncharitable beneficiary other than yourself or your spouse, but there may be gift tax implications.) At the end of the trust term, the remaining trust assets are distributed to one or more charities you’ve selected.

The year was 2014 and the New York State Court of Appeals breathed life and a lot of common sense into the New York residency wars.  Matter of Gaied v New York State Tax Appeals Tribunal[1] was decided by New York State’s highest court, and it seemed like a new competitor named common sense has finally entered into the residency battles.

As my readers know, there are two ways to be taxed as a resident in New York; either by being domiciled in the State or by being a statutory resident.  The statutory residency test involves a mechanical day-count test (more than 183) and requires the maintenance of a permanent place of abode (“PPA”).  Unfortunately, until the Gaied decision, determining whether one had a PPA was also viewed somewhat mechanically.  To sum up a long line of litigation in one sentence, if you maintained living quarters that were suitable for year-round use, regardless of the use to you as a taxpayer or whether you used the living quarters, you had a PPA.

As an employer, you must pay federal unemployment (FUTA) tax on amounts up to $7,000 paid to each employee as wages during the calendar year. The rate of tax imposed is 6% but can be reduced by a credit (described below). Most employers end up paying an effective FUTA tax rate of 0.6%. An employer taxed at a 6% rate would pay FUTA tax of $420 for each employee who earned at least $7,000 per year, while an employer taxed at 0.6% pays $42.

Tax Credit

Unlike FICA taxes, only employers — and not employees — are liable for FUTA tax. Most employers pay both federal and a state unemployment tax. Unemployment tax rates for employers vary from state to state. The FUTA tax may be offset by a credit for contributions paid into state unemployment funds, effectively reducing (but not eliminating) the net FUTA tax rate.

Traditional and Roth IRAs can be powerful estate planning tools. With a “self-directed” IRA, you may be able to amp up the benefits of these tools by enabling them to hold nontraditional investments that offer potentially greater returns. However, self-directed IRAs present pitfalls that can lead to unfavorable tax consequences. Consequently, you need to handle these vehicles with care.

Estate Planning Benefits

IRAs are designed primarily as retirement-saving tools, but if you don’t need the funds for retirement, they can provide a tax-advantaged source of wealth for your family.

Example: if you name your spouse as beneficiary, your spouse can roll the funds over into his or her own IRA after you die, enabling the funds to continue growing on a tax-deferred basis.

If you name someone other than your spouse as beneficiary, that person will have to begin taking distributions.

Way back when, July 22, 2019 to be exact, this writer informed his faithful readers of the battle of the Blue States vs. the newly enacted state and local tax cap [I Sue You, You Sue Me, They Sue Us, Here We Go Again].  Most experts predicted the plaintiffs didn’t have a chance and, on September 30, 2019, United States District Judge J. Paul Oetken agreed, by granting the Federal Government’s motion to dismiss the lawsuit[1].

In a thirty-seven-page opinion, Judge Oetken outlines the Plaintiffs’ (New York, Connecticut, Maryland, and New Jersey or the “States”) objections to the Tax Cuts and Jobs Act’s (TCJA) substantial restriction on the deductibility of state and local taxes— a limitation to a maximum of $10,000.

The Opinion begins with a history lesson delving into the financial hardships of the Civil War as well as the creation of the federal tax system in general, and how the SALT deduction was always a mainstay.  Without ever mentioning baseball, Judge Oetken does recognize that the 2017 TCJA “changed the ballgame.”

As we head toward the gift-giving season, you may be considering giving gifts of cash or securities to your loved ones. Taxpayers can transfer substantial amounts free of gift taxes to their children and others each year through the use of the annual federal gift tax exclusion. The amount is adjusted for inflation annually. For 2019, the exclusion is $15,000.

The exclusion covers gifts that you make to each person each year. Therefore, if you have three children, you can transfer a total of $45,000 to them this year (and next year) free of federal gift taxes. If the only gifts made during the year are excluded in this way, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 and only the excess is taxable. Further, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).

Note: this discussion isn’t relevant to gifts made from one spouse to the other spouse, because these gifts are gift tax-free under separate marital deduction rules.

Fewer people currently are subject to transfer taxes than ever before. But gift, estate, and generation-skipping transfer (GST) taxes continue to place a burden on families with significant amounts of wealth tied up in illiquid closely held businesses.

Fortunately, Internal Revenue Code Section 6166 provides some relief, allowing the estates of family business owners to defer estate taxes and pay them in installments if certain requirements are met.

Sec. 6166 Benefits

For families with substantial closely held business interests, an election to defer estate taxes under Section 6166 can help them avoid having to sell business assets to pay estate taxes. It allows an estate to pay interest only (at modest rates) for four years and then to stretch out estate tax payments over 10 years in equal annual installments. The goal is to enable the estate to pay the taxes out of business earnings or otherwise to buy enough time to raise the necessary funds without disrupting business operations.

You may have Series EE savings bonds that were bought many years ago. Perhaps you have them in a file cabinet or safe deposit box and rarely think about them. You may wonder how the interest you earn on EE bonds is taxed. And if they reach final maturity, you may need to take action to ensure there’s no loss of interest or unanticipated tax consequences.

Interest Deferral

Series EE Bonds dated May 2005 and after earn a fixed rate of interest. Bonds purchased between May 1997 and April 30, 2005, earn a variable market-based rate of return.

Paper Series EE bonds were sold at half their face value. For example, if you own a $50 bond, you paid $25 for it. The bond isn’t worth its face value until it has matured. (The U.S. Treasury Department no longer issues EE bonds in paper form.) Electronic Series EE Bonds are sold at face value and are worth their full value when available for redemption.

The minimum term of ownership is one year, but a penalty is imposed if the bond is redeemed in the first five years. The bonds earn interest for 30 years.

AFRs (applicable federal rates) are interest rates published each month by the IRS. They are the lowest rates you can charge when making intra-family loans. Because they are taking a substantial dip in October (see chart), now may be a good time to accelerate any gifting you are planning.

These rates are the lowest for the year and, in the case of the long-term, the lowest in history.  While is it not clear whether rates will trend even lower, families should seriously consider the opportunity to pursue tax efficient wealth transfer strategies now.