With tax rates increasing, especially for those in the higher tax brackets, we like to keep readers thinking about tax strategies.  The strategy I’m discussing here is geared for those that have appreciated assets (value has increased from purchased price.) These assets are typically subject to federal income tax, specifically capital gains tax if the assets are sold.  This strategy is a tax planning technique that depends on holding the assets for the life of either yourself or your spouse but allows your spouse to sell the asset free of capital gains tax.  So, if you would prefer to sell the asset quickly this particular strategy would probably not be for you.

As many of you are already aware, the current federal income tax system allows for a full step-up of basis for assets owned when an individual passes away, so long as the assets are included in the gross estate for estate tax return purposes.  This means that no federal income tax is ever paid on capital gains of appreciated assets from purchase price to the fair market value in the hands of the estate.

Joint ownership laws vary by state.  In some states including the state of Georgia, where we are located, there is joint tenancy with right of survivorship (JTWRS) or tenants in common.   Or, you or your spouse may own an asset in your name only.  If the asset is owned with joint ownership, you only get a tax-free step up on your portion of the asset owned.  When it is owned JTWRS with a spouse, only 50% of the asset will be stepped up upon the passing of the first spouse.

If the asset is sold after the first spouse passes away, the capital gain will be reduced.  However, if you believe one spouse may pass away first, given the lifetime tax-free gifts among spouses, you can put the entire asset in the name of the one spouse.  If the will gives the asset back to the other spouse, the asset will obtain a full step-up in basis and be able to be sold tax free after the passing of the one spouse.  Of course, if you are wrong on which spouse passes away first, you will gain no step-up on the passing of the first spouse.  There are many other considerations outside of tax consequences like the certainly the marriage won’t dissolve and the probability that the asset will be willed back to the gifting spouse after the ownership changes.

A handful of states operate under community property ownership between spouses. In those states you may get a 100% step-up regardless of which spouse passes away first, if owned jointly between spouses. So you need to know the law in your state and should get tax and legal advice for your area before making a decision to make a change.

Also, while I discuss some general strategies, there are some rules that need to be followed and some exclusions or adjustments needed for non-citizen spouses and others.  There are also some time periods for making transfers that must be followed or you will not gain the desired result.   You will need to get specific professional tax advice for your circumstances and set of facts to ensure this strategy makes sense for you.

Circular 230 regulations require all attorneys and accountants to provide extensive disclosure when providing certain written tax communications to clients. We would like to inform you that since this document does not contain all of such disclosures, you may not rely on any tax advice contained in this document to avoid tax penalties.

With all of the tax software options available today, there are still millions of Americans wanting or needing an accountant for tax return preparation and tax planning. It is our belief that tax software works well for simple tax returns for taxpayers with taxes that are not complex (like a 1040 EZ) or when you do not own a house or have state income taxes (when the standard deduction is used as opposed to itemized deductions.)

Even some the less complex 1040’s may be done well in today’s tax software environment. However, when it comes to individuals with real estate, small businesses or investment activity a software program might work but may not be the smartest choice. We find that most small business owners do hire a tax accountant and those that don’t, well let’s just say that they usually “don’t know what they don’t know” and certainly have the most opportunity for tax compliance and tax reduction within the law. But some people can be penny wise but miss the boat on the larger opportunity.

Tax software is a good choice for some but here are the top 5 reasons clients choose to hire a CPA for their tax services:

1. Complex Tax Situation. Whether you own a business, have a large estate or trust, own real estate or have a large investment portfolio, many people have tax implications that are very challenging to the taxpayer.
2. Complex Tax System. The tax system is a combination of law, administrative guidance and court cases. The tax system is not always black and white and there are constantly changing laws and interpretations of the law by various parties in the government and the courts. Did you know that the law can be interpreted differently in Georgia than in other parts of the country?
3. Large Infrequent Event. Many of us have had an occasional event or life changes where we may need professional guidance. Whether it is winning a lottery, exercising stock options, buying or selling a business, departure of a family member or selling a house, there are often times when professional guidance is helpful or even an absolute necessity.
4. Allocation of Time. Let’s face it, time is limited and most people need or want to spend time on other activities. Whether it is making more money, putting more time into family activities or spending time on hobbies, taxes are not the top on many people’s choice of activity that they want to spend their time on. IRS audits are even less enjoyable – when was the last time you looked forward to sitting across the desk from an IRS examiner? This leads people to their local CPA, maybe even for the next time.
5. Professional Work. When you need a service, you want it done right. In the event of a major home remodel, one might call an electrician, plumber and carpenter to do the various jobs they are skilled at. Though some people may call a handyman, those of us wanting to be sure all is done correctly, we want a professional who has years of learning and experience.

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We all have heard rumors about the social security system’s need for overhaul and its eventual inability to make benefit payments at current inflation adjusted levels to future retirees. However, what if it could continue at current levels – do I ever get the money back in full, from social security tax paid by the employee? Do I get any return on the full tax (employer & employee side?) If I do, what rate of return do I get? Is there any level of tax, with reasonable return expectations?

This article is the first in a series that will begin to address these questions. There are many factors that impact returns on social security payments at the individual level so the answer is not going to be the same for any two people. Some examples of these differences are very clear, for example the life expectancy of the worker and the age an individual decides to take retirement. Other unique factors at the individual level that may be less evident would be the life expectancy of a spouse, disability prior to retirement, earnings by spouses, family maximums, and whether there are dependent children under 18 at the time a worker dies.

Ok, so there are a lot of unknowns and unique situations which individuals should be aware of and have discussions with their tax and financial advisors about. What about the averages? The social security tax and system is setup primarily to meet some of the basic needs of retirees and their families. So, at lower income levels the returns are generally ok. As income goes up for a worker’s average over his or her lifetime, the returns on higher levels of income are quickly diminished and for many result in negative marginal returns, even for individuals with high life expectancy.

The social security administration at SSA.gov shows the formula for the tiers where the benefit payments are reduced for each additional dollar of income. While there are multiple factors, the “primary insurance amount” formula may be the best illustration of these “bend points” or tiers. As you can see below, the benefits are dramatically higher (90% of income level) for the first $9,800 of annual income in today’s wages. The benefits are much lower for the next tier (32% of income level), from $9,800 to $59,000 and for wages above $59,000, even the return of capital (tax paid in) is generally not likely (benefits received at 15% of income level up to social security maximum benefits.)

PIA formula*
For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2014, or who dies in 2014 before becoming eligible for benefits, his/her PIA will be the sum of:
(a) 90 percent of the first $816 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $816 and through $4,917, plus
(c) 15 percent of his/her average indexed monthly earnings over $4,917.

*ssa.gov

So, what does this tell me about the returns from the social security tax I pay in? What can I do about it? There are some frequently used tax strategies that may reduce a taxpayer’s burden. For business owners and some independent contractors the ability to use tax strategies greatly increases. For more information or for a personal assessment of your situation, you can contact me at eric@emgoldstein.com.

Soon I will post part 2 in the series of articles which will give more detail on the expected rates of return. This will be posted to our website at The Goldstein Firm, CPA, LLC and also sent our current clients as a value add service we provide.

The Goldstein Firm, CPA, LLC is a CPA firm located in the metro Atlanta area in the city of Alpharetta. Founder Eric Goldstein has 20 years of private and public experience helping small business and big business as well.

Circular 230 regulations require all attorneys and accountants to provide extensive disclosure when providing certain written tax communications to clients. We would like to inform you that since this document does not contain all of such disclosures, you may not rely on any tax advice contained in this document to avoid tax penalties.

By Eric Goldstein