Learning Center for Tax and Financial Insights

Article Highlights:Exclusions from Gift and Estate TaxesAnnual Gift Tax ExclusionGifts for Medical Expenses and TuitionLifetime Exclusion from Gift and Estate TaxesSpousal Exclusion PortabilityQualified Tuition ProgramsBasis of GiftsThe tax code places limits on the amounts that individuals can gift to others (as money or property) without paying taxes. This is meant to keep an individual from using gifts to avoid the estate tax that is imposed upon the assets owned by the individual at their death. This can be a significant issue for family-operated businesses when the business owner dies; such businesses often must be sold to pay the resulting estate taxes. This is, in large part, why high-net-worth individuals invest in estate planning.Exclusions – Current tax law provides both an annual gift tax exclusion and a lifetime exclusion from the gift and estate taxes. Because the two taxes are linked, gifts that exceed the annual gift tax exclusion reduce the amount that the giver can later exclude for estate tax purposes. The term exclusion means that the amount specified by law is exempt from the gift or estate tax.Annual Gift Tax Exclusion – This inflation-adjusted exclusion is $18,000 for 2024 (up from $17,000 for 2023). Thus, an individual can give $18,000 each to an unlimited number of other individuals (not necessarily relatives) without any tax ramifications. When a gift exceeds the $18,000 limit, the individual must file a Form 709 Gift Tax Return. However, unlimited amounts may be transferred between spouses without the need to file such a return – unless the spouse is not a U.S. citizen. Gifts to noncitizen spouses are eligible for an annual gift tax exclusion of up to $185,000 in 2024 (up from $175,000 in 2023).Example: Jack has four adult children. In 2024, he can give each child $18,000 ($72,000 total) without reducing his lifetime exclusion or having to file a gift tax return. Jack’s spouse can also give $18,000 to each child without reducing either spouse’s lifetime exclusion. If each child is married, then Jack and his wife can each also give $18,000 to each of the children’s spouses (raising the total to $72,000 given to each couple) without reducing their lifetime gift and estate tax exclusions. The gift recipients (termed “donees”) are not required to report the gifts as taxable income and do not even have to declare that they received the gifts on their income tax returns.If any individual gift exceeds the annual gift tax exclusion, the giver must file a Form 709 Gift Tax Return. However, the giver pays no tax until the total amount of gifts more than the annual exclusion exceeds the amount of the lifetime exclusion. The government uses Form 709 to keep track of how much of the lifetime exclusion an individual has used prior to that person’s death. If the individual exceeds the lifetime exclusion, then the excess is taxed; the current rate is 40%.All gifts to the same person during a calendar year count toward the annual exclusion. Thus, in the example above, if Jack gave one of his children a check for $18,000 on January 1, any other gifts that Jack makes to that child during the year, including birthday or Christmas gifts, would mean that Jack would have to file a Form 709.Gifts for Medical Expenses and Tuition – An often-overlooked provision of the tax code allows for nontaxable gifts in addition to the annual gift tax exclusion; these gifts must pay for medical or education expenses. Such gifts can be significant; they include.tuition payments made directly to an educational institution (whether a college or a private primary or secondary school) on the donee’s behalf – but not payments for books or room and board – andpayments made directly to any person or entity who provides medical care for the donee.In both cases, it is critical that the payments be made directly to the educational institution or health care provider. Reimbursements to the donee do not qualify.Lifetime Exclusion from Gift and Estate Taxes – The gift and estate taxes have been the subject of considerable political bickering over the past few years. Some want to abolish this tax, but there has not been sufficient support in Congress to do that; instead, the lifetime exclusion amount was nearly doubled as of 2018 and has been increased annually due to an inflation-adjustment requirement in the law. In 2024, the lifetime exclusion is $13.61 million per person. By comparison, in 2017 (prior to the tax reform that increased the exemption), the lifetime exclusion was $5.49 million. The lifetime estate tax exclusion and the gift tax exclusion have not always been linked; for example, in 2006, the estate tax exclusion was $2 million, and the gift tax exclusion was $1 million. The tax rates for amounts beyond the exclusion limit have varied from a high of 46% in 2006 to a low of 0% in 2010. The 0% rate only lasted for one year before jumping to 35% for a couple of years and then settling at the current rate of 40%.

It is not uncommon to discover that an item of income was overlooked, a deduction was not claimed, or that an amended tax document was received after a tax return was already filed. Regardless of whether the oversight will result in more tax due or a refund, it should not be dismissed, and an amended or corrected tax return should be filed.

Article Highlights:Understanding Emergency Savings AccountsPlan ContributionsAutomatic EnrollmentOpting Out of Automatic EnrollmentRoth-Like Basis and Employer Matching ContributionsWithdrawals and Transition OptionsIn a significant move to enhance the financial resilience of American workers, a delayed provision of the SECURE 2.0 Act, enacted in December of 2022, introduced a novel feature, the Pension-Linked Emergency Savings Account (PLESA) which became effective in 2024. The purpose of PLESAs is to address a critical gap in the financial planning of non-highly compensated employees by providing them with a mechanism to save for emergencies, without derailing their long-term retirement goals or incurring tax penalties for early withdrawals from their retirement plans.Understanding PLESA - PLESA allows employers to offer their non-highly compensated employees (generally those whose compensation in 2024 is less than $155,000) the option to contribute to emergency savings accounts directly linked to their pension plans. This innovative approach is designed to encourage savings and also ensures that employees have a financial cushion to rely on in times of unexpected expenses, without having to dip into their retirement funds.Employers can automatically enroll employees in PLESA, with contributions set at no less than 1% and no more than 3% of their salary. The contribution cap for these accounts is set at $2,500, although employers have the discretion to set a lower limit. Earnings credited to the account in excess of $2,500 would not constitute a violation of the $2,500 limit.Once this cap is reached, any additional contributions are either directed to the employee’s Roth defined contribution plan, if available, or halted until the account balance falls below the cap.However, automatic enrollment is not the same as mandatory participation. Employees must be given written notification before they are automatically enrolled into a PLESA program, and they have the right under federal law to opt out and withdraw their money at no charge.Roth-like Basis and Matching Contributions - Contributions to a PLESA are made on a Roth-like basis, meaning they are made with after-tax dollars. However, these contributions are treated as elective deferrals for the purpose of an employer’s retirement matching contributions, with an annual matching cap set at the maximum account balance of $2,500 or lower, as determined by the plan sponsor. This feature not only incentivizes employees to save but also enhances the value of their savings through employer matching contributions.

Tax law is as complex as it is daunting. Each year, countless taxpayers find themselves entangled in disputes that lead to the tax court. Understanding the most litigated tax issues can empower you and your business to navigate the tax maze more effectively, ensuring compliance and avoiding unnecessary disputes with the Internal Revenue Service (IRS). Here, we delve into the common areas of the tax code that frequently end up in tax court, offering insights and best practices to help you avoid IRS scrutiny. If you find yourself in a dispute with the IRS or another agency, remember that help is just a call away.The Battlefield of Gross Income DisputesGross income, which encompasses unreported or underreported income, is at the top of the list of tax disputes. The IRS is keen to ensure that all income is accurately reported. Discrepancies often arise from misunderstandings about what constitutes taxable income or from simple oversight. Best Practice: Maintain meticulous records of all income sources and consult with a tax professional to ensure you report all income accurately.The Dreaded Penalties: Filing and Payment ErrorsPenalties for failing to file or pay taxes on time are also hotspots for litigation. These penalties can accumulate quickly, turning a small oversight into a significant financial burden.Best Practice: Mark your calendar with all tax deadlines, and consider setting up electronic payments to ensure timely submissions. If you anticipate a delay, proactively communicate with the IRS to explore options such as payment plans.The Quagmire of Itemized DeductionsItemized deductions on Schedule A are another frequent subject of tax court cases. Taxpayers often struggle with understanding which expenses are deductible and the documentation required to support these deductions. Best Practice: Keep detailed records of all potential deductions and seek guidance on their eligibility. When in doubt, err on the side of caution and consult a tax advisor.

Article Highlights:Special SchoolingLearning DisabilitiesNon-Hospital InstitutionsMedical ConferencesAuto TravelTripsMealsLodgingVehicle ModificationsDrug AddictionHome ModificationsChildcare CreditNursing ServicesFor families who have disabled children or children with special needs, tax laws provide opportunities to save substantial amounts of money at tax time. Here is a rundown of tax-deductible expenses that parents may benefit from in addition to normal medical expenses.Special Schooling - For a child diagnosed with learning disabilities, tuition paid to attend a school designed to assist students in overcoming their disabilities and developing appropriate social and educational skills is a deductible medical expense.Treating a child's learning disabilities can place a heavy financial burden on parents and the tax law may help by allowing a deduction for the cost of educating such a child.However, like other deductible medical expenses, this cost is deductible only to the extent that medical expenses for the year cumulatively exceed 7.5% of the taxpayer's adjusted gross income.Medical care includes the cost of attending a special school designed to compensate for or overcome a physical handicap, in order to qualify the individual for future normal education or for normal living. This includes a school for the teaching of Braille or lip reading. The principal reason for attending must be the special resources for alleviating the handicap. The cost of tuition for ordinary education that is incidental to the special services provided at the school, and the cost of meals and lodging supplied by the school, also are included as a medical expense. The distinguishing characteristic of a special school is the substantive content of its curriculum, which may include some ordinary education, but only if the ordinary education is incidental to the school's primary purpose of enabling students to compensate for or overcome a handicap.Where a school uses special teaching techniques to assist its students in overcoming their condition, and those techniques along with the care of other staff professionals are the principal reasons for the child’s enrollment at the school, then the school is a “special school”. Thus the child’s tuition at the school in those years the child is diagnosed as having a medical condition that handicaps his ability to learn are deductible.If a school attended by a student with a medical problem doesn't qualify as a special school because the ordinary education isn't incidental to the special services provided, the costs of the special program or special treatment (but not the entire tuition) may still be a deductible medical expense.Non-Hospital Institutions - The following are examples taken from Tax Court cases or IRS rulings of when expenses for nonhospital institutions are deductible:All amounts paid by the taxpayer to maintain his mentally disabled son in a specially selected private home (which qualified as an “institution”) in accordance with the recommendation of the psychiatrist in charge of the son's case, to help the son adjust to life in the community after living in a mental hospital.Hotel meals and lodging, where taxpayer stayed in and received nursing service in the hotel, after getting appendicitis, having surgery in a hospital and being discharged from the hospital because it needed his hospital room. All these events took place in New York, while the taxpayer lived in Milwaukee. At the time of his discharge, the attending physician said the taxpayer was too weak to travel home.Amounts paid to maintain a child at a halfway house, including room and board. Admission to the halfway house required the recommendation of a psychiatrist and continued psychiatric supervision during the stay. The house staff included a psychiatrist and mental health counselor.Medical Conferences - IRS has ruled that a taxpayer may deduct the cost of attending a conference relating to a dependent’s disease or disablement. In this ruling, the taxpayer was allowed to deduct the cost of the conference registration fee and travel to the conference, because those costs were primarily for a dependent's medical care and the taxpayer's attendance was essential for that care. The costs of meals and lodging were not deductible, because the dependent did not receive medical care at a licensed facility (a prerequisite for medical deduction of meals and lodging).Auto Travel – When using a vehicle for medical reasons, deduction is allowed at a specified rate (cents) per mile (21 cents per mile for 2024 down from 22 cents per mile in 2023) or for actual cost of gas and oil (not repairs, maintenance, depreciation, lease fees, etc.). Trips - Amounts paid for transportation to another city may be included in medical expenses, if the trip is primarily for, and essential to, receiving medical services. Up to $50 per night for lodging may be included. A trip or vacation taken merely for a change in environment, improvement of morale, or general improvement of health cannot be included in medical expenses, even if the trip is made on the advice of a doctor.

The landscape of tax legislation in the United States has been marked by constant evolution, with changes often reflecting the broader economic and political priorities of the time. One area that has seen significant shifts, and consequent uncertainty, involves the treatment of research and development (R&D) expenses. Historically, businesses could immediately deduct R&D expenses in the year they were incurred, a provision that encouraged innovation and investment in new technologies.However, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced a significant change that has since cast a shadow of uncertainty over the ability of companies to deduct these expenses: the requirement to amortize R&D expenses over five years, or fifteen years for research conducted outside the U.S., starting from the midpoint of the tax year in which the expenses were paid or incurred.This shift, effective for tax years beginning after December 31, 2021, represents a departure from previous tax treatment and poses a challenge for businesses engaged in R&D activities. The immediate deduction of R&D expenses was a critical factor in lowering the effective cost of investment in innovation. By spreading the deduction over several years, the TCJA provision increases the short-term tax burden on companies, potentially discouraging investment in R&D activities that are crucial for technological advancement and economic growth.The Impact of AmortizationThe requirement to amortize R&D expenses affects cash flow and financial planning for businesses. Immediate expensing allows companies to reduce their taxable income in the year expenses are incurred, providing a more immediate cash benefit. Amortization, on the other hand, delays this benefit, which could lead to reduced investment in R&D due to tighter cash flow, especially for startups and small businesses that are often more sensitive to cash flow constraints.Moreover, the change complicates tax planning and increases administrative burdens. Companies must track R&D expenses over the amortization period, adjusting for any changes in their R&D investment strategies. This complexity adds to the cost of compliance and may divert resources away from productive R&D activities.Legislative Responses and UncertaintyIn response to concerns raised by the business community and tax professionals, bipartisan bills have been introduced in both the House of Representatives and the Senate aiming to repeal the amortization requirement. If enacted, these bills would allow companies to continue fully deducting R&D expenses in the year they are incurred, maintaining the United States' competitive edge in innovation and technology development.However, the legislative process is inherently uncertain, and the outcome of these proposals is not guaranteed. The uncertainty surrounding the tax treatment of R&D expenses makes it difficult for businesses to plan their investment strategies. Companies may adopt a more cautious approach to R&D spending, awaiting clearer signals from Congress and the administration on the future of these tax provisions.Early in 2024, a glimmer of hope emerged with the proposal of the Tax Relief for American Families and Workers Act, aimed at reversing these changes. However, the legislative process has been slow, leaving businesses in a state of limbo. The implications of this uncertainty are profound, influencing the way R&D expenses are reported.The Potential Outcomes and Their ImplicationsShould the bill pass retroactively, businesses would once again be able to fully expense U.S.-based R&D costs for the current tax year through 2025. This would delay the requirement to amortize these expenses, providing significant relief.