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1 Member LLC Back to Top

A limited liability company with only one owner (called member) is a 1 member LLC and is disregarded (ignored) for income tax purposes

1031 Exchange Back to Top

You can exchange real or personal property for other real or personal property and not have to report the fair market value of the property you gave up in the exchange as a taxable event for income tax purposes. This can be a tremendous tool to defer (not save) income taxes on the transfer of appreciated real estate assets. These transactions are more complex than most advertisers for their services might lead you to believe so use a reputable company and skilled real estate attorney to be sure that the transaction is carried out properly. Also, before committing to a tax deferred like kind exchange explore all your options. Will selling and paying the tax actually better serve your needs? Might a charitable remainder trust prove more valuable?

1202 Back to Top

Section 1202 of the tax laws provides for incentives to invest in small businesses. These incentives were enhanced by The Recovery Act. Prior to these changes you could have excluded 50% of the qualifying gain on investments you made in closely held businesses that met the requirements of the tax law. Generally, the business must be a regular corporation (a "C" corporation in tax jargon) and have gross assets of $50M or less. The 50% exclusion coupled with 28% tax rate meant a maximum tax of 14% (ignoring AMT). The new law increased the exclusion to 75% so that on the effective tax rate on the sale of stock in a qualifying small business would only be about 7% (ignoring AMT). If that isn't enough tax benefit you can even roll over gains by reinvesting them into another qualifying small business and deferring tax on the gain you cannot exclude.

179 Back to Top

Code Section 179 provides a special tax break, called "elective expensing" which permits you to write off (deduct) immediately (in the year of purchase) the cost of a substantial amount of equipment, furniture and other tangible movable personal property. The amount you can deduct in one year was increased in 2008 from $128,000 to a quarter million dollars, $250,000. This high limit will remain in 2009, but watch for new developments in the law, especially after 2009. This valuable tax break is phased out as your business purchases more than $800,000 of qualifying equipment in one year.

2036(a) Back to Top

Code Section 2036 has become one of the IRS' weapons of choice in attacking family limited partnership (FLP) and other transactions. The provision, its many sub-parts, and the case law interpreting it, are all very complex such that a mere definition could prove more dangerous then helpful in guiding your planning. In brief, 2036 includes in your estate property interests that you might have thought should not be. If you transferred (directly or indirectly) property interests but retained a tainted right in the property transferred, 2036 might operate to pull the entire value of that property back into your estate. If you transferred property to a trust or otherwise and retained the right to the possession or enjoyment of the property, or the right to the income from the property, or the right to designate who can enjoy the property, the value of that property will be included in your estate.

Here are some examples:
o You give your house to your children but reserve the right to live in your house for the rest of your life. The entire value of the house is taxable in your estate.
o You give your children interests in a family partnership but you have an implied agreement with them that you'll continue to earn all the income of the partnership. All of the partnership interests given will be included in your estate.

For 2036(a) to apply you must be the transferor of the property. This is not always obvious or simple. If you gave a nephew $13,000 in cash with the tacit understanding that the nephew would transfer the property to a trust for which you are a trustee, 2036 might apply.

There is a bona fide sale exception. If you receive full and adequate consideration for the property transferred it will not be reached by 2036(a). For example, if you sell an asset to a trust for its fair value, 2036(a) won't apply. To help backstop this position you should have an appropriate independent appraisal of the property sold to corroborate that you are in fact selling it for "adequate and full consideration".

215 Back to Top

Code Section 215 provides rules for the taxation of alimony payments. See the discussion under IRC Sec 71 (71 in the Glossary).

301(a) of the 2010 Tax Act Back to Top

2010 TRA Section 301(a): “In general.—Each provision of law amended by subtitle A or E of title V of the Economic Growth and Tax Relief Reconciliation Act of 2001 is amended to read as such provision would read if such subtitle had never been enacted. “The repeal of the estate tax (i.e., subtitle A) is repealed, so that the estate tax applies to the estates of a person who died in 2010. The carryover basis rules (which were in subtitle E) no practitioner wanted to have to deal with are repealed as if they had never been enacted. The only exception will be for those estates for which the executor elects to apply the carryover basis rules, instead of the estate tax, based on the optional provision the 2010 TRA provides for (see below). “Carryover basis” as explained in considerable detail in Chapter 4 is a tax system in which an estate is not subjected to the federal estate tax, but in exchange loses the ability to increase (step up, but more technically, adjust) the tax basis (cost, investment) of appreciated assets held at death to their fair value. The complexity of these rules makes tax experts shudder. If you’re not dealing with an estate of someone who died in 2010 (and generally one that is in excess of $5 million) you may never have to understand or deal with these carryover basis rules.

302(a)(1) and (2) of the 2010 Tax Act Back to Top

The 2010 Tax Act sets the estate, gift, and GST exemption at $5 million per person and $10 million per married couple. Section 302(a)(1) and (2) of the 2010 TRA: Modifications to estate, gift, and generation-skipping transfer taxes. $5,000,000 Applicable Exclusion Amount.—(2) Applicable exclusion amount.—(A) In general.—For purposes of this subsection, the applicable exclusion amount is $5,000,000. The exemption changes apply for 2010 going forward, except that the gift exemption remains at $1 million for 2010. Everyone should review his or her will, revocable trust, and other dispositive arrangements to be certain that their plan will work as intended with this dramatic increase in the estate tax exemption A tax rate of 35 percent will apply for all the federal transfer taxes: the estate tax applicable at death, the gift tax applicable onto lifetime (inter-vivos) transfers, and Generation Skipping Transfer (GST) tax beginning in 2010 (except that the GST tax rate is zero in 2010, as discussed in Chapter 3). The 35% rate had already applied to taxable gifts in 2010. If the executor of an estate for someone who died in 2010 chooses to be subject to the estate tax instead of the carryover basis rules, the 35 percent rate will apply as well.

419 Plan Back to Top

Multi-employer pension plans can be structured to provide long term death benefits. These plans are typically administered by banks or other third party providers.

Requirements for a qualified plan include: The pension trust must include 10 or more participating employers, none of whom have greater than a 10% interest in the trust. Participants may face loss of benefits if they terminate their employment. Cans and losses in the trust must be allocated uniformly. No employer can control the plan.

Section 419 plans may be appropriate if there is a need for life insurance, and a desire to purchase that insurance with pre-tax dollars.

529 Plan Back to Top

College savings plan named after the provision of the Internal Revenue Code that creates it. These plans, in the appropriate circumstances (which is not everyone) and with an appropriate investment choice (not all our) can provide tremendous income, gift and estate tax benefits all while facilitating college savings. Be certain to make a decision to use a 529 Plan in the context of an overall family estate, tax and investment plan, not just based on the one factor of saving for a particular person's(child's) college costs. Also exercise some care in selecting a plan. Consider state income tax benefits on funding, if any, investment and administrative costs, investment options, etc.

71 Back to Top

Code Section 71 (IRC Sec. 71) permits a deduction in determining your income tax for alimony payments you paid during the year. Generally, you must have a legally enforceable obligation to pay alimony to claim a tax deduction. Alimony payments must generally meet the requirements of Code Section 215 as well. They must end on the death of the payee ex spouse, be made under a divorce or separation agreement, not be specified as nontaxable (this is an interesting planning idea many are not familiar with...you can actually negotiate and agree in your divorce agreement that the alimony payments will not be deductible by the payor and will not be income to the payee).

7520 Rate Back to Top

Section 7520 of the Internal Revenue Code provides for specified interest rates which the Internal Revenue Service publishes monthly. A host of different tax planning techniques and results are required to be calculated using the mandated interest rates under Code Section 7520. These include the periodic annuity payment to be made to the grantor of a grantor retained annuity trusts (GRATs), the current (present) value of your interest in a house that you transfer to a qualified personal residence trust (QPRT), the value of certain annuities and life estates, etc. For many tax planning techniques, if the value of the assets involved appreciate at a rate greater then the 7520 you will have achieved some tax planning benefit from the plan.