Two-Income Families Benefit from ‘Paycheck Checkup’
Many two-income families will be able to change or reduce withholding due to the passage of the Tax Cuts and Jobs Act (TCJA). The TCJA increased the standard deduction to $24,000 for couples. It also eliminated personal exemptions, increased the Child Tax Credit and changed both the tax rates and brackets.
If you and your spouse have two or more sources of income, you could be overwithholding or underwithholding. The “Paycheck Checkup” is especially useful with two-income families because it shows the best withholding amounts for your specific situation.
To use the Withholding Calculator, you should have your 2017 tax returns and a recent paystub for both spouses. To protect your identity, the Withholding Calculator does not ask for your name, Social Security Number, address or bank account numbers. It also does not save or record the data you enter.
After you use the Withholding Calculator and enter the requisite information, you may need to contact your employer to update your IRS Form W-4. Your employer will use the new Form W-4 with your updated withholding allowances to adjust the amounts withheld from your paycheck.
With the increased $24,000 standard deduction, many couples with two incomes will be able to reduce withholding and increase their monthly take-home amounts.
GRAT Included in Estate
In Badgley, Judith v. United States; No. 4:17-cv-00877 (17 May 2018), a United States District Court for the Northern District of California denied a $3,810,004 estate tax refund request and upheld full inclusion of a grantor retained annuity trust (GRAT) in the estate.
Decedent Patricia Yoder held real property interests in the Y & Y Company, a California partnership. On February 1, 1998, Yoder transferred her one-half partnership interest in Y & Y Company to a 15-year GRAT. The GRAT made a 12.5% payment in the amount of $302,259 per year. Yoder’s two daughters were the GRAT remainder beneficiaries. They were scheduled to receive their remainder interest on February 1, 2013.
Patricia Yoder received the GRAT payments and passed away on September 30, 2012. Her executor reported a gross estate of $36,829,057 (with full inclusion of the GRAT assets) and paid estate tax of $11,187,475. Subsequently, executor Judith Badgley filed a Claim for Refund and Adjustment in the amount of $3,810,004.
The District Court noted Sec. 2036(a)(1) requires inclusion of a GRAT if the annuitant does not survive the stated term. The executor claimed that only “income” and not an “annuity” was subject to Sec. 2036 inclusion. This claim was rejected by the Court.
Second, the executor claimed the IRS formula for valuing the GRAT was invalid because it assumed a payment from income. However, the Court held that the formula “reasonably looks to the amount of property needed, given the interest rate at the time of death, to fund the annuity.”
Because the interest rate was low when decedent passed away in 2012, the IRS formula required inclusion of the full GRAT value. However, the Court concluded the regulation was reasonable and the full value is required to be included in the estate. The request for a refund was denied.
IRS Opposes SALT Charitable Deduction Strategy
The Tax Cuts and Jobs Act limited state and local tax deductions (SALT) to $10,000. Because most state and local taxes are no longer deductible, some states fear pressure from taxpayers to reduce state and local taxes. As a result, creative efforts are underway to substitute a charitable deduction for the SALT deduction.
In response to actions by several states to permit “charitable” gifts to state funds in exchange for a state tax credit, the Service published Notice 2018-54; 2018-24 IRB 1 (23 May 2018).
The Notice promises the Service will issue proposed regulation to preclude “legislative proposals that would allow taxpayers to make transfers to funds controlled by state or local governments, or other transferees specified by the state, in exchange for credits against the state or local taxes that the taxpayer is required to pay.”
The Service objects to these strategies because the purpose is to allow these “transfers as fully deductible charitable contributions for federal income tax purposes, while using the same transfers to satisfy state or local tax liabilities.”
In the view of the IRS, these creative strategies “circumvent the new statutory limitation on state and local tax deductions” and “taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.”
Editor’s Note: With billions of tax dollars at stake, there will be litigation between states and the federal government over this SALT issue. Meanwhile, CPAs for many taxpayers who are concerned about the loss of the SALT deduction are encouraging them to increase their charitable giving in order to reduce taxes.
Applicable Federal Rate of 3.4 for June — Rev. Rul. 2018-16; 2018-23 IRB 1 (16 May 2018)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2018. The AFR under Section 7520 for the month of June is 3.4%. The rates for May or 3.2% or April of 3.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.