Estate Planning - the New Way?

But, what about the issue of income tax on capital gains, while still living? With the new higher capital gains tax rates, federally, effective Jan 1, 2013 of 20%, plus the new ACA/Medicare surtax of 3.8% if one’s taxable income is greater than $400,000 (single) or $450,000 (married filing joint). Further, if one lives in California, under newly passed Proposition 30, after $1,000,000 in capital gains this state’s tax rate can be as high as 13.3%. Before deduction of state income tax paid from federal taxable income, if you are fully able to,, the total capital gains tax rate for a California resident with more than $1 million in capital gain is now 37.1%. For low tax basis property, this will be a larger number than most of us have paid in a long time. It amounts to a combined 41% increase in total capital gains taxes for federal and California.

Isn’t it also the task of good estate planning to reduce income tax while the client is still alive? All realized capital gains are forgiven at the moment of death. How do we plan to “do this,” and also have the same assets then receive a “stepped-up tax basis” at the moment of death?

IRC Code Section 1031 is still alive and well. It allows a “tax-deferred exchange” for sales of real estate and other property, held for use in a trade or business, or for investment. Not easy to do, but feasible with good strategic deal planning and proper tax planning. The time allowed to nominate up to (generally) three replacement properties is very tight. The problem is the taxpayer’s inability to do proper due diligence on any nominee property before they are in contract, and comfortable nominating the property. Defects or misrepresentations, are always found later. The Seller knows you are in an exchange and is unwilling to renegotiate the purchase contract.

And last: IRC Section 1031 is mandatory. There may be a loss, which could be deducted, depending on the tax basis. Some people do a 1031 exchange without realizing that they are; like when they trade in one car, for another.

We can work with you to resolve these problems. Please contact us and we can show you how.

Amazon VS the Sales Tax

The time for great face-off of brick and mortar retailing vs the online retail industry has begun! Jeff Bezos of Amazon last week said he hopes there will be a federal solution to the matter of whether the online retail industry should collect local sales taxes in the various states Amazon and its affiliates sell merchandise in. Bear in mind that retailers do not pay the tax; they merely collect and remit it to the various states they do business in. However, Amazon, in a demonstration of defiance of the new California law requiring online sellers of Amazon's size, begin to charge the sales tax to California residents and remit monthly like any other retailer in this state - has refused to do so, and is not collecting the tax from its CA customers. This means they are openly running the risk that they may be forced to pay the sales tax they should have collected, if the CA courts later determine they should indeed have followed the law.

This is no small matter. The cost to Amazon will eat into their low gross margins: the heart of their business plan. Further it is a blatant violation of the new CA law. Why is it fine for one of the largest US corporations to disobey a tax law, but a US citizen will do this at the peril of being sent to prison for tax evasion?

Amazon yesterday said it would support a referendum which it hopes to have on the CA ballot in February to impede and overturn this new law. What do you think abou Amazon's cheekiness in not collecting the sales tax in the first place, and now, openly funding a referendum in a state where they claim they have no "nexus" (basically sufficient business presence to warrant  a claim they are operating a "trade or business" there)?

We look forward to your thoughts....