Taxpayer asks:

Dear TaxGirl,

Recently I received a request from a company to fill out a W-9 form.  I am not, nor have I ever been, an employee of this company.  However, I did receive money from them.  I’ll explain quickly…

My mother worked as a 1099 employee for a manufacturing company.  She sold millions of dollars of their product to different companies, and in turn that manufacturing company would then send her commissions.  Unfortunately my mother passed away last year and as a result of her unexpected passing I, being her next of kin, was responsible for paying her funeral expenses.  Because my mother had worked for this company for so many years, and was very close with the owners of the company, the CEO and CFO both felt that it would be the right thing to do to pay me a set amount of her commissions.  They wrote me a check out of the company account and I accepted it thinking it was a gift.  I am now being asked to complete a W-9 form.  Since this was a “gift” am I required to fill out this form?  And am I required to list this amount as income and therefor be taxed on it?

I’m not sure if it will help you, but the amount was $5000.00.

I appreciate any help you can provide me with this situation.  I was always taught to never look a gift horse in the mouth, but now I guess I should first ask if there are tax implications!  Ha!

taxgirl says:

So this is a tough situation. Unfortunately for you, the IRS doesn’t consider payments made by an employer to an employee (or for the benefit of an employee) to be a gift. With that in mind, the CEO and CFO should have been more clear about the nature of the payments. However, it sounds as if they intended to settle with you for commissions owed to your mother, which means they’re going to report it as if it were taxable compensation.

Regarding the form W-9, they should have asked you to complete the form prior to issuing the check. However, if the form is required and you fail to complete it – whether the company asked you when they should have or not – you could be subject to a penalty from IRS (as will the company, but that’s their issue). Alternately, the company could issue the 1099 with the taxpayer ID marked as “REFUSED” which could raise eyebrows at IRS. I rarely find that it’s worth it to refuse to complete the form W-9 if you know they’re planning on issuing a 1099.

All of that said, I don’t know if this was properly payable to you in the first place from a tax perspective. There might be some complicating factors here such as the commissions being more properly payable to the estate (which it might have been if this was actually a settlement for money owed to your mother). You should contact your tax pro and/or estate attorney if you have questions or concerns about taxes owed on the payment.

One last thing… That bit about always asking first if there are tax implications before accepting gifts, compensation or money from third parties? Excellent advice. Promise me that you will in the future.

–

And let’s make sure we understand a few things, ok?

1. Unless you have a representation letter in hand, you and I don’t have an attorney-client relationship, capiche? I mean, I’m sure you’re a nice person. I appreciate you stopping by the blog. But it doesn’t mean anything more (I’m having a weird deja vu to a couple of bad dates in college).
2. Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. This blog isn’t meant to offer you legal advice. I’m just calling it like it is. If you have real questions – i.e. you’re hiding in a closet while the feds bang on your door – you need to consult with a tax professional. If you live in my corner of the world, that might be me. But see #1.
3. I do work at a law firm. Some might even say I’m a partner at said law firm. But this blog is in no way affiliated with my law firm. The other partner and my malpractice carrier insist on it. And I have to live with one of them. And it’s not my malpractice carrier. So, again see #1.
4. I’m not responsible for anything anybody says on this blog except me. But play nice. I don’t want to have to throw you out of here (there’s that deja vu to college again).
5. And one more thing. I’m not here to help you cheat the system. That should be obvious. But just in case it’s not, the IRS wants me to reiterate that I’m not. So consider this your Circular 230 Notice:

IRS Circular 230 notice: In order to comply with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in this blog is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this blog.

It will also fail to make you rich, lose weight, get white teeth or regrow hair that has been lost. I can’t guarantee dates or life matches (in fact, it’s arguable that if your friends find out that you read a tax blog, you could lose points). I have never made a good stock tip and I can’t buy your gold. I’m also miserable at making pie.

If you still have a question, check out these tips before you “ask the taxgirl.”

–

Want more taxgirl goodness? Sign up to receive posts by email, follow me on twitter (@taxgirl) or hang out with me on Facebook.Similar Posts:

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Last December, Congress pushed through a whole set of changes meant to make them look good on Election Day things easier for taxpayers. One of the changes was the new portability provision which allows spouses to “share” their federal estate tax exclusion amounts with each other.

Each person is allowed an exclusion for federal estate tax purposes (it’s $5 million for 2011) which, traditionally, was wasted if not used up. That made for some jumping through hoops on the part of taxpayers in terms of retitling property to equalize estates and creating trusts in order to preserve the exemption amounts.

Under the new portability provision, estates of married taxpayers can pass along the unused part of the their exclusion amount to the other basically creating a joint $10 million exclusion for married taxpayers. Pretty great, right? I think most of us can swing not having to pay federal estate tax with that size exemption.

However, the portability provision isn’t automatic. It’s an election. In order to take advantage, then, estates must timely file a federal form 706, U.S. Estate Tax Return (downloads as a pdf). Federal estate tax returns are due nine months after the date of death unless you request an extension.

To take advantage of the election, you must timely file the return. The IRS assumes that most estates will *want* to make the election so the default is that a filed return equals making the election. There’s no box to tick or extra form to fill out, just file the return. If you don’t timely file the return, you haven’t made the election.

Yes, this does mean that, if you want to make the election, you will have to file a federal estate tax return even when there’s no taxable estate. Most practitioners, like myself, tend to file anyway when there’s a surviving spouse who might be subject to federal estate tax, mostly for statute of limitations and valuation reasons, so my guess is that this won’t be much of a burden.

Of course, there might be a situation where you have a taxable estate and are required to file a federal form 706 but do not want to make the election. If that’s the case, you’ll have to attach a statement to the form 706 indicating that the estate is not making the election under I.R.C. section 2010(c)(5) or write “No Election Under Section 2010(c)(5)” on the top of the first page of the form 706.

To be honest, I’d be surprised if that procedure continues past this year. It’s bound to cause confusion. I expect to see some kind of checkbox in the future. But for now, it is what it is.

The IRS plans to issue regulations providing further guidance and if you have a comment, they’d love to hear from you. For more information, check out Notice 2011-82 (downloads as a pdf).Similar Posts:

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• Movin’ On Up: Inflation May Translate to Lower Tax Bills
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• IRS Delays Basis Reporting for Decedent’s Estates

If you lost a loved one in 2010, my sympathies are with you. If you lost a loved one in 2010 that might have a taxable estate, my sympathies are really with you. The “surefire vote getting” one year repeal of the federal estate tax for 2010 has turned into one of the biggest administrative nightmares that tax practitioners have seen in awhile. And now, more than 9 months after the “repeal” ended, the IRS finds itself in the position of offering guidance and extensions – and adding to the confusion – on the tax.

Let me get you up to speed. For years, we had a federal estate with a relatively low personal exemption amount (stuck at $600,000 for eons). Under the Clinton administration, the personal exemption was increased over a period of about ten years to $1,000,000. Under the Bush administration, the personal exemption was accelerated to $3,500,000 in 2009 with no federal estate tax in 2010. Under the Obama administration, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 brought back the federal estate tax for 2010, sort of. Large estates have the option of electing federal estate tax treatment using a $5 million exemption for 2010 – and keeping the coveted “step up” in basis. However, instead of opting in to federal estate tax treatment under the new law, estates must opt out. If an estate opts out of the federal estate tax for decedents who died in 2010, the step-up in basis in assets for income tax purposes is limited.

Crazy, right?

The oddities in the law mean that the IRS has found itself scrambling to develop forms and guidance for one year – thanks, Congress, that’s efficient.

In March, the IRS announced that the form 8939 wasn’t actually due on April 18, 2011, after all – which was good since there was no form 8939 available. In August, the IRS released some guidance on the form 8939 – but still no form.

Now, the IRS has announced that estates which opt out of the federal estate tax for 2010, now will have until Tuesday, January 17, 2012, to file the mysterious form 8939 (still not available). The prior deadline was November 15, 2011.

Additionally, estates of most decedents who died in 2010 and have timely requested an extension will have until March 19, 2012 to file their estate tax returns and pay any estate tax due. For estates of decedents who died December 16, 2010 and before January 1, 2011, the due date is 15 months after the date of death.

If your head is spinning by now, you’re not alone. For more information about extensions and penalty relief, check out Notice 2011-76 (downloads as a pdf).Similar Posts:

• IRS Releases Guidance (But No Form) for 2010 Estates
• IRS Delays Basis Reporting for Decedent’s Estates
• What’s Mine is Yours: IRS Issues Estate Tax Portability Guidance
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• Death and Taxes… Actually Certain?

Whew.

It has taken awhile but the IRS has finally issued guidance for the treatment of basis for certain estates of decedents who died in 2010. As you’ve probably heard, there was no federal estate tax due for decedents who died in 2010. Well, er, sort of…

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate tax was repealed for 2010, implementing a set of confusing carry over basis rules instead. The federal estate tax was slated to come back in 2011 under the old rules. However, the last minute tax deal under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reinstated the federal estate tax for persons who died in 2010. You didn’t know that, right? Yeah, there’s a reason it didn’t get a lot of press.

The legislation was worded such that estates which would have been subject to the federal estate tax have to proactively opt out. Under the law, executors of the estates of decedents who died in 2010 may now opt out of the federal estate tax and instead elect to be governed by the repealed carry-over basis provisions of the 2001 Act. To do this, those executors must file a federal form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent.

However, the federal form 8939 still remains elusive. As in no mere mortals outside of the IRS have seen one yet. The IRS expects to release the form in the fall. If you’re dying to get a peek, you can see a draft copy here (downloads as a pdf).

And, after the IRS previously announced that federal form 8939 was not due on April 18, 2011, we now know that it is due on November 15, 2011 – assuming we have the form by then.

For more guidance and details on the election, you can read Notice 2011-66 (downloads as a pdf).Similar Posts:

• IRS Delays Basis Reporting for Decedent’s Estates
• IRS Issues Extension for Form Not Yet Available (Thanks?)
• What’s Mine is Yours: IRS Issues Estate Tax Portability Guidance
• Permanent Federal Estate Tax Repeal: Making a Comeback?
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The IRS has announced that federal form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent, is not due on April 18, 2011 and should not be filed with the final federal form 1040 of persons who died in 2010.

Of course, if you’ve tried to file a federal form 8939, you probably already knew that. It looks like this (downloads as a pdf) which is basically a form with the word “Draft” stamped all over it. The most recent draft is dated 12/16/2010 – just one day before President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The Act brought back the federal estate tax in a completely confusing manner. If an estate opts out of the federal estate tax for decedents who died in 2010, the step-up in basis in assets for income tax purposes is limited. The federal form 8939 is an informational return used to establish basis in that event. The form was supposed to be due on the date of the decedent’s final federal form 1040 or a later date specified in regulations issued by the Treasury Department.

There’s been no guidance, however, for federal form 8939 (I’m guessing they’re still trying to figure out how this whole mess will work). The IRS promises there will eventually be some and that there will be a “reasonable period of time for preparation and filing” of the form.

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First in the series: A is for Applicable Federal Rates, or AFRs.

Each month, the IRS provides various prescribed rates for federal income tax purposes; those rates are regularly published as revenue rulings. You can see the latest list of rates as a revenue ruling here (downloads as a pdf).

If you browse the list, you’ll note a few different versions of the AFR:

• Current Short Term AFRs for terms of three (3) years or less;
• Current Mid Term AFRs for terms in excess of three (3) years but no greater than nine (9) years;
• Current Long Term AFRs for terms in excess of nine (9) years;
• Current Adjusted Long Term Rates for determining the Long Term Tax-Exempt Rate, used to compute the annual net operating loss carryover utilization limitation following a change in ownership; and
• Current Section 7520 Rate, used to value annuities, life interests or interests for terms of years and remainder or reversionary interests.

So, what in the world does all of this mean?

The easiest way to think of AFRs is that they’re guidelines that the IRS uses to determine interest rates for certain transactions. Commonly, these numbers are used to determine imputed interest (for family loans, for example).

Planners and other tax professionals watch these rates fairly closely because they can present some interesting opportunities. This is especially true when dealing with deferred or split interest gifts; examples of those include a charitable trust when part of the gift is going to a charity and part of the gift is going to a non-charitable beneficiary. Under the statute, the person making the gift can choose the most favorable AFR (that section 7520 rate alluded to above) over a period of about three months. That can be helpful because with something like a charitable remainder trust, you’d want to choose a high number, and for charitable lead trusts and remainder interests, you’d generally want to choose a low number.

The AFR is also used to calculate withdrawal amounts from IRAs. The IRS requires the use of AFRs for purposes of amortization calculation (stay with me) for figuring certain IRA withdrawals since the interest rate must be “reasonable” (and that’s based on the AFR). You might not actually plug those numbers in yourself but someone does when figuring how much your IRA withdrawals (using the amortization and annuity factor methods).

If your eyes glaze over while looking at the tables, you’re not alone. While many tax pros swear by the tables (my former law professor still calculates split interest gifts by hand using the tables), others opt to skip the tables altogether and go straight for the software. There is software available now that does all of these split interest, imputed interest and other calculations that rely on the AFR.

Chances are that you won’t ever have to use an AFR to make a calculation yourself (unless you’re a tax pro). But now you know what it is which is good to know if you have to deal with loans, IRAs or gifts. If nothing else, it makes good cocktail party chatter…Similar Posts:

• Taxes from A to Z: R is for Roth IRA
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With the significant increase in the personal exemption for federal estate tax (albeit temporary), many folks believe that they no longer need a will. That couldn’t be further from the truth: there are a lots of non-tax reasons to have a will (I just rolled back in from Center City with three of them: my kids). I had the opportunity to chat with Ashlea Ebeling of Forbes about this very thing. You can read her interview here.Similar Posts:

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Taxpayer asks:

Hello Tax Girl:

I am in NY.
My father is giving me approximately $25-$30k this year.
He will be reporting the payment to the government by sending me a 1099.
My question is:
Are there any special provisions to keep in mind when I report this on my income tax form or do I just report this as misc income?

Thanks,

taxgirl says:

I think you and your father might be confusing a couple of concepts. Let me see if I can straighten it out for you both.

Assuming that your father is giving you $25-30k as a gift, there are no immediate income tax consequences to you. You need not report the receipt of the gift at all on your income tax return. If the gift is something other than cash (or cash equivalent), you would need to find out the basis of the gift since gifts are subject to “carry over” basis – this means you would use your father’s basis in the gift to figure any gain when you dispose of the gift. For more information on basis, check out my prior post.

When your father makes the gift to you, he would not report it via a form 1099. Since there are no income tax consequences as a result of the gift, there’s no need to reference it on any income tax related forms. He would, however, likely want to report the gift for gift tax purposes on a federal gift tax return, federal form 709 (downloads as a pdf). Each person is allowed to make up to $13,000 in gifts per year to as many people as he or she likes without any gift tax consequences. Your father can gift you $13,000 without gift tax consequences or he could gift 10 people $13,000 without gift tax consequences – the limit is per recipient, not per donor.

There are some techniques which allow you to gift more money more quickly, such as splitting gifts, gifting over time and taking valuation discounts, depending on the nature of the gift, but your father would want to consult with his estate planning attorney or tax professional to find out more.

Like any good lawyer, I need to add a disclaimer: unfortunately, it is impossible to offer comprehensive tax info over the internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – On twitter at http://www.twitter.com/taxgirl and on Facebook at http://www.facebook.com/taxgirlSimilar Posts:

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Quick pop quiz: what form of tax do most Americans claim to hate the most? Income taxes? Nope. Payroll taxes? Nope. Tax on alcohol? Tax on cigarettes? Nope and nope.

It’s the federal estate tax. That’s a pretty remarkable statement considering that fewer than 2% of Americans are generally subject to the federal estate tax (that number has decreased as the exemption has increased). And yet, it’s still the most hated tax in America. It’s no surprise then that the federal estate tax has again popped up as an election issue.

For those of you who aren’t familiar with what’s been happening, let me get you up to speed. The federal estate tax applies for estates which exceed a certain taxable amount. When I started practicing, that amount was $600,000 and basically what it meant was that you could pass $600,000 worth of net estate assets to someone other than a US citizen spouse without paying any federal estate tax (transfers to US spouses are eligible for a marital deduction so there’s no federal estate tax payable on those). Deductions also apply for administrative expenses (fees associated with the estate), debts of the decedent, some taxes and charitable gifts.

Congress bumped up the exemption amount over the next few years until it reached $1,000,000 in 2002. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001), signed into law by President Bush, the exemption climbed to $3,500,000 in 2009. The federal estate tax was “repealed” for the current year, 2010. However, the provisions of EGTRRA 2001 mean that the law actually “disappears” for 2011 and the old law kicks back in. Under the Taxpayer Relief Act of 1997, signed into law by President Clinton, the exemption would have been $1,000,000 in 2001 (it was actually $675,000 in 2001 because of EGTRRA). I know, it’s confusing.

The bottom line is that the federal estate tax exemption, unless Congress makes other plans, will be $1,000,000 in 2011. Depending on where you sit, this is either too much or not enough.

For years, it’s looked like the fight over the federal estate tax was going to focus on the amount of the exemption. As recently as July 2010, Sens. Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) introduced a compromise bill to increase the exemption to $5,000,000; that bipartisan bill looked to have a decent amount of support.

However, as the campaigns ramp up their volume, support for a compromise bill seems to be dwindling in favor complete repeal. More than half of the Republicans running for House and Senate have signed a pledge to eliminate the federal estate tax; only two Democrats and a few Libertarians have signed the pledge. You can see all the details on this map, prepared by the American Family Business Institute (AFBI). AFBI is a 501(c)(6) trade association founded in 1994 which states on its website that:

Our mission is the permanent repeal of the death tax, the federal estate tax. We focus 100% of our energy, leadership and resources on moving America towards this goal.

Realistically, I don’t think that anyone expects the federal estate tax to actually be repealed prior to 2011: eliminating the federal estate tax would cost $410 billion in the next decade alone. That’s a lot of revenue to give up in a tight economy. However, it’s clear that a change in leadership in Congress will be pushing for repeal, not for an increased exemption. The WSJ quotes Sen. Jim DeMint (R-SC) as saying that he hoped the 2010 elections would generate “the momentum to finally kill the death tax for good.” But will it? I don’t think so. It is interesting, however, to see the issue back on the table.

Similar Posts:

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This week, Congress has been sparring over the best way to fix the economy. It looks like, one way or the other, we’re going to have some tax cuts. The specifics have yet to be worked out. Many are pushing for individual tax rate cuts while others believe that cutting corporate tax rates (something Speaker Pelosi just indicated she might consider) would kick start the economy much faster. Statistically, however, the federal estate tax remains the least popular tax in the country.

Let’s pretend for a second that Congress could only pick one set of cuts to make. And let’s make it today’s Fix the Tax Code Friday question:

• Fix the Tax Code Friday: Tax Predictions
• Fix the Tax Code Friday: A Year From Now
• Fix the Tax Code Friday: How Rich is Rich?
• Bush Tax Cuts
• Fix the Tax Code Friday: Federal Tax Amnesty