After scrutinizing the United States v. Windsor decision yesterday a little more thoroughly, it occurs to me that same sex couples in New Jersey are still a state of limbo. It should be noted that the Supreme Court relied on the fact that the couple in the Windsor case not only were legally married in Canada, but resided in New York, a jurisdiction that recognized the marriage.
The Supreme Court left open the question as to whether a couple that is in a Civil Union (like in New Jersey) would be entitled to the same benefits as a same sex married couple and it also left open the question as to whether the federal government would have to recognize the marriage of a same sex couple that legally married in one jurisdiction and resides in a jurisdiction that does not recognize the marriage.
While New Jersey recognizes same sex marriages from other jurisdictions in New Jersey, according to the 2007 Opinion of Attorney General Stuart Rabner, it ONLY recognizes them as Civil Unions. New Jersey does not currently allow same sex marriages. Therefore, there is a real question as to whether the Windsor case will benefit same sex couples living in New Jersey, regardless of whether they entered into a Civil Union or were married in another jurisdiction.
To take the analysis a little further, the 2007 Opinion of Rabner was not meant to be restrictive, it was actually near the forefront at the time and designed to treat same sex couples as married couples, just using different terminology. Moreover, New Jersey Statute 26:8A-6(c) specifically states: A domestic partnership, civil union or reciprocal beneficiary relationship
entered into outside of this State, which is valid under the laws of the
jurisdiction under which the partnership was created, shall be valid in this
State. This statutory language (which was written in 2003, one year before Massachusetts became the first state to allow same sex marriages) would seem to imply that the New Jersey should in fact recognize foreign same sex marriages.
Finally, the New Jersey Supreme Court has already issued an opinion in Lewis v. Harris, 188 N.J. 415 (2006), which held that New Jersey's State Constitution requires that same sex couples be afforded access to a government sanctioned relationship that provides all of the rights and obligations of marriage. As a result, it is my opinion that if the federal government does not recognize New Jersey Civil Unions or it does not recognize the validity of the legal marriage of same couples living in New Jersey, New Jersey will be required to modify its statutes to allow for same sex marriages.
Perhaps the easiest and best way to test this is for a same sex couple to file a joint federal tax return and see if it is accepted...
Thursday, June 27, 2013
Wednesday, June 26, 2013
Same Sex Couples Entitled to Unlimited Marital Deduction
In a landmark Supreme Court case today, United States v. Windsor, the Supreme Court ruled that the Defense of Marriage Act ("DOMA") was unconstitutional. DOMA was signed into law in 1996 and defined marriage as between a man and a woman for purposes of federal law. Importantly, this meant that same sex couples could not file joint tax returns and that a surviving same sex spouse was not entitled to a marital deduction (resulting in higher federal estate taxes).
As a result of this ruling, same sex couples who have married should immediately consider whether they should amend their federal tax returns for the last few years. Consideration should also be given to whether your estate planning documents should be updated to reflect the change in the law.
The ramifications of this ruling are extremely broad, as it can affect immigration laws, the right to receive health insurance, the right to receive a pension, and Social Security. All told, there are about 1000 laws that may be affected.
Importantly, it does not require that a state allow a same sex couple to marry. Accordingly, in states where same sex couples are not allowed to marry, they will have to travel to another jurisdiction to get married in order to receive federal benefits. (It is still slightly unclear at this point whether the state that the couples lives in must recognize the marriage to take advantage of federal benefits - I haven't had time to read the full opinion yet. I will point out that New York allows same sex marriages and New Jersey recognizes same sex marriages from other jurisdictions*. Pennsylvania and Florida have both enacted laws banning such recognition.)
Just a reminder though, strictly from a tax perspective, it does not always make financial sense to get married due to the "marriage penalty". The marriage penalty is a called a penalty because it creates a higher tax on a married couple when both spouses work. However, if one spouse works and the other does not, it does create a substantial tax benefit.
*See post on the Affect of United States v. Windsor on New Jersey Same Sex Couples
As a result of this ruling, same sex couples who have married should immediately consider whether they should amend their federal tax returns for the last few years. Consideration should also be given to whether your estate planning documents should be updated to reflect the change in the law.
The ramifications of this ruling are extremely broad, as it can affect immigration laws, the right to receive health insurance, the right to receive a pension, and Social Security. All told, there are about 1000 laws that may be affected.
Importantly, it does not require that a state allow a same sex couple to marry. Accordingly, in states where same sex couples are not allowed to marry, they will have to travel to another jurisdiction to get married in order to receive federal benefits. (It is still slightly unclear at this point whether the state that the couples lives in must recognize the marriage to take advantage of federal benefits - I haven't had time to read the full opinion yet. I will point out that New York allows same sex marriages and New Jersey recognizes same sex marriages from other jurisdictions*. Pennsylvania and Florida have both enacted laws banning such recognition.)
Just a reminder though, strictly from a tax perspective, it does not always make financial sense to get married due to the "marriage penalty". The marriage penalty is a called a penalty because it creates a higher tax on a married couple when both spouses work. However, if one spouse works and the other does not, it does create a substantial tax benefit.
*See post on the Affect of United States v. Windsor on New Jersey Same Sex Couples
Monday, June 10, 2013
A Trust can Qualify for a Section 121 Deduction (For Sale of a Personal Residence)
Typically, people take it for granted that there will not be any tax when they sell their personal residence. Technically, there is a tax, but the government also offers a limited exclusion under Section 121 of the Internal Revenue Code.
For individuals who sell their primary residence, you can exclude the first $250,000 of gain. After that, it is subject to a capital gains tax. For married couples, you can exclude the first $500,000 of gain.
In order to qualify for the exclusion, you must have OWNED and USED the residence as your principal residence for 2 of the last 5 years ending with the date of sale (it does not have to be consecutively). If the home was previously used as a rental property, in a business or for another non-qualified use, there may be longer holding requirements or a reduced exemption amount.
One common estate planning tool that many attorneys create is a revocable living trust. A revocable living trust, also known as just a Living Trust, is device to manage a person’s assets during life and after death. While the Grantor is alive, the Grantor can manage his or her trust funds as the Grantor wishes. When the Grantor passes, it acts like a Will but with the added benefit of avoiding probate. If a person sets up a revocable trust, it is highly recommended to transfer all real estate into this trust, including the primary residence.
Another common estate planning tool, particularly for individuals doing Medicaid planning or VA benefit planning, is to move the primary house to an irrevocable trust, which is set up as an intentionally defective grantor trust (IDGT). An IDGT is a type of trust that is outside a Grantor’s estate for estate tax purposes while simultaneously requiring the Grantor to be taxed on the income earned in the Trust.
Under Internal Revenue Code Treasury Regulation 1.121-1(c)(3)(i), if a residence is owned by a trust, for the period that a taxpayer is treated under sections 671 through 679 (relating to the treatment of grantors and others as substantial owners) as the owner of the trust or the portion of the trust that includes the residence, the taxpayer will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the trust will be treated as if made by the taxpayer.
So, the long winded answer to the question is, yes, if a trust owns a primary residence and it is set up correctly, it can qualify for the Capital Gains Tax Exclusion under Section 121 of the Code.
For individuals who sell their primary residence, you can exclude the first $250,000 of gain. After that, it is subject to a capital gains tax. For married couples, you can exclude the first $500,000 of gain.
In order to qualify for the exclusion, you must have OWNED and USED the residence as your principal residence for 2 of the last 5 years ending with the date of sale (it does not have to be consecutively). If the home was previously used as a rental property, in a business or for another non-qualified use, there may be longer holding requirements or a reduced exemption amount.
One common estate planning tool that many attorneys create is a revocable living trust. A revocable living trust, also known as just a Living Trust, is device to manage a person’s assets during life and after death. While the Grantor is alive, the Grantor can manage his or her trust funds as the Grantor wishes. When the Grantor passes, it acts like a Will but with the added benefit of avoiding probate. If a person sets up a revocable trust, it is highly recommended to transfer all real estate into this trust, including the primary residence.
Another common estate planning tool, particularly for individuals doing Medicaid planning or VA benefit planning, is to move the primary house to an irrevocable trust, which is set up as an intentionally defective grantor trust (IDGT). An IDGT is a type of trust that is outside a Grantor’s estate for estate tax purposes while simultaneously requiring the Grantor to be taxed on the income earned in the Trust.
Under Internal Revenue Code Treasury Regulation 1.121-1(c)(3)(i), if a residence is owned by a trust, for the period that a taxpayer is treated under sections 671 through 679 (relating to the treatment of grantors and others as substantial owners) as the owner of the trust or the portion of the trust that includes the residence, the taxpayer will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the trust will be treated as if made by the taxpayer.
So, the long winded answer to the question is, yes, if a trust owns a primary residence and it is set up correctly, it can qualify for the Capital Gains Tax Exclusion under Section 121 of the Code.
Wednesday, June 5, 2013
IRS FATCA Form 8938 and the FBAR Form TD F 90-22.1
For US citizens and US permanent residents, you must file Form 8938 (also known as the FATCA Form) if your overseas investment assets are above $50,000 for an individual or $100,000 for a married couple (filing jointly) at year end. Additionally, on any given day during the year if your assets are above $75,000 for an individual or $150,000 for a married couple (filing jointly), you will also be required to file the FATCA Form. (If you are married but file separate tax returns, follow the rules for an individual.)
For US Citizens living abroad, you must file the Form 8938 if your overseas investment assets are above $200,000 for an individual or $400,000 for a married couple (filing jointly) at year end. Additionally, on any given day during the year if your assets are above $300,000 for an individual or $600,000 for a married couple (filing jointly), you will also be required to file the FATCA Form.
The IRS has listed a helpful chart of what assets count towards the reporting threshhold. Note, ownership of foreign real estate outside of the United States does not need to be reported on the FATCA Form if you own it directly, but it does need to be reported if you own it through a foreign entity.
The FATCA Form should not be confused with Form TD F 90-22.1 (FBAR). The FBAR form relates strictly to foreign bank accounts that hold more than $10,000 at any time during the year for ALL foreign bank accounts. This can be a real problem for individuals who own small accounts held in multiple countries that fluctuate greatly against the US Dollar.
A good rule of thumb is that if must file a FATCA Form 8938, you should almost always be filing a FBAR Form as well.
The penalties for failure to file Form 8938 can be quite high. If you do not file an accurate Form 8938 in a timely manner, there is a $10,000 penalty. If the IRS asks for a FATCA form and you refuse to comply, they may assess you with a $50,000 penalty for noncompliance. Form 8938 should be filed along with your income tax Form 1040.
The penalties for failure to file the FBAR Form can also be quite high. If you do not file an accurate FBAR in a timely manner, they may assess up to a $10,000 penalty for each non-willful violation or the greater of $100,000 or 50% of the highest account balance for willful violations. The FBAR must be filed by June 30th - there is no ability to extend this deadline.
Finally, other individuals subject to the US taxing authority may also be required to complete the FATCA form.
For US Citizens living abroad, you must file the Form 8938 if your overseas investment assets are above $200,000 for an individual or $400,000 for a married couple (filing jointly) at year end. Additionally, on any given day during the year if your assets are above $300,000 for an individual or $600,000 for a married couple (filing jointly), you will also be required to file the FATCA Form.
The IRS has listed a helpful chart of what assets count towards the reporting threshhold. Note, ownership of foreign real estate outside of the United States does not need to be reported on the FATCA Form if you own it directly, but it does need to be reported if you own it through a foreign entity.
The FATCA Form should not be confused with Form TD F 90-22.1 (FBAR). The FBAR form relates strictly to foreign bank accounts that hold more than $10,000 at any time during the year for ALL foreign bank accounts. This can be a real problem for individuals who own small accounts held in multiple countries that fluctuate greatly against the US Dollar.
A good rule of thumb is that if must file a FATCA Form 8938, you should almost always be filing a FBAR Form as well.
The penalties for failure to file Form 8938 can be quite high. If you do not file an accurate Form 8938 in a timely manner, there is a $10,000 penalty. If the IRS asks for a FATCA form and you refuse to comply, they may assess you with a $50,000 penalty for noncompliance. Form 8938 should be filed along with your income tax Form 1040.
The penalties for failure to file the FBAR Form can also be quite high. If you do not file an accurate FBAR in a timely manner, they may assess up to a $10,000 penalty for each non-willful violation or the greater of $100,000 or 50% of the highest account balance for willful violations. The FBAR must be filed by June 30th - there is no ability to extend this deadline.
Finally, other individuals subject to the US taxing authority may also be required to complete the FATCA form.
Receiving Gifts or an Inheritance from Relatives Overseas
If you live in the United States and receive a gift from a family member who lives overseas who is not a US citizen, you should be aware that the IRS requires the US beneficiary to file Form 3520 to report the gift. You are also required to file Form 3520 if you are receiving money as part of an inheritance or a distribution from a foreign trust.
The requirement to report the gift, bequest or trust distribution kicks in for assets valued at more than $100,000. All gifts, bequests and trust distributions received during the calendar year must be aggregated if they come from related parties. So, if you receive $70,000 from your mother and $50,000 from your father (both of whom live in a foreign country and are not citizens of the US), you will be required to complete the Form 3520. However, if you receive a gift of $95,000 from your parents and $10,000 from a friend, you will not have to report it.
Payments by a foreign person for qualified medical or tuition payments do not count against the $100,000 threshhold provided the payments are made directly to the health care provider or school.
The penalties for failure to file Form 3520 can be quite high. If you do not file an accurate Form 3520 in a timely manner, you may be penalized 5% of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25%). The return is due when you file or income tax.
If you receive a gift of foreign property, money in a foreign bank account or a foreign business interest, do not forget that you may also need to file a IRS Form 8938 (FATCA Form) and the FBAR Form in addition to the Form 3520.
Finally, there are special rules for gifts from individuals who ceased to be a US Citizen or green card holder after June 16, 2008. There are also special rules for gifts received from foreign corporations or foreign partnerships as gifts from those entities in excess of $14,723 (adjusted annually for inflation) must be reported as well.
The requirement to report the gift, bequest or trust distribution kicks in for assets valued at more than $100,000. All gifts, bequests and trust distributions received during the calendar year must be aggregated if they come from related parties. So, if you receive $70,000 from your mother and $50,000 from your father (both of whom live in a foreign country and are not citizens of the US), you will be required to complete the Form 3520. However, if you receive a gift of $95,000 from your parents and $10,000 from a friend, you will not have to report it.
Payments by a foreign person for qualified medical or tuition payments do not count against the $100,000 threshhold provided the payments are made directly to the health care provider or school.
The penalties for failure to file Form 3520 can be quite high. If you do not file an accurate Form 3520 in a timely manner, you may be penalized 5% of the amount of the foreign gift for each month for which the failure to report continues (not to exceed a total of 25%). The return is due when you file or income tax.
If you receive a gift of foreign property, money in a foreign bank account or a foreign business interest, do not forget that you may also need to file a IRS Form 8938 (FATCA Form) and the FBAR Form in addition to the Form 3520.
Finally, there are special rules for gifts from individuals who ceased to be a US Citizen or green card holder after June 16, 2008. There are also special rules for gifts received from foreign corporations or foreign partnerships as gifts from those entities in excess of $14,723 (adjusted annually for inflation) must be reported as well.
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