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Tax consequences of debt discharge income

Sunday, February 14th, 2010 by Moore McLaughlin

Many financially distressed borrowers may have had some or all of their debts cancelled or forgiven by their lender last year. As tax time approaches, these individuals may not realize that they may have to report the canceled debt as income on their 2009 tax returns. McLaughlin & Quinn, LLC partners Moore McLaughlin, Esq., CPA and Thomas P. Quinn, Esq. are apprising existing and prospective clients of how discharged debts can trigger income unless one of numerous exceptions or exclusions applies.  Note that even if there is not an exception or exclusion in a given case, the taxable amount can be reduced if the amount reported from the lender can be shown to be incorrect.

In these troubled economic times, many financially distressed borrowers may have had some or all of their debt cancelled or forgiven by their lender last year. While such relief was no doubt welcome to people who received it, what they may not have realized is that debt forgiveness may have tax consequences. Specifically, debt forgiven in 2009 may have to be included as income on your 2009 return. However, not all canceled debts trigger taxable income. And, even if there is no exception or exclusion in a particular case, that may not be the last word. The tax bite may be reduced or eliminated if you can show that the amount reported by the lender is incorrect.Cancellation of debt

General rule. The tax laws specifically include income from the discharge of indebtedness in gross income. However, there are several exceptions to this rule. In addition, there are numerous exclusions from gross income for certain types of forgiven debts.

Exceptions. If the cancellation of debt by a private lender, such as a relative or friend, is intended as a gift, there is no income. Likewise, a debt cancelled by a private lender’s Last Will and Testament triggers no income to the borrower.

There is also an exception for certain student loans. For example, doctors, nurses, and teachers agreeing to serve in rural or low income areas in exchange for cancellation of their student loans will not have income from the cancellation if they meet certain conditions.

Also keep in mind that there is no income from cancellation of deductible debt. For example, if a lender cancels home mortgage interest that could have been claimed as an itemized deduction on Schedule A of Form 1040, there is no tax problem to contend with.

Price adjustment. There is no income if an individual purchases property and the seller later reduces the price. The purchaser’s basis (yardstick for measuring gain or loss on a later sale) in the property, however, is reduced by the amount of the purchase price adjustment.

Exclusions. In addition to the above exceptions, there are exclusions from the general rule for reporting canceled debt as income for:

  • discharge of debt through bankruptcy,
  • discharge of debt of an insolvent taxpayer,
  • discharge of qualified farm debt,
  • discharge of qualified real property business debt, and
  • discharge of qualified principal residence debt.

These exclusions are quite complicated and a detailed discussion of them is beyond the scope of this post. However, it is worth pointing out that the qualified principal residence debt exclusion applies where individuals restructure their acquisition debt on a principal residence, lose their principal residence in a foreclosure, or sell a principal residence in a short sale (where the sales proceeds are insufficient to pay off the mortgage and the lender cancels the balance). Also, the exclusions require certain tax attributes to be reduced and must be reported to the IRS on its Form 982.

Repurchased business debt. Income from certain repurchased business debt can be stretched out over several years. Although all of the deferred debt discharge income will eventually be recognized, you benefit from the deferral of tax to later years.

Form 1099-C, Cancellation of Debt. A taxpayer should receive a Form 1099-C from a federal government agency, financial institution, or credit union that forgives a debt of $600 or more. The amount of the canceled debt is shown in box 2. Any forgiven interest included in the amount of canceled debt in box 2 will also be shown in box 3. As noted above, if the interest would otherwise be deductible, it does not have to be included in income.

An individual who does not agree with the amount shown on Form 1099-C should contact the lender in writing and request it to issue a corrected Form 1099-C showing the proper amount of canceled debt. Even if the lender refuses to issue a corrected report, there still may be recourse if you have adequate documentation to show that the lender incorrectly reported the amount canceled.

If you had a debt forgiven last year, we can determine how it may affect your 2009 taxes, make sure you gain maximum advantage from any exception or exclusion that may apply, and guide you through various choices that may be available to you, depending on the specific circumstances of your situation. We also may be able to help you to resolve any discrepancy concerning the amount reported by the lender.

Contact Moore McLaughlin, Esq, CPA by e-mail at mmclaughlin@mclaughlinquinn.com or Thomas P. Quinn, Esq. by e-mail at tquinn@mclaughlinquinn.com, or either of them by phone at 401-421-5115.

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Posted in Asset Protection Planning, Bankruptcy, Financial workout, IRS and state tax collections, Tax Current Events and News, Tax planning

Spouses Could Be In Jeopardy under 2010 Repeal of Estate Tax

Sunday, January 31st, 2010 by Moore McLaughlin

As McLaughlin & Quinn, LLC has posted previously, the estate tax expired on January 1, 2010. It remains to be seen whether Congress will reinstate it before it returns in 2011, but the fact that there is currently no estate tax can have unintended consequences for spouses. Standard language found in many estate plans could leave spouses with nothing. It is important to check with an elder law or estate planning attorney such as McLaughlin & Quinn’s Jill E. Sugarman, Esq. to make sure your estate plan does what you want it to do.Widow

In previous years, estates could pass a certain amount of assets tax free (up to $3.5 million in 2009). In addition, spouses can receive an unlimited amount tax free. To take advantage of these rules, estate plans often contain a “bypass trust” (or “credit shelter trust”) and a will with language in it that is designed to allow estates to pass without any estate tax. For example, the will may state: “I leave to my trustees the maximum amount that can pass free of estate tax and leave the residual to my spouse.” Because there is currently no estate tax, individuals who die in 2010 with this language in their estate plan would wind up leaving nothing to their spouses.

While most states allow spouses to claim a portion of the estate (usually one-third), even if they don’t receive anything under a will, this can be a time-consuming and expensive process. To ensure your spouse is covered, you should talk to an attorney.

To learn more about this, contact Jill E. Sugarman, Esq. by e-mail at jsugarman@mclaughlinquinn.com or by phone at 401-421-5115.

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Posted in Asset Protection Planning, Current Events, Elderlaw/Law For Life, Estate Planning, Tax Current Events and News, Tax planning

Estate Tax Likely to Expire, Spelling Higher Taxes for Less Wealthy Heirs

Sunday, December 20th, 2009 by Moore McLaughlin

Estate Tax 2010With the estate tax set to expire in two weeks, it appears that Senate Democrats will be unable to persuade Republicans to extend the current law for even a couple of months until a more permanent solution can be devised. This means that there will be no estate tax during 2010. Although Congress may well reinstate the tax retroactively in 2010, it’s entirely possible that it won’t. If that happens, a few thousand very wealthy families will have reason to celebrate, while tens of thousands of taxpayers of more modest means could face significant tax bills following the death of a loved one — as well as great confusion for executors.

Congress has had nine years to prevent this from happening but hasn’t been able to. Under the provisions of a Bush-era tax-cut bill enacted in 2001, the value of estates exempt from the tax has been gradually raised over the past eight years while the tax rate on estates has been reduced, so that in 2009 only an individual estate worth $3.5 million or more is taxed, at a rate of 45 percent. For the year 2010, according to the 2001 law, the estate tax disappears entirely, only to be restored in 2011 at a rate of 55 percent on estates of $1 million or more, which is where things stood before the 2001 change.

Loss of Step-Up Means Step Down for Many Taxpayers

The catch for taxpayers of more modest means, however, is that for 2010 the estate tax is replaced with a 15 percent capital gains tax on inherited assets that are later sold. Normally someone inheriting propery at an individual’s death gets a “step-up in basis” in the property. That is, the value of the property for determining capital gains tax due is calculated at the time it is inherited, not when it was originally bought.

But the law eliminating the estate tax in 2010 also largely does away with the basis step-up rules. This means that those inheriting estates will have to pay capital gains taxes on any assets sold based on the original price paid for the asset, after an exemption for the first $1.3 million in capital gains (plus $3 million for assets transferred to a surviving spouse).

Let’s say your father dies and leaves you a home worth $1.5 million and a $500,000 portfolio of stocks purchased at various times over the past 40 years. If you decided to sell any of these assets, you’d normally pay little or no capital gains tax on the sales. The new provisions mean that you have to calculate capital gains based on the value of the home and the stocks when your father bought them, not when you inherited them. That could be very expensive, not to mention time-consuming in trying to ascertain the original price your father paid for everything.

“If we do not extend our estate tax law, all taxpayers, all heirs will be subject to massive, massive confusion in trying to determine the value of their underlying asset,” Senate Finance Committee Chairman Max Baucus (D-MT) said on the Senate floor.

The chief tax counsel for the House Ways and Means Committee estimates that while extending the current estate tax law would affect about 6,000 estates, 71,400 estates could face new capital gains taxes if the estate tax disappears. According to the Center on Budget and Policy Priorities, “at least 62,500 of these are estates that would not owe any estate tax if the 2009 rules were continued and that thus would be adversely affected by estate tax repeal. Farm and business estates would constitute a disproportionately large share of this group.” Small farms and businesses are the groups whose interests opponents of the estate tax have claimed they are defending.

The House passed a bill in early December permanently extending the 2009 estate tax rules, which will bring in an estimated $25 billion this year by imposing the 45 percent rate on estates over $3.5 million (or $7 million for a couple). The Senate’s Democratic leadership wanted to pass a similar bill and put it on President Obama’s desk before the estate tax expired at the end of the year, but they have been blocked by united Senate Republicans who prefer a lower tax rate of 35 percent and a higher exclusion amount of $5 million ($10 million for couples).

“Republicans who claim to have accomplished something by blocking an extension need to explain why raising taxes on the middle class while lowering them for the very rich is something to be proud of,” the Los Angeles Times editorialized.

The Perils of Going Retroactive

Sen. Baucus has pledged to try to restore the estate tax retroactively in 2010. This would undo the capital gains increase, but it could also create fertile ground for lawsuits by those whose family members die between January 1, 2010, and the date when any retroactive law is enacted.

“I can guarantee this: if they succeed in getting retroactive in hiking the death tax from zero to 45 percent, there are going to be lawsuits,” said Dick Patten, president of the American Family Business Foundation, which opposes the estate tax. “Its going to be messy, its going to be noisy.” (For an excellent discussion by Forbes.com of the mess that a lapse in the estate tax could create, click here .”Beneficiaries will deal with uncertainty for years,” warns one tax expert.)

In a 1994 decision, the U.S. Supreme Court ruled that the Constitution’s ban on the enactment of ex-post facto laws doesn’t apply to tax legislation, provided the retroactive application is “supported by a legitimate legislative purpose furthered by rational means”. United States v. Carlton, 512 U.S. 26 (1994). Since most estates don’t file tax returns until about nine months after someone dies, if Congress can come to an agreement quickly in 2010 the problems caused by a retroactive law may be limited. But Bloomberg.com notes that “The pressure to reach agreement may breathe new life into” into the Republicans’ “compromise proposal” of a 35 percent tax on couples’ estates worth more than $10 million.

For more information on how the estate tax laws will affect you, contact F. Moore McLaughlin, Esq. at 401-421-5115 x212 or by e-mail at mmclaughlin@mclaughlinquinn.com or Jill E. Sugarman, Esq. at 401-421-5115 or by e-mail at jsugarman@mclaughlinquinn.com.

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Posted in Asset Protection Planning, Current Events, Elderlaw/Law For Life, Estate Planning, Tax Current Events and News, Tax planning

The Need for Medicaid Planning

Saturday, December 12th, 2009 by Moore McLaughlin

MedicaidJill E. Sugarman, Esq., of McLaughlin & Quinn, LLC knows that one of the greatest fears of older Americans is that they may end up in a nursing home. This not only means a great loss of personal autonomy, but also a tremendous financial price. Depending on location and level of care, nursing homes cost between $35,000 and $150,000 a year.

Most people end up paying for nursing home care out of their savings until they run out. Then they can qualify for Medicaid to pick up the cost. The advantages of paying privately are that you are more likely to gain entrance to a better quality facility and doing so eliminates or postpones dealing with your state’s welfare bureaucracy–an often demeaning and time-consuming process. The disadvantage is that it’s expensive.

Careful planning, whether in advance or in response to an unanticipated need for care, can help protect your estate, whether for your spouse or for your children. This can be done by purchasing long-term care insurance or by making sure you receive the benefits to which you are entitled under the Medicare and Medicaid programs. Veterans may also seek benefits from the Veterans Administration.

For more information about Medicaid planning for you and your loved ones, contact Jill E. Sugarman, Esq. at 401-421-5115 or by e-mail at jsugarman@mclaughlinquinn.com.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning

Duties of a Trustee

Thursday, November 19th, 2009 by Moore McLaughlin

The elderlaw and estate planning attorneys at McLaughlin & Quinn, LLC frequently prepare trusts for our clients.  In many cases, Attorney Jill E. Sugarman will recommend a trust for various estate planning, Medicaid planning and asset protection planning purposes.  Often times, a spouse, a child, a parent or another close relative or friend will be appointed as the trustee of the trust.Trustee Duties

A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.” If you have been appointed the trustee of a trust, this is a strong vote of confidence in your judgment and probity. Unfortunately, it is also a major responsibility. Following is a brief overview of your duties:

  1. Fiduciary Responsibility. As a trustee, you stand in a “fiduciary” role with respect to the beneficiaries of the trust, both the current beneficiaries and any “remaindermen” named to receive trust assets upon the death of those entitled to income or principal now. As a fiduciary, you will be held to a very high standard, meaning that you must pay even more attention to the trust investments and disbursements than you would for your own accounts.
  2. The Trust’s Terms. Read the trust itself carefully, both now and when any questions arise. The trust is your road map and you must follow its directions, whether about when and how to distribute income and principal or what reports you need to make to beneficiaries.
  3. Investment Standards. Your investments must be prudent, meaning that you cannot place money in speculative or risky investments. In addition, your investments must take into account the interests of both current and future beneficiaries. For instance, you may have a current beneficiary who is entitled to income from the trust. He or she would be best off in most cases if you invested the trust funds to generate as much income as possible. However, this may be detrimental to the interest of later beneficiaries who would be happiest if you invested for growth. In addition to balancing the interests of the various beneficiaries, you must consider their future financial needs. Does a trust beneficiary anticipate buying a house or going to school? Will she be depending on the trust income for retirement in 15 years? All of these questions need to be considered in determining an investment plan for the trust. Only then can you start considering the propriety of individual investments.
  4. Distributions. Where you have discretion on whether or not to make distributions to a beneficiary you need to evaluate his current needs, his future needs, his other sources of income, and your responsibilities to other beneficiaries before making a decision. And all of these considerations must be made in light of the size of the trust. Often the most important role of a trustee is the ability to say “no” and set limits on the use of the trust assets. This can be difficult when the need for current assistance is readily apparent.
  5. Accounting. One of your jobs as trustee is to keep track of all income to, distributions from, and expenditures by the trust. Generally, you must give an account of this information to the beneficiaries on an annual basis, though you need to check the terms of the trust to be sure. In strict trust accounting, you must keep track of and report on principal and income separately.
  6. Taxes. Depending on whether the trust is revocable or irrevocable and whether it is considered a “grantor” trust for tax purposes, the trustee will have to file an annual tax return and may have to pay taxes. In many cases, the trust will act as a pass through with the income being taxed to the beneficiary. In any event, if you keep good records and turn this over to an accountant to prepare, this should not be a big problem.
  7. Delegation. While you cannot delegate your responsibility as trustee, you can delegate all of the functions described above. You can hire financial advisors to make investments, accountants to handle taxes and bookkeeping for the trust, and lawyers to advise you on questions of interpretation. With such professional assistance, the job of trustee need not be difficult. However, you still need to communicate with those you hire and make any discretionary decisions, such as when to make distributions of principal from the trust to one or more beneficiaries.
  8. Fees. Trustees are entitled to reasonable fees for their services. Family members often do not accept fees, though that can depend on the work involved in a particular case, the relationship of the family member, and whether the family member trustee has been chosen due to his or her professional expertise. Determining what is reasonable can be difficult. Banks, trust companies, and law firms typically charge a percentage of the funds under management. Others may charge for their time. In general, what’s reasonable depends on the work involved, the amount of funds in the trust, other expenses paid out by the trust, the professional experience of the trustee, and the overall expenses for administering the trust. For instance, if the trustee has hired an outside firm for investment purposes, that expense would argue for the trustee taking a somewhat smaller fee. In any case, it makes sense to consult with a professional experienced with trust work who can guide you on what would be normal fees considering all of the circumstances.

In short, acting as trustee gives you a wonderful opportunity to provide a great service to the trust’s beneficiaries. The work can be very gratifying. Just keep an eye on the responsibilities described above to make sure everything is in order so no one has grounds to question your actions at a later date.

If you have any further questions about the role of a trustee or how to establish a trust, contact Jill E. Sugarman, Esq. at 401-421-5115 or by e-mail at jsugarman@mclaughlinquinn.com.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning, Tax planning

Cost of Nursing Homes Rising

Thursday, November 5th, 2009 by Moore McLaughlin

Nursing Home CareAs Jill E. Sugarman, Esq., managing attorney for McLaughlin & Quinn, LLC’s Law For Life elderlaw practice can attest, price rollbacks throughout the U.S. economy during the past year did not apply to long-term care service providers.  According to the 2009 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs, private room nursing home rates rose 3.3 percent to $79,935 a year or $219 a day, while assisted living also climbed 3.3 percent on average to $37,572 a year or $3,131 a month.

Home health care aides now cost an average of $21 per hour, a 5 percent jump, and adult day care services now average $67 per day, a 4.7 percent increase over 2008.

The survey also reports on the cost of a semi-private room in a nursing home, which increased 4 percent to $198 a day, or $72,270 a year. The cost of a semi-private room in an Alzheimer’s wing averages $75,920 annually.

Once again, the highest rates for a private nursing home room in 2009 were found in Alaska, where the cost is $584 a day on average. The lowest rates were found in Louisiana (with the exception of Baton Rouge and the Shreveport area), at $132 a day.

The cost of assisted living was the highest in Wilmington, Delaware, at $5,219 a month and the lowest in North Dakota at $2,014 a month. Home health care aide services ranged from a high of $30 an hour in Rochester, Minnesota, to $13 and hour in the Shreveport area. Adult day care services were highest in Vermont at an average $150 a day and lowest in the Montgomery, Alabama, area, at $27 a day.

For the full 2009 report, including listings of average long-term care costs in selected cities, click here.

For more information on how to pay for nursing home care, contact Jill E. Sugarman, Esq. at 401-421-5115 or by e-mail at jsugarman@mclaughlinquinn.com.

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Posted in Asset Protection Planning, Current Events, Elderlaw/Law For Life, Estate Planning

Understanding the differences between a will and a trust

Saturday, October 24th, 2009 by Moore McLaughlin

TrustEveryone has heard the terms “will” and “trust,” but not everyone knows the differences between the two.  Jill E. Sugarman, attorney at McLaughlin & Quinn, LLC’s Law For Life elderlaw practice deals with this confusion and explains both to clients every day.  Both wills and trusts are useful estate planning devices that serve different purposes, and both can work together to create a complete estate plan.

One main difference between a will and a trust is that a will goes into effect only after you die, while a trust takes effect as soon as you create it. A will is a document that directs who will receive your property at your death and it appoints a legal representative to carry out your wishes. By contrast, a trust can be used to begin distributing property before death, at death or afterwards. A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.” A trust usually has two types of beneficiaries one set that receives income from the trust during their lives and another set that receives whatever is left over after the first set of beneficiaries dies.

A will covers any property that is only in your name when you die. It does not cover property held in joint tenancy or in a trust. A trust, on the other hand, covers only property that has been transferred to the trust. In order for property to be included in a trust, it must be put in the name of the trust.

Another difference between a will and a trust is that a will passes through probate. That means a court oversees the administration of the will and ensures the will is valid and the property gets distributed the way the deceased wanted. A trust passes outside of probate, so a court does not need to oversee the process, which can save time and money. Unlike a will, which becomes part of the public record, a trust can remain private.

Wills and trusts each have their advantages and disadvantages. For example, a will allows you to name a guardian for children and to specify funeral arrangements, while a trust does not. On the other hand, a trust can be used to plan for disability or to provide savings on taxes.

The attorneys at McLaughlin & Quinn, LLC can tell you how best to use a will and a trust in your estate plan.  Contact Jill E. Sugarman, Esq. by e-mail at jsugarman@mclaughlinquinn.com or Moore McLaughlin, Esq. at mmclaughlin@mclaughlinquinn.com to learn more about the proper uses of wills and trusts.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning

Support Services for Family Caregivers

Saturday, October 10th, 2009 by Moore McLaughlin

CaregiverCaring for a family member is hard work, and without support, caregivers can easily get burnt out or overwhelmed. However, there is help available for caregivers if they know where to look. The National Family Caregiver Support Program is a federal initiative that provides money to states to fund programs that support family caregivers. The goal is to help caregivers care for seniors at home for as long as possible.

The National Family Caregivers Support Program supports family caregivers of adults aged 60 or older or anyone with Alzheimer’s disease. It also funds services to grandparents and relative caregivers, age 55 or older, of children 18 years of age or under or who care for a relative with a disability age 19 to 59.

Under the program, states must provide the following five types of services:

  • Information about available services
  • Assistance in accessing services
  • Counseling, support groups, and training
  • Respite care for the caregiver, which could be through companions, home health aides, adult day care, or in-facility care
  • Supplemental services, such as medical supplies, home safety aides, legal assistance, and financial consultation

The exact services vary from state to state, but caregivers can receive anything from training seminars to case management to home-delivered meals. The services provided are supposed to make daily tasks and routines a little easier.

Click here for more information about these services in Rhode Island.

Click here for more information about these services in Massachusetts.

Or, contact Law for Life attorney Jill E. Sugarman by e-mail at jsugarman@mclaughlinquinn.com or by phone at 401-421-5115, for more information.

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Posted in Asset Protection Planning, Elderlaw/Law For Life, Estate Planning

IRS Releases New Estate Tax Return But Is Silent on 2010 repeal

Wednesday, October 7th, 2009 by Moore McLaughlin

IRS has released a revised Form 706 for use by estates of decedents dying after December 31, 2008 and before January 1, 2010.  Changes reflected in the revision include some law and indexing changes. The revision makes no mention of next year’s scheduled repeal of the estate tax.IRS Form 706

Items reflected on the revised form. The instructions stress that this revision is to be used only for decedents dying in calendar year 2009. They also note these changes:

  • The applicable exclusion amount for estates of decedents dying in calendar year 2009 is $3.5 million.
  • Various dollar amounts and limitations relevant to Form 706 are indexed for inflation. For decedents dying in 2009, the following amounts have increased: (a) the ceiling on special-use valuation is $1 million; and (b) the amount used in computing the 2% portion of estate tax payable in installments is $1.33 million. IRS says it will publish amounts for future years in an annual revenue procedure.

Reminder. The instructions also point out that, in 2008, IRS added a worksheet to help executors figure how much of the estate tax may be paid in installments under Code Sec. 6166.

Which estates must file. For decedents dying in 2009, Form 706 must be filed by the executor for the estate of every U.S. citizen or resident whose gross estate, plus adjusted taxable gifts and specific exemption, is more than $3.5 million.
(more…)

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Posted in Asset Protection Planning, Current Events, Elderlaw/Law For Life, Estate Planning, Tax Current Events and News, Tax planning

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