As with all things, there is a time for filing taxes, and it's approaching quickly. As soon as January 31st, you'll begin receiving crucial tax documents. Whether you're submitting as an individual or managing an estate or trust, it's time to begin preparations for the April 18th, 2023 tax deadline.

Young couple managing finances, reviewing their bank accounts using laptop computer and calculator at modern home.

Filing as an Individual

Form 1040 is the one used by individuals and married couples to file their yearly income taxes. Keep an eye out for forms indicating your overall income for 2022 in your mail and online, as soon as this January. Here are some of the forms you may need to finish your Form 1040:

It's crucial to keep records of items that can lower your taxable income, such as IRA and health savings account contributions, as well as documents that support tax deductions or credits, such as charitable contributions and mortgage interest. These records will assist you in taking advantage of all the possible tax benefits for which you are eligible.

Filing as an Executor or Trustee

"As an executor of an estate or trustee of a trust, you are responsible for reporting any income over $600 earned by the estate or trust on Form 1041. Even if the income earned is less than $600, if a beneficiary is a nonresident alien, the form must still be filed. However, the beneficiaries, not the estate or trust, are responsible for paying the income tax on the income received. Examples of assets that may generate income for an estate or trust include mutual funds, rental property, savings accounts, stocks, or bonds."

The due date for filing a return for an estate or trust depends on whether it follows a calendar or fiscal year. For those that follow a calendar year, the return must be filed by April 18, 2023. However, for those that follow a fiscal year, the return must be filed by the 15th day of the fourth month after the end of the tax year. The executor or trustee can choose which framework to use. Many opt for a fiscal year, which starts on the date of the grantor’s death and finalizes on the last day of the month prior to the death anniversary. This schedule provides more time for tax planning. If a calendar year is chosen, the tax year starts on the date of death and ends on December 31st of the same year.

Both trustees and executors must report all income distributions given to beneficiaries on the Schedule K-1. You also have to provide a copy of the Schedule K-1 to each respective beneficiary who received an income distribution, and the beneficiaries must report the distribution amount when they file their personal income taxes. The deadlines to submit Schedule K-1 follow the same guidelines as Form 1041 and depend on whether it’s subject to a calendar or fiscal year framework. Since the beneficiaries must report this income on their personal tax returns, it is essential to send them the Schedule K-1 as soon as possible so they have ample time to report the income.

As the trustee or executor, it is important to gather and keep track of your own fees, fees paid to professionals like accountants or lawyers, any administrative expenses, and distributions given to beneficiaries. This way, you can report them on Form 1041, which supports the tax deductions claimed for the trust or estate.

Anderson, Dorn & Rader can assist you with complex tax filing.

It is important to take into account the impact of income taxes when it comes to estate planning and administration. This is true whether you are an individual creating / updating your own estate plan, or administering a trust or estate on behalf of a loved one. If you have any questions on how income taxes should factor into your planning or administration decisions, please contact the estate planning professionals at Anderson, Dorn & Rader.

annual gift tax exclusion in renoDuring this Holiday season, the majority of us get wrapped up (pun intended) in giving.  'Tis the season, right?  But did you know that certain gifts may be subject to a transfer tax?
Whenever ownership of property is transferred, the IRS imposes a “gift tax.”  What is considered a gift?  According to the government, a gift is “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.”  Despite the general rule that all gifts are taxable, there are some exceptions.  For example, tuition or medical expenses you pay for someone else are not taxable.  Also, gifts to a spouse, certain political organization or qualified charities are deductible from your taxes.
The most important exception is the Annual Gift Tax Exclusion, which provides that gifts not exceeding the annual exclusion amount for that calendar year are not taxable.  The Annual Gift Tax Exclusion for 2015 is $14,000 per recipient.  In plain language, this means that you can give away as much as $14,000 per recipient during the year to anyone you choose without any tax consequences.  These gifts can be to anyone, including family, friends or strangers.  You and your spouse can also combine your gift tax exclusions, meaning the gift can be for as much as $28,000 for each recipient, if it is given as a joint gift.
This is not to imply that you cannot make a gift larger than $14,000 per recipient per year.  If you make a gift that exceeds the annual exclusion amount, the gift must be reported to the Internal Revenue Service any applied against your unified credit (discussed below).

Not all gifts fall under the annual gift tax exclusion.

The annual gift exclusion only applies to gifts of “present interest.”  This means that the person must receive an unrestricted right to immediate possession, use and enjoyment of that particular gift.  For example, cash left in an envelope hanging on the Christmas tree is a gift that conveys a present interest.  On the other hand, an irrevocable trust that does not allow the beneficiary to have access to the money until they reach a certain age is an example of a gift of a future interest.

What is the unified credit?

The gift tax and estate tax exclusions are often referred to as the unified credit.  Together they entitle you to a lifetime exclusion of $5.43 million (in 2015), meaning that $5.43 million of your estate will be exempt from inheritance or gift taxes.  To the extent a gift made during a year exceeds the Annual Gift Tax Exclusion, then your unified credit is reduced by that amount.  In other words, if you make a gift to an individual in the amount of $1,014,000, the gift will not be taxable but will reduce your estate tax exemption to $4.43 million upon your death (the $5.43 million unified credit, less the $1 million gift that exceeds the Annual Exclusion Amount).  The unified credit is also “portable,” meaning that if you do not use the full amount of your tax credit the remainder may pass to your spouse when you die.

What happens if I exceed the lifetime exclusion amount?

If you exceed the $5.34 million lifetime exclusion amount, you will be required to pay as much as 40% tax on any transfers made either during your life (as gifts) or upon your death (passed on as an inheritance).  One exception is a gift made to your spouse, as long as he or she is a U.S. citizen.  Those gifts are considered tax-free under the unlimited marital deduction.

How to make the most of your Annual Gift Tax Exclusion

In order to make the most of your annual gift tax exclusion, remember that the exclusion is based on a calendar year.  You cannot go back and claim a year you may have missed.  However, you can spread a large gift over two or more years and still avoid gift tax complications.  If you have a goal of gifting as much as possible without tax, you may write a check to to your beneficiary for $14,000 before December 31, 2015 (or $28,000 if you are married and splitting gifts with your spouse), and write a second check to the same beneficiary for $14,000 on January 1, 2016 (or $28,000 if you are married and splitting gifts with your spouse).  That way, both gifts will be tax free and will not reduce your lifetime exclusion.
If you have any questions about gift taxes, estate taxes, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.

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