What Is the Generation-Skipping Transfer Tax?

Woman works on her tax returnsEstate planning can help you pass on assets to your heirs while potentially minimizing taxes. When gifting assets, it’s important to consider when and how the generation-skipping tax transfer (GSTT) may apply. Also called the generation-skipping tax, this federal tax can apply when a grandparent leaves assets to a grandchild while skipping over their parents in the line of inheritance. It can also be triggered when leaving assets to someone who’s at least 37.5 years younger than you. If you’re considering “skipping” any of your heirs when passing on assets, it’s important to understand what that means from a tax perspective and how to fill out the requisite form. A financial advisor can also give you valuable guidance on how best to pass along your estate to your beneficiaries.

Generation-Skipping Tax, Definition

The Internal Revenue Code imposes both gift and estate taxes on transfers of assets above certain limits. For 2020, you can exclude gifts of up to $15,000 per person from the gift tax, with the limit doubling for married couples who file a joint return. Estate tax applies to estates larger than $11,580,000 for 2020, increasing to $11,700,000 in 2021. Again, these exemption limits double for married couples filing a joint return.

The gift tax rate can be as high as 40%, while the estate tax also maxes out at 40%. The IRS uses the generation-skipping transfer tax to collect its share of any wealth that moves across families when assets aren’t passed directly from parent to child. Assets subject to the generation-skipping tax are taxed at a flat 40% rate.

This tax can apply to both direct transfers of assets to your chosen beneficiaries as well as assets passed through a trust. A trust can be subject to the GSTT if all the beneficiaries of the trust are considered to be skip persons who have a direct interest in the trust.

How Generation-Skipping Transfer Tax Works

Generation-skipping tax rules cover the transfer of assets to people who at least one generation apart. A common scenario where the GSTT can apply is the transfer of assets from a grandparent to a grandchild when one or both of the grandchild’s parents are still alive. If you’re transferring assets to a grandchild because your child has predeceased you, then the transfer tax wouldn’t apply.

The generation-skipping tax is a separate tax from the estate tax and it applies alongside it. Similar to estate tax, this tax kicks in when an estate’s value exceeds the annual exemption limits. The 40% GSTT would be applied to any transfers of assets above the exempt amount, in addition to the regular 40% estate tax.

This is how the IRS covers its bases in collecting taxes on wealth as it moves from one person to another. If you were to pass your estate from your child, who then passes it to their child then no GSTT would apply. The IRS could simply collect estate taxes from each successive generation. But if you skip your child and leave assets to your grandchild instead, that removes a link from the taxation chain. The GSTT essentially allows the IRS to replace that link.

You do have the ability to take advantage of lifetime estate and gift tax exemption limits, which can help to offset how much is owed for the generation-skipping tax. But any unused portion of the exemption counted toward the generation-skipping tax is lost when you die.

How to Avoid Generation-Skipping Transfer Tax

Accountant prepares a tax return

If you’d like to minimize estate and gift taxes as much as possible, talking to a financial advisor can be a good place to start. An advisor who’s well-versed in gift and estate taxes can help you create a plan for transferring assets. For example, that plan might include gifting assets to your grandchildren or another generation-skipping person annually, rather than at the end of your life. Remember, you can gift up to $15,000 per person each year without incurring gift tax, or up to $30,000 per person if you’re married and file a joint return. You’d just need to keep the lifetime exemption limits in mind when scheduling gifts.

You could also make payments on behalf of a beneficiary to avoid tax. Say you want to help your granddaughter with college costs, for example. Any direct payments you make to the school to cover tuition would generally be tax-free. The same is true for direct payments made to healthcare providers if you’re paying medical expenses on behalf of someone else.

Setting up a trust may be another option worth exploring to minimize generation-skipping taxes. A generation-skipping trust allows you to transfer assets to the trust and pay estate taxes at the time of the transfer. The assets you put into the trust have to remain there during the skipped generation’s lifetime. Once they pass away, the assets in the trust could be passed on tax-free to the next generation.

This strategy requires some planning and some patience on the part of the generation that stands to inherit. But the upside is that members of the skipped generation and the generation that follows can benefit from any income the assets in the trust generates in the meantime. Trusts can also yield another benefit, in that they can offer asset protection against creditors who may file legal claims against you or your estate.

Another type of trust you might consider is a dynasty trust. This type of trust can allow you to pass assets on to future generations without triggering estate, gift or generation-skipping taxes. The caveat is that these are designed to be long-term trusts.

You can name your children, grandchildren, great-grandchildren and subsequent generations as beneficiaries and the transfer of assets to the trust is irrevocable. That means once you place the assets in the trust, you won’t be able to take them back out again so it’s important to understand the implications before creating this type of trust.

The Bottom Line

Man works on his tax returns

The generation-skipping tax could take a significant bite out of the assets you’re able to leave behind to grandchildren or another eligible person. If you’re considering using this type of trust to pass on assets or you’re interested in exploring other ways to transfer assets while minimizing taxes, it’s wise to consult an estate planning lawyer or tax attorney first.

Tips for Estate Planning

  • Consider talking to your financial advisor about how to best shape your estate plan to minimize taxation. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. It takes just a few minutes to get your personalized recommendations for advisors online. If you’re ready, get started now.
  • Creating a trust can yield some advantages in your estate plan. In addition to helping you minimize tax liability, the assets in a trust are not subject to probate. That’s different from assets you leave behind in a will.

Photo credit: ©iStock.com/ljubaphoto, ©iStock.com/baona, ©iStock.com/svetikd

The post What Is the Generation-Skipping Transfer Tax? appeared first on SmartAsset Blog.

Source: smartasset.com

Here Are the Taxes You Pay on /r/WallStreetBets Investment Gains

Much of America — and other parts of the world — was caught up in the excitement of the investment success of the /r/WallStreetBets Reddit forum in late January, in which a bunch of small-scale investors identified a weak spot in the stock market and successfully exploited it, creating a bunch of individual rags-to-riches stories. […]

The post Here Are the Taxes You Pay on /r/WallStreetBets Investment Gains appeared first on The Simple Dollar.

Source: thesimpledollar.com

7 Creative and Quick Dining Room Updates

With so many dining rooms being converted into part of the living room or kitchen these days, dining room design has kind of fallen by the wayside. But if you’re one of the lucky homeowners to have hung on to a formal dining space, you’ve got an opportunity to make some amazing modern updates. Here are 7 affordable ways to breathe new life into an old dining room:

#1 Perk things up with paint.
Are your dining room walls still the same color they were when you moved into your house 10 years ago? If so, there’s a good chance the color’s a little past its prime. In fact, it may also be doing an injustice to your furniture and the updates you’ve made in adjoining rooms as well. Refresh the walls with a paint shade that makes you feel comfortable and cozy. The room will reflect that feeling.

#2 Modernize the lighting.
Are outdated chandeliers and lamps gathering dust in your dining room? Consider sending them packing and installing some recessed lighting and pendants in their place. Pendant lights, in particular, come in a wide variety of styles and colors sure to add some new pizzazz to your space.

#3 Repurpose another room.
If your dining room is located in an undesirable space — a cramped corner of the house away from the kitchen, for example — pick a new place for your table and chairs. Put them in the kitchen, if you have the the space. Or, place the dining table somewhere right in your living room, where there’s easy access to the TV and stereo. You should always feel comfortable during a meal, and being confined to an area you don’t enjoy doesn’t contribute to that feeling.

#4 Add some visual appeal.
Visual appeal doesn’t stop at paint and lighting. It’s also important to consider how wall decor may increase the interest and comfort of the room. Blank walls may make it easy to zone out and focus on your meals, but your guests will surely enjoy looking at something a little more interesting. Depending on your budget and the size of your dining room, consider hanging potted plants and colorful pieces of art. Just be sure to balance wall decor with other elements in the room so your space doesn’t feel like it’s cluttered with stuff.

#5 Throw in a rug.
One of the worst sounds to hear is a chair scratching against the floor as you go to get up from the dining table. So fix the issue. Add a rug underneath the table and chairs to make things soft and cozy. Choose a rug that isn’t too thick with fibers. Otherwise, your chairs can get stuck and twisted. Of course, you’ll also want to make sure that the style and color of your rug complement the rest of the room.

#6 Use dividers.
Many newer homes combine kitchen and dining spaces. If you want to create a dedicated dining space, think about incorporating a room divider. It’s much cheaper than installing a wall — and you can add shelves, plants or a sliding door to further divide the two spaces. Plus, the flexibility of the divider allows to revert back to the bigger space any time you like.

#7 Build in.
How’s your dining room designed? Do you have a table that sits in the middle with four chairs around it? If you want to make the room more functional — and create more storage in the process — think about ditching the clunky furniture and opting instead for built-ins like bench seating, china cabinets and buffets. A professional can create custom built-ins to suit any style.

The post 7 Creative and Quick Dining Room Updates first appeared on Century 21®.

Source: century21.com

7 Things to Know Before Taking a Work From Home Tax Deduction

If you’re one of the millions of workers whose home is now doubling as office space due to COVID-19, you may be wondering whether that means a sweet deduction at tax time. Hold up, though: The IRS has strict rules about taking the home office deduction — and they changed drastically under the Tax Cuts and Jobs Act, which passed in late 2017.

7 Essential Rules for Claiming a Work From Home Tax Deduction

Thinking about claiming a home office deduction on your tax return? Follow these tips to avoid raising any eyebrows at the IRS.

1. You can’t claim it if you’re a regular employee, even if your company is requiring you to work from home due to COVID-19.

If you’re employed by a company and you work from home, you can’t deduct home office space from your taxes. This applies whether you’re a permanent remote worker or if your office is temporarily closed because of the pandemic. The rule of thumb is that if you’re a W-2 employee, you’re not eligible.

This wasn’t always the case, though. The Tax Cuts and Jobs Act suspended the deduction for miscellaneous unreimbursed employee business expenses, which allowed you to claim a home office if you worked from home for the convenience of your employer, provided that you itemized your tax deductions. The law nearly doubled the standard deduction. As a result, many people who once saved money by itemizing now have a lower tax bill when they take the standard deduction.

2. If you have a regular job but you also have self-employment income, you can qualify.

If you’re self-employed — whether you own a business or you’re a freelancer, gig worker or independent contractor — you probably can take the deduction, even if you’re also a full-time employee of a company you don’t own. It doesn’t matter if you work from home at that full-time job or work from an office, as long as you meet the other criteria that we’ll discuss shortly.

You’re only allowed to deduct the gross income you earn from self-employment, though. That means if you earned $1,000 from your side hustle plus a $50,000 salary from your regular job that you do remotely, $1,000 is the most you can deduct.

3. It needs to be a separate space that you use exclusively for business.

The IRS requires that you have a space that you use “exclusively and regularly” for business purposes. If you have an extra bedroom and you use it solely as your office space, you’re allowed to deduct the space — and that space alone. So if your house is 1,000 square feet and the home office is 200 square feet, you’re allowed to deduct 20% of your home expenses.

But if that home office also doubles as a guest bedroom, it wouldn’t qualify. Same goes for if you’re using that space to do your day job. The IRS takes the word “exclusively” pretty seriously here when it says you need to use the space exclusively for your business purposes.

To avoid running afoul of the rules, be cautious about what you keep in your home office. Photos, posters and other decorations are fine. But if you move your gaming console, exercise equipment or a TV into your office, that’s probably not. Even mixing professional books with personal books could technically cross the line.

4. You don’t need a separate room.

There needs to be a clear division between your home office space and your personal space. That doesn’t mean you have to have an entire room that you use as an office to take the deduction, though. Suppose you have a desk area in that extra bedroom. You can still claim a portion of the room as long as there’s a marker between your office space and the rest of the room.

Pro Tip

An easy way to separate your home office from your personal space, courtesy of TurboTax Intuit: Mark it with duct tape.

5. The space needs to be your principal place of business.

To deduct your home office, it needs to be your principal place of business. But that doesn’t mean you have to conduct all your business activities in the space. If you’re a handyman and you get paid to fix things at other people’s houses, but you handle the bulk of your paperwork, billing and phone calls in your home office, that’s allowed.

There are some exceptions if you operate a day care center or you store inventory. If either of these scenarios apply, check out the IRS rules.

6. Mortgage and rent aren’t the only expenses you can deduct. 

If you use 20% of your home as an office, you can deduct 20% of your mortgage or rent. But that’s not all you can deduct. You’re also allowed to deduct expenses like real estate taxes, homeowner insurance and utilities, though in this example, you’d only be allowed to deduct 20% of any of these expenses.

Be careful here, though. You can only deduct expenses for the part of the home you use for business purposes. So using the example above, if you pay someone to mow your lawn or you’re painting your kitchen, you don’t get to deduct 20% of the expenses.

You’ll also need to account for depreciation if you own the home. That can get complicated. Consider consulting with a tax professional in this situation. If you sell your home for a profit, you’ll owe capital gains taxes on the depreciation. Whenever you’re claiming deductions, it’s essential to keep good records so you can provide them to the IRS if necessary.

If you don’t want to deal with extensive record-keeping or deducting depreciation, the IRS offers a simplified option: You can take a deduction of $5 per square foot, up to a maximum of 300 square feet. This method will probably result in a smaller deduction, but it’s less complicated than the regular method.

FROM THE TAXES FORUM
Claim innocent spouse with IRS after divorce
wood
Never received my returns
Rachel Sciuto
I forgot
Chance Olwen
See more in Taxes or ask a money question

7. Relax. You probably won’t get audited if you follow the rules.

The home office deduction has a notorious reputation as an audit trigger, but it’s mostly undeserved. Deducting your home office expenses is perfectly legal, provided that you follow the IRS guidelines. A more likely audit trigger: You deduct a huge amount of expenses relative to the income you report, regardless of whether they’re related to a home office.

It’s essential to be ready in case you are audited, though. Make sure you can provide a copy of your mortgage or lease, insurance policies, tax records, utility bills, etc., so you can prove your deductions were warranted. You’ll also want to take pictures and be prepared to provide a diagram of your setup to the IRS if necessary.

As always, consult with a tax adviser if you’re not sure whether the expense you’re deducting is allowable. It’s best to shell out a little extra money now to avoid the headache of an audit later.

The Penny Hoarder Shop is always stocked with great deals, including technology, subscriptions, courses, kitchenware and more. Check it out today!

Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to DearPenny@thepennyhoarder.com.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

Source: thepennyhoarder.com

5 Creative Ways to Decorate Your Home for Halloween

Goblins and witches and ghosts, oh my! How many of these ghoulish creatures will you be greeting this Halloween? Hopefully you’ll have the candy and creepy (but cute) ambiance to avoid the “trick” end of “trick-or-treat!” If you haven’t yet decorated for the holiday, don’t worry. Here are five easy ideas for a “spook-tacular” home.

  1. Eerie Entranceway
    • Paint black jack-o-lantern faces on small, glass votives. Drop a flameless tealight candle in each of them and use them to decorate around your front door.
  1. Frightening Florals
    • Black calla lilies have a wonderful dark, purply color. Plant some in flower pots around your home for a gloomy look with an exotic twist.
  1. Raven’s Nest Wreath
    • Remember last year when you weren’t as prepared for Halloween? Nevermore. Grab a twig wreath from your local craft store and place a faux black bird in the middle.
  1. Black Cat Pumpkins
    • Paint two pumpkins, one smaller and one larger, all black. Stack the smaller one on top of the other, and add eyes, a nose, and whiskers. Add cat ears cut from card stock and stand back! You won’t want these bad boys crossing your path.
  1. Mummified Glassware
    • Whether you’re serving up a glass of pumpkin flavored punch or a dish of fun sized candy bars, dress up your glassware to match the mood. Tape gauze to the bottom of the cup and wrap upwards, tucking in an end piece at the top to secure it.

With decorations like these, you just might have trick-or-treaters flocking to your home—if they’re not too scared, that is!

 

The post 5 Creative Ways to Decorate Your Home for Halloween first appeared on Century 21®.

Source: century21.com