Category Archives: Tax Related

4 Reasons to Turn Down an Inheritance

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Most people are happy to receive an inheritance. But there may be situations when you might not want one. You can use a qualified disclaimer to refuse a bequest from a loved one. Doing so will cause the asset to bypass your estate and go to the next beneficiary in line. Let’s take a closer look at why you might want to take this action with four reasons to turn down an inheritance.

Gift and Estate Tax Savings

This is often cited as the main incentive for using a qualified disclaimer. But make sure you understand the issue. For starters, the unlimited marital deduction shelters all transfers between spouses from gift and estate tax. In addition, transfers to non-spouse beneficiaries, such as your children and grandchildren, may be covered by the gift and estate tax exemption.

The exemption shelters a generous $13.61 million in assets for 2024. By maximizing portability of any unused exemption amount, a married couple can effectively pass up to $27.22 million in 2024 to their heirs, free of gift and estate taxes.

However, despite these lofty amounts, wealthier individuals, including those who aren’t married and can’t benefit from the unlimited marital deduction or portability, still might have estate tax liability concerns. By using a disclaimer, you ensure that the exemption won’t be further eroded by the inherited amount. Assuming you don’t need the money, shifting the funds to the younger generation without them ever touching your hands can save gift and estate taxes for the family as a whole.

Generation-Skipping Transfer Tax

Disclaimers may also be useful in planning for the generation-skipping transfer (GST) tax. This tax applies to most transfers that skip a generation, such as bequests and gifts from a grandparent to a grandchild or comparable transfers through trusts. Like the gift and estate tax exemption, the GST tax exemption is $13.61 million for 2024.

If GST tax liability is a concern, you may want to disclaim an inheritance. For instance, if you disclaim a parent’s assets, the parent’s exemption can shelter the transfer from the GST tax when the inheritance goes directly to your children. The GST tax exemption for your own assets won’t be affected.

Passing Down a Family Business

A disclaimer may also be used as a means for passing a family-owned business to the younger generation. By disclaiming an interest in the business, you can position stock ownership to your family’s benefit.

Charitable Deductions

In some cases, a charitable contribution may be structured to provide a life estate, with the remainder going to a charitable organization. Without the benefit of a charitable remainder trust, an estate won’t qualify for a charitable deduction in this instance. But using a disclaimer can provide a deduction because the assets will pass directly to the charity.

We Can Help with the Details

Every situation is different, and there may be other reasons to turn down an inheritance, too. Additionally, be aware that a disclaimer doesn’t have to be an “all or nothing” decision. It’s possible to disclaim only certain assets, or only a portion of a particular asset, which would otherwise be received. In any case, before making a final decision on whether to accept a bequest or use a qualified disclaimer to refuse it, turn to the estate tax professionals at Ramsay & Associates. We can help you better understand the details and answer any questions. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

What to Know About Restricted Stock Awards and Taxes

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Restricted stock awards are a popular way for companies to offer equity-oriented executive compensation. Some businesses offer them instead of stock option awards. The reason: Options can lose most or all their value if the price of the underlying stock takes a dive. But with restricted stock, if the stock price goes down, your company can issue you additional restricted shares to make up the difference. Here, we’ve outlined the essentials of what to know about restricted stock awards and taxes.

Restricted Stock Basics

In a typical restricted stock deal, you receive company stock subject to one or more restrictions. The most common restriction is that you must continue working for the company until a certain date. If you leave before then, you forfeit the restricted shares, which are usually issued at minimal or no cost to you.

To be clear, the restricted shares are transferred to you, but you don’t actually own them without any restrictions until they become vested.

Tax Rules for Share Awards

So, what are the tax implications? You don’t have any taxable income from a restricted share award until the shares become vested — meaning when your ownership is no longer restricted. At that time, you’re deemed to receive taxable compensation income equal to the difference between the value of the shares on the vesting date and the amount you paid for them, if anything. The current federal income tax rate on compensation income can be as high as 37 percent, and you’ll probably owe an additional 3.8 percent net investment income tax (NIIT). You may owe state income tax, too.

Any appreciation after the shares vest is treated as capital gain. So, if you hold the stock for more than one year after the vesting date, you’ll have a lower-taxed, long-term capital gain on any post-vesting-date appreciation. The current maximum federal rate on long-term capital gains is 20 percent, but you may also owe the 3.8 percent NIIT and possibly state income tax.

Special Election to Be Currently Taxed

If you make a special Section 83(b) election, you’ll be taxed at the time you receive your restricted stock award instead of later when the restricted shares vest. The income amount equals the difference between the value of the shares at the time of the restricted stock award and the amount you pay for them, if anything. The income is treated as compensation subject to federal income tax, federal employment taxes, and state income tax, if applicable.

The benefit of making the election is that any subsequent appreciation in the value of the stock is treated as lower-taxed, long-term capital gain if you hold the stock for more than one year. Also, making the election can provide insurance against higher tax rates that might be in place when your restricted shares become vested.

The downside of making the election is that you recognize taxable income in the year you receive the restricted stock award, even though the shares may later be forfeited or decline in value. If you forfeit the shares back to your employer, you can claim a capital loss for the amount you paid for the shares, if anything.

If you opt to make the election, you must notify the IRS either before the restricted stock is transferred to you or within 30 days after that date. We can help you with election details.

Your Important Decision

The rules are fairly straightforward regarding what to know about restricted stock awards and taxes. The major tax planning consideration is deciding whether to make the Section 83(b) election. The trusted team at Ramsay & Associates is here to help. Consult with us before making that choice.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Claiming Casualty Loss Tax Deductions

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This year, many Americans have been victimized by wildfires, severe storms, flooding, tornadoes, and other disasters. No matter where you live, unexpected disasters may cause damage to your home or personal property. But claiming a deduction has gotten more complicated. Keep reading to learn the rules for claiming casualty loss tax deductions.

Defining Casualty

What’s considered a casualty for tax purposes? A “casualty” is a sudden, unexpected, or unusual event, such as a hurricane, tornado, flood, earthquake, fire, act of vandalism, or a terrorist attack.

Before the Tax Cuts and Jobs Act (TCJA), eligible casualty loss victims could claim a deduction on their tax returns. But currently, there are restrictions that make these deductions harder to take.

The Rules and Exception

For losses incurred from 2018 through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters.

Note: There’s an exception to the general rule of allowing casualty loss deductions only in federally declared disaster areas. If you have personal casualty gains because your insurance proceeds exceed the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.

Claim a Refund with a Special Election

If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year and claim a refund. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. This can potentially help you get extra cash when you need it.

This election must be made no later than six months after the due date (without considering extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.

Calculating the Casualty Loss Deduction

You must take the following three steps to calculate the casualty loss deduction for personal-use property in an area declared a federal disaster:

  1. Subtract any insurance proceeds.
  2. Subtract $100 per casualty event.
  3. Combine the results from the first two steps and then subtract 10 percent of your adjusted gross income (AGI) for the year you claim the loss deduction.

Important: Another factor that makes it harder to claim a casualty loss than it was years ago is that you must itemize deductions to claim one. Through 2025, fewer people will itemize because the TCJA significantly increased the standard deduction amounts. For 2023, they’re $13,850 for single filers, $20,800 for heads of households, and $27,700 for married joint-filing couples. So, even if you qualify for a casualty deduction, you might not get any tax benefit because you don’t have enough itemized deductions.

Lawmakers Debating the Issue

Earlier this year, a bipartisan group of lawmakers in Washington introduced a bill that would make the deduction available to more taxpayers. The proposed Casualty Loss Deduction Restoration Act would reinstate the deduction to all taxpayers with a casualty loss — not just those located in a federal disaster declaration area. Passage of the bill is uncertain at this time.

We Can Help

When it comes to claiming casualty loss tax deductions, the rules described here are for personal property. Keep in mind that the rules for business or income-producing property are different and other rules may apply. As it happens, it’s easier to get a deduction for a business property casualty loss. If you’re a victim of a disaster, contact us. The knowledgeable team at Ramsay & Associates can help you understand the complex tax deduction rules.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Moving a Parent to a Nursing Home?

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According to various reports, more than a million Americans live in nursing homes. If you have a parent entering one, you’re probably not thinking about taxes. But there may be tax consequences. Let’s take a look at five potential tax implications when moving a parent to a nursing home.

Deducting Long-Term Medical Care Costs

The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 7.5 percent of adjusted gross income (AGI).

Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal-care services required by a chronically ill individual that are provided under care administered by a licensed healthcare practitioner.

To qualify as chronically ill, a physician or other licensed healthcare practitioner must certify an individual as unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity or severe cognitive impairment.

Nursing Home Payments

Amounts paid to a nursing home are deductible as medical expenses if a person is staying at the facility principally for medical, rather than custodial, care. If a person isn’t in the nursing home principally to receive medical care, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense. But if the individual is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.

If your parent qualifies as your dependent, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction.

Qualified Long-Term Care Insurance

Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to limitations explained below) to the extent they, along with other medical expenses, exceed the percentage-of-AGI threshold. A qualified long-term care insurance contract covers only qualified long-term care services, doesn’t pay costs covered by Medicare, is guaranteed renewable, and doesn’t have a cash surrender value.

Qualified long-term care premiums are includible as medical expenses up to certain amounts. For individuals over 60 but not over 70 years old, the 2023 limit on deductible long-term care insurance premiums is $4,770, and for those over 70, the 2023 limit is $5,960.

The Sale of Your Parent’s Home

If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. To qualify for the $250,000 exclusion ($500,000 if married), the seller must generally have owned and used the home for at least two years out of the five years before the sale. However, there’s an exception to the two-out-of-five-year use test if the seller becomes physically or mentally unable to care for him or herself during the five-year period.

Head-Of-Household Filing Status

If you aren’t married and you meet certain dependency tests for your parent, you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than single filing status. You may be eligible to file as head of household even if the parent for whom you claim an exemption doesn’t live with you.

We Are Here to Help

These are only some of the tax issues you may have to contend with when moving a parent to a nursing home. If you need additional information or assistance, the professionals at Ramsay & Associates are always here to help. Contact us with questions.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

How to Survive an IRS Audit

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The IRS recently released its audit statistics for the 2022 fiscal year, and fewer taxpayers had their returns examined as compared with prior years. But even though a small percentage of returns are being chosen for audits these days, that will be little consolation if yours is one of them. Keep reading to learn how to survive an IRS audit.

Tax Return Statistics

Overall, just 0.49 percent of individual tax returns were audited in 2022. However, as in the past, those with higher incomes were audited at higher rates. For example, 8.5 percent of returns of taxpayers with adjusted gross incomes (AGIs) of $10 million or more were audited as of the end of FY 2022.

However, audits are expected to be on the rise in coming months because the Biden administration has made it a priority to go after high-income taxpayers who don’t pay what they legally owe. In any event, the IRS will examine thousands of returns this year. With proper planning, you may fare well even if you’re one of the unfortunate ones.

Be Ready

The easiest way to survive an IRS examination is to prepare in advance. On a regular basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns.

Keep in mind that if you’re chosen, it’s possible you didn’t do anything wrong. Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why.

Returns can also be selected if they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors.

The government generally has three years from when a tax return is filed to conduct an audit, and often the exam won’t begin until a year or more after you file a return.

Tax Return Complexity

The scope of an audit generally depends on whether it’s simple or complex. A return reflecting business or real estate income and expenses will obviously take longer to examine than a return with only salary income.

In FY 2022, most examinations (78.6 percent) were “correspondence audits” conducted by mail. The rest were face-to-face audits conducted at an IRS office or “field audits” at the taxpayers’ homes, businesses, or accountants’ offices.

Important: Even if you’re chosen, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented.

Ask the Professionals for Help

It’s prudent to have a tax professional represent you at an audit. A tax pro knows the issues that the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow certain deductions) even though courts and other guidance have expressed contrary opinions on the issues. Because pros can point to the proper authority, the IRS may be forced to concede on certain issues.

The Ramsay & Associates team is here to answer questions and help you better understand how to survive an IRS audit. Contact us if you receive an IRS audit letter or simply want to improve your recordkeeping.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.