May 2007:
May 25, 2007, President Bush signed into law the "U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007" (the "Act"). In addition to the Act's primary function of funding the wars in Iraq and Afghanistan, establishing a gradual minimum wage increase, and small business tax breaks, it impacts how gifts to children will be made in the future.
IRC Section 1(g) (also known as the "Kiddie Tax") currently applies to a child's investment income in excess of $1,700. The new legislation creates three separate categories of taxpayers, each subject to different requirements for the imposition of the tax. The categories are: (1) Children under age 18, at the end of the calendar year, who have investment income in excess of $1,700, and do not file a joint return; (2) Children who are age 18 on December 31, have investment income in excess of $1,700, and do not file a joint return; and (3) Children who are age 19 through 23 on December 31 who: (i) have investment income in excess of $1,700; (ii) do not file a joint return; (iii) do not have earned income that exceeds 50% of their own support; and (iv) are full-time students for at least five months of the calendar year. The tax law change is applicable to tax years beginning after May 25, 2007.
January 2007:
Federal Estate, Gift and GST Tax Rates:
• Non-citizen Spouse gift tax annual exclusion increases to $125,000.
• Top federal estate, gift, and generation-skipping transfer (“GST”) tax rates decrease from 46% to 45%.
• Federal Estate and GST tax exemptions remain at $2 million.
• Gift tax exemption remains at $1 million.
• Gift tax annual exclusion remains at $12,000 ($24,000 in the case of a married couple).
State Estate Tax:
• Several states, including Florida, continue not to impose a state estate tax.
• Connecticut, Massachusetts, New Jersey and New York continue to impose a state estate tax. The estate tax exemption amounts in these states are:
o Connecticut - $2 million;
o Massachusetts - $1 million;
o New Jersey - $675,000; and
o New York - $1 million.
Charitable IRA Provisions:
In 2007 only, an individual age 70 1/2 or older can make charitable lifetime gifts directly from an IRA, up to a maximum of $100,000. The distribution will not be reported as income by the IRA owner, and will not give rise to an income tax deduction. The funds are required to be distributed directly from the IRA to a qualified charity and will count towards the IRA owner’s minimum required distribution for 2007. Options: The IRA custodian may mail a check directly to the qualified charity, or issue a check to the qualified charity and deliver that check to the donor, who can then deliver the check directly to the charity. Donors may also use the charitable IRA provisions to satisfy outstanding charitable pledges, even if those pledges were made before the Act took effect.
Transfers by non-spousal beneficiaries from Company Pension Plans to Inherited IRAs:
If the beneficiary of an employer-sponsored retirement plan is not the employee’s spouse, then upon the employee’s death, many plans require the entire account balance to be distributed to the beneficiary within a short period of time, such as five years or less. The new provisions allow a non-spouse beneficiary of a deceased employee who participated in a company retirement plan to make a direct Trustee-to-Trustee transfer to an inherited IRA. This allows the non-spousal beneficiary to defer immediate income taxation on lump sum distributions from pension plans, transfer the funds to an inherited IRA, and receive distributions over their life expectancy.
