Gallet, Dreyer & Berkey, LLP
As the year draws to a close, we offer valuable planning tips to our clients, colleagues, and friends of the firm regarding their assets, tax, and estate concerns.
Foremost, there are still some time-sensitive ways to save taxes that could result in much more money for your family.
Written by Josephine Nesbit, U.S. News. Featuring Asher Rubinstein, Gallet Dreyer & Berkey, LLP.
The IRS has specific rules regarding how homebuyers qualify for certain tax credits. There are also credits that are only available to first-time buyers.
Through 2025, taxpayers who itemize their tax deductions can claim a deduction on their federal tax return up to $10,000 each year for local property taxes paid, according to Rubinstein. “When the tax law changed in 2017, this was very controversial, because taxpayers previously had an unlimited deduction. The $10,000 limit is significant for taxpayers in high-tax states like New York and California.” Asher Rubinstein, Partner Gallet Dreyer & Berkey, LLP
One of the biggest benefits of homeownership is tax breaks. If you’re a homeowner, tax credits and deductions could save you thousands of dollars per year. But are there tax credits for buying a house? And what about deductions? To help you come next tax season, here are tax credits and deductions you can get when you buy a house, and additional tax breaks that come with homeownership.
Both tax credits and deductions can help a homeowner save money on their tax bill, but they work differently. “Both lower one’s taxes, but a credit applies to the tax owed, while a deduction applies to one’s income that is subject to tax,” says Asher Rubinstein, partner and tax, asset protection and trusts and estates attorney at Gallet Dreyer & Berkey in New York City. “In other words, it’s a matter of timing and when the tax discount is applied.”
There are also refundable and nonrefundable tax credits. According to the IRS, if your tax bill is less than the refundable credit, then you get the difference back in your refund.
Credits are typically much more valuable than deductions. “For example, someone with a $1,000 tax credit in the 20% tax bracket will see their tax bill reduced by $1,000. Someone with a $1,000 tax deduction will only see $200 in tax savings,” explains Eric Presogna, founder and CEO of One-Up Financial and a certified financial planner public accountant.
There are two types of deductions available to all taxpayers: standard deduction and itemized deduction. If you take the standard deduction, you reduce your taxable income by a set amount. For the 2024 tax year, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. “There is no need for the taxpayer to keep records of individual tax deductions if the taxpayer takes the standard deduction,” Rubinstein says. Itemized deductions are individual tax deductions that could potentially add up to more than the standard deduction.
According to Presogna, homeowners should only take the standard deduction when they don’t have enough itemized deductions to exceed the standard. “With the SALT deduction (state, local, real estate taxes) currently limited to $10,000, a married couple would need more than $19,200 in mortgage interest, charitable donations and other qualifying deductions in order to warrant itemizing,” Presogna says.
The IRS has specific rules regarding how homebuyers qualify for certain tax credits. There are also credits that are only available to first-time buyers. You generally qualify as a firsttime homebuyer if you’re purchasing your first home. However, you may still qualify if you’ve not owned a home for three years prior to the date of purchasing the new home for which the credit is claimed, according to the IRS. That home must be your principal residence.
One federal tax credit available to first-time buyers is through the Mortgage Credit Certificate (MCC) program. This program was designed to help lower-income families afford a home. The MCC program allows buyers to claim a dollar-for-dollar tax credit for a portion of the mortgage interest paid per year, up to $2,000. Eligible individuals must be first-time homebuyers, use the house as their primary residence and meet the program’s income and purchase price requirements.
There may also be tax credits available through your state. These buyer programs vary from state to state. You can research what may be available in your local area or look through the U.S. Department of Housing and Urban Development’s directory of local homebuying programs.
There are more tax deductions available to homebuyers and homeowners than there are tax credits, but Presogna says it depends on whether you itemize your deductions or take the standard deduction. Regarding homeownership, “If you have enough deductions to itemize, real estate taxes, home equity loan and mortgage interest are some of the larger deductible costs,” Presogna adds.
Keep in mind that not everything is deductible. According to Rubinstein, most costs associated with homeownership do not qualify for any tax benefits, including cosmetic upgrades, homeowners insurance and your mortgage principal, to name a few.
First-time homebuyer savings account (FHSA). Some states offer tax benefits to first-time homebuyers to open an FHSA. This is a specific type of savings account that helps first-time buyers save up to $15,000 or $30,000 per year for a down payment, closing costs and other expenses related to their home purchase. You can deduct the annual savings from your state-taxable income, but limits vary by state.
Mortgage interest deduction. This is a deduction for interest paid on mortgage debt, but you will need to itemize your deductions to qualify for this tax break. “Under current law, this applies to loans up to $750,000,” Rubinstein says.
Property tax deduction. Through 2025, taxpayers who itemize their tax deductions can claim a deduction on their federal tax return up to $10,000 each year for local property taxes paid, according to Rubinstein. “When the tax law changed in 2017, this was very controversial, because taxpayers previously had an unlimited deduction,” he says. “The $10,000 limit is significant for taxpayers in high-tax states like New York and California.”
Mortgage points deduction. Per IRS guidelines, mortgage points are fees paid to take out a mortgage. This also includes origination fees or discount points purchased in order to reduce the interest rate.
Home office deduction. “If you’re a business owner or selfemployed and work from home, you may be entitled to a deduction for the portion of your home used for business,” Presogna says. However, Rubinstein warns that this is the most audited deduction due to the amount of taxpayers who try to claim this deduction. “The IRS has specific rules to follow. For instance, you can’t work from home for an employer. You have to use a dedicated room and you have to use it regularly. And there are square footage limitations,” Rubinstein explains.
Many tax benefits extend beyond the initial purchase of a home. The IRS offers some tax benefits for certain capital improvements, such as renovating your home office, making energy-efficient improvements or making changes due to a medical condition. If you take out a home equity loan to buy, build or improve your home, you could qualify for the home equity loan interest deduction. The IRS would classify the interest you pay on the borrowed funds as home acquisition debt, which may be deductible.
First-time homebuyers could also potentially qualify for a traditional or Roth IRA penalty waiver. If you meet IRS qualifications as a first-time buyer and take out $10,000 or less, you can use those funds toward a down payment without a 10% tax penalty if you close within 120 days. However, the actual withdrawal may still be considered taxable income.
One of the biggest tax breaks for a homeowner is the exclusion of capital gains when they sell their home. Capital gains are the profit from the sale of the home. For married couples, the first $500,000 in capital gains are not subject to tax. For individuals, the first $250,000 in capital gains are not subject to tax. “However, the home has to be used as one’s personal residence for two out of the last five years in order to get this tax break,” Rubinstein says.
As the year comes to a close, we offer some planning tips to our clients, colleagues and friends of the firm regarding their assets, tax and estate concerns.
Foremost, there are some time-sensitive ways to save taxes that could result in much more money for your family.
New York residents who are planning to move out of state to avoid higher New York state taxes should be prepared to prove that they no longer have a tax nexus to New York in case the state decides to audit their returns.
It is no surprise that the COVID-19 pandemic has further destroyed the finances of New York City and New York State. As people and businesses have made less money in 2020, the government has collected fewer tax dollars, while the costs of running the government and dealing with the pandemic have significantly increased. Governor Cuomo announced tax increases to try to lessen the shortfall, and New York State residents will soon pay more tax. Some New York City residents will pay the highest state and local tax rate in the United States (14.7%, on top of federal income tax), as Governor Cuomo acknowledged in his announcement. COVID-19 has resulted in many taxpayers leaving New York City, and the tax increases will further the trend as more people flee. Florida is one of a few states that offers sunshine and zero state income tax. In addition to the thousands of people moving out of New York, Goldman Sachs, Citadel and Blackstone, among other businesses, are also moving to Florida.
However, New York’s Department of Taxation and Finance does not take such moves lightly. Leaving property behind in New York City because the real estate market has slowed due to COVID-19? That’s a reason for New York City and State to still tax your income, even if you live and work in Florida. Still being paid by a New York employer? If so, you still owe income tax to New York State, even if you live and work from a new home in Florida.
Whether you move for better weather or to pay less in taxes, be prepared for a residency audit. High-tax jurisdictions like New York frequently challenge claims that taxpayers have severed ties and are living and working in low-tax jurisdictions.
New York City and New York State are particularly aggressive in auditing the tax returns of people who claim to have moved to a different state. In an audit, the burden is on the taxpayer to prove that he or she no longer has a tax nexus to the former state. Simply buying property in the new state is not sufficient. There are many factors that are used to establish tax residency. In a 2018 lawsuit, a taxpayer was found to still have a New York residence despite the taxpayer spending more than 183 days at his condo in Florida.
We can help you implement a plan to support your new residency and break from your high tax state. We can also defend you in an audit from the state that is challenging your new residency and seeks to continue to tax you. Please contact us for more information.
Please also see our related article: Cutting Ties to a High-Tax State.
Our last post discussed end-of-year planning to lock-in estate tax savings, and get more to your family, before the tax law changes.
Here are some other strategies to consider now before taxes could go up in 2021:
Consider a Charitable Remainder Trust. Contributing appreciated assets, such as stock, family businesses and real estate to a Charitable Remainder Trust is a good way to avoid capital gains tax. The Charitable Remainder Trust is tax-exempt. It may sell assets free of tax and invest the proceeds tax-free. You can enjoy distributions from the trust at very low tax-favored rates, and at the end of the trust term, the remainder will go to a qualified charity. You will receive a tax deduction equal to the present value of the remainder that will be left to charity. The benefits: tax free growth of trust assets, a low-tax income stream for you and your beneficiaries, philanthropy of your choice, a charitable deduction and significant capital gains tax minimization. Benefits can be further enhanced by creating a tax-exempt family foundation to serve as the qualified charity receiving the remainder from the charitable trust.
In addition to lowering estate taxes and getting more to your heirs and less to the IRS, proper tax and estate planning also provides the following benefits:
The current exemption from federal gift and estate tax is at an all-time high ($11.6 million per person), which you should utilize now, before the favorable opportunity is lost. This is a way to get more to your heirs, less to the IRS, relatively easily.
Please contact us for more information.
When the tax law changed in 2017, the benefits to taxpayers were expected to last through 2025. The favorable tax changes included an increase in the amount exempt from estate tax, from $5 million to $11 million per person, and a maximum capital gains tax rate of 20%. With the upcoming presidential and congressional elections, and calls by politicians to undo these favorable tax laws, our clients wonder what they should do now, before the tax law changes again.
Fortunately, there are many strategies that allow us to benefit from the current tax law, and to lower our taxes through already-proven techniques, before the law changes again. There is no new “magic button” tax remedy for Election Year 2020. Instead, tax lawyers can rely on “tried and true” tax strategies that have already proven to be effective and are available now. An added bonus: the IRS has stated that it will not challenge taxpayers who implement these tax strategies now, before the law changes.
On a basic level, one can simply gift up to $11.58 million worth of assets in order to remove the assets from one’s taxable estate at death. However, most people are hesitant to part with such a high amount, and they may not want their relatives to be enriched with such a windfall, simply to lower a tax at death. Instead, the following strategies contemplate lowering tax, while still controlling or benefiting from the asset during one’s lifetime.
How to Lower Your Estate Tax;
More to Your Beneficiaries, Less to the IRS
The goal here is to remove assets from the reach of the estate tax, utilizing up to the full current $11.58 million exemption (before it may be reduced to $5 million or perhaps $3.5 million after the election), while still controlling or benefiting from the use of those assets. This generous exemption is per person; a married couple may remove $23 million combined from estate tax. Here are some techniques to keep the assets in the family, and still remove them from estate tax at your death. Some have acronyms that lawyers, but probably few others, find to be cute.
Leveraged Gifting
This method to reduce estate taxes utilizes discounted transfers of interests in closely held entities (Family Limited Partnerships, LLCs, family corporations) to family members. Such “leveraged gifting” has been an extremely important, effective and common method used to reduce or eliminate estate taxes. As long as you retain your controlling interest (e.g., LLC Manager, General Partner), you will continue to control all assets within the entity, while still escaping the estate tax.
If you own a Family Limited Partnership (FLP), you can gift Limited Partnership (LP) interests (or membership interests in an LLC) to your heirs, and take advantage of discounting, to get even more out of your estate, tax-free. In some cases, as much as $46,000,000 worth of FLP interests can be conveyed to your heirs and escape the estate tax. FLPs also provide the additional bonus of excellent asset protection. It should also be noted that in the past, politicians have called for the elimination of such discounting benefits. Once again in this election year, discounting is in jeopardy of legislative repeal. However, until the tax law changes once again, leveraged gifting utilizing favorable discounting is a legal, available and very worthwhile strategy.
GRAT (Grantor Retained Annuity Trust)
GRATs are particularly effective for assets that you think will appreciate over time. The IRS sets a very low “hurdle rate” which in today’s COVID economy is at 0.4%, a historic low. (The rate was 2.2% in September 2019.) So long as the assets in the GRAT perform better than the IRS’s hurdle rate, they escape taxation.
If you contribute assets into a GRAT, you can receive a regular payment akin to an annuity over many years. When the trust term ends (from two to ten years), the appreciated assets pass to your heirs, are not considered part of your estate and will not be subject to estate or gift tax.
There are calls to eliminate GRATs, like discounting, after the election. However, GRATs are an effective and completely legal strategy, currently available for tax savings.
SLAT (Spousal Lifetime Access Trusts)
Spouses who are uncomfortable gifting significant monies to their heirs may instead set up trusts for each other and utilize the current $23 million joint exemption while still benefiting from the assets. The trust would provide distributions to your spouse (which would also benefit you) and would distribute the remaining assets to your heirs after your spouse’s death.
QPRT (Qualified Personal Residence Trust)
If you contribute your personal residence into a QPRT, you may still live in the residence for a term of years, and when the trust term ends, the home is removed from your estate while passing to your heirs, free of estate taxes.
ILIT (Irrevocable Life Insurance Trust)
If you own or control life insurance policies, the IRS deems the death benefit to be in your estate and subject to estate tax, even though you will never receive the death benefit during your life. If you contribute these life insurance policies to an Irrevocable Life Insurance Trust, you may remove the insurance policies from your estate. Your family members may receive the death benefit from the trust, free of any estate tax.
Dynasty Trust
A Dynasty Trust allows for the preservation of assets for one’s immediate and remote descendants, along with offering asset protection from creditors, as well as delay of the estate tax bite for many generations. The trust can distribute income to beneficiaries, but principal is preserved, asset-protected and grows tax-free.
CRUT (Charitable Remainder Trust)
In addition to the loss of an $11.58 million exemption from estate tax, politicians are also calling for an increase in the income tax on capital gains from the current 20% to 39.6% (plus the 4.3% investment tax). This will affect taxpayers who own appreciated assets; if the law changes, they will pay double when they sell those assets. In addition, politicians are also calling for the repeal of the basis “step up” at death. (Under current law, assets passing at death are entitled to a “step up” to their current value, rather than their original value. This means, for example, that when the heir inherits and sells the inherited asset, the heir pays no tax. Such a “step up” in basis may be eliminated after the election.) To avoid this, taxpayers should consider a Charitable Remainder Trust. CRUTs are effective for both income tax and estate tax savings.
By contributing appreciated assets to a CRUT, the sale of these assets by the CRUT is exempt from all taxes; you are entitled to a charitable deduction; the trust makes regular payments back to you during the trust term; and at the end of the term, 10% of the assets pass to the charity, are not subject to income tax and are removed from your estate.
When?
Some clients are availing themselves of the above strategies currently. Some clients are waiting until after the election on November 3 to see who wins, and which way the tax winds will blow. Even if final legislation may not be enacted until well into 2021, there are concerns that such legislation would be retroactive to January 1, 2021. The window from November 3 to December 31, 2020 is not wide.
Who?
These strategies are not only for the mega-wealthy. We have successfully utilized these strategies for clients of means at various levels who are concerned with leaving as much of their hard-earned assets for their heirs with as little as possible going to the IRS and state tax authorities. These are equally attainable goals with a $5 million estate as they are at $50 million. Moreover, these strategies are affordable, especially considering the amount of tax savings they offer.
Please contact us for more information.
New York State has assisted businesses suffering economic hardship from the COVID-19 crises by enacting legislation over the past few months granting eviction moratoria and relief to individual guarantors of commercial leases. A new bill is being considered by the legislature which may offer long-term property tax abatements to commercial landlords who agree to limit rent increases and settle arrears owed by commercial tenants who have been impacted financially by the pandemic.
Even as some businesses in New York City have reopened, many are still struggling with decreased revenues and an inability to keep up with expenses. Senate Bill 8904 would offer relief to small businesses (100 or fewer employees) by allowing New York City to adopt or amend legislation to provide an as-yet-undetermined abatement of real estate taxes to property owners who enter into “recovery leases” with their commercial tenants. A “recovery lease” is defined in the statute as one meeting the following five criteria:
In essence, the legislation seeks to settle past rent arrears and limit rent increases over a long-term lease, while providing tax incentives to landlords who enter into such leases.
Commercial landlords remain limited in their ability to recover rent from commercial tenants who are suffering economically from the pandemic. These landlords, who are suffering economically due to their inability to collect rent, may soon have a tax incentive to negotiate payment terms with their tenants in a recovery lease.
Landlords considering entering into recovery leases should be mindful that they may not be entitled to tax abatements if the recovery lease is signed before the legislation is enacted. In addition, participating landlords should note that they could be subjecting themselves to a commercial rent regulation system with unknown consequences going forward.
The bill is currently in committee and has not yet been passed by either the New York State Senate or Assembly. The benefits to both commercial landlords and commercial tenants are apparent, but it will be critically important to review the details of any local law enacted by New York City to implement the property tax incentives should S8904 pass.
Please follow our blog for further developments. For additional information, please contact us.
We previously advised that due to Coronavirus, deadlines for filing federal and state income tax returns have been extended to July 15, 2020. This week, in Notice 2020-23, the IRS provided additional extensions of time to file tax returns and pay taxes. Below are some highlights:
In addition, deadlines for filing tax court petitions, claims for credits or refunds, and for bringing lawsuits against the IRS for credits or refunds, have also been extended.
Finally, if you are involved in an IRS audit, examination or appeal, you must be aware that not all deadlines have been automatically extended. IRS employees (auditors, examiners, appeals officers) are still working, and pending IRS matters are continuing.
Please contact us with any questions.