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Can I Change My Will to Avoid Estate Tax? And More Free Tax Q&A – Ask the Tax Pro 12/20/12

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On Thursdays, CPA and President of Corporate Tax Network, Gary Milkwick and his team, answer tax questions for free on the LegalZoom Facebook Page. Did you miss the last Ask the Tax Pro? Don’t worry. We’ve got it all right here.

Robb: My in-laws are thinking of changing their wills so that individual items are bequeathed directly to specific heirs as opposed to out of the estate, as such. Is there any tax benefit to this?

Corporate Tax Network: Hi Robb, The estate tax is based on the ‘taxable estate”. The taxable estate covers all of the items owned by your in-laws. How those assets are transferred, either through direct bequest or through the estate, will not change the size of the taxable estate. The main benefit in using a specific bequest is to try to minimize any family mis-understandings about the disposition of property. The taxable estate can be reduced by making lifetime gifts to individuals. A couple can make a gift of $26,000 ($28,000 in 2014) to any individual without tax consequences.

Dom: HI Gary: Let’s say you just changed over from a sole proprietorship (on Dec 19) to LLC. Does this affect filing for 2012? Also, how does the EIN come into play in 2013 if you’ve filed jointly with your spouse in 2012, any change?

Corporate Tax Network: Hi Dom,
If you registered an LLC on 12/19, then your business activity from 12/19 to 12/31 would be reported on the LLC’s tax return. If this is a single member LLC, the activity would be reported on a schedule C, on form 1040, and if it is a partnership it would be reported on form 1065. If you have determined to elect for your LLC to be taxed as an S-corporation, then your business tax information would be reported on form 1120S, and if you elected C-corp tax treatment, then it would be reported on form 1120.
If you have a single member LLC, and are not making any special elections, you would only need to file a schedule C if the business was active and had some financial activity during the year. If there was no activity, you would not need to fill out a schedule C, however some states do require a separate return filing for LLC’s regardless of whether there is activity or not.
If your business is taxed as a partnership, S-corp or C-corp, you would have to file a federal return, even if you did not have any activity. If your state requires the filing of a state return, you would need to file that as well.
You can still file a joint return with your spouse going forward.

Beverly: If I make less than $13k a year do I have to file taxes? My husband doesn’t work & has no income.
Also, I’m 58yrs old, disabled can I claim Homestead on my home yet? Thx

Corporate Tax Network: Hi Beverly,
If you are filing as married Filing Jointly, and your combined income is less than $19500 (and you are not self employed) then you would generally not be required to file a tax return. However you may still want to file if you are expecting a refund or if you are eligible for any tax credits.
With regard to the homestead credit for South Carolina, if you are not age 65 or older, then you would qualify if you were declared totally and permanently disabled by a state or federal agency or are legally blind.
Here is the link to the site where you can find more information:

Julie: I bought a second house this year in a different state. What are the tax implications? Do I need to file a state return in that state? I do not live there full time, but most weekends. Does that matter? I still have a mortgage on both homes. Thanks

Corporate Tax Network: Hi Julie,
If you have any earned income or rental income within the state where you purchased your second home, then you would need to file a state return. If this is your second home, you would be able to deduct the mortgage interest on your Schedule A-itemized deductions, assuming your mortgages combined, don’t exceed one million dollars.

Andrew: I have an LLC that I didn’t use/or pay the franchise tax for 2011. I think I filed the paperwork to close it correctly, but I’m not sure. How can I check?

online or phone and if I want to re-activate it how do I do this? forms etc.

Or if it wasn’t closed entirely, can I bring it up to date? I assume I’d have to make the payment and penalty etc. is there a form for this?

Corporate Tax Network: Hi Andrew,
Most state (Secretary of State) websites allow you to search your business information. You should be able to see the status of your business by searching the SOS business database and find out whether it is active, dissolved, in bad standing, etc.
If your company is in bad standing, or involuntarily dissolved by the state, you can reinstate the business by filing the outstanding forms (annual reports, tax returns, etc) and paying the penalties and interest associated with the late filing. However if you dissolve the company, you would need to form a new one. The filing requirements for each state vary. You should contact the Secretary of State where the company is registered, in order to obtain the forms necessary for either reinstating your business or registering a new one or work with a professional to get all the paperwork filled out.

Andrew: I’ve checked the SOS site my LLC is still active under status. Where do I find out if there are any fees and penalties due?

Corporate Tax Network: Andrew, if the state website shows the company as active, it’s an indication that the dissolution documents you submitted are either incomplete or have not been processed yet. You may need to contact the state directly to determine whether they have processed the paperwork you sent to them. You should file form 568- Limited Liability Company Return of Income, and pay the $800 franchise fee for 2011 as soon as possible. Also please make sure you file your 2012 tax return and make the tax payment by April 15th.

Debbie: Can you contribute to a college savings plan (Ohio’s 529) up until April the following year? Or does the contribution have to happen in the tax year, by December 31st?

Corporate Tax Network: Hi Debbie, the contribution deadline for the Ohio 529 College Savings Plan is December 31st. It would have to be made during the tax year.

Emma: HI my tax question is this. I am currently receiving an annuity from CalPers in Ca. If I move to Arizona would I have to pay any state income tax in either CA or AZ?

Corporate Tax Network: Hi Emma,
California taxes pensions that were earned there. If you now live in Arizona, you would need to report and pay tax on all income in Arizona as well. You should be able to get credit for state taxes paid to CA on your AZ state return.

Frederick: Refinanced primary home and removed my sisters name from the deed. However added my wife instead. I then recently got a letter from the county assessor about filling out a firm of the transfer is from parent to child. However this is not the case. What should I do?

Corporate Tax Network: Fredrick, I would suggest to contact the county assessor to determine why such a letter was sent. They may have incorrectly reported your wife, as your child. You may also want to discuss this issue with a legal advisor in case a resolution cannot be reach with the county assessor’s office.

Mel: Do we need a tax accountant to complete annual K-1 Partnership for an apartment building that is jointly owned by 2 other partners? We are in our second year of our partnership and seems we can just carry over the depreciation numbers into the next year along with our expenses and income for the year.

Corporate Tax Network: Hi Mel,
In order to complete the Schedule K-1’s, you would need to first prepare the partnerships tax return form 1065. If you have prepared the returns in the past, along with the Schedule K-1’s and are familiar with the reporting requirements and filing procedures, and feel comfortable continuing to file on your own, without professional assistance, then you can do so. If you are not familiar with business taxation, filing and reporting requirements, I would suggest working with a CPA/EA to prepare the partnership tax return and the schedule K-1’s.

Oscar: I’m going to be “self employed” stating 1/1 . What paperwork will I be needing to take care of? Thanks

Corporate Tax Network: Hi Oscar,
Self employment income is reported on a schedule C, on your personal income tax return. The income would be subject to self employment taxes (15.3%) and income taxes. In order to pre-pay your taxes and avoid getting hit with an underpayment penalty, you should make estimated tax payments. (federal and state)
Here is the IRS website that explains the filing of estimated tax payments:
You can also minimize your tax liability by contributing up to 20% of your self-employment income into a retirement account. You should consult with a CPA or EA to determine the best tax reduction strategies based on the nature of your-self employment business, revenue, and future goals.

Stan: Stan, unfortunately the law requires IRS to charge late filing penalties, late payment penalties and interest on any tax returns that are not filed and/or tax not paid on time. However they do allow for a penalty waiver if there is a reasonable cause. I would recommend you discuss your situation with an Enrolled Agent or Certified Public Accountant to determine if your reason for accumulating back taxes has a reasonable cause for a penalty waiver.

Corporate Tax Network: Stan, unfortunately the law requires IRS to charge late filing penalties, late payment penalties and interest on any tax returns that are not filed and/or tax not paid on time. However they do allow for a penalty waiver if there is a reasonable cause. I would recommend you discuss your situation with an Enrolled Agent or Certified Public Accountant to determine if your reason for accumulating back taxes has a reasonable cause for a penalty waiver.

Reginal: I am a real estate agent in NYC, I was thinking of starting a corporation. Which one should I start and why?

Corporate Tax Network: Reginal, this is a very good question. As accountants usually say the answer is “it depends”. If one was better than the other, everyone would just set up the same kind of business entity. Things to consider are income level of the business, any other income you have personally, NYC corporate income tax vs Unincorporated Business Tax and the most important item is whether the real estate company would be able to pay you through a corporation or if the law requires them to pay you personally. If they are able to pay you through a corporation I would consider either a Subchapter S Corporation or an LLC, depending on various outside factors. You should discuss this in private with a tax advisor. If New York law requires real estate companies to only pay commission to licensed agents and not their companies you might not have much of a choice here.

Michelle: Hi! I am recently divorced, the beginning of November it was finalized, and I have a child whom I have full custody of. I want to know how I should file my taxes because I’m unemployed. My ex-husband is telling me to file jointly with him but I feel like that’s illegal because we aren’t married anymore. And I don’t think how you file goes by whether you were married most of the year. I’m really confused and refuse to defraud the government. Please help!!

Corporate Tax Network: Michelle, since you are officially divorced you cannot file a Married Filing Joint return unless you re-marry in the next 11 days and file it with your new husband. Since you are not legally married and have a custody of a child who is your dependent, then your filing status would be Head of Household. Your ex husband can only file as single, unless he remarries or has other dependents of his own that he has custody of.

Rachel: How much do get back when u have a 10 year old and a 15 year old

Corporate Tax Network: Rachel, your refund depends on various factors. Generally, if your income is under certain threshholds, you would qualify for earned income tax credit. You may need to work directly with an accountant, and provide your income, filing status, etc to determine how much you would get back.

Mike: I have a nonprofit that became incorporated this month (via Legal Zoom). Can I write the startup costs off on my taxes (such as the incorporating, website, and equipment)?

Corporate Tax Network: Mike, the non profit- organization should reimburse you for your expenses. Otherwise you can claim this as a charitable contribution on your personal return, once the organization obtains its 501c3 status from the IRS.

LegalZoom: The pros from Corporate Tax Network will be back in 2013 for more free tax Q&A! Join us then:

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December 24th, 2012 at 5:41 am