What Type of Expenses Are Deductible on The REV 1500 Pennsylvania Inheritance Tax Return?

You should keep receipts for the following expenses which are deductible on the PA Inheritance Tax Return and the PA final PA-41 fiduciary return:

  1. Funeral costs including luncheon and head stone;
  2. Attorney, Accounting and Appraisal fees and Real Estate Commissions;
  3. Final medical bills;
  4. Final utility bills including cable, internet, telephone, gas and electric;
  5. Costs incurred to sell assets of the estate including real estate taxes and property insurance;
  6. Probate Fees paid to the Register of wills;
  7. Probate publication fees;
  8. Executor Travel Expenses;
  9. Cost of a Posting a Bond;
  10. Debts of the Decedent;
  11. Federal and Pa Income Tax paid with final income tax returns.

Contact Spadea & Associates, LLC at 610-521-0604 if you need help administering an estate or find yourself being appointed as an Executor.

2013 American Taxpayer Relief Act

Tax return paper
We finally have clarity on income, payroll, and transfer taxes for the foreseeable future.  The new law, referred to as the American Taxpayer Relief Act, contains both good and bad news for affluent and high-net worth taxpayers.

Income Tax Rates –This was one of the most controversial issues in the negotiations leading up to the new law’s enactment. When the dust settled, income tax rates for 2013 will remain the same as last year for most individuals. However, affluent and HNW taxpayers will see their top rate increases from 35 percent to 39.6 percent. This change affects singles with taxable income above $400,000, marrieds filing jointly with taxable income above $450,000, heads of households with taxable income above $425,000, and married individuals who file separate returns with taxable income above $225,000.

The following table contains the new rates and brackets with projected inflation adjustments. As of this date, the IRS has not announced the official inflation-adjusted numbers.


Tax Rate Single Individuals Married / Joint Married / Separate Head of Household
10% on taxable income to: $8,925 $17,850 $8,925 $12,750
15% on next taxable income to: 36,250 72,500 36,250 48,600
25% on next taxable income to: 87,850 146,400 73,200 125,450
28% on next taxable income to: 183,250 233,050 111,525 203,150
33% on next taxable income to: 398,350 398,350 199,175 398,350
35% on next taxable income to: 400,000 450,000 225,000 425,000
39.6% on next taxable income above: 400,000 450,000 225,000 425,000

Rates on Long-Term Gains and Dividends—While the tax rates on long-term capital gains and dividends will also remain the same as last year for most individuals, the maximum rate for affluent clients increases from an historic low of 15 percent to 20. This change affects singles with taxable income above $400,000, married joint-filing couples with taxable income above $450,000, heads of households with taxable income above $425,000, and married individuals who file separate returns with taxable income above $225,000.

Note also, that beginning in 2013 taxpayers with modified adjusted gross incomes (MAGIs) above a designated threshold ($200,000 for single filers, $250,000 for married couples filing jointly) will pay a surtax of 3.8 percent on net investment income. Net investment income is gross income from annuities, interest, rents, royalties, dividends, and net gain from the sale of property, reduced by deductions attributable to the production of such income.  This provision is part of what has become known as Obamacare and is unrelated to the American Taxpayer Relief Act.

Personal and Dependent Exemption Deduction Phase-Out – The phase-out of personal and dependent exemptions has not been seen since 2009. However, under the new law, the phase-out returns for affluent clients. Phase-out starts at the following adjusted gross income (AGI) thresholds:

  • $250,000 for single filers;
  • $300,000 for marrieds filing jointly;
  • $275,000 for heads of households; and
  • $150,000 for married individuals who file separate returns.

Itemized Deduction Phase-Out—Similarly, the new law revives the limitation on total itemized deductions for taxpayers whose (AGI) exceeds the applicable amount. The applicable amount is $300,000 for marrieds filing jointly, $275,000 for heads of household, $250,000 for individuals, and $150,000 for married individuals filing separately.

These applicable amounts for both phase-outs are indexed for inflation for tax years beginning after 2013.

Beginning January 1, 2013, the standard mileage rates for the business use of a car, van or truck is:

  • 56.5 cents per mile for business miles driven
  • 24 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

Alternative Minimum Tax—With negotiations leading up to the new law’s passage appearing to ignore the alternative minimum tax (AMT), many tax professionals were worried that a “glitch” in the law could cause the AMT to affect even more taxpayers.

The AMT is a parallel tax system. Individuals pay the higher of the AMT or their regular income tax. Originally enacted in 1969, the stated purpose of the AMT was to prevent higher-income tax payers from decreasing or eliminating their income taxes through taking advantage of certain deductions and credits including:

  • State and local income taxes and property taxes;
  • Child-tax credits;
  • Home-equity loan interest; and
  • Miscellaneous itemized deductions such as employee business expenses that are not reimbursed by employers.

Although the highest tax rate under the AMT, 28 percent, is lower than the highest regular income tax rate, 35 percent, AMT victims pay more taxes because their taxes are based on a higher taxable base.  Although the exemption was not indexed for inflation, Congress routinely enacted legislation to increase the exemption. Unfortunately, the last “patch” expired on December 31, 2011. Thus, for tax year 2012, the alternative minimum tax exemption amounts reverted to the previous amounts of $45,000 for married couples filing jointly and $33,750 for single filers.  Fortunately, the new law sets the 2012 exemption level at $50,600 for single filers and $78,750 for joint filers and adjusts these amounts for inflation going forward. In 2013, inflation adjustments are projected to result in an exemption level of $51,900 for single filers and $80,800 for joint filers.

Payroll Taxes—Despite the fact that income tax rates stay the same for most taxpayers, wage-earners can expect a decrease in their paychecks beginning in January of 2013. That’s because the 2011 decrease in payroll taxes from 6.2 percent to 4.2 percent was allowed to expire on December 31, 2012.

Estate and Gift Taxes—Prior to the new law, many were concerned that both tax rates and exemption amounts would revert to 2001 levels (55 percent maximum rate, $1 million exemption amount).

First, the new law makes permanent the $5 million gift, estate, and GST tax exemption amount, subject to annual inflation increases. In 2012 the inflation-adjusted exemption amount was $5.12 million. The projected inflation-adjusted amount in 2013 is approximately $5.25 million per person. For married couples in 2013, the aggregate exemption will be twice this amount or approximately $10.5 million.

The new law also caps the top rate at 40 percent tax for decedents dying and transfers occurring in 2013.

In addition, the new law also makes permanent “portability” of an unused deceased spouse’s estate tax exemption amount to a surviving spouse. For example, if the first spouse passes away in 2013 with $5 million of assets, that deceased spouse could leave his or her entire estate to the surviving spouse tax free under the marital deduction, thus preserving the use of his or unused exemption by the survivor. Even if the surviving spouse’s estate was also valued $10 million (including the inheritance from the deceased spouse), he or she could pass the entire estate to non-spousal beneficiaries without tax by combining the deceased spouse’s “unused estate tax exemption amount” and his or her own exemption amount. The “inherited” exemption may be applied against both lifetime gifts and bequests.

If you have any tax questions please call Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, PA.

Tax Information Needed to Prepare Your 2012 Income Tax Returns

Please click on the link below in order to download and print tax preparation information needed for 2012. This income tax checklist is divided into relevant categories to help you organize your tax information.

Tax Information Needed to Prepare Your 2012 Income Tax Returns

Taxability of Lawsuit Settlement Awards

Blue man carrying the words tax on his back
Personal Injury and Medical Malpractice Lawyers who negotiate settlements need to consider the tax issues affecting their client when drafting both the complaint and the final settlement agreement.

Payments received as compensation for physical injuries are free of federal income tax and Pennsylvania Income tax. Such is the case even if the monies received are from a court-ordered award or an out-of-court settlement. It also matters not if the payment is in a single, lump sum or paid in installments. However, you cannot deduct attorney fees incurred to collect a tax-free award or settlement for physical injury.

Some additional tax rules to consider in determining if the award is taxable:

  • Compensation for emotional distress arising out of a physical injury is tax-free because the distress is considered part of the physical injury or illness.
  • Amounts received under a disability policy where you paid the premiums are not taxable as long as you did not deduct the premiums on your past tax returns. If you did deduct the premiums then the amounts received are taxable as ordinary income.
  • Amounts received for medical expenses will be tax-free unless the individual claimed a medical expense deduction for such expenses that are later reimbursed from the settlement. Even when there is no specific allocation, the settlement is deemed to include a reimbursement for such expenses up to the amount of those expenses and includible in income.
  • Claims for taxable lost wages or lost profits will generally be reported as ordinary income while claims for injury to a capital asset will be taxable as a recovery of basis and capital gain.
  • Front pay or back pay will be characterized as “wages” for purposes of payroll tax withholdings and subject to federal income and payroll tax.
  • Interest received on the award or settlement will be taxable.
  • Awards to effectively punish the wrongdoer such as punitive damages are generally taxable even when paid as a result of a physical injury.
  • Payments for non-physical injuries (i.e. discrimination, wrongful termination, emotional distress not caused by physical injury, invasion of privacy, libel, harassment, etc.) will be taxable. Such amounts for emotional distress are not treated as a physical injury or physical sickness, except to the extent those damages attributable to the emotional distress were used to pay for medical care.
  • If part of your award is tax-free (i.e. physical injury) and the balance is taxable (i.e. interest, punitive damages, non-physical injury, etc.) the recipient is required to report the entire gross amount of the taxable portion of the award as taxable income. No reduction is made for the related legal fees. The proportionate attorney fees applicable to the taxable portion may be deducted as a miscellaneous itemized deduction (i.e. multiplying the total fees by a numerator of the taxable portion over the denominator of the total amount of the award or settlement). Unfortunately, such “miscellaneous itemized deductions” are only deductible in excess of 2% of Adjusted Gross Income (AGI) and they are completely disallowed for AMT (Alternative Minimum Tax) purposes. Thus, the injured person’s actual deduction for the attorney fees related to taxable awards may actually yield little or no tax benefit if their adjusted gross income exceeds approximately $180,000.
  • There are two noteworthy exceptions to this when part of your award is taxable and part is tax free. One is that legal fees will be deductible “above the line” as a Schedule C deduction when the lawsuit arises entirely from the taxpayer’s business. The second will occur for legal fees incurred in certain types of unlawful discrimination cases (i.e. whistleblower rights, civil rights, labor/employment rights, etc.). These can also be deducted “above the line” and not as a “miscellaneous itemized deduction” on schedule A.
  • Structured settlements for physical injury awards are where payments are received over a specified period of time rather than in a lump sum can escape taxation. If done properly, a structured settlement may convert “earnings” (imbedded accumulated interest) which otherwise might have been taxable to tax-free.

If you or your lawyer has any questions about the taxability of your lawsuit settlement call Gregory Spadea of Spadea & Associates, LLC in Ridley Park at 610-521-0604.

Exclusion Of Gain On The Sale of Your Small Business Stock

Checking stock data
If you are the founder or an employee of a technology, manufacturing, wholesale or retail company you may be able to exclude all or part the gain on sale of your company’s stock if you hold the stock for more than 5 years. The amount of the gain to be excluded depends on when the stock was issued.

Exclusion % If Stock was issued
50% After August 10, 1993 and before February 18, 2009.
75% After February 17, 2009 and before September 28, 2010.
100% After September 27, 2010 and before January 1, 2012.

For a stock to be considered qualified small business stock it must meet all of the following five conditions:

  1. The actual stock must be issued after August 10, 1993. Note that options to buy the stock are not considered stock for purposes of Section 1202.
  2. The stock must be acquired by purchase from the corporation or for the performance of services which means it cannot be acquired by gift or inheritance.
  3. The corporation must be an active business.
  4. The corporation cannot be involved in certain activities such as;
    • One involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services;
    • One whose principal asset is the reputation or skill of one or more employees;
    • Any banking, insurance, financing, leasing, investing, or similar business;
    • Any farming business including the raising or harvesting of trees;
    • Any business involving the production of products for which percentage depletion can be claimed; or
    • Any business of operating a hotel, motel, restaurant, or similar business.
  5. The corporation’s gross assets before and after the issuance of stock cannot exceed $50 million.

Feel free to contact Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park, PA at 610-521-0604 if you would like additional information on how to make the Section 1202 election.

When Am I Subject to Gift Tax?

What is a Gift?

The IRS considers anything a gift that you give away forever and the recipient does not give you anything of value in return.  An example would be something you sell for less than fair market value.  Remember that only the donor is subject to the gift tax.  The recipient never pays gift or income tax on gifts received.

The gift tax was created so that taxpayers wouldn’t give away all of their wealth while they were alive as a way to avoid estate taxes after their death.

Four Exceptions to the Gift Tax

  1. You can give unlimited gifts to your spouse without being subjected to gift tax.
  2. You can give unlimited gifts to charitable organizations recognized by the IRS under code section 501(c).
  3. You can pay someone else’s medical bills as a gift, as long as the payments are made directly to a health care provider.
  4. You can also pay student’s tuition, as long as those payments are made directly to the educational institution.

Annual Gift Tax Exclusion and Gift Splitting

In 2013 you can give $14,000 per year to anyone without triggering gift tax. If you or your spouse makes a gift to anyone, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Currently, gift splitting allows married couples to give up to $28,000 to a person without making a taxable gift. The annual exclusion was just increased to $14,000 in 2013, and is adjusted for inflation annually. The annual exclusion was 13,000 for tax years 2009 through 2012.

If you gift more than the annual exclusion in 2013 you have to file form 709 by April 15, 2014 and either use part of your $5.25 million gift and estate tax exemption amount or pay gift tax rates between 18% and 40% in 2013. Currently the highest federal estate tax rate is 40%.

Congress Made Portability of Your Spouses Unused Basic Exclusion Amount Permanent

If your spouse dies in 2013 without using up their $5.25 million basic exclusion amount you can transfer it to your estate by filing form 706. Note that you must file form 706 to transfer your spouse’s unused exemption even if your spouse owes no federal estate tax.

There are many reasons for gifting including reducing your federal taxable estate. If you have questions about gifting or federal estate tax, feel free to call Gregory J. Spadea at Spadea & Associates, LLC in Ridley Park, PA at 610-521-0604.

What Should I Do If I Owe the IRS Money for Back Taxes?

Notepad with sign Owe Taxes
If you have unfiled returns the first step would be to file those returns because you have to be in full compliance before you are eligible for an installment agreement. Then I would determine if you were assessed any penalties and if so I would try to get the penalties abated.

If you owe less than $50,000 you can get up to a 6 year installment agreement over the phone by providing limited financial information. However you must agree to make monthly direct debit payments from your bank account.

If you owe more than $50,000 you can still get an installment agreement but you have to file a 433-A financial statement and provide bank statements and mortgage and student loan payoff information.

The IRS uses that 433-A information which contains your income, assets and secured liabilities to determine your ability to pay the tax. However the IRS only considers secured liabilities like primary residence mortgages and student loans and monthly living expenses like food, utilities, health insurance transportation costs and court ordered payments like child support. The IRS has 10 years to collect the tax from the later of the due date of the return or the actual date filed.

If you file a separate business return (other than a 1040) like an 1120S or 1120 then you would also complete a 433-B based on that returns expenses.

If you do not have the ability to pay the tax within the 10 year collection statute you can consider filing an offer in compromise but the IRS also considers your health, age and future earning ability in addition to your assets and liabilities.

Once you get on an installment agreement, I can help you get the bank levy’s or wage garnishments released. Feel free to call Gregory Spadea at 610-521-0604 if you need help with back taxes.

How do I File a Protective Refund Claim or Get IRS Penalties Abated?

Protective Claims

If there is a split between Courts of Appeal on the treatment of a deduction or taxability of income item you can file a protective claim using form 843. If the IRS denies the claim you have two years from the denial date to petition the Federal Tax Court or Court of Federal Claims.

An example would be when the Insurance companies demutualized ten years ago and policy holders received stock in the insurance company the IRS took the position the policy holders had a zero basis in the stock.  Before the case was decided the policy holders filed protective claims for refund after the IRS disallowed their basis on their 1040, to preserve their refund until the Tax Court made a decision.  Since there were so many policy holders with the same issue IRS  Counsel decided not to disallow the 843 claims outright until the case was decided.

Penalty Abatement

The IRS allows you to request an elimination of all or part of penalties assessed and the corresponding interest that has accrued on those penalties.  Form 843 can be used to request the following:

  • A refund of tax, other than a tax for which a different form must be used. For example if you can use form 1040X to request a refund of income tax that should be used and not the form 843.
  • An abatement of tax, other than income, estate, or gift tax. Employers cannot use Form 843 to request an abatement of FICA tax, RRTA tax, or income tax withholding.  Instead they should use form 941X.
  • A refund to an employee of excess social security or RRTA tax withheld by any one employer, but only if your employer will not adjust the overcollection.   When claiming a refund of excess social security or RRTA tax withheld by one employer you must  attach a statement from the employer indicating the following.  1) The amount, if any, the employer has reimbursed you for excess taxes withheld.   2) The amount, if any, of credit or refund claimed by the employer or authorized by you to be claimed by the employer.   3) The employer should include in the statement the fact that it is made in support of your claim for refund of employee tax paid by the employer to the IRS.  If you cannot obtain a statement from the employer, you should attach a statement with the same information to the best of your knowledge and belief and include in the statement an explanation of why you could not obtain a statement from the employer. Attach a copy of your Form W-2 to prove the amount of social security taxes withheld.
  • A refund of excess tier 2 RRTA tax when you had more than one railroad employer for the year and your total tier 2 RRTA tax withheld or paid for the year was more than the tier 2 limit.

  • A refund or abatement of interest, penalties, or additions to tax, caused by certain IRS errors or delays, or certain erroneous written advice from the IRS. An Example is if an IRS official gave you erroneous advice while acting in an official capacity that you relied upon you can get the penalty and the interest on the penalty abated.
  • A refund or abatement of a penalty or addition to tax due to reasonable cause or other reason  allowed under the law. An Example would be if you relied on your Accountant in taking a deduction and the IRS disallowed that deduction you could request abatement of the penalty.
  • A refund of the penalty imposed under section 6715 for misuse of dyed fuel.
  • A refund of a branded prescription drug fee. You would have to attach a copy of the Form 8947 that provided the basis for the fee as calculated by the IRS, as well as any additional information on the amount to be refunded.

If you have questions or need assistance in filing form 843, contact Gregory J. Spadea at 610-521-0604.

Why I need an IRA Trust

Jar with label Retirement Plan
The biggest retirement asset for most people other than their primary residence is their retirement plans. One way to ensure that your children do not mishandle your retirement funds after you and your spouse pass away is to set up an IRA trust as your Plan’s contingent beneficiary. This ensures an orderly transfer of wealth from one generation to the next.

The advantages of an IRA trust are as follows:

1. It allows you to control when distributions are made and the circumstances when they should be made. This also allows the beneficiary to stretch out the payments and pay the least amount of income tax over his or her lifetime. This also allows the IRA Assets to continue growing tax free inside the trust over the beneficiary’s lifetime.

2. The IRA trust assets would be protected from creditors so if your beneficiary is sued the assets in the IRA trust would not be subject to any creditor claims. In addition if your beneficiary gets divorced the IRA trust assets would not be part of the marital estate and not subject to claims by the ex-spouse.

3. You can select an investment advisor to ensure the IRA portfolio remains diversified to maximize the investment returns over your beneficiary’s lifetime.

4. If your beneficiary is disabled and receiving government medical benefits the IRA Trust would not disqualify him or her from continuing to receive benefits.

From a procedural perspective you would name the IRA Trust as a beneficiary of your IRA, and upon your passing the IRA trust would distribute the proceeds of your IRA to your beneficiaries over their lifetimes based on the IRS tables for required minimum distributions. If you were married, you may want to have your spouse be the primary beneficiary of your IRA and the IRA trust could be a contingent beneficiary of your IRA.

The reason this is so important is because a nonspouse beneficiary may not receive funds directly from an inherited IRA and roll them over tax free to another inherited IRA within 60 days, as a surviving beneficiary can. Therefore they must use a direct trustee to trustee transfer to avoid income tax on the distribution. Many beneficiaries do not realize once they take the distribution they will be taxed on the entire amount in the year they receive it. This would be disastrous from an income tax perspective because they will lose the power of tax deferred compounding over their lifetime. Therefore setting up the IRA trust as the Beneficiary avoids this problem.

If your IRA assets exceed $250,000 you should consider setting up an IRA trust to ensure your legacy is are protected and your beneficiaries are taken care of after your gone. Contact Gregory J. Spadea at 610-521-0604 if you would like more information.

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