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December 15, 2005
TAX UPDATE
Last week, the Massachusetts Department of Revenue announced two changes that are of interest to all taxpayers across the state. The first was an increase in the allowable value of a residence to be eligible for the Senior Circuit Breaker. It was raised from $452,000 to $600,000. This is good news for seniors whose homes have increased in value beyond their belief.
Last week I also wrote about the other announcement dealing with the capital gains rate reduction for tax year 2002. It has been reduced from 5.3% down to as low as zero. On December 9, 2005 the Department of Revenue issued Technical Information Release 05-20 that provides guidance on how to get your refund. Here’s what is says:
· The Department of Revenue will not automatically issue refunds. You must determine if you are eligible for a refund.
· Interest will not be paid on tax refunds.
· Refunds will be paid in 4 equal annual payments
· There will be a online special abatement application (not available yet) or you may file manually, a form CA-6.
· Refund applications must be filed by June 30, 2006 for most taxpayers.
Estate Tax Changes For 2006
For most people, estate tax changes are pretty meaningless. By this I mean that in order to be liable for estate taxes in 2006 you will need to have more than $1 million in assets upon your death to pay Massachusetts estate taxes and more than $2 million to be subject to federal estate taxes. With proper planning, married couples can have twice that amount. For these purposes, assets that you own include life insurance paid on your life.
If you are on the borderline of having to pay estate taxes you might consider making gifts to your children. This can reduce or eliminate estate taxes paid upon your death. In the past you used to be able to give away $10,000 per person per year to reduce your taxable estate. This figure has been raised to $11,000 per person per year and on January 1, 2006 it will increase to $12,000 per person per year. Husbands and wives are able to give away twice this amount by filing form 709, U.S. Gift Tax Return and elect gift splitting. Here is an example:
Example: Doris is a widow and has 3 children and 6 grandchildren. Her total assets amount to $1.3 million. If she were to pass away in 2007 she would owe the Commonwealth of Massachusetts $51,600 for estate taxes. If Doris started making gifts this year and in 2006 and 2007 she could completely avoid paying the estate tax, saving her heirs $51,600 in taxes.
Both the federal and Massachusetts estate tax exemptions are going up on January 1, 2006. The current federal estate tax exemption is $1.5 million and will increase to $2 million in 2006. This amount will go up each year until it reaches $3.5 million in year 2009. In 2010 the estate tax is repealed, but in order to stay repealed, Congress must vote to extend the repeal. If Congress does not vote to extend the repeal the estate tax will come back in the year 2011 and we will be back at a $1 million exemption.
Prior to the year 2003, Massachusetts did not have a separate estate tax return; we had something known as a sponge tax. The sponge tax meant that anyone who owed federal estate taxes ended up owing Massachusetts estate taxes. As the federal estate tax exemption increased each year, Massachusetts found themselves with less and less income from estates. So, in 2003 they resurrected their estate tax division and started taxing estates whose value exceeded $700,000. The current Massachusetts estate tax exemption is $950,000 and will increase to $1 million in 2006.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org