Many employers provide a flexible spending arrangement (FSA) for their employees. In IR-2018-224, the Service encouraged employees with FSAs to make plans for 2019. The permitted employee funding amount for an FSA increases from $2,650 in 2018 to 2,700 in 2019.
An FSA is an excellent way to cover many types of medical expenses. The employee's voluntary contribution is free from both income and employment taxes. The employer may also contribute to an FSA.
Each employee must decide how much to contribute at the beginning of the plan year. Normally, the employer will deduct a portion of the annual amount from each paycheck.
You may use your FSA for qualified medical expenses. Many plans enable you to use a credit or debit card for your medical expenses. However, you will need receipts to document the date, medical provider and type of expense.
Qualified medical expenses include prescriptions, medical procedures and dental services. The covered medical services generally are the type of services that are deductible for income tax purposes. The individuals receiving medical care may be you, your spouse or dependents who are claimed on your income tax return.
The FSA amount must typically be used in the year of the contribution, but there are two potential exceptions. Your employer may permit a "carry forward" of up to $500 to the next year. Alternatively, your employer may grant a grace period of up to 2½ months in the next year to use your FSA amounts. Your employer may choose either of these options.
Many employers offer both a medical insurance plan and an FSA. If your employer offers an FSA, it is a taxwise way to cover many of your family medical expenses.
No Future Estate and Gift Tax Clawback
In REG-106706-118, the Service issued Proposed Regulations to clarify the gift tax rules under the Tax Cuts and Jobs Act (TCJA). For gifts made between December 31, 2017 and January 1, 2026, an estate may calculate taxes using the higher of the basic exclusion amount on the date of the gift or the date of death.
The TCJA modified Sec. 2010(c)(3) to change the basic exclusion amount from $5 million to $10 million (plus indexed increases). The increased amount applies for years 2018 to 2025. In 2026, unless the law is changed, the exclusion reverts back to $5 million (plus indexed increases).
Gift and estate taxes are calculated on a unified basis. The applicable exclusion amount, a combination of the basic exclusion amount and other items, is initially used to cover taxable gifts. The amount of applicable exclusion remaining at death is available for estate transfers.
The Proposed Regulations address both the potential gift and estate tax consequences. Assume a taxpayer makes a taxable gift of $12 million in 2019 when the basic exclusion amount is $11.4 million. The taxpayer has used his or her full exclusion amount. If the taxpayer survives until 2026 and the reduced exclusion amount is effective, will there be any impact on future transfers?
In 2026, the taxpayer either makes another gift of $10 million or passes away with an estate of $10 million. The concern by commentators is that if the exemption reverts to $5 million plus indexed increases, most of the estate could then be allocated to estate tax on the combined total of the gifts and the taxable estate.
Fortunately, the Proposed Regulations provide a solution. The Proposed Regulations state, "The portion of the credit against the net tentative estate tax that is attributable to the BEA would be based on the greater of those two credit amounts." The regulation explains that the two amounts are the basic exclusion amount as of the date of the gift or the date of death. Because the higher of the two amounts is available when the gift or estate tax return is filed in 2026 or subsequent years, there will be no "clawback" of gift or estate taxes.
Full Marital Deduction Even With Potential Death Taxes
In Estate of Claude W. Turner Sr. et al. v. Commissioner;
No. 18911-08; 151 T.C. No. 10 (20 Nov 2018), the Tax Court held a marital deduction was not reduced by potential estate tax payments because the executor had a Sec. 2207B Right of Recovery against the recipients of gifts.
In 2002, Claude W. Turner Sr. and his wife Jewell Turner created Turner and Co. FLP (TCFLP). Claude Turner gave 21.7446% of TCFLP to family members and passed away in 2004. In two prior Tax Court decisions, the FLP units he transferred to family were included in his estate under Sec. 2036 and these gifts to family did not qualify for a marital deduction.
Because there were not sufficient assets in the estate to pay the estate taxes, the IRS reduced the marital deduction by the amount of potential estate tax taken from the marital share. The IRS deficiency increased from $362,822 to $513,820 because the marital deduction was reduced.
The Tax Court noted that there is a right of recovery from the gift recipients under Sec. 2207B. The estate is entitled "to recover from the person receiving the property the amount which bears the same ratio to the total tax under this chapter which has been paid as (A) the value of such property, bears to (B) the taxable estate."
Because the will states the marital share shall not be reduced by taxes, "It is reasonable to assume that Claude Sr. would want his executor to take all steps necessary to ensure that the property passing to his surviving spouse and qualifying for the marital deduction not be impaired."
Therefore, the executor has a fiduciary obligation to seek to recover the estate taxes from the gift recipients. Because of this right of recovery, the marital share will not be reduced by taxes and the full marital deduction is permitted.
The estate also requested the marital share be increased by the income earned during the estate administration. However, the Court determined that the marital share is calculated based on date of death value and not increased by the value of accumulated income.
Applicable Federal Rate of 3.6% for December -- Rev. Rul. 2018-30; 2018-49 IRB 1 (16 November 2018)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2018. The AFR under Section 7520 for the month of December is 3.6%. The rates for November of 3.6% or October of 3.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return.