Extension for Small Estates to Elect Portability

The IRS just released Revenue Procedure 2014-18 outlining a procedure for certain eligible small estates of persons who died before 2014, and who had a surviving spouse, to obtain an automatic extension of time to elect “portability.”  Portability was added to the law for deaths after 2010.  Portability allows the surviving spouse to elect to add the deceased spouse’s unused estate tax exclusion (DSUE) amount to his or her own estate and gift tax exemption amounts.  The election is made by filing Form 706, the estate tax return.  In some cases, administrators of small estates have had a difficult decision to make, whether to incur the costs of filing an estate tax return when it wasn’t otherwise necessary, simply to make the portability election.  This new procedure gives administrators a fresh start and the ability to examine the issue again, as long as the estate return is filed by the end of 2014.

For example, assume husband died in 2011 having a gross estate of $2 million and that the assets were left to a credit shelter trust under his estate plan.  His DSUE is $3 million.  Assume the surviving spouse also had a gross estate of $2 million.  Since the surviving spouse’s estate is way under the $5 million exemption, and the exemption is indexed for inflation going forward, does it make sense to incur the costs (which could start at $5,000 at the low end) of filing an estate tax return to make the portability election?  On the other hand, if the husband’s assets were all left to the surviving spouse, then the gross estate of the surviving spouse would be $4 million and the husband’s DSUE would be $5 million.  In this case, it would be reasonable to assume that the surviving spouse’s estate could grow and exceed the future estate tax exemption amount, and so the portability election would be desirable.  Note, that there are many other factors that must be considered before deciding whether or not to make the portability election.  These factors are not discussed in this article.

A small estate is one where the value of the gross estate (plus adjusted taxable gifts) is less than the Form 706 filing threshold amount.  The portability election is made by filing the Form 706 estate tax return.  Form 706 is due nine months following the date of death.  A six-month extension can be obtained if the extension request is filed by the original due date.

Before this revenue procedure, the estate administrator had to apply to the IRS under Treas. Reg. §301.9100-3 to obtain late filing relief in order to file a late estate tax return to make the portability election.  The application had to establish to IRS's satisfaction that the estate acted reasonably and in good faith and that granting relief would not prejudice the interests of the government.

This revenue procedure now grants an automatic extension for a late estate tax return filed to make the portability election if all of the following criteria are met:

1.     The decedent: (a) had a surviving spouse, (b) died after 2010 but before 2014, and (c) was a citizen or resident of the United States on the date of death.

2.     The estate wasn’t required to file an estate tax return because the gross estate (plus adjusted taxable gifts) was under the filing threshold.  The relevant filing thresholds were as follows:

Deaths in 2011:  $5,000,000
Deaths in 2012:  $5,120,000
Deaths in 2013:  $5,250,000

3.     The estate did not file Form 706 by the due date; and

4.     The estate files a complete and properly-prepared Form 706 on or before December 31, 2014.

If these criteria are not met, estates may continue to request an extension of time to make the portability election under Treas. Reg. §301.9100-3 by filing a private letter ruling request with the IRS.

Selected New Tax Laws Starting in 2014

While the start of 2014 doesn’t bring with it the enormous tax changes that the start of 2013 brought, there are still many important changes that will impact your taxes.  Here is an overview of some of those changes.  I do not address the dozens of tax laws that expired at the end of 2013.

Personal Taxes

·       Individuals must pay a tax penalty if they do not maintain minimum essential health insurance coverage for each month during 2014.  There is an exception for one short-term gap in coverage of three months or less.  Also, the Federal government apparently gave a hardship waiver from the penalty to all individuals who received a notice saying that their current health insurance plan was being cancelled.  To receive the waiver, it appears that the affected individuals must buy a “catastrophic” health insurance policy.

·       Certain low- or moderate-income families buying health insurance through a government exchange may qualify for a refundable tax credit.  Most people eligible for the credit will use it during the year to help pay the cost of monthly premiums.  Since the credit is based upon estimated 2014 household income, a reconciliation of the credit will be part of the 2014 tax return.

·       The provision for direct charitable gifting of up to $100,000 of IRA assets for those age 70 ½ or older expired at the end of 2013.  This important tax break enabled taxpayers to meet their required minimum distributions (RMD) and exclude the charitable IRA distribution from adjusted gross income.  Congress has historically retroactively reinstated this provision several times in the past.  You may wish to wait towards the end of 2014 before taking your RMD to see whether this provision may be reinstated for 2014.

Business Taxes

·       Recently published final regulations concerning the acquisition, production, and improvement of tangible property go into effect for tax years beginning on or after January 1, 2014.  Some of the provisions may require a change in tax accounting methods including the required filing of Form 3115 to report the change.

·       The amount that taxpayers can expense under Section 179 drops to $25,000 from $500,000 for tax years that began in 2013.  The expensing limit is reduced dollar for dollar as total eligible Section 179 property purchases during the year exceeds $200,000 (down from $2 million in 2013).  A trap exists for fiscal year pass-through entities whose tax years begin in 2013 and end in 2014.  If the entity claims an expensing amount above $25,000 per owner, the excess will be permanently lost because the owners receiving the expensing allocation must follow the 2014 limits.  They can’t deduct more than $25,000 and any excess allocation  is permanently lost.

·       Corporations that issue or are included in audited financial statements, that have total assets of $10 million or more (down from $50 million in 2013), and that have made a contingency reserve for possible additional taxes (or did not record a reserve because they intend to litigate the issue if challenged), must include Schedule UTP with their 2014 income tax returns.  UTP means “uncertain tax positions.”  The government is requiring these corporations to self-report their uncertain tax positions, giving the IRS notice of issues that can be audited.