Gift Tax Returns for 2010 Gifts
Gift tax returns for gifts that you made in 2010 are due on Monday, April 18, 2011 (as Friday, April 15, is Emancipation Day); however, you can extend the due date to October 17, 2011 (since this year October 15 falls on a Saturday). In order to do so, you must timely file a request for an automatic extension of time to file your 2010 income tax return. That also extends the time to file your gift tax return.
Allocation of GST in 2010
If you created a trust in 2010, you should direct your accountant to elect to have your generation-skipping transfer (“GST”) tax exemption either allocated or not allocated, as the case may be, to contributions to that trust. You may have heard that for 2010 the GST tax rate was zero and incorrectly assumed that you need not file a gift tax return in order to elect in or out of GST allocation for 2010 trusts. The GST tax was still applicable in 2010, albeit with a zero tax rate. Thus, it remains critical that you file your 2010 gift tax return and opt out of automatic allocations of GST exemption to trusts where all of the beneficiaries are two generations below you (known as “skip persons”) and the property is intended to pass to them.
For instance, if you created a 2010 trust for your grandchildren, given the 2010 GST tax rate of zero, you would be wasting your GST exemption if any of it were allocated to that trust if the trust will not later pass to successively younger generations. Additionally, there may be instances where you will want to opt out of automatic GST exemption to trusts where the beneficiaries are your children and grandchildren (known as “indirect skips”).
You should file a gift tax return for those purposes even if your gifts did not exceed the annual gift tax exclusion and, therefore, would not otherwise require the filing of a gift tax return. Please call one of our attorneys if you have any questions about your GST tax exemption allocation.
Make Sure that You Take Your IRA Required Minimum Distributions
If you are the owner of a traditional IRA, you must begin to receive required minimum distributions from your IRA and, subject to narrow exceptions, other retirement plans, by April 1 of the year after you turn 70 ½. After that, you must receive those distributions by December 31 of each year. So, if you turned 70 ½ during 2010, then you have until April 1, 2011 to take your RMDs. The RMDs must be calculated separately for each retirement account that you own, and you, not the financial institution at which your account is held, are ultimately responsible for making the correct calculations. The penalty for not withdrawing your RMD on time is an additional 50% tax on the amount that should have been withdrawn.
Please consult us if you need assistance with your RMDs.
2010 Conversions of Traditional IRAs to Roth IRAs
When you convert from a traditional IRA (which is funded with pre-tax dollars) to a Roth IRA (which is funded with post-tax dollars), the resulting income is reportable by you for income tax purposes with respect to the conversion year. However, for 2010 conversions, you can benefit from a special deferral arrangement whereby one-half of the converted amount is taxed in 2011 and the other half is taxed in 2012. This tax deferral benefit applies to 2010 conversions only.
You must report your 2010 IRA conversions on IRS Form 8606 that you will attach to your individual income tax return (or separately file, if you do not need to file an income tax return). Unless you elect out of the special 2010 benefit, the conversion income automatically will be spread over 2011 and 2012. You should, of course, compare your other 2010 income and deductions to those you anticipate having in 2011 and 2012 before you irrevocably default to the two-year deferral. Under certain circumstances, you may find it more advantageous to elect out of the automatic two-year spread and include all of the conversion income in 2010. You also may do that on Form 8606.
Unfortunately, if you converted more than one traditional IRA, you do not have the option of deferring the tax on one conversion but not another. It is an all-or-nothing election. However, you can choose different tax treatment if you both converted a traditional IRA to a Roth IRA and made an in-plan rollover from a traditional account to a Roth 401(k), Roth 403(b) or Roth 457(b) account. In that case, you are able to make different elections because you are required to file a separate Form 8606 to report conversions and rollovers. The filing of the separate forms enables you to make elections that relate specifically to all of your conversions or all of your rollovers, as the case may be, reported on each form.
Although this tax deferral provision will not be available for any 2011 IRA conversions, converting to a Roth IRA may still be advantageous, since assets in a Roth IRA grow tax-free and are not subject to required minimum distributions during your lifetime. That allows a Roth IRA to act as a “tax shelter” to hold wealth for your descendants if you have no need to make withdrawals during your retirement. More information on the benefits of a conversion to a Roth IRA may be found in the June 2009 issue of Personal Planning Strategies, available on our website.
If you transfer funds to an insurance trust (or another trust where a beneficiary has withdrawal powers), remember that when you make contributions to that trust, the Trustees should send “Crummey” letters to the beneficiaries to notify them of their withdrawal rights over the amount of your contribution to the trust. Without these letters, transfers to the trust will not qualify for the gift tax annual exclusion.