Calculations
Calculation Description Category
Calculation Description Category

# Credit Exclusion Gifts

The estate tax benefit of credit exclusion gifts can be projected in two different ways:

• One way to project the benefit is to determine the donor's life expectancy (the average number of years the donor can be expected to live), calculate the possible future growth in the value of the gift based on either an assumed rate of capital appreciation or an assumed rate of after-tax income accumulation, and then calculate what the federal estate tax (and any state death taxes) would have been if the growth were still part of the estate.
• The other way to project the benefit is to calculate the future growth in each future year (using the same kind of assumed growth rate or income accumulation rate), and the possible estate tax on that future growth, but multiply those possible future estate tax savings by the probability of the donor dying in that future year. The sum of those possible benefits is the total probable benefit of the gift.

Webcalculators illustrates the probable benefit of making a lifetime gift using both methods.

A disadvantage of lifetime gifts of property is that the donee (recipient of the gift) receives the property with the donor's income tax basis, while if the property had been held until death the property would have received a new income tax basis equal to fair market value at death (or at the alternate valuation date six months after death, if that would reduce the estate tax otherwise payable). To compare the income tax cost of a lifetime gift of appreciating property with the estate tax benefit of excluding the appreciation from estate tax, see "Cost/Benefit of Gifts of Appreciating Property."

Estate Tax
Benefit/Cost of Grantor Trusts
Grantor Trusts

# Cost/Benefit of Grantor Trusts

A "grantor trust" is a trust which is considered to be "owned" by the grantor (or creator) of the trust (or a beneficiary of the trust) for federal income tax purposes. When the grantor or beneficiary of a trust is treated as the "owner" of a trust (or a portion of the trust), that grantor or beneficiary must include the income, deductions, and credits of the trust (or portion of the trust) on that person’s individual income tax return, and not on the tax return of the trust.

There are a number of different ways that a trust can be a grantor trust, and all of those different ways are too numerous and complicated to be described in detail, but they represent the judgment of Congress that a grantor who has retained a certain level of control over the income or principal of a trust should be treated as the owner of that trust for income tax purposes. The simplest example is a revocable trust. If the grantor of a trust can revoke the trust, then the trust should be ignored for income tax purposes. Similarly, a beneficiary who can withdraw the income and principal of a trust should be treated as the owner of that trust.

That a revocable trust is a grantor trust does not create any opportunities for estate or gift tax planning, because the creation of a revocable trust is not a completed gift, and the trust is still part of the gross estate of the grantor for federal estate tax purposes (and also subject to Pennsylvania inheritance tax). However, there are other powers that the grantor can retain to create a grantor trust other than the power to revoke, and the IRS has issued favorable gift and estate tax rulings on the use of those powers, so a trust can be a grantor trust even when the trust is irrevocable.

The most commonly used power to make an irrevocable trust a grantor trust is for the grantor of the trust to retain the power, exercisable in an individual and not a fiduciary capacity, to reacquire the trust principal (or corpus) by substituting other property of equivalent value. If the grantor creates an irrevocable trust and retains the power (in a nonfiduciary capacity) to require the return of property held in the trust in exchange for property of equal value, the trust is a grantor trust even if the grantor has no other interest or power in the trust. And the IRS has issued public rulings (on which taxpayers can rely) holding that the retention of a power of substitution does not cause the trust assets to be included in the grantor's gross estate, and so the trust is not subject to federal estate tax at the grantor's death.

## Grantor Trust Benefit

The benefit of a grantor trust comes from who pays the tax on the trust's income and gains. The IRS has ruled that, when a trust is a grantor trust, the grantor is liable for the tax on the trust’s income. Therefore, because the grantor is paying his own tax liability and not the liability of the trust, the payment of the tax by the grantor is not a gift by the grantor to the trust or its beneficiaries.

The IRS ruling is not limited to any particular kind of income and applies to both capital gains and ordinary income. It also makes no difference whether the income or gains are distributed or accumulated. This means that the grantor of a grantor trust can pay the income taxes for income paid to children and grandchildren, or accumulated for their future benefit, without making a taxable gift.

So, if a trust has \$20,000 of income and would otherwise have to pay \$6,444 of federal income tax to accumulate that income (at 2017 rates), but the trust is a grantor trust and the grantor pays the tax on the income, the grantor has effectively made a \$6,444 gift to the trust without payment of any gift tax. The trust will continue to earn income for which the grantor will have to pay additional taxes each year, so the grantor can indirectly add substantial sums to that trust during his or her lifetime by paying the income taxes for the trust.

## Possible Income Tax Benefit (or Cost)

There may be a small income tax benefit to having income taxed to the grantor rather than the trust or its beneficiaries, because trusts reach the top income tax bracket very quickly (with only \$12,500 of taxable income in 2017) and the grantor might not be in the top income tax bracket, in which case the income that would be taxed to the trust at the top rate is instead taxed at the lower rate that applies to the grantor.

In the alternative, there may be an income tax cost if the grantor is in the top income tax bracket, because then all of the income will the taxed at the top rate and the benefit of the lower income tax brackets of the trust will have been lost. However, this income tax cost is likely to be small in comparison to the gift and estate tax benefit, because the tax brackets that apply to trusts are much smaller than the tax brackets that apply to individuals, and so a trust reaches the top income tax rate very quickly. For example, in 2017, a trust reaches the top income tax rate with only \$12,500 of income, and the difference between the tax on that income (\$3,232.50) and the tax at the top income tax rate of 39.6% (\$4,950) is only \$1,717.50. So it doesn't take much of a gift tax benefit to overcome that income tax cost.

Further, if both the grantor and the trust are investing in securities that pay qualified dividends that are taxed as capital gains and not ordinary income, then the difference between the income tax payable by the trust as a separate taxpayer (non-grantor trust) and the income tax payable by the grantor will be even less.

An additional factor is that a trust accumulating income might also have to pay the 3.8% tax on net investment income under IRC section 1441, which the grantor might or might not have to pay because individuals have higher threshold amounts for that tax. So it is possible that the income tax paid by the grantor might be more than the income tax that would have been paid by the trust, while the tax on net investment income would be less, off-setting some (or all) of the income tax increase.

## Comparing the Costs and Benefits

Webcalculators illustrates the gift tax benefit and income tax costs by calculating the income earned by a trust and comparing (a) the income taxes payable by the trust as a separate taxpayer (a non-grantor trust) and (b) the additional income taxes that would be payable by the grantor. The income tax cost is the difference between the cumulative difference in the income taxes paid by the two different kinds of trusts, plus the lost income, and the estate tax benefit is the difference between the compounded after-tax value of the two trusts.

Estate Tax
Benefit/Cost of Gifts of Appreciating Property

One way to compare the income tax costs with the estate tax benefit is to project the future value of the property using an assumed rate of growth in value, then calculate both the possible estate tax on that post-gift growth and the possible income tax on the pre-gift and post-gift appreciation. The difference between the possible estate tax on the post-gift appreciation and the possible income tax on all of the pre-death appreciation is the net benefit of the lifetime gift.

Two additional calculations are possible:

• If the property has a basis that is less than current fair market value, then there is a current income tax cost but only a future estate tax benefit, and the net benefit will be negative if the donor dies soon after making the gift. There will be "break-even" point at which the estate tax benefit exceeds the income tax cost, and it is possible to calculate that break-even point and the probability of the donor living to that point, using the same mortality table used by the Internal Revenue Service for life estate and annuity calculations.
• By calculating the possible net benefit in future years, and the probability of the donor dying in each of those future years, it is possible to add those future probabilities together into a total net probable benefit for the lifetime gift.

The net benefit of the lifetime gift increases if the donor's basis in the property is nearer current market value, the assumed rate of growth is larger, or the donor is younger. The net benefit decreases if the property has a lower basis, the growth rate is lower, or the donor is older.

These calculations do not take into account the possibility that the property might not be sold for many years post-death, and so the tax on the capital gains might be deferred for many years (or avoided entirely if the beneficiary or beneficiaries who inherit the property should die before selling the property, so that the property receives a new income tax basis and the tax on the appreciation disappears). There is also the possibility of future tax law changes that would change the projected estate tax or income tax liabilities.

Estate Tax
Pennsylvania Inheritance Tax
Pennsylvania Inheritance Tax

# Pennsylvania Inheritance Tax

Pennsylvania imposes an inheritance tax on the transfer of property at death by will or intestate succession, as well as certain other transfers at death or within one year before death.

## Taxable Transfers

The inheritance tax is imposed on a number of different kinds of transfers of property at death, the most common of which are the following:

• The transfer of property will or intestate succession (the laws governing how an estate is distributed when there is no will), which generally means all of the property in the name of the decedent at death.
• Gifts made within one year before the death to the extent that the total of the gifts to any one person exceeded \$3,000 during a calendar year.
• Any lifetime transfer of property for which the decedent has retained the right to the income or use of the property, the right to amend or revoke the transfer, or the power to decide who shall possess or enjoy the property. This would include revocable ("living") trusts, bank and broker accounts that are "in trust for" or payable to named beneficiaries, as well as transfers of houses or other properties while retaining a life estate in the properties or the explicit or implicit right to use or occupy the properties.
• Individual retirement accounts and other retirement benefits, unless the decedent did not have rights of ownership. (Generally speaking, IRAs and retirement benefits are taxable when a decedent is 59-1/2 years of age or older.)
• Joint bank and broker accounts and other properties held as joint tenants with right of survivorship, other than accounts and properties in the joint names of a married couple (see below). Under Pennsylvania law, bank and broker accounts in two or more names are presumed by the held as joint tenants with right of survivorship.

Except for gifts within one year before death, these assets and transfers are all valued as of the date of death.

Some things that are not taxable:

• Transfers to the United States, the Commonwealth of Pennsylvania, political subdivisions of Pennsylvania, and charities.
• Property owned jointly by a married couple with right of survivorship. Property passing to a surviving spouse is subject to a 0% tax rate (see below), but jointly held property is not even considered a transfer subject to tax and so bank accounts and houses joint names are not even reported on an inheritance tax return.
• Life insurance, even if payable to the estate.
• Retirement benefits payable through the pension system of the Commonwealth of Pennsylvania.
• Real and tangible property outside of Pennsylvania, and intangible property (such as stocks and bank accounts) owned by a decedent who was not domiciled in Pennsylvania.
• Propery over which the decedent held a power of appointment, such as property in a trust created by someone other than the decedent but which the decedent had the right to withdraw or direct the distribution of.
• Certain kinds of agricultural property and closely held business interests.

## Deductions

From the gross value of assets and transfers subject to tax, there is deductible:

• Funeral expenses, compensation paid to executors or administrators of the estate, attorney fees, and other costs of administering the estate.
• Debts of the decedent, and mortages and liens imposed on property subject to tax.

## Rates of Tax

The rate of tax that is imposed on each transfer depends on the relationship between the person receiving the transfer and the decedent.

• Transfers to a surviving spouse are taxed at 0% (i.e., there is no tax).
• Transfers to children, grandchildren, and other descendants and step-descendants, the spouse, widow, or widower of a child, and parents, grandparents, and other ancestors are taxed at 4.5%. However, transfers by a minor decedent to a parent are taxed at 0%.
• Transfers to siblings (i.e., brothers and sisters) are taxed at 12%.
• Transfers to all other persons, such as aunts, uncles, nieces, nephews, as cousins, as well as friends and persons who are unrelated, are taxed at 15%.

There is no exemption or exclusion amount, so a net transfer of \$100 to a child will result in a tax of \$4.50.

## Returns and Payment of Tax

Inheritance tax returns are due, and the tax is payable, nine months after death. So, for example, if death occurs on April 3, the tax return and payments are due on the following January 3.

There is a discount of 5% for tax paid within three months of death, so it is usually advisable to estimate the tax that will be due and pay the tax within the three month period.

Unless a will (or revocable trust) directs otherwise, the burden of the tax is allocated as follows:

• The tax on gifts under a will (or revocable trust) of specific amounts of cash or specific property is payable from the residue (if any) of the estate (or trust).
• The tax on each share of the residue under a will or revocable trust, or each intestate share of an estate, is payable from the share.
• The tax on all other transfers is paid by the beneficiary of the transfer.

All returns are filed with, and tax payments are made to, the Register of Wills, and tax returns must be filed in duplicate. However, the tax returns are examined by the Department of Revenue, which also assesses the tax.

Estate Tax
Value of Income and '5 & 5' Power
Value of Five-and-Five Power

# Value of Income and 'Five and Five' Power

A common feature of a trust that gives liberal benefits to a beneficiary is to give the beneficiary all of the income and, in addition, the power to withdraw each year either five percent of the value of the trust or \$5,000, whichever is the greater amount. (Those limits are intended to conform with a provision of the Internal Revenue Code that states that, if the beneficiary does not exercise the withdrawal right, and the right lapses, the lapse is not a gift by the beneficiary to the trust.)

These "5&5" powers must sometimes be valued for tax purposes, and this calculator determines the value of the combined income and principal withdrawal rights in accordance with section 7520 of the Internal Revenue (which applies to the valuation of life estates, remainders, and annuities). Valuations under section 7520 rest upon two assumptions: (a) a rate of interest that is applied to discount future amounts back to present value, and (b) a mortality table that is used to determine the probability that a person with survive to a particular age, or die before reaching that age.

The valuation of a 5&5 power is done in the following steps for each possible future year:

• The income of the trust is assumed to be the principal of the trust times the 7520 rate.
• The withdrawal right is either 5% of the principal of the trust or \$5,000, whichever is greater.
• The present value of the income and withdrawal right is the sum of those rights multiplied by a factor that represents the present value of \$1 to be paid only if the beneficiary is living, and so discounted by both the interest the \$1 could have earned at the 7520 rate and the probability the beneficiary could die before receiving those interests.
• Those present values, for all years from year one to the year in which the beneficiary would reach 110 (which the mortality table considers to be the oldest possible age), are added up, and become the total present value of all future income and withdrawal rights.
Estate Tax

Under the federal gift tax system, the donor pays the gift tax on a gift, and not the recipient ("donee") of the gift. In the classic "net gift," the recipient agrees to pay the gift tax on the gift. Because the recipient is paying an obligation of the donor, essentially paying money back to the donor, the value of the gift is reduced by the gift tax that must be paid by the recipient.

The classic net gift does not result in any actual tax savings, because the donor is simply making a smaller gift, and is usually done because the donor is making a gift of real property, a closely held business, or other assets that the donor doesn't wish to sell and the recipient has the cash necessary to pay the gift tax and is willing to pay the gift tax in order to get the property being given.

Unlike the classic net gift, the net-net gift produces an actual tax savings, because the value of the gift is being reduced by an amount that the recipients of the gift have not actually paid, and might never pay if the donor survives the three-year period after the death. And, even if the donor does die within the three-year period, the resulting estate tax is still less than it would have otherwise been because the gift tax that was paid was less than it otherwise would have been.

Based on a court opinion upholding the validity of a net-net gift, it would appear that the present value of the estate tax that might be paid should be valued in the same way as a contingent remainder (the present value of \$1 payable upon the death of an individual, but only if the individual dies within the three-year period), applying the rules of I.R.C. section 7520, which generally controls the valuation of life estates, remainders, and annuities.

## Income Tax Considerations

A net-net gift also has income tax consequences:

• A net gift or net-net gift is treated as part sale and part gift, and may result in taxable gain to the donor if the consideration paid by the recipient (the gift tax paid by the recipient and the present value of the agreement to pay the possible estaet tax on the gift tax) exceeds the donor's basis in the property.
Income Tax Changes in 2018 for Individuals
Income Tax Changes in 2018

# Income Tax Changes in 2018

The Reconciliation Act of 2017 (formerly known as the "Tax Cuts and Jobs Act") lowers most tax rates, but also denies or limits certain deductions, so whether any particular individual will see their federal income tax increase or decrease in 2018 depends on their level of income and what deductions will be claimed.

## Changes in Rates

The most significant change in tax rates is the reduction in the top income tax rate from 39.6% to 37%, which means that taxpayers in the top income tax bracket will generally pay less tax.

The lowest income tax rate remains unchanged at 10%, but the intermediate rates have changed from 15%, 25%, 28%, 33%, and 35%, to 12%, 22%, 24%, 32%, and 35%. Because of changes in both rates and brackets, it's difficult to predict how much the tax has been reduced at any particular level of taxable income, but there is some decrease (or no increase) at every level of taxable income, with two exceptions:

• Heads of households with taxable incomes between \$249,325 and \$529,562 will pay slightly more tax under the new law than they would have paid under the old law. For example, a head of household with taxable income of \$424,950 of taxable income will pay \$123,030.50 of tax instead of \$119,518, an increase of \$3,512.50.
• Other unmarried taxpayers with taxable incomes \$369,038 and \$451,010 will also pay slightly more in tax under the new law, but only about \$1,118 at most.

## Changes in Deductions

Taxpayers who do not itemize deductions and have no dependents will generally be better off, even though personal exemptions have been eliminated, because the standard deduction has been increased. So, for example, under the old law a married couple with no dependents would have been entitled to a standard deduction of \$13,800, and two exemptions of \$4,450 each, for a total of \$22,700 in reductions to taxable income. Under the new law, there will be no personal exemptions, but a standard deduction of \$24,000.

For taxpayers with minor dependent child, the elimination of the deduction for personal exemptions may be offset by the increase in the child tax credit for dependent children under the age of 17, which has been doubled, from \$1,000 to \$2,000, and for which the threshold amounts at which the credit begins to be phased out has been increased from \$110,000 to \$400,000 for married taxpayers filing jointly, and to \$200,000 for other taxpayers. (The threshold amounts had been \$75,000 for unmarried taxpayers and \$55,000 for married filing separately.) An additional credit of \$500 is also allowed for dependents other than minor children.

Taxpayers who normally itemize deductions may see the benefit of lower tax rates entirely neutralized, or perhaps overwhelmed, by limitations on itemized deductions, such as the new limitation on deductions for state and local taxes.

The changes in deductions for the year 2018 can be summarized as follows:

Type of Deduction Prior Law New Law
Standard Deduction \$13,000 for married filing jointly; \$9,550 for heads of households; \$6,500 for other unmarried taxpayers; \$6,500 for married filing separately. \$24,000 for married filing jointly; \$18,00 for heads of households; \$12,000 for other unmarried taxpayers; \$12,000 for married filing separately.
Personal Exemption \$4,150 for each taxpayer and dependent. No deduction.
Medical Expenses Reduced by 10% of adjusted gross income. Reduced by 7.5% of adjusted gross income.
State and Local Taxes Deduction for all state and local income and property taxes. Deduction is limited to \$10,000, or \$5,000 for married filing separately.
Mortgage Interest Deduction for acquisition interest for mortgage of not more than \$1 million, or \$500,000 for married filing separately, as well as interest on home equity loans. No deduction for home equity loans and, for residences purchased on or after 12/15/2017, deduction is allowed for acquisition interest for mortgage of not more than \$750,000, or \$375,000 for married filing separately.
Charitable Deduction Deductions for cash contributions to public charities limited to 50% of adjusted gross income. Deductions for cash contributions to public charities limited to 60% of adjusted gross income.
Miscellaneous Itemized Deductions Deductions for costs of tax preparation, maintenance of income producing property, and other "miscellaneous itemized deductions" reduced by 2% of adjusted gross income. No deduction for miscellaneous itemized deductions.
Limit on Itemized Deductions Total itemized deductions are reduced by 3% of amount that adjusted gross income exceeds \$320,000 for married filing jointly, \$293,350 for a head of household, \$266,700 for other unmarried individuals, and \$160,000 for married filing separately, but not to less than 80% of deductions other than medical expenses, investment interest, and casualty losses. No limit on itemized deductions.

All of the changes described above apply to the years 2018 through 2025 except for the change in medical expense deductions, which only applies to 2018 and 2019.

## Other Changes

The base for calculating future inflation adjustments has changed from the consumer price index for all urban consumers (CPI-U) to what is known as the chained consumer price index (C-CPI-U). This may affect calculations for 2018 that use factors that have not otherwise been changed by the new law, but are adjusted for inflation.

Changes for individual taxpayers that are not incorporated into the calculations include the new deduction for qualified business income received through entities other than corporations (new IRC section 199A), as well as changes in the tax treatment of alimony, contributions to ABLE accounts, student loan discharges, casualty loss deductions, moving expenses, wagering losses, and the alternative minimum tax.

Income Taxes
Income Tax on Estates and Trusts
Fiduciary Income Tax

# Income Tax on Estates and Trusts

Trusts and estates file income tax returns that are known as "fiduciary returns," Form 1041. (A "fiduciary" is a person who holds property for the benefit of other persons. Common types of fiduciaries are executors or administrators of decedent's estates, trustees of trusts, and guardians or conservators of the estates of minors or persons declared to be legally incapacitated.)

Estates and trusts are often described as "pass-through entities" because the beneficiaries of the trust are taxed on the income that is distributed to them and the trust is taxed on the income that is not distributed. The character of the income that is distributed generally has the same character that is received by the estate or trust, so if a trust that receives qualified dividends as income distributes all its income, the income received by the beneficiary is taxed as qualified dividends.

The taxation of estates and trusts is similar to the taxation of individuals in the following ways:

• Estates and trusts can claim deductions for some of the same things for which individuals can claim deductions, such as interest that is paid, and state and local taxes. And, like other taxpayers, the expenses of producing income must be allocated between taxable and tax exempt income and the expenses attributable to exempt income are not deductible.
• The undistributed taxable income of estates and trusts is subject to progressive tax rates that are similar to the tax rates that apply to individuals, and that are based on tax brackets that are indexed for inflation like the tax brackets of individuals, but there is no 10% bracket and the brackets are much smaller than those for individuals, with the top tax rate of 39.6% applied to income in excess of \$12,400 (for the year 2016).
• The long-term capital gains of estates and trusts are subject to a top tax rate of 15%, qualified dividends are treated like long-term capital gains, and the tax on capital gains is calculated in the same way as for individuals.
• The capital losses of an estate or trust can only reduce other taxable income by \$3,000.
• Estates and trusts are subject to the 3.8% tax on net investment income, just like individuals.

There are also a number of differences between the income taxation of estates and trusts and the income taxation of individuals:

• Estates and trusts can claim a charitable deduction, but only in the governing instrument (the will or trust document) requires the payment to the charity and only if the payment must be made out of the income of the estate or trust.
• The expenses of an estate or trust that are for the collection of income or the management or preservation of income-producing property (which covers most of the costs of administering an estate or trust) is deductible as a "miscellaneous itemized deduction" and, like the same kinds of deductions for an individual, are only deductible to the extent the expenses exceed 2% of "adjusted gross income." However, estates and trusts can deduct costs which would not have been incurred if the property were not held in the estate or trust. So, for example, fiduciary fees are fully deductible, but investment management fees are subject to the 2% "floor."
• Estates and trusts are entitled to a deduction for income distributions to beneficiaries (and the beneficiaries must then include the distributions in their own income), but the deduction is limited by the "distributable net income" of the estate or trust. (See below for a more detailed explanation of distributable net income.)
• Estates and trusts have a deductible exemption that is like the personal exemption for individuals, but it is much smaller, and not indexed for inflation.
• Estates are entitled to an exemption of \$600.
• Trusts that are required to distribute all of their income each year are entitled to an exemption of \$300. (Because all income is distributed currently, the exemption usually applies only to capital gains, which are usually not considered to be income and so not distributed.)
• Trusts that can accumulate income are entitled to an exemption of \$100.
Income Taxes
Required Minimum Distribution
Required Minimum Distributions

# Required Minimum Distributions

Qualified retirement plans and individual retirement accounts (IRAs) were intended by Congress to help support the plan participant or account owner during retirement, and not as a tax-deferred investment account for the benefit of future generations. Therefore, section 401(a)(9) of the Internal Revenue Code, and the regulations that have been adopted for that section, require distributions from retirement plans during the plan owner's lifetime and, afher the owner's death, complete distribution either within five years after the owner's death or, if there is a "qualified beneficiary," within that beneficiary's lifetime.

The minimum distribution requirements can be summarized as follows:

• The owner must begin taking distributions in the year in which the owner reaches age 69-1/2. (The owner is age 60-1/2 in the year in which falls the date that is six months after the owner's 60th birthday.) That first distribution must be made before April 15 of the following year. Required distributions in the years after the year in which the owner turns 69-1/2 must be made before the end of the year (i.e., by December 31).
• During the owner's lifetime, required distributions are (a) the value of the account at the beginning of the year, divided by (b) the applicable life expectancy. The applicable life expectancy is calculated based on ages at the end of the year, as follows:
• If no "qualified beneficiary" has been named, the applicable life expectancy is taken from the "Uniform Lifetime Table," which is a joint-and-survivor life expectancy table based on the owner's age and a second age 10 years younger.
• If a spouse is named as a qualified beneficiary and the spouse is more than ten years younger than the owner, the applicable life expectancy is a joint-and-survivor life expectancy calculated from the owner's age and the spouse's age.
• Following the account owner's death:
• If there is no qualified beneficiary, all distributions must be completed within five years.
• If there is a qualified beneficiary and the owner died before the required beginning date for distributions (e.g., before the owner has reached age 69-1/2), the required distributions are based on the qualified beneficiary's life expectancy.
• If there is a qualified beneficiary and the owner died after the required beginning date for distributions, the required distributions can be based either on the owner's age or on the qualified beneficiary's age, as the beneficiary elects.

A "qualified beneficiary" must be either an individual (or group of individuals) or a trust which meets certain requirements. When there is more than one qualified beneficiary, the age of the oldest beneficiary is used to calculate required distributions. However, following the death of an account owner, the identity of the "qualified beneficiary" is determined after nine months, so accounts and plans can be divided into new accounts among multiple beneficiaries and the required distributions calculated for each beneficiary's separate account.

Retirement
Interest on Federal Taxes
Interest on Federal Taxes

# Interest on Federal Taxes

Underpayments and overpayments of federal taxes result in the imposition of interest that is compounded daily until the tax (and interest) is paid. This means that the annual interest rate is divided by 365 (366 in a leap year) to determine a daily interest rate, and then the daily interest rate is applied each day to both the tax that is owed and the interest has accrued.

Although this system might sound complicated, it actually simplifies the accounting for taxes and payments, because it lo longer makes any difference whether payments are applied to the tax or the accrued interest.

The interest rate on underpayments is calculated by the Internal Revenue Service and published quarterly, based on the applicable federal short-term rate for the first month of the quarter, rounded to the nearest whole percentage. (The applicable federal short-term rate for a month is the average yield on federal securities with a maturity of less than three years during the preceding three months.) In addition:

• The rate for overpayments of taxes by individuals (and estates and trusts) is the same as the rate for underpayments.
• The rate for overpayments of taxes by corporations is one percentage less than the rate on underpayments.
• The rate for overpayments by corporations in excess of \$10,000 is 2.5 percentage points less than the rate on underpayments.
• The rate for underpayments by corporations in excess of is 2 percentage points more than the rate on underpayments.

The date on which interest begins to accrue on a tax (or penalty) depends on the type of tax (or penalty).

• When a tax is due with a return, interest on underpayments generally starts to accrue with the due date of the return, without regard to any extension of time. That is:
• For income tax returns of individuals, estates, and trusts, the 15th day of the fourth month following the end of the tax year (which is April 15th for calendar year taxpayers);
• For income tax returns of corporations, the 15th day of the third month following the end of the tax year (which is March 15th for corporations which file returns based on the calendar year);
• For estate tax returns, the date that is nine months after the date of death (or the last day of the month if the date of death was on the 30th or 31st and there is no 30th or 31st in the month the return is due);
• For gift tax returns, April 15th of the year following the year in which the gifts were made.
• In most cases, interest on penalties and additions to taxes (such as estimated tax penalties, penalties for failure to file, or penalties for failure to pay taxes) does not accrue until there is a notice to the taxpayer of the penalty or addition, and no interest is imposed if the penalty or addition is paid with 21 days of the date of the notice.
• For refunds, interest usually does not start to accrue until 45 days after the claim for the refund is filed or, in the case of a return that is filed before the due date of the return, 45 days after the return was due. (So, if an individual income tax return is filed claiming a refund before the April 15th deadline, interest on the refund does not begin to accrue until May 30th.
Utility
Interest on Pennsylvania Taxes
Interest on Pennsylvania Taxes

# Interest on Pennsylvania Taxes

Underpayments and overpayments of Pennsylvania taxes result in the imposition of interest that is simple interest, and not compounded, regardless of how long the tax (and interest) remain unpaid.

This can complicate the accounting for taxes and payments, because it makes a difference whether payments are applied to the tax or the accrued interest. Generally speaking, payments are applied first to the tax owed, so payments will stop the accrual of additional interest even though the interest already imposed remains unpaid.

The interest rate on underpayments and overpayments is the same as the interest rate on underpayments of federal tax, but is only updated annually, in January, even though the federal rates can change quarterly. In addition:

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