Tax Update Summer 2020 Considerations

August 10, 2020Evergreen Q3 2020, News

Woodstock Quarterly Newsletter Update

Tax Update summer 2020 family loans and taxes
Remote Work and “Domicile”

If you and your family are handling estate tax planning by living in a low-tax state, then you’re familiar with “domicile,” the determination of a taxpayer’s true “home.” If your business operates in more than one state, then you are familiar with the term “nexus,” which can trigger state taxes depending on an evaluation of sales, physical location of offices, or even location of employees (“payroll”).

Now comes the pandemic with workers choosing or being forced to work remotely. Over two dozen states have announced that they expect workers and their employers to follow their states’ rules on domicile and nexus.[1] As a Wall Street Journal article points out, “these rules are famous for taxing out-of-state entertainers and professional athletes.” The most aggressive states shouldn’t be a surprise: New York and California. Because every state has a slightly different approach, the suggestion is to first understand what the rules are for the situation you’re in, then coordinate, if possible, with your employer to get the paperwork correctly done.

Intra-Family Loans: Tread Carefully

On another matter, we’ve had a recent request from a client concerning intra-family loans. The request was actually about helping a family member with a personal financial transaction. Of course, the first step is to make sure to do no harm. An offer of financial support into an angry situation or to someone irresponsible with funds might not be a good idea. Once you are satisfied on that score, then funds can be gifted or loaned. Gifting relates generally with estate and gift planning, now unified. Loans take a great variety of forms, with varying security and payment terms. From a tax point of view, the interest rate and documentation are key. Another Wall Street Journal article pointed out that the IRS-mandated rates of interest on intra-family loans for both long-term and short-term loans are now at their lowest levels in many, many years: 1.15% and .25%, respectively.[2] Creating documentation covering the term, repayment schedule, and other provisions, as well as charging at least the mandated rate, makes the loan real.

The main point is that gifting, loaning or a combination of the two can be designed to meet a variety of goals.

If you or any of your other advisors have questions about the issues raised here, please contact your investment manager or one of us.

William H. Darling, CPA – Chairman & CEO
Jeanne M. FitzGerald, CPA – Tax Manager

[1] WSJ, Laura Saunders, “Remote Working From a Different State?” 5/30-31/20.
[2] WSJ, Laura Saunders, “Thinking About Lending Money to Family?” 5/9-10/20.