A comprehensive estate and inheritance plan

Even those who understand the importance of estate planning may sometimes unintentionally make things harder for their heirs and beneficiaries in a variety of ways. One simple problem is that an individual's heirs may not know about plans that have been made.

This means the family may have no idea where to find important documents such as a will, or may not even know they exist, minimizing the chance that they will be found before it is too late. For example, beneficiaries of a life insurance policy who are unaware of it or lack needed information may not be able to claim the plan's benefit, leaving it in the hands of the insurer indefinitely.

As a result of similar miscommunications, state treasurers are currently holding $32.9 billion in unclaimed assets, according to the National Association of Unclaimed Property Administrators. When the time comes, family members may need information on insurance policies, bank accounts and brokerage accounts, among other assets. If an individual makes his or her own funereal arrangements in advance, documentation may be needed for the family to follow through on those wishes.

Part of this issue can be resolved by providing a comprehensive list of documents to a trustworthy individual, such as an attorney. Among the most important documents are living trusts and wills, which can determine the disposition of assets, guardianship of dependents and other matters. Experts told the Wall Street Journal that living trusts can be more helpful than wills in some respects, since they may exempt assets from probate and are often harder to dispute in court.

Taxing wealthy may be insufficient, backfire on governments

Officials around the world, including state and federal government personnel in the U.S., are discussing proposals that would focus taxes on the wealthy. Some of these are direct, while others would impose taxes on luxury items that they purchase but others generally do not, such as high-end real estate.

These plans have economic ramifications that make them unwise, according to Bloomberg. When assessing the various proposals, experts have in many cases concluded that their effect on government budgets will be minimal, largely because the wealthy are not numerous enough to have a larger impact.

In the case of the United States, a proposal to impose a surtax on the wealthy might not address issues such as the fact that some of them derive their income from dividends and investments rather than wages. As a result, it could create unequal taxation between wealthy taxpayers, unintentionally making the situation more complicated and encouraging them to seek loopholes.

In Britain, the government estimated that attempts to raise taxes on those above a certain income threshold would be less than half as effective as designed as taxpayers either left the country or successfully avoided the tax. The danger of singling out this group is that they will react similarly, according to the news source.

Attempts to focus on investors and day traders could have similar effects, since they are relatively few compared to wage-earners, suggesting that broader tax reforms are more likely to be effective.

Tax Rules May Affect Your Child’s Investment Income

Parents may not realize that there are tax rules that may affect their child’s investment income. The IRS offers the following four facts to help parents determine whether their child’s investment income will be taxed at the parents’ rate or the child's rate.

1. Investment income Children with investment income may have part or all of this income taxed at their parents’ tax rate rather than at the child’s rate. Investment income includes interest, dividends, capital gains and other unearned income.

2. Age requirement The child’s tax must be figured using the parents’ rates if the child has investment income of more than $1,900 and meets one of three age requirements for 2011:

• Was under age 18 at the end of the year,
• Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or
• Was a full-time student over age 18 and under age 24 at the end of the year and did not have earned income that was more than half of his or her support.

3. Form 8615 To figure the child's tax using the parents’ rate for the child’s return, fill out Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, and attach it to the child's federal income tax return.

4. Form 8814 When certain conditions are met, a parent may be able to avoid having to file a tax return for the child by including the child’s income on the parent’s tax return. In this situation, the parent would file Form 8814, Parents' Election To Report Child's Interest and Dividends.

More information can be found in IRS Publication 929, Tax Rules for Children and Dependents. This publication and Forms 8615 and 8814 are available on this website or by calling 800-TAX-FORM (800-829-3676).

Avoiding audits and preparing for scrutiny

There is no way to guarantee that a given taxpayer will not be audited, but some are more likely to draw the attention of the Internal Revenue Service than others.

Every American should be prepared for an IRS audit, since they could be selected randomly even if nothing in their tax returns triggers a closer look. It is especially important for small business owners and the self-employed, however. Day traders may find they are statistically more likely to be audited than the average American.

The most common trigger for an audit is a simple math error, according to Consumer Reports. These can happen to anyone, although careful attention and professional assistance may make them less likely. Having taxes prepared by a professional accounting firm may decrease the risk, although the IRS states that everyone should look over their own filing before turning it in, since they are legally responsible for it.

Tax records should be kept for a minimum of the past three years, although Consumer Reports suggests seven is better. The IRS usually does not look further back than three years when conducting an investigation, but it is possible.

When the IRS is determining who to audit, they look for certain signs of potential fraud. Among these are potentially excessive charitable donations. Proper receipts and documentation of gifts may become more important as the amounts given increase.

One common target for closer examination is business expenses that may be personal, such as travel costs, meals or the use of a home office. These are deductions that are relatively easy to falsify, making them suspect.

Refunds delayed as IRS copes with new software

The distribution of many tax refunds by the Internal Revenue Service has been delayed this year due to problems with new software, the agency indicated in response to complaints.

Some early filers are upset, saying the IRS has been taking significantly longer than it said it would to process filings. According to Accounting Web, filers of early returns from the beginning of February did not see refunds for between 15 and 22 days, or in some cases longer. Last year, taxpayers who filed electronically typically received their refunds within two weeks, or even one.

The delays have happened regardless of the efforts and programs used by early filers and tax preparers, according to the news source. The IRS reports that the delay is due to software changes meant to help detect fraud.

The agency has stated that delays are being dealt with, and more recent filers should find that the problem is solved. Federal officials and employees have been working to update IRS software for some time, and intended to eliminate the old system in October. This plan was pushed back and some tax preparers have been instructed to file through the old system this season to avoid difficulties with the new one.

Day traders may wish to be prepared for processing to take longer than in previous years. On the other hand, Reuters reports that IRS spokesman Frank Keith has said the IRS has mostly caught up and is now working at a speed comparable to past efforts.