taxation law Tag

by Chris Swiecicki

Understanding the Annual Gift Tax Exclusion in 2025

This article is a “plain English” draft of an article for the Bar Association of Metropolitan St. Louis. Please reach out if you would like the full copy.

In our last article, we explored anticipated tax law changes for 2025. This time, we’re focusing on a powerful estate planning tool: the annual gift tax exclusion. Used wisely, it can significantly reduce your taxable estate.

What Is the Gift Tax?

The federal gift tax, governed by Section 2501 of the Internal Revenue Code, applies to transfers of property made without receiving something of equal value in return. It covers direct and indirect gifts—whether the asset is real estate, cash, stocks, or other property.

What Is the Annual Gift Tax Exclusion?

To avoid tracking every small gift, Congress created an annual exclusion. For 2025, that amount is $19,000 per recipient, up from $18,000 in 2024.

That means you can gift $19,000 to as many individuals as you’d like—without filing a gift tax return or dipping into your lifetime exemption. Married couples can double that and give $38,000 per recipient, per year.

Example: A couple with three children can gift a total of $114,000 annually ($38,000 x 3), tax-free. Over five years, that’s $570,000 moved out of their estate.

Making Exclusion Gifts Through a Trust: Future vs. Present Interest

Using a trust can enhance your gift strategy—if done correctly. But not all trust gifts qualify for the annual exclusion.

Gifts must be of a present interest—meaning the recipient can use or enjoy the gift immediately. This was clarified in several court cases.

• In Pelzer, the court ruled that gifts made to a trust without immediate access didn’t qualify.

• But in Estate of Cristofani, things changed. The decedent created a trust giving her children and grandchildren the right to withdraw trust contributions within 15 days. Even though the grandchildren had only contingent future interests in the trust overall, the right to withdraw created a present interest.

The IRS challenged this, claiming the withdrawal right was only included to get around the rules. However, the court ruled that if the legal right exists, the motive behind it doesn’t matter.

This principle was reaffirmed in the Crummey case. As long as a beneficiary has a legal right to withdraw the gift—even if they don’t actually do so—it qualifies for the exclusion.

Why This Matters

These cases confirm that properly structured trusts can allow you to take advantage of the annual gift tax exclusion while still controlling how and when beneficiaries receive assets.

This strategy lets you reduce your estate’s value for tax purposes without giving beneficiaries full control over the assets right away.

Final Thoughts

The gift tax exclusion remains a valuable estate planning tool. Whether giving directly or through a trust, it’s a legal way to transfer wealth while minimizing tax exposure.

If you’re looking to preserve your estate and provide for loved ones, consult a tax professional to explore how the annual exclusion—and trust planning—might fit your goals.

 

Photo credit: Photo by Towfiqu barbhuiya via Pexels.com

by Chris Swiecicki

What is the Outlook for Tax Laws in 2025?

I am again both proud and honored to be co-author with Richard Wise on this article, which first appears in the St. Louis Law Journal Blog. Any errors are mine alone. Readers who want the full version, complete with footnotes, should check out the original.

During President Donald Trump’s first administration, Congress passed the Tax Cuts and Job Act of 2017 (TCJA). It is scheduled to sunset on December 31, 2025. If the TCJA sunsets, the relevant tax provisions will expire and the Internal Revenue Code will revert to its pre-2018 status.

If that were to happen, the following changes would occur:

Individual Income Taxes  

• The individual income tax rates would increase. Notably, the top tax rate would increase from 37% to 39.6%.
• Individual Standard Deduction: In the calculation of taxable income,  taxpayers subtract the standard deduction from their Adjusted Gross Income (AGI). In 2024, the standard deduction was $29,200 for married couples; the pre-2018 standard deduction was $13,000 for married couples.
• Personal Exemption: In calculation of taxable income, taxpayers subtract the number of personal exemptions for themselves, their spouse and dependents from their AGI.  The personal exemption under TCJA was reduced to zero; the personal exemption pre-TCJA was $4,150 per person.
• Child Tax Credit: The child tax credit allows taxpayers to reduce their federal income tax liability for each qualifying child. The TCJA set the amount at $2,000. The pre-2018 tax credit was $1,000 per child. Note: this is a dollar-for-dollar tax credit on an individual’s tax return.
• State and Local Tax Deduction (SALT): Currently, taxpayers who itemize their deductions are limited to claiming $10,000 in state and local income and property taxes under the TCJA. Under pre-TCJA provisions, the $10,000 cap did not apply and, hence, taxpayers will be able to deduct all eligible state and local income, sales, and property taxes. Note: the current administration is interested in removing the cap regardless of whether the TCJA is allowed to sunset.
• Mortgage Interest Deduction: Under TCJA, married taxpayers can deduct mortgage interest paid on the first $750,000 of mortgage debt. Returning to pre-TCJA status will increase the $750,000 to $1,000,000.
• Deduction for Pass-Through Business Income: Ordinarily, pass-through business owners are taxed at their ordinary income tax rates on such pass-through income. The TCJA created a deduction equal to 20% of qualified business income. This deduction will expire upon the expiration of the TCJA.
• Capitalization of Costs in a Trade or Business: A business generally must capitalize the cost of property used in a trade or business or held for the production of income and recover such costs through deductions for depreciation. For example, a business acquires a bulldozer for $500,000 with a depreciable life of 10 years. For 10 years, the business can deduct a depreciation expense of $50,000 per year. Under TCJA, a business was eligible to fully expense the purchase in the year the property was placed in service.  Accordingly, in year 1, the business could tax a business expense deduction of $500,000. This provision was phased down from 2022 to 2026.
• Estate and Gift Taxation: Estate and gift taxes are levied at a rate of 40% after excluding the applicable exclusion from taxation. For decedents who died in 2024, the exclusion amount was $13,610,000. This exclusion amount was set at $10,000,000 and adjusted annually for inflation. Pre – TCJA, the exclusion amount was $5,000,000, adjusted for inflation, which again will take effect upon the expiration of the TCJA.

What Proposed Tax Changes Are Under Discussion Now?

The new administration has announced that it is looking at some new proposals for changes to tax law.

• Social Security Tax: There are discussions about exempting Social Security benefits from income tax. In fact, at least one member of the U.S. House of Representatives has proposed such legislation.
• Tips: There is talk that the administration wants to exempt from taxation tips paid to retail service providers, although we have not seen any specific details. The consensus is that it would apply to restaurant waiters and waitresses.  A sidebar on this topic is how or if this would affect the base compensation paid to such workers. Would management pay the service workers less of a base pay (which is fully taxable) on the prospect that service workers would be able to keep more of their compensation derived from tips? It’s anyone’s guess until the administration issues specific proposed revisions to existing law.
• Overtime: There have been discussions that overtime compensation paid to hourly workers would be exempt from tax. Again, we are short on specifics. Might such an overtime exemption apply only to the 50% overtime payment, or if it would apply to the entire overtime compensation? Would such a change distort the labor market? For instance, would the labor market move to more hourly and non-exempt jobs if an adjustment is not made for salaried employees that are exempt from the Fair Labor Standards Act (FLSA) overtime rules? Would such a tax provision distort the labor market by employers relying more on overtime compensation than by hiring new workers?

In addition to the above considerations, Congress has to consider the estimated revenue effects of each provision under analysis and determine whether there should be corresponding provisions enacted to counter any projected revenue loss.

One takeaway from this article is that the reader should note how a change in tax policy may have a significant impact on the behavior of consumers and businesses. In some instances, tax policy is specifically designed to encourage a change in behavior.

 

This piece originally appeared in the St. Louis Law Journal blog.

Photo credit: Photo by Nataliya Vaitkevich, via Pexels.com

by Chris Swiecicki

Tax Court Holds Form Over (Controlled) Substance

I am again both proud and honored to be co-author with Richard Wise on this article, which first appear in the St. Louis Bar Journal. Any errors are mine alone. Readers who want the full version, complete with footnotes, should check out the original published by the Bar Journal.

In 2017, Lonnie Wayne Hubbard, a pharmacist from Kentucky, was found guilty by a jury on multiple charges of distributing a controlled substance. The indictment included a forfeiture provision with respect to the pharmacist’s listed property, more specifically an Individual Retirement Account held at T. Rowe Price. Following the defendant’s jury trial, his IRA was condemned and forfeited to the United States.

T. Rowe Price issued Hubbard a Form 1099–R: Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the 2017 tax year, reporting an early taxable distribution in the amount of $427,518.00. For 2017, Hubbard did not file an income tax return, thus failing to report the $427,518.00 IRA distribution which was forfeited.

The Internal Revenue Service via its Automated Substitute for Return Program, authorized by § 6020(b) of the Internal Revenue Code, prepared a substitute tax return on behalf of the taxpayer.

In 2020, the IRS sent a notice informing Hubbard of an income tax deficiency for the 2017 tax year of $165,353, an addition to tax of $37,204.00 for failure to file a timely tax return, an addition to tax of $28,937 for failure to timely pay, and an addition to tax of $3,959 under for failure to make estimated tax payments for 2017. In 2021, Hubbard timely filed a notice of petition with the Tax Court contesting the tax deficiency.

Hubbard’s argument was that since the funds were directly transferred to the government, he never constructively received the funds. Furthermore, he argued that he had reasonable cause for not filing his tax return, as he was incarcerated at the time the tax return was due. Lastly, he argued that his wife (now his ex-wife) never forwarded him the Form 1099-R received from T. Rowe Price.

Constructive Receipt

Section 61(a) of the Code provides that gross income includes “all income from whatever source derived.” This includes all accessions to wealth, clearly realized, and over which the taxpayer has complete dominion. Pensions and IRA distributions are generally taxable as income.

Gross income under § 61(a) includes items of income that the taxpayer has constructively received. Under the constructive receipt doctrine, funds or property which are subject to a taxpayer’s unfettered command and which they are free to enjoy at their option are constructively received whether they see fit to enjoy them or not.

Where a taxpayer’s funds are criminally forfeited to the United States to satisfy a forfeiture judgment, the taxpayer is not relieved of the income tax consequences that would have attached to the funds without such forfeiture. By forfeiting the funds, the taxpayer has realized the benefits of the funds, and must recognize the funds as gross income to the same extent as if they had been physically received.

The courts have held that a discharge by a third person of an obligation is equivalent to receipt by the person taxed.

In addition, the courts have previously held that IRA funds constitute gross income as an involuntary distribution when forfeited to a third party. A taxpayer constructively receives the IRA distribution when the distribution is made from the taxpayer’s IRA to satisfy a fine or restitution related to criminal conviction.

In the present case, there were undeniable accessions to wealth, clearly realized, and over which Hubbard had complete dominion. The mere fact that the payments were extracted as punishment for his unlawful conduct did not take away from their character as taxable income to him.

Excuses Not to File Petitioner’s Tax Return

Sections 6651(a)(1) and (2) of the Code provide that additions to tax may be reduced if petitioner can establish that his failure to timely file or failure to timely pay was due to reasonable cause and not willful neglect. Hubbard argued that he had reasonable cause not to file his tax return because he was incarcerated.

This argument failed, as the Tax Court held that Hubbard knew that he had a duty to file his tax returns. The Tax Court took judicial notice that Hubbard had filed his tax returns in previous years, and that he was aware of the criminal forfeiture. The Tax Court relied on Commissioner v. George, in which it was held that incarceration is not reasonable cause for the failure to file an income tax return.

Lastly, the court addressed Hubbard’s claim that he did not know that he had to file an income tax return because he did not receive the Form 1099-R from T. Rowe Price. Failure to receive tax documents does not excuse taxpayers from the duty to report income, and the courts have held that non-receipt of a tax document does not constitute reasonable cause to prevent the application of a § 6662(a) accuracy-related penalty.

Conclusion

In conclusion, Hubbard had no better luck in his proceedings in Tax Court than he did in his unlawful distribution of controlled substances.

This piece originally appeared in the St. Louis Bar Journal blog.

by Chris Swiecicki

Sonny Did Not Rollover: Some Perils of Holding and Transferring Nontraditional Assets in IRAs

I was delighted when asked to be co-author with Richard Wise on this article, which first appear in the St. Louis Bar Journal. Richard is a wealth of information on many topics, and I was happy to contribute my two cents on this particular case. Readers who want the full version, complete with footnotes, should check out the edition published by the Bar Journal.

With the popularity of using Individual Retirement Accounts (IRAs) to hold non-traditional assets such as precious metals, partnership interests, real estate, and other property, a recent case involving James Caan, the actor who played Santino Corleone (better known as Sonny) in the movie The Godfather, illustrates some of the perils of using IRAs to hold non-traditional assets.

What is an IRA?

Section 408 of the Internal Revenue Code is the main Code provision governing IRAs. It was enacted as part of the Employee Retirement Income Security Act of 1974, in furtherance of Congress’s goal “to create a system whereby employees not covered by qualified retirement plans would have the opportunity to set aside at least some retirement savings on a tax-sheltered basis.”

Section 408(a) provides that an IRA is “a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the [requirements enumerated in paragraphs (1) through (6)].” Section 408(h) further provides that for purposes of section 408:

a custodial account shall be treated as a trust if the assets of such account are held by a bank (as defined in subsection (n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the requirements of this section, and if the custodial account would, except for the fact that it is not a trust, constitute an individual retirement account described in subsection (a). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.

To form a custodial IRA, the taxpayer executes a written custodial agreement that meets the requirements specified in section 408(a)(1) through (6). Once the custodial agreement is executed, section 408(h) treats the custodial agreement as a trust instrument and the custodian as a trustee, which allows for section 408(a) to apply, thereby creating a custodial IRA.

If the IRA is a custodial account, the institution’s duty is to hold and safeguard the investment; there is no duty with respect to investment decisions. The practical distinction is that a custodial account’s investment decisions can be dictated by the IRA owner/beneficiary.

Trust IRAs and custodial IRAs have the same three tax attributes, which together constitute the tax- deferral system that Congress created: (1) cash contributions are generally deductible; (2) accretions from the IRA’s assets are not taxable (except for Section 511 unrelated business income); and (3) distributions are taxable.

Alternative/Nontraditional Asset

IRAs are not limited to holding traditional assets such as cash, bonds, and publicly traded securities; they can still qualify for tax advantages while holding alternative assets.

When an IRA holds alternative assets, however, the IRS requires that the IRA’s trustee or custodian report the fair market value of the alternative assets yearly, valued as of December 31 of the preceding year, i.e. year-end fair market value.

Distributions from an IRA

In addition to creating a tax-deferral system through IRAs, Congress provided for nontaxable rollovers of IRA distributions, by which taxpayers can transfer investments from one IRA to another without incurring tax liability.

When a taxpayer requests an IRA distribution, that distribution is nontaxable if the entire amount received, including money and any other property is paid into an IRA for the benefit of such individual not later than the 60th day after the day on which he receives the distribution.

A taxpayer may also choose to roll over only a portion of the distribution, in which case only the portion that is contributed to another IRA within the 60-day rollover period qualifies as a nontaxable rollover contribution, and the non-contributed portion must be included in income.

Taxpayers are limited to one nontaxable rollover of an IRA distribution per one-year period, whether it be a full or partial rollover.

Distributions of Noncash Property

If the distribution consists of noncash property, the taxpayer must contribute the exact same property in order for the distribution to be considered a nontaxable rollover contribution under section 408(d)(3)(A)(i). In other words, the taxpayer cannot change the character of the noncash property.

Sonny’s Predicament

Caan held a partnership interest in an IRA with UBS serving as the IRA custodian. As part of the UBS custodial agreement, UBS placed the responsibility with Caan to provide a year-end fair market value of the partnership. In 2015, Caan failed to provide UBS with the partnership’s 2014 year-end fair market value. As a result, UBS refused to continue serving as the custodian of the partnership interest, and sent a letter to Caan notifying him of a distribution of the partnership Interest. UBS then issued Caan a Form 1099–R – Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., which reported to the IRS a distribution of the partnership Interest using the 2013 year-end value as the value of the distribution.

Also in 2015, Caan’s financial advisor moved to Merrill Lynch and Caan transferred his IRAs to Merrill Lynch. The partnership interest, however, was not eligible for electronic transfer, so Caan’s investment advisor at Merrill Lynch directed that the partnership be liquidated, and the cash sent to Caan’s Merrill Lynch IRA account. Said liquidation and cash transfer did not occur until approximately a year from the time that UBS notified Caan of UBS’s distribution of the partnership interest.

On his federal income tax return for tax year 2015, Caan reported a nontaxable distribution of his IRA. The IRS Commissioner disagreed with Caan’s position and determined an income tax deficiency of $779,915.00 for tax year 2015. He filed a petition with the U.S. Tax Court for redetermination of his 2015 income tax deficiency.

Shortly before filing the Tax Court petition, Caan requested a private letter ruling from the IRS granting him a waiver of the 60-day period for rollovers of IRA distributions. The IRS denied that request on the grounds that Caan did not meet the “same property” requirement. In other words, regardless of the timing of the rollover, Caan’s liquidation of the partnership interest and contribution of the cash to the Merrill Lynch IRA did not comply with the “same property” requirement. As such, it was not a nontaxable rollover.

The Tax Court sided with the IRS, holding that the partnership interest was distributed in 2015 to Caan, and that Caan did not contribute the partnership interest in a manner that would qualify as a nontaxable rollover contribution under section 408(d)(3) because he changed the character of the property when the partnership interest was liquidated prior to rolling over the property to his new IRA.

Takeaway

When a client holds nontraditional or alternative assets in an IRA, the IRA should be reviewed yearly, and any actions involving rolling over such assets to a different custodian must be taken with care.

This piece originally appeared in the St. Louis Bar Journal blog.

by Chris Swiecicki

How to Find a Corporate Tax Lawyer

Creating a tax strategy takes teamwork among legal, finance, and accounting professionals. Many companies trust an independent corporate tax lawyer as an advisor to the tax strategy team. When you are ready to add a corporate tax lawyer to your team, how do you find one? The search starts the old-fashioned way and ends with a list of interview questions. 

Ask for a Referral to a Corporate Tax Lawyer

This is a case when “Googling it” is not a good first step. You will not see many listings for “corporate tax lawyer.” You probably will have better success by asking your professional network if they will refer you to a corporate tax lawyer. Inquire with your banker and accountant, and the lawyers you work with on other matters. Most of us trust recommendations from respected colleagues, which is why this is the best way to find a lawyer you will trust from day one. 

If you do not get a referral from someone you know, check with the bar associations in your area; for Missouri, those include the Federal Bar Association and the Eighth Circuit Bar Association, the bar for the St. Louis area. (You can also learn about our own Taxation Law capabilities here at Swiecicki & Muskett.) 

Check Their Credentials for Practicing Taxation Law

The practice of taxation law requires a minimum of a Juris Doctor degree, known as a J.D. The attorney also must be licensed by the state bar. Many corporate tax lawyers expand their expertise and earn a Master of Laws in Taxation degree, known as an L.L.M.. Some are certified public accountants and others have served in corporate finance positions.

Christopher Swiecicki, founder and managing attorney at Swiecicki & Muskett, L.L.C., practices taxation law with the insight of decades of experience in law, finance, and accounting. During his career he has:

 

• Earned a J.D. in 1990 and an L.L.M. in 2005, both from the Washington University School of Law, one of the top law schools in the nation.
• Taught a course in Business Acquisitions as an adjunct professor at the Washington University School of Law since 2011. 
• Worked as a tax accountant at one of the Big Four accounting firms.
• Served as inside tax counsel to a Fortune 500 Company.
• Worked as inside tax counsel to a regional financial institution.
• Served as a chief financial officer and general counsel for a $40 million private company. 
• Been recognized as an expert in the field by the Association of Corporate Counsel and the American Bar Association. 

Today, Christopher Swiecicki provides personalized service to business owners and executives at major corporations. He keeps his client roster small enough to respond quickly to every client. When he meets with clients, he has in-depth knowledge of their needs. (To begin a conversation, you can find his contact information here.)

Ask If the Corporate Tax Lawyer Has Applicable Experience

A corporate tax lawyer might have impressive credentials but lack experience related to your situation. Ask them about it before signing a contract with them. In some cases, you may need to meet with them to explain your situation. If you learn they are not experienced in the area you need help with, ask them for a referral to another corporate tax lawyer. 

Learn What the Corporate Tax Attorney Will Do for You

When hiring a corporate tax attorney, find out what they will do for you. Christopher Swiecicki has decades of experience advising companies on the federal tax-related aspects of acquisitions and dispositions, mergers and financial structures and products, and corporate governance. If you are seeking counsel in one of these areas, contact Swiecicki to discuss your situation and see if there is a good fit.

In other situations, consider asking the following questions, or variations of them, depending upon your business:

 

1. What is your experience with a business like ours?
2. How do you see our business interests intersecting with tax law?
3. How will you apply your knowledge of taxation law to help us manage our business functions more effectively?
4. Will you help us decide whether to set up a C-Corp or an LLC?
5. What skills and resources do you have to help our company manage tax exposure and risk?
6. How does your team stay current on IRS rulings and government programs affecting business taxes?
7. Will you advise us on the tax ramifications of current operational and business decisions?
8. Do you provide counsel related to e-commerce and cloud-based services?
9. Do you have experience litigating cases before the IRS?

 

At Swiecicki & Muskett, we serve businesses in many industries with varied structures and sizes. We are constantly gaining new insights, thanks to the diversity of our clientele.  

When you are ready to increase profits with a sophisticated tax strategy, contact us. We will serve you with the strength of our experience combined with constant attention to changes in taxation law. Contact Christopher Swiecicki at 636-778-0209 or email [email protected].

by Chris Swiecicki

C-Corps vs. LLCs: Which One is Right for My Business?

When deciding the best way to structure their business, owners are often inundated with advice. And while friends , colleagues, and even accountants can mean well, they can inadvertently steer them into a choice that is problematic and expensive.

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