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Case highlights state taxation of trust income

In a recent case, the U.S. Supreme Court ruled that the presence of trust beneficiaries in North Carolina did not, by itself, empower the state to tax income earned by an out-of-state trust. The court noted that the trust didn’t have a physical presence, make any direct investments or hold any real property in North Carolina. Moreover, the in-state beneficiaries had no right to demand trust income and it was uncertain whether such income would be distributed to them. Under these circumstances, the beneficiaries’ in-state residence was too tenuous a link between the state and the trust to support imposition of its income tax.

In light of this ruling, trusts currently filing income tax returns in a state solely because of the presence of one or more beneficiaries living there should reconsider whether such filings are required.

Consider forgiving intrafamily loans

The federal gift and estate tax exemption is at its highest level ever — $11.4 million. But this generous tax break is only temporary. In 2026 — or sooner if lawmakers so decide — it’ll drop back to its previous level of $5 million (indexed for inflation). One way to take advantage of the higher exemption before it expires is to forgive loans to your children or other family members. These loans are often used in connection with estate planning techniques that enable you to transfer wealth tax-free, but their success often depends on whether returns on the loan proceeds exceed certain thresholds. Outright gifts — including forgiveness of an outstanding loan — may be a more reliable way to transfer wealth, so long as you have enough unused exemption to shield it from gift taxes.

Employee bonuses: Deduct now, pay later

If your business is on the accrual basis of accounting, you may be able to deduct year-end employee bonuses this year even if you don’t pay them until next year. And your employees need not report these bonuses as income until they file their 2020 tax returns.

To take advantage of this year-end tax planning technique, you must pay bonuses within 2½ months after the end of the tax year (by March 15 for calendar-year businesses) and meet certain other requirements. Among other things, you can’t accelerate deductions on bonuses paid to related parties, including certain company owners or shareholders, and the bonuses must be “fixed and determinable” as of the last day of this year.

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