FEDERAL TAXES

FEDERAL TAXES

Federal Tax Liens

Any unpaid Internal Revenue Code tax becomes a lien on all property and rights to property of the taxpayer,
including property or rights to property acquired after the lien arises. A federal tax lien is not valid against
purchasers, holders of security interests (e.g., mortgages or mechanics’ liens) and judgment lien creditors until a
notice of lien has been filed in the proper place. Even though a notice of lien has been filed, it is not valid
against certain classes of creditors (known as “Super Priorities”) defined in Section 6323(b) of the Internal
Revenue Code. With respect to real property, the notice must be filed with the county recorder.

In addition to the general tax lien, the Internal Revenue Code provides for special liens for estate and gift taxes.
At the date of the decedent’s death, an unrecorded estate tax lien attaches to every part of the gross estate and
continues for a period of ten years. An estate tax lien is valid against most purchasers and transferees. (If the
estate elects to pay the tax in installments for up to fifteen years, the lien is recorded.)

An unrecorded gift tax lien attaches to all gifts made during the calendar year. If the gift tax is not paid by the
donor, the donee becomes personally liable for the tax. The gift tax lien extends for ten years from the time the
gifts were made.

Federal Gift Tax and the Unified Credit

This tax applies to completed voluntary transfers by an individual of any type of property for less than an
adequate and full consideration in money or money’s worth.

If a gift is a transfer of a present interest, there is an annual exclusion of $13,000. If a gift exceeds $13,000 in a
year, a return is due. If the gift is a transfer of a future interest (i.e., any interest that is to commence in use,
possession, or enjoyment at some future time), the exclusion does not apply and a return is due.

Two types of “indirect” transfers are no longer considered gifts and no return is due. These include any amount
paid on behalf of an individual:

1. as tuition to an educational organization; or

2. to any person who provides medical care.

The due date of the Federal Gift Tax Return is April 15 of the year following the gift. Any extension of time
granted for filing the form 1040 applies to the return. Any compliance questions should be referred to a tax
advisor or the local IRS office.

Even though a return may be due, there may not be a tax liability. For example, transfers between spouses are
not taxable gifts. Also, donors may make large transfers and use their Unified Credit rather than pay the gift
tax. The Unified Credit is a dollar for dollar offset against the tax. It was phased in as follows:

For Gift Tax Purposes: For Estate Tax Purposes:
Year Unified Credit Applicable Exclusion Amount Unified Credit Applicable Exclusion Amount
2002 and 2003 345,800 1,000,000 345,800 1,000,000
2004 and 2005 345,800 1,000,000 555,800 1,500,000
2006, 2007, and 2008 345,800 1,000,000 780,800 2,000,000
2009 345,800 1,000,000 1,455,800 3,500,000

To the extent the Unified Credit is used to offset a gift tax liability, it is unavailable for offset in settlement of
the transferor’s estate tax liability.

Social Security Tax

The federal government operates a retirement pay program. Self-employed persons are generally covered also.
This program, commonly known as “social security,” requires quarterly contributions by almost all employers.

Federal Insurance Contributions Act (FICA) withholdings are employee contributions to social security and
medicare. An employee’s FICA tax rate is 7.65%. The social security tax portion is applied to wages up to a
certain amount (e.g., $106,800 for 2010). The medicare portion applies to all wages.

Unemployment Tax

This federal tax is applicable only to those non-farm employers who:

1. pay wages of $1,500 or more during any calendar quarter; or

2. employ at least one employee for some portion of at least one day of each of at least 20 different weeks
(not necessarily consecutive) during the current or the preceding calendar year.

There are also specific requirements for those individuals employing agricultural or domestic workers.