By Alan L. Olsen, CPA, MBA (Tax)
Greenstein, Rogoff, Olsen & Co., LLP
Washington’s ‘gift’ to tax payers was signed into law by President Obama on December 17th. While the argument is still raging behind closed doors, we the tax payers now have some additional clarity to guide us through our year-end tax planning.
In a nutshell, our ‘gift’ (depending on how you want to look at it) includes the following:
All Bush-era taxes will be extended for two more years for all American families. Tax brackets will stay at 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent through Dec. 31, 2012.
Higher exemption amounts for AMT (Alternative Minimum Tax): For 2010, the AMT exempt income levels increase to $47,450 for individuals and $72,450 for married filing jointly, and will increase again for 2011.
13-month extension of unemployment benefits. The extension is expected to help about 9 million Americans.
One-year Social Security tax reduction for employees, from 6.2 percent to 4.2 percent for individuals.
Child Tax Credit, Earned Income Tax Credit and the tax credit increases for college tuition (American Opportunity Tax Credit) adopted in 2009 as part of the economic stimulus package will be extended.
Businesses will be allowed to deduct 100 percent of capital investments in 2011, a doubling from the current write-off figure of 50 percent.
The agreement also calls for holding the estate tax at 35 percent for two years, with a $5 million floor for individuals.
We recommend the following tried-and-true tips for your year-end tax planning:
Make an Investment in Developing Small Business. For QSBS purchased between September 27, 2010 and December 31, 2010, a zero percent effective income tax rate will apply to at least the first $10 million of gain upon its ultimate sale if applicable requirements are met. Excluded gain from these investments will not be treated as a preference item for AMT purposes, so the benefits extend equally to AMT taxpayers.
Sell ‘loser’ stocks to offset gains. You may have a mix of winner and ‘loser’ stocks – if you have a big gain, sell some of the ‘loser’ stocks. You can erase a large gain with a corresponding loss.
Expense Business Assets under Section 179. If you own your own business and have plans to buy office furniture, equipment or other tangible business property, you might consider doing so before year-end to take advantage of the temporarily increased Section 179 deduction and/or the temporary 50% / 100% bonus depreciation. For 2010, the new rule increases the maximum amount a taxpayer may expense under Section 179 to $500,000 and increases the phase-out threshold amount to $2 million. In addition, a first-year 100% bonus depreciation deduction is available for qualified properties acquired and placed in service during the period from September 8, 2010 through December 31, 2011. First-year 50% bonus depreciation deduction is still available for the qualified purchase from January 1, 2010 to September 7, 2010.
Put the maximum amount into retirement accounts. Bump up your 401k contribution for the maximum allowed contribution ($16,500 for year 2010). Payroll deductions can increase your take-home pay because they reduce your taxable income. Some employers allow catch up for the current year. Other types of qualified retired plans are available to you if you own your own business. In a defined contribution plan, the maximum that may be contributed to a participant’s account is limited to lesser of $49,000 or 100% of the participant’s compensation. In a defined benefit plan, the maximum annual benefit for the year cannot exceed the lesser of $195,000 or 100% of the participant’s average compensation for his or her highest three (3) consecutive calendar years.
Do a Roth IRA Conversion. For 2010, no matter how high your income is, you are allowed to take advantage of the Roth conversion strategy. If your income level prevented a 2009 Roth conversion, you can do one in 2010. There is a novel tax deferral opportunity with respect to 2010 Roth IRA conversion – the tax that you’ll owe as a result of the rollover will be payable half in 2011 and half in 2012, unless you elect to pay the entire tax bill in 2010. Moreover, if your conversion decision turns out to be a bad idea, you have until October 15, 2011 to recharacterize (unwind) your converted account(s).
Prepay state and/or local tax. If you expect your income to be lower and you won’t be affected by the AMT (sometimes, the acceleration of deductions can cost you money if it triggers the AMT) you should make additional state and local tax payments to take the deduction this year.
Make charitable contributions. Donate and save receipts for deductions on your return. Donate stock that is growing. If you have appreciated stock that has been held for more than 1 year, hang on to cash but donate stock. With this strategy you avoid tax on appreciation but can deduct the full value of stock – everyone wins. If you are 70 1/2 and older, you may elect to take a tax-free distribution from an IRA to public charities.
Think green – take a tax credit. A great way to cut energy cost and save up to $1,500 in income taxes is to make energy efficiency improvements to your principal residence. The $1,500 maximum does not apply to geothermal heat pumps, solar water heaters, solar panels, fuel cells, and wind generators. These are all eligible for a 30% tax credit with no upper limit.
Tax credits. Tax credits can be more valuable than deductions. Here are some of the ‘big’ ones:
Child Tax Credit: $1,000 for each qualified child under the age of 17.
American Opportunity Credit: a maximum allowable credit is $2,500 per student for each of the first four years of post-secondary education and 40% is refundable.
Lifetime Learning Credit: Up to $2,000 – part time students can qualify.
Child Independent Care Credit: If you paid someone to care for your child(ren) under the age of 13 so you could work, you are entitled to up to $3,000 paid for one qualifying individual or $6,000 for two.
Adoption Credit: $13,170 per adopted child and it is refundable.
Gift Your Money at the Lowest Rate. For the 2010 tax year, the top gift tax rate is 35% with an exemption of $1 million and the generation-skipping transfer (GST) tax has been suspended (only for the current year). For years 2011 and 2012, the top transfer tax rate remains 35%, but the exemption increases to $5 million. Additionally, the new law reunifies the federal estate tax exemption and the federal gift tax exemption, meaning the lifetime gift tax exemption rises to $5 million per person ($10 million per couple). Now is a good time for you to consider when to make a gift to your child and grandchildren and what estate tax planning strategy you should take.
Weigh the tax election for 2010 estates: Estate tax is repealed in 2010. However, the executors of 2010 estates over $5 million with highly appreciated assets should consider whether to make an election to subject the estate to the new law. If the executor selects to do so, the first $5 million of estate assets will exempt from federal estate taxes, while the amount exceeding $5 million may be subject to estate tax. However, the entire estate will receive full step up in basis.
Take advantage of “portability” rule for an estate: New tax provision allows a surviving spouse to utilize an unused exemption from the spouse who has passed away, so a married couple can exempt up to $10 million. If this is the case for your family, do not forget to make the election on the estate tax return to take advantage of this new “portability” rule.
As always, these are general guidelines and we suggest you consult with a tax professional regarding your particular situation before taking any action. For additional information please contact Alan L. Olsen, CPA, MBA (Tax) at Greenstein, Rogoff, Olsen & Co. – (510) 797-8661.