George Steinbrenner Beats Uncle Sam On Estate Taxes

Stuart Rohatiner, CPA, JD

George Steinbrenner died at age 80 — an amazing bit of timing for his heirs. Like Texas billionaire Dan L. Duncan, death comes in the one year when no estate taxes are are due.

You see, the 2001 Bush tax cuts included a peculiar twist: in tax year 2010, there would NO estate tax at all. That means Steinbrenner’s $1.1 billion estate and Duncan’s $9 billion estate could pass to their heirs without any federal tax. I’m sure that Red Sox fans are seething at this very notion (at least Big Papi won the home run derby!)

Considering that lawmakers have been aware of this issue since 2001, it’s deplorable that they have done nothing to address it and have left families stuck in the fog for planning purposes.

I spoke with an estate attorney this morning who said that for the past couple of years, there was talk of setting the estate tax hurdle at $7 million for couples and $3.5 million for individuals, which was the 2009 level. But without legislative action, the estate tax repeal will “sunset”, effective January 1, 2011 at which time the exemption amount for estates and gifts is $1 million and the the maximum rate for estate tax returns to 55%.

There’s been talk about making any fix retroactive to the beginning of 2010, but the lawyer said that may be unconstitutional and more importantly, given how much money would be at stake (approximately $5 billion in taxes for Duncan and $500 million for Steinbrenner) the lawyers will fight this one for a long time. Then again, Uncle Sam has a lot to gain…and he sure could use the money, especially this year.

By Jill Schlesinger | Jul 13, 2010 |

President Signs Bill Providing Temporary Funding Relief for Pension Plans

June 27, 2010

Stuart Rohatiner, CPA, JD

President Barack Obama signed HR 3962, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, on Friday. The bill includes the so-called “doc fix,” increasing Medicare reimbursement to physicians by 2.2% through the end of November, in place of a scheduled 21% cut.

The pension relief title of HR 3962 allows single-employer plans to elect to amortize over a longer period pension shortfalls caused by losses in asset value they experienced in 2008. However, if plan sponsors pay compensation exceeding $1 million to any employee (including nonqualified deferred compensation amounts set aside or reserved in a trust or other arrangement) or pay “extraordinary” dividends or stock redemptions during the relief period, they must increase pension installment contributions by the excess amount of the dividends or redemptions. The compensation limits apply to services performed after Feb. 28, 2010.

Extraordinary dividends and stock redemptions are the portion of the combined total of dividends declared and stock redemptions paid during the plan year that exceeds the greater of either the employer’s adjusted net income (without regard to interest, taxes, depreciation and amortization expenses) in the preceding plan year, or dividends declared in the plan year (if the employer has declared dividends in the same manner for the immediately preceding five consecutive years). Certain redemptions and dividends with respect to preferred stock are excluded.

For multiemployer plans, the act provides relief from standard accounting rules to treat separately from any other “experience gain or loss” such experience gain or loss attributable to net investment losses incurred in either or both of the first two plan years ending after Aug. 31, 2008. Such gains or losses may be amortized over 30 years. The act also prescribes an extended “smoothing period” for the difference between expected and actual returns in the same plan years. Such an extension will be deemed an approved change in funding method under IRC § 412(d)(1) and will not be considered an unreasonable asset valuation method solely because of the change. The provisions also restrict pension benefit increases for plans making the election.

From the Journal of Accountancy

Deferral and Spreading of Roth Conversion Income Not Always Best

This year has been touted as the Year of the Roth IRA Conversion (“2010: The Year of the Roth Conversion?” JofA, Jan. 2010, page 28). Advice abounds on when to carry out a conversion and how to pay for it. Often, though, a thorough analysis of the alternatives requires planners to consider a number of details.

Stuart Rohatiner, CPA, JD

For example, how do projected increases in marginal tax rates and the client’s exposure to the alternative minimum tax (AMT) affect the election either to pay the resulting tax in tax year 2010 or to defer and spread it to tax years 2011 and 2012? Our analysis suggests that opting out of the two-year spread may sometimes be the better tax option, particularly for taxpayers subject to a 2010 AMT liability or to increased marginal tax rates.

PROSPECTS FOR HIGHER TAX RATES

 

One concern is the possibility that the top two individual tax rates will be allowed to revert as scheduled to their pre-EGTRRA (Economic Growth and Tax Relief Reconciliation Act) levels of 36% and 39.6% in 2011 and 2012, rather than their current 33% and 35%. For a non-AMT taxpayer who expects tax rates to remain the same, the two-year deferral may be the better option, simply due to the time value of money. But what if the taxpayer expects top tax rates to go to 36% and 39.6%?

A taxpayer with other taxable income large enough to be subject to the 39.6% maximum tax rate in 2011 and 2012 before considering the taxable distribution will benefit from opting out of the two-year spread election. But if the same individual’s other taxable income and/or the conversion amount is taxed at less than that rate in 2011 and 2012, the two-year deferral becomes the better option.

TAXPAYERS SUBJECT TO THE AMT

 

Understanding the nature of the minimum tax credit is critical to evaluating the two-year spread election for Roth IRA conversions when a taxpayer already is subject to the AMT. After all, the maximum AMT rate is 28%, versus a maximum ordinary tax rate of 35% (or 39.6%), so wouldn’t it make sense to accelerate recognition of the conversion into the AMT year? But the workings of the minimum tax credit may simply accelerate the client’s tax liability, not really reduce it, before considering the time value of money. Individuals obtain a minimum tax credit only from AMT preferences and adjustments that are timing (“deferral,” not “exclusion”) differences.

In effect, the tax savings generated by avoiding the 36% and 39.6% rates in 2011 and 2012 on the conversion amount may more than compensate for the time value of money issue caused by the earlier payment of the tax. A greater proportion of permanent differences to timing differences may make the two-year spread election still less attractive.

WHO SHOULD OPT OUT?

 

The better planning strategy for some taxpayers may be to opt out of the two-year spread election for the tax liability from a Roth IRA conversion, incurring the entire resulting income tax in 2010. This may be the case for high-income taxpayers who (1) expect tax rates to increase significantly in 2011 and 2012, and/or (2) are in a 2010 AMT position, especially one caused primarily by permanent (“exclusion”) adjustments and preferences.

An illustrative spreadsheet is available at journalofaccountancy.com/Web/RothConversion.htm so that you can examine these possibilities in detail. The spreadsheet allows planners to choose between two possible tax rate schedules for individual taxpayers (any determination of whether a Roth conversion is advisable for a particular person must take into account all of that person’s particular facts and circumstances). One is the current schedule with its 35% top rate. The other retains the current rate structure for up to the first $250,000 of taxable income and then taxes incomes above $250,000 at 36%, up to the current threshold for the 35% rate ($373,650), where a 39.6% rate would apply. For simplicity, tax brackets for 2011 and 2012 include no inflation adjustments, and AMT exemption amounts for 2009 are used. The spreadsheet also allows planners to adjust for the taxpayer’s filing status, provides a discount rate for the present value of tax liabilities in 2011 and 2012, and provides a rate of increase in annual income other than that recognized as a result of the Roth conversion.

By William A. Raabe, CPA, Ph.D., John O. Everett, CPA, Ph.D. and Cherie J. Hennig, Ph.D., MBA JULY 2010

Five Lessons From Your ’09 Tax Return

From MoneyWatch.com:

These Money-Making Tips Will Help you Analyze Last Year’s Finances in Order to Lower Your Taxes in the Future

(MoneyWatch.com)  This story, by Jill Schlesinger, originally appeared on CBS’ Moneywatch.com

Your 2009 taxes are done. Congratulations! But you’re not done yet. (Sorry.) While you have all your 2009 tax forms and documents handy, this is the perfect time to analyze last year’s finances and use those insights to lower your taxes in 2010 and beyond.

The sooner you get started, the more you can save. So, take a big breath and then take these five steps:

1. Avoid a Big Tax Refund

You think you love getting a tax refund. What’s not to like about found money? But a refund is really just the return of a year-long, interest-free loan that you extended to your spendthrift Uncle Sam.

You can do much smarter things with that money, like putting it into a retirement plan or a college savings fund. So if you will be receiving a 2009 refund of more than a few thousand dollars and you’re an employee, adjust your withholding at work. If you’re self-employed, lower your quarterly estimated tax payments accordingly.

If your 2010 income will be less than $75,000 ($150,000 if you’re married and will file jointly), be sure your tax withholding has been properly adjusted for the new Making Work Pay Tax Credityou’re entitled to receive this year. This credit (up to $400 for singles and $800 for couples) should be reflected in the amount of taxes taken out of your paycheck. But you may need to submit a revised W-4, especially if you’re holding down multiple jobs or you’re married, since your employer wouldn’t know about your extra work or your spouse’s income.

2. Save More in Your Retirement Plan

If you are not maxing out your employer-sponsored, tax-deferred retirement plan, you’re missing outon the single best opportunity to save on taxes.

I know that the idea of saving more may be difficult these days, as so many people are just getting back on their feet. But if you can squeeze just an extra 1 or 2 percent out of your paycheck and pour that cash into the plan, you’ll reduce your taxable income and your 2010 tax bill.

Doing so might also bring your income under certain thresholds that will let you qualify for bigger tax breaks you’d otherwise miss – such as personal exemptions, itemized deductions, an Individual Retirement Account, the Child Tax Credit, the Child and Dependent Care Credit, and the Hope and Lifetime Learning Credits for college.

Here’s an example, courtesy of Research401k.com: Say you’re a single person earning $50,000 and in the 25 percent tax bracket. Without making a 401(k) contribution, you might owe $12,500 in taxes this year. By contributing $4,000 to the plan, however, you’d lower your taxable income to $46,000 and might owe $11,500 in taxes. Essentially, the government lends you $1,000 to invest for your future and you don’t have to pay the loan back until you withdraw the money from the 401(k) in retirement.
3. Look into Muni Bonds and Funds

If you have money in interest-paying bank accounts, CDs, money market funds, or taxable bonds or bond funds, you could be adding to your tax liability. High-income taxpayers need to be especially concerned since their tax liability will rise as a result of the passage of health care reform.

You may want to consider moving some of those taxable savings and investments into tax-free municipal bond funds. I’m a fan of ones from Vanguard (VWITX), T. Rowe Price (PRTAX) and Fidelity (FLTMX).

After a stellar 2009, muni funds are not quite as good a deal as they were last year, compared with taxable investments. Still, if you are in a high tax bracket, muni funds could offer a better tax-exempt yield. To see how much more in your case, use this taxable-equivalent yield calculator. Just be aware that the sweet yields on munis come with some extra risk, since there’s always a possibility that a few bond issuers won’t make their payments. Historically, that risk is pretty slim, but it’s not zero.

4. Lower Your Mutual Fund Taxes

As the equity and fixed income markets recover from the financial meltdown, be on the lookout for mutual fund taxable distributions. A distribution is one of the most aggravating features of a managed mutual fund: You are on the hook for capital gains on the fund’s investments as well as the fund’s tax liability. You may even be taxed on gains the fund incurred before you owned it!

One way to limit the damage before you invest is to ask the fund company if it will be making a distribution soon. If the answer is “yes,” hold off buying until afterward.

Or you might invest in funds with low turnover ratios, such as index funds, since they’ll be less likely to throw off taxable distributions. A turnover ratio below 10 percent is generally tax-efficient. (A fund’s annual report will show its turnover rate.) Morningstar’s Fund Screener tool can help you find low-turnover stock funds.

One class of mutual funds, tax-managed funds, is all about keeping your tax liability down. These funds do so by keeping turnover low and avoiding dividend-paying stocks. Some tax-managed funds own stocks; some own stocks and bonds. Morningstar and Yahoo! Finance’s Mutual Funds Center can help you find them.

5. Keep Better Tax Records

Organizing your tax records might not only lower your tax liability, it could help you get rid of the tax-filing headache sooner. Create a file called “Taxes 2010” and throughout the year toss into it business receipts; bank, brokerage, and mutual fund statements; W-2s; 1099s; property tax bills; and mortgage interest statements. And keep track of your purchase price, commission, and sales price for any investment transactions in 2010. You’ll thank yourself in April 2011.

• Last-Minute Tax-Filing Strategies

• How to File for an Extension

• What if You Can’t Pay the IRS?

• Save Time Filing Your Taxes

• Lower Your Taxes in 2010

Also important: self employment tax information, paying your estimated taxes

How Much Damage Did the Market Crash Do to Retirement Security?

from TaxVox: the Tax Policy Center blog by Howard Gleckman

The stock market collapse of 2007-2009 was the worst since the 1930s, and rivaled in modern times only by the crash of 1973-74. But the real question for those counting on equities to help fund their retirement security is: “What are my long-term prospects in the wake of the carnage?”

In a new paper, TPC’s Eric Toder, along with the Urban Institute’s Karen Smith and Barbara Butrica, look at how investors would fare under three post-crash market scenarios. And what they found may surprise you a bit. Under one, your portfolio gets back to where it would have been, absent the crash, by 2017. That would take large, but not unprecedented, stock gains over the next decade. If equities merely revert to their historic annual returns from the market’s December 2008 level, you’ll permanently remain far behind where you would have been if there had been no collapse. And if stocks respond as they did in the decade after the 1970s crash—well, you don’t want to know.

Now for the numbers. First, the researchers used the S&P 500 Index. Based on historical data, they assumed a real, inflation-adjusted, average growth rate in the index of 3.5 percent. Add in reinvested dividends and subtract 1 percent in administrative costs, and stock portfolios “normally” increase by 5.5 percent. You should also know they measured future returns from December 31, 2008, and not from the March, 2009 market bottom that was 27 percent lower.

If you had invested $100 in December, 2007 and the market hadn’t crashed, you’d have had $171 (in 2008 dollars) by 2017. The authors figure you still can get there, but it would take an implied average real annual growth rate of 9.4 percent in the index until 2017. That’s less than the 13 percent we saw in the 90s and the 12 percent from 1955 to 1964, but it is awfully robust.

If instead, the S&P index had simply resumed its historical 3.5 percent real growth rate after 2008 as if nothing had happened, you’d have just $100 in 2017—exactly where you started in December, 2007. But it could be worse. If we get a repeat of 1974-82, when the S&P grew at an average annual rate of minus 4 percent, your 2007 nest egg of $100 will turn into a whopping $60 by 2017. Ouch.

Aha, you say, all these scenarios are far too pessimistic. After all, the market has recovered about half of its losses since it bottomed last spring. But remember the 1930s. The market lost 86 percent of its value between 1930 and 1932, rebounded strongly until 1937 but crashed again. In the end, it took nearly three decades for the Dow to find its 1929 high. What matters to future retirees is the long-term trend, not a nine-month rebound.

Keep in mind that there will be big differences in how the crash affects individuals’ retirement prospects, depending on their age and income. Older people are likely to lose more because they had more invested before the crash and have less time to recover their losses before they retire. But younger people may benefit because they’ll have the chance to buy stocks at bargain prices. Because the wealthy are likely to own more stocks, they’ll lose more if the market does not bounce back, but gain more if it recovers. In contrast, low and middle-income individuals own few stocks and rely mostly on Social Security for their retirement. They are little affected by the market crash and most can recover their losses by working for an additional year.

There is, of course, no way to predict the future. But this paper will give you a sense of just how bad the last couple of years were for our retirement savings.

Numerous Tax Provisions Expired at End of 2009

December 31, 2009

The ringing in of the new year at midnight on Dec. 31 also signaled the expiration of several tax provisions. The biggest was the estate and generation-skipping tax regime, which is repealed for 2010. Various bills have been introduced that would revive the estate tax in its 2009 form, but as of Jan. 1 no extension has been enacted, and the estate and generation-skipping taxes, at least temporarily,  no longer exist.

In addition, a number of temporary tax provisions, often referred to as “extenders,” have expired as of Jan. 1. They include tax credits, deductions and various tax incentives. Many of the provisions have been extended several times in the past, and a bill to extend them again is pending in Congress (HR 4213). It passed the House on Dec. 9, 2009, and has been referred to the Senate Finance Committee.

Estate and Generation-Skipping Taxes

In 2001, Congress enacted the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which resulted in the gradual repeal of the estate and generation-skipping transfer (GST) taxes over the next decade, resulting in no tax in 2010. However, under EGTRRA’s sunset provision, the repeal will be in effect for 2010 only. After that, the estate and GST regime in place before the passage of EGTRRA will spring back to life, as if EGTRRA had never been enacted. This means that in 2011 the estate tax exemption will be $1 million (adjusted for inflation), the tax rate will be 55%, and the state death tax credit will be revived.

EGTRRA also repealed for 2010 the step-up in basis for assets passing at death. Instead, inherited assets are subject to a modified carryover basis rule. Under this new rule, a recipient’s basis in property acquired from a decedent will be the lesser of the adjusted basis of the property at death or its fair market value on the date of death. The carryover basis provision is also scheduled to sunset after 2010.

A number of bills have been introduced that would restore the estate tax. In his budget proposal for fiscal 2010, President Obama proposed keeping the estate and GST tax rules in their 2009 form. The Taxpayer Certainty and Relief Act of 2009, S. 722, introduced in March, would make the estate tax permanent at a 45% top rate and would reunify it with the gift tax by restoring the unified credit at $3.5 million. It would also provide portability of the exemption between spouses. A similar bill, HR 4154, passed the House on Dec. 3.

Expired Tax Credits

The expired temporary tax credits include:

IRC § 30B alternative motor vehicle credit for hybrids weighing more than 8,500 pounds;

IRC § 40A credit for biodiesel and renewable diesel fuel;

IRC § 41 credit for research and experimentation;

IRC § 45A Indian employment tax credit;

IRC § 45D new markets tax credit;

IRC § 45G credit for certain railroad track expenditures;

IRC § 45N mine rescue team training credit;

IRC § 45P employer wage credit for active-duty members of the uniformed services;

IRC §§ 936 and 27(b) possession tax credit with respect to American Samoa;

IRC § 1397E credit for holders of qualified zone academy bonds; and

IRC § 1400C credit for first-time District of Columbia homebuyers.

Note that the possession tax credit with respect to American Samoa and the credit for holders of qualified zone academy bonds would not be extended by HR 4213.

Expired Deductions

The expired temporary deductions include:

IRC § 62(a)(2)(D) deduction for elementary and secondary schoolteachers;

IRC § 63(c)(1) additional standard deduction for state and local real property taxes;

IRC § 164 state and local sales tax deduction;

IRC § 165(h) deduction for personal casualty losses in federally declared disasters;

IRC § 168(e)(3)(E)(iv) 15-year straight-line cost recovery for qualified leasehold improvements;

IRC § 168(e)(3)(E)(v) 15-year straight-line cost recovery for qualified restaurant improvements;

IRC § 168(j) accelerated depreciation for property on Indian reservations;

IRC § 168(i)(15)(D) seven-year cost recovery period for motor sports entertainment complexes;

IRC § 168(n) expensing and special depreciation allowance for qualified disaster assistance property;

IRC § 170(b)(1)(E)(vi) contributions of capital gain real property made for conservation purposes;

IRC § 170(e)(3)(C)(iv)  enhanced deduction for contributions of food inventory;

IRC § 170(e)(3)(D)(iv)  enhanced deduction for contributions of book inventory to public schools;

IRC § 170(e)(6)(G) enhanced deduction for corporate contributions of computer equipment for educational purposes;

IRC § 179E(g) election to expense advanced mine safety equipment;

IRC § 181(f) expensing treatment for certain film and television productions;

IRC § 198(h) expensing of environmental remediation costs;

IRC § 199(d)(8) deduction for income attributable to domestic production activities in Puerto Rico; and

IRC § 222 deduction for tuition and related expenses.

Other Provisions

Other expired provisions include:

IRC § 172(j) carryback of net operating losses attributable to federally declared disasters;

IRC § 408(d)(8) allowance for tax-free distributions from individual retirement plans for charitable purposes;

IRC § 613A(c) suspension of limitation on percentage depletion for oil and gas from marginal wells;

IRC § 871(k) treatment of regulated investment company dividends and assets;

IRC § 897(h) qualified investment entity treatment of regulated investment companies under the Foreign Investment in Real Property Tax Act of 1980;

IRC §§ 953(e) and 954(h) exceptions for active financing income;

IRC § 954(c) look-through treatment of payments between related controlled foreign corporations;

IRC § 2105(d) look-through of certain regulated investment company stock in determining gross estate of nonresidents;

IRC § 1367(a) basis adjustment to stock of S corporations making charitable contributions of property;

IRC § 1391 empowerment zone designations;

IRC §§ 1400, 1400A and 1400B District of Columbia Enterprise Zone incentives;

IRC § 1400E renewal community tax incentives;

IRC § 1400L(b) New York Liberty Zone bonus depreciation and 1400L(d) tax-exempt bond financing;

IRC § 1400N Gulf Opportunity Zone rehabilitation credit; and

IRC § 7652(f) “cover over” of tax on distilled spirits to Puerto Rico and the U.S. Virgin Islands.

Tax Vox’s Lump of Coal Award: The Worst Tax Ideas of 2009

by Howard Gleckman

As 2009 draws to an icy conclusion, Tax Vox is pleased to announce its Third Annual Lump of Coal Award for the worst tax ideas of the year. So many choices. So little time.

10.  The Roth Rollover. Let’s see, allowing people to turn their tax-deferred retirement savings into fully tax-free investments starting on Jan. 1 will be a long-term fiscal catastrophe. And in the short run, the up-front taxes people must pay to roll into a Roth could depress the stock market and damage the shaky recovery. What’s not to like?

9. The Bo-Tax and the Tanning Bed Tariff. This is what happens when you need money and won’t talk seriously about revenues.

8. Obama’s Middle-Class. This is a rerun from last year, but it is too good to leave out. The President thinks we will somehow reduce the deficit and fix the tax code without raising taxes by a dime for those poor souls making a quarter million dollars-a-year or less. Unfortunately, that’s 95 percent of us. Can’t wait to see how he does it.

7. Taxing the Rich. Why not let a handful of wealthy taxpayers finance all your new ideas. So let’s drive the top rate north of 45 percent, even though no one will really pay it. On the other hand, except for Barbra Streisand and those other Hollywood types, they are mostly Republicans anyway.

6. The Estate Tax. Now you see it. Now you don’t. Wait, there it is again. So what if nobody has any idea how to do estate planning anymore. On the other hand, Congress has had only eight years to fix this mess.

4. California. It claims to be the fifth largest economy in the world but can’t pass a serious budget, and can’t govern itself. It is the poster child for dysfunctional state governments and fiscal crises everywhere

3. The homebuyer credit. Congress started the year by giving away $8,000 in subsidies to “first-time” homebuyers, as many as 74,000 of whom, it turned out, never quite got around to buying a house. Then, it extended the boondoggle to current owners who buy up. Bottom line: People who were already going to buy will get billions of dollars in government subsides. But you gotta make those real estate agents happy.

2. The Obama Tax Reform Panel. Not only will it fail to propose an improved tax code, it missed its own deadline. Nothing beats being both disappointing and late. “After the holidays,” the Obama people say. Does anybody care?

1. And the winner is, of course, the HAPPY Act. We’ve got a $1.5 trillion deficit and a Republican congressman named Thaddeus McCotter wants a $3,500 deduction for the cost of caring for our pets. Why? Because we love them.

Family Finance: Be cautious when lending to family

Date: 12/18/2009 3:22 PM

EILEEN AJ CONNELLY AP
Personal Finance Writer

NEW YORK (AP)

Get it in writing.

That’s the No. 1 recommendation from financial professionals about lending money to a relative.

Yet as more people who are unemployed or face losing their homes seek help, most people who make loans to family members skip that important step. The result is family loans often don’t get paid back, and hard feelings can damage relationships.

“There’s an old saying with a family loan,” said Donald W. Patrick, a certified financial planner with Patrick, MacLeod & Cranman in Atlanta. “Consider it a gift.”

It doesn’t have to be that way.

Documenting a loan can be done simply and at low cost. Spelling out the terms makes the arrangement businesslike, and can help avoid emotional and financial issues that may arise if the money isn’t repaid.

“If everybody put everything in writing, it would work more often,” said Mitchell Kraus, a certified financial planner with Capital Intelligence Associates, Los Angeles.

Some people think that a formal agreement isn’t needed if the loan is between close relatives. But whether the borrower is your child or a third cousin twice-removed, professionals warn against depending on trust alone. And try to keep emotions out of it.

Advisers also counsel not to lend money you can’t afford to give away. Older parents frequently use savings they need for future living expenses to lend to their kids.

“We see the emotion when the kids aren’t paying back and the parents are really feeling a financial pinch,” said Sally Hurme of AARP.

Reasons to lend

Unemployment is at 10 percent, and 35 percent of Americans say the financial situation in their households is “poor,” a recent Associated Press

Stuart Rohatiner, CPA, JD

-GfK poll found. Home foreclosures remain epidemic and banks are still tight with lending.

“There’s no doubt about it. It’s bad out there,” said Patrick. His clients, who tend to be wealthy, are reporting more requests for loans from family, usually their children. Planners say the reasons for the requests run the gamut from debt consolidation to medical expenses to preventing foreclosure.

And if the family lender charges interest, the loan could be more profitable than putting the money in a certificate of deposit or even many bonds.

Deborah Danielson, owner of Danielson Financial Group in Las Vegas, has clients who financed a $140,000 mortgage for their son. They are charging just 4 percent interest — lower than he would have gotten at any bank, yet more than the money was earning parked in CDs.

To structure it as a business arrangement, the couple had a mortgage company draw up the documents and hire a company to collect the payments. Their son sends his payment to the collector, along with a $6 fee for processing. At year end, the company will send statements to both parties for tax purposes.

Danielson said the arrangement made everyone more comfortable, since the son is dealing with a company instead of writing a check to his parents.

How to set up a loan

The loan documentation, at the very least, should state the amount, duration, interest rate, payment size, and any late penalties. It may seem like overkill, but making the terms clear ensures that everyone knows what is expected.

“If you don’t pay your mortgage or you don’t pay your MasterCard, they penalize you or they take your credit away,” said Stuart Rohatiner, senior tax manager with Gerson, Preston, Robinson & Co., a Miami accounting firm. “With a parent or a relative, there’s too much emotion involved.”

There can be tax implications for loans among family members if no interest is charged, or if the interest rate is very low. Typically, the Internal Revenue Service expects lenders to charge the “applicable federal rate,” published monthly by the agency. The rates also vary with the length of the loan: currently a loan of three to nine years, for example, must carry a rate of at least 2.61 percent.

If no interest is charged, the loan could be considered a gift. In that case, the lender would have to pay gift tax on any amount over $13,000.

Prepared lending forms are available at some office supply stores and online. Forms can also be found at LendingKarma.com, where users can set up e-mail payment reminders for borrowers. Payments can also be entered and tracked on the site.

Some peer-to-peer lending sites, like VirginMoney.com and Prosper.com, facilitate the loan, acting as a middleman between lender and borrower to collect and distribute payments.

More complicated or large loans may best be handled by a financial planner or an attorney. For mortgages, it’s smart to run a credit check and to verify income like a bank would, said Dale Siegel, an attorney with Circle Mortgage Group in Harrison, N.Y. and author of “The New Rules for Mortgages.” ”From step one, after everybody understands how this is going to work.”

Copyright 2009 The Associated Press.

More Tax Chores for the Wealthy at Year-End

Wealth Matters

By PAUL SULLIVAN
Published: December 11, 2009

At the end of every year, there is a basic list of things wealthy people should do to put their financial houses in order. But this year, that house may be a lot messier than in years past, given the wild swings in wealth in the last 12 months and the various government programs and proposals that can change the calculus.

Sam Petrucci of Credit Suisse Private Bank says a popular tactic has been a special annuity trust to give money to an heir tax-free.

The biggest question — the one that overshadows all of the others and is still unresolved — is what will happen to the estate tax next year. While the House of Representatives has voted to make permanent the current 45 percent tax rate on all estates above $3.5 million, the Senate has yet to take up the bill. And it is not clear if it will have time to do so this year.

The uncertainty gives wealthy investors much to consider in the next few weeks. To address these concerns, I intend to discuss here what you should do before the end of the year and use the next column to look at what you should do at the beginning of 2010.

NOW OR THEN?

The mantra for year-end tax planning is usually “accelerate deductions, delay income.”

The reason is simple: to lower your tax bill in that year. But with the prospect of higher taxes on the wealthy by 2011 at the latest, the advice now is the opposite: accelerate income now and delay deductions until after taxes rise, when they could be more valuable.

“Many people are resigned that income taxes are going to rise,” said Janine Racanelli, managing director and head of the Advice Lab at J. P. Morgan Private Bank. “People are being tactical as the picture is becoming clearer.”

What is certain is the income tax for the top earners is going to be 39.6 percent in 2011, up from 35 percent now.

Yet there are other variables, Ms. Racanelli said, that could drive tax rates even higher, like surcharges on those who make more than $250,000 a year and other taxes to pay for the health care legislation.

Some of the popular types of income being accelerated are stock options, distributions from retirement accounts for people over 59 ½ and payments from deferred compensation plans. Ms. Racanelli added that business owners were looking particularly closely at paying themselves dividends from their company. Their fear is that the tax on these qualified dividends may rise to the income tax rate, from the current 15 percent.

CAPITAL GAINS DECISIONS

Also unknown is what will happen to the long-term capital gains tax rate. Many advisers suspect it will rise to 20 percent, from 15 percent, by 2011. As a result, some investors are weighing whether to sell securities now and pay the lower capital gains tax.

Stephen Horan, head of private wealth at the CFA Institute, said it might not make sense to rush to sell, even if the rate went up. He has run calculations on the impact of an increase and said that if your investment horizon was 10 years, you needed to earn just 2 percent more per year to make up for a five percentage point increase in the capital gains tax.

“It’s better to keep your money than give it to the government,” he said.

Mr. Horan said investors could actually do even better by avoiding the higher short-term capital gains tax. That rate is 35 percent and is applied to investments held for less than 12 months. Over 10 years, investors could earn 15 percent more on their money by avoiding short-term capital gains, he said.

Of course, these taxes are paid only on gains. Most investors still have substantial losses left from 2008. If losses outweigh gains, people can deduct $3,000 from their taxes each year until that loss is used up.

SHORT-TERM TRUST

For the wealthy, this was the year of the GRAT, for grantor retained annuity trust. Sam Petrucci, a director in the wealth planning group at Credit Suisse Private Bank, said he arranged more of these trusts this year than at any time in the previous decade.

GRATs are a fairly simple way to transfer money to an heir tax-free. A person puts a sum in the trust that will be paid back to him over a fixed period of time. The heir receives any appreciation in the trust above a “hurdle rate” — the interest the Internal Revenue Service requires to be paid to the person who set up the trust.

The reasons for the increased attention in these trusts were twofold: the hurdle rates were low all year, as were the prices of some securities. Mr. Petrucci said that someone who put $10 million into a two-year GRAT with the December hurdle rate of 3.2 percent, assuming an 8 percent return, would pay himself two payments of roughly $5.2 million and pass $760,000 to heirs free of gift tax.

But it was the prospect of Congressional action that really touched off the interest in setting up short-duration GRATs before the end of the year, Mr. Petrucci said. One proposal would require a GRAT to be at least 10 years long. If the person setting it up died in that time, the money would revert to the estate. The second proposal would require the person setting up the trust to pay a gift tax on 10 percent of what he puts in. Currently, a person can “zero out the GRAT,” which means he pays himself back the full amount and nothing is taxed.

CHARITABLE EXPIRATION

The next Wealth Matters column will discuss the pros and cons of converting your pretax retirement account into a post-tax Roth Individual Retirement Account in 2010. Meanwhile, there is one I.R.A. provision that will expire this year unless Congress extends it. It is the charitable rollover provision, which allows someone to donate $100,000 directly from his or her retirement account to a public charity. The person doing this has to be over 70 ½ and the money has to be transferred directly from the I.R.A.

Jere Doyle, wealth strategist at Bank of New York Mellon, said the donor would not get a tax deduction, which he would get if he donated the money directly. But he would get the benefit of not having to pay ordinary income tax on that amount. The transfer also counts toward the minimum distribution from a retirement account, which the I.R.S. suspended for 2009 but may reinstate next year. “It’s a good way to clean out your I.R.A.,” he said.

HOUSING ISSUES

Two property-related benefits also need to be considered. The Mortgage Forgiveness Debt Relief Act was scheduled to expire at the end of the year, but it has been extended until 2012. Normally, a person has to pay ordinary income tax on the part of a mortgage the bank forgives. Under this law, up to $2 million will continue to be forgiven tax-free on a person’s primary residence.

The second issue is conservation easements. The wealthy use these to give part of their property to a local conservancy and get a tax break. Mr. Doyle said this is probably the last year that people can deduct an easement worth up to 50 percent of their adjusted gross income.

Ending the Roth Rollover: Why Stop There?

from: TaxVox: the Tax Policy Center blog by Eric Toder

Howard Gleckman made a strong case yesterday for repealing the provision that allows unlimited conversions of traditional (deductible) IRAs into Roth accounts beginning next year. Today, Len Burman adds the totally sensible suggestion that Congressional scorekeepers display the present value costs of such provisions, so we’ll know that they cost the government money in the long run despite the short-run revenue pickup in the budget window.

But why stop with ending the Roth rollover? Why not allow—or better still, require—taxpayers to convert their Roth IRAs and 401k plans to deductible IRAs and 401ks. Taxpayers with Roth accounts could deduct the entire value of the account from taxable income in the current year, thus reducing the tax basis (the amount deemed paid for the assets) to zero. Future withdrawals from the accounts would be fully taxable.

Reverse rollovers would cost a bundle in the next two years, as taxpayers claim deductions for the conversions. But that’s good in a recession. Recovery may have begun, but unemployment is still abnormally high and any additional spending out of these tax refunds would add to the stimulus programs that are only now kicking in fully.

In present value terms, eliminating Roth IRAs would raise federal revenues, especially if marginal tax rates rise. And with Roth assets converted to traditional deductible assets, we’d be spared the prospect of having wealthy seniors getting a lot of their retirement income tax-free. That future would surely create resentment among younger workers who will have to pay higher taxes to support the growing numbers of seniors.

So, the bottom line: cut taxes now and get smaller deficits later!