It’s Time for Year-End Tax Planning

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Regardless of what Congress does late this year or early next, solid tax savings can  be realized by taking advantage of tax breaks that are on the books for 2011. For individuals, these include:

• the option to deduct state and local sales and use taxes instead of state and local income taxes;
• the above-the-line deduction for qualified higher education expenses; and
• tax-free distributions by those age 70-1/2 or older from IRAs for charitable purposes.

For businesses, tax breaks available through the end of this year that may not be around next year unless Congress acts include:

• 100% bonus first-year depreciation for most new machinery, equipment and software;
• an extraordinarily high $500,000 Section 179 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property); and
• the research tax credit.

Not all actions will apply to your particular situation, but you will likely benefit from many of them. There also may be additional strategies that will apply to your particular tax situation. We can narrow down the specific actions that you can take once we meet with you. In the meantime, please review this list and contact us at your earliest convenience so we can advise you on which tax-saving moves to make.

Year-End Tax Planning Moves for Individuals

Be Aware of the Alternative Minimum Tax (AMT) – Keep in mind when considering year-end tax strategies that many of the tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, these deductions should not be accelerated. This office has tax planning software that can analyze and minimize the effects of the AMT.

Employer Flexible Spending Accounts – If you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. Keep in mind, however, that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs.

Health Savings Accounts – If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2011.

Capital Gains and Losses – We can employ a number of strategies to suit your specific tax circumstances. For example, some taxpayers may be in the zero percent capital gains bracket and should be looking for gains that benefit from no tax. Others may be affected by the wash sale rules when they are trying to achieve deductible losses while maintaining their investment position. Generally, portfolios should be reviewed near year’s end with an eye to minimizing gains and maximizing deductible losses. It may be appropriate for you to call for a year-end strategy appointment to discuss trades and actions that can produce tax benefits for you.

Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting your traditional IRA into a Roth IRA. Even if your income is at your normal level, with the recent decline in the stock markets, the current value of your Traditional IRA may be low, which provides you an opportunity to convert it into a Roth IRA at a lower tax amount. Thereafter, future increases in value would be tax-free when you retire.

Recharacterizing a Roth Conversion – If you converted assets in a traditional IRA to a Roth IRA earlier in the year, you may have seen the assets decline in value due to the recent market decline, and you will end up paying higher than necessary taxes on that higher valuation. However, you may undo that rollover by recharacterizing the conversion by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later (generally after 30 days) reconvert to a Roth IRA.

IRA to Charity Transfer – This year may well be the last chance for taxpayers ages 70-1/2 or older to take advantage of an up-to-$100,000 annual exclusion from gross income for otherwise taxable individual retirement account (IRA) distributions that are qualified charitable distributions. Such distributions aren’t subject to the charitable contribution percentage limits and can’t be included in gross income. However, the contribution isn’t deductible.

Advance Charitable Deductions – If you regularly tithe at a house of worship, you might consider pre-paying part or all of your 2012 tithing and thus advancing the deduction into 2011. This can be especially helpful to individuals who marginally itemize their deductions, allowing them to itemize in one year and then take the standard deduction in the next.

Income Deferral – Depending upon your particular tax circumstances, it may be appropriate to defer income into 2012 if possible. For example, if you are receiving an employee bonus, you might ask your employer to defer it until 2012.

Income Acceleration – If your taxable income is unusually low because of lower income or larger deductions, you may be able to absorb additional income with no or minimal additional tax. In that case, you should consider accelerating income when possible without incurring penalties. This would include pension plan and IRA distributions and accelerated capital gains.

Prepay Tax Deductible Expenses – Consider prepaying tax-deductible expenses to increase your 2011 itemized deductions. For example, if you have outstanding dental bills, paying the balance before year-end may be beneficial, but only if you already meet the 7.5% of AGI floor for deducting medical expenses, or if adding the dental payments would put you over the 7.5% threshold. You can even use a credit card to prepay the expenses, but you would only want to do so if the interest expense you’d incur is less than the tax savings.

Prepay State Income Taxes – State income taxes paid during the year are deductible as an itemized deduction. As long as pre-paying the state taxes does not create an AMT problem and you expect to owe state and local income taxes next year, it may be appropriate to increase your withholding at your employment or make an estimated tax payment before the close of 2011, thereby advancing the deduction into this year.

Avoid Underpayment Penalties – If you are going to owe taxes for 2011, you can take steps before year-end to avoid or minimize the underpayment penalty. The penalty is applied quarterly, so making a fourth quarter estimate will not reduce the penalties applied to the first three quarters of the year. However, withholding is treated as paid ratably throughout the year, so increasing withholding at the end of the year can reduce the penalties for the earlier quarters. This can be accomplished with cooperative employers or by taking a non-qualified distribution from a pension plan, which will be subject to a 20% withholding, and then returning the gross amount of the distribution to the plan within the 60-day statutory limit. Please consult this office to determine if you will be subject to underpayment penalties (there are exceptions), and if so, the best strategy to avoid or minimize them.

Sales Tax – Without a congressional extension, 2011 is the final year in which you can elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. You may wish to accelerate big-ticket purchases into 2011 to assure yourself a deduction for sales taxes on the purchases, assuming the increased sales tax deduction is greater than the state and local tax amount. The deduction is extremely helpful in states with no state income tax.

Home Energy Credits – If you are a homeowner, making energy-saving improvements to your residence such as putting in extra insulation or installing energy saving windows and energy efficient heaters or air conditioners may qualify you for a tax credit, if the assets are installed in your home before 2012. The credit is 10% of the cost of the improvement with a cap of $500; the credit is reduced by any credit claimed in prior years for the purchase of other energy-saving property.

Education Credits and Deductions – If someone in your family is attending college and qualifies for an education credit, you can pre-pay the first three months of 2012’s tuition to reach the maximum credit for 2011. In addition, unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses expires after 2011. Thus, prepaying the first three months of 2012’s eligible expenses will increase your deduction for qualified higher education expenses.

Acquire Qualified Small Business Stock (QSBS) – If you have the opportunity, you may wish to acquire QSBS before the close of the year. Doing so won’t save taxes for 2011, but could benefit you in the future. A special provision of the tax code eliminates any tax from sale of QSBS if it is purchased after September 27, 2010 and before January 1, 2012, and is held for more than five years. In addition, such sales won’t cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less. There are some other technical requirements, so call this office for additional details.

Don’t Forget Your Minimum Required Distribution – If you have reached age 70-1/2, you are required to make minimum distributions (RMDs) from your IRA, 401(k) plan and other employer-sponsored retirement plans. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2011, you can delay the first required distribution to the first quarter of 2012, but if you do, you will have to take a double distribution in 2012. Consider carefully the tax impact of a double distribution in 2012 versus a distribution in both this year and next.

Take Advantage of the Annual Gift Tax Exemption – You can give $13,000 in 2011 to each of an unlimited number of individuals, but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes when income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for Businesses & Business Owners

Expensing Allowance (Sec 179 Deduction) – Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000, and the investment ceiling limit is $2,000,000. Without Congressional intervention, these limits are scheduled for a significant drop in 2012. That means that businesses that make timely purchases will be able to currently deduct most, if not all, of the outlays for machinery and equipment. Additionally, for 2011, the expensing deduction applies to certain qualified real property such as leasehold improvements, restaurant, and retail property.

100% First-year Depreciation – Businesses also should consider making expenditures that qualify for 100% bonus first-year depreciation if the property is bought and placed in service this year. This 100% first-year write-off rate drops to 50% next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or next should try to accelerate their buying plans if doing so makes sound business sense.

Work Opportunity Tax Credit (WOTC) – Take advantage of the WOTC by hiring qualifying workers, such as qualifying veterans, before the end of 2011. Unless extended by Congress, the WOTC won’t be available for workers hired after this year.

Research Credit – Make qualified research expenses before the end of 2011 to claim a research credit, which won’t be available for post-2011 expenditures unless Congress extends the credit.

Self-employed Retirement Plans – If you are self-employed and haven’t done so yet, you may wish to establish a self-employed retirement plan. Certain types of plans must be established before the end of the year to make you eligible to deduct contributions made to the plan for 2011, even if the contributions aren’t made until 2012. You may also qualify for the pension start-up credit.

Increase Basis – If you own an interest in a partnership or S corporation that is going to show a loss in 2011, you may need to increase your basis in the entity so you can deduct the loss, which is limited to your basis in the entity.

These are just some of the year-end steps that can be taken to save taxes. You are encouraged to contact this office so a plan can be tailored to meet your specific tax and financial circumstances.

Business Benefits Abound This Year

There are an abundant number of provisions that provide tax relief to small businesses this year.  Just so that you don’t overlook any of these benefits, or in case your business would like to position itself to take advantage of some before the close of the year, here is a brief rundown on many of the business benefits that are available for 2011.  Some of these provisions are currently set to expire after December 31, 2011.

o    Research Tax Credit – A tax credit of up to 20% of qualified expenditures for businesses that develop, design, or improve products, processes, techniques, formulas, or software or perform similar activities.  The credit is calculated on the basis of increases in research activities and expenditures.

• Work Opportunity Tax Credit – A tax credit of up to 40% based upon a portion of the first-year wages paid to members of certain targeted groups.  The credit is generally capped at $6,000 per employee ($12,000 for qualified veterans and $3,000 for qualified summer youth employees).
• Differential Wage Payment Credit – Employers who have an average of less than 50 employees during the year and who pay differential wages to employees for the periods they were called to active duty in the U.S. military can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year.
• New Energy Efficient Home Credit – An eligible contractor can claim a credit of $2,000 or $1,000 for each qualified new energy efficient home either constructed by the contractor or acquired by a person from the contractor for use as a residence during the tax year.
• 100% Bonus Depreciation – Businesses are allowed a 100% bonus depreciation on qualified business property purchased and placed into service during the year.   This generally includes machinery, equipment, computers, qualified leasehold improvements, etc. (but see limitations on vehicles).
• Expensing Allowance – In lieu of depreciating the cost of new assets, a business is allowed to deduct up to $500,000 expensed under Code Sec. 179.  The $500,000 maximum amount is generally reduced dollar-for-dollar by the amount of Section 179 property placed in service during the tax year in excess of $2,000,000.
• 15-year Write-off for Specialized Realty Assets – Qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service during the year are eligible for a 15-year depreciation write-off instead of the normal 39 years.

• HIRE Retention Credit – In 2010, employers were granted a payroll tax holiday for hiring long-term unemployed individuals.  As an incentive to retain those individuals, a non-refundable credit up to $1,000 per employee is allowed to employers who kept those employees on payroll for a continuous 52 weeks.  The credit is limited to 6.2% of the employee’s wages, and will be claimed on the 2011 return.

• Business Autos – As part of the benefit of the 100% depreciation, the first-year luxury auto limit is increased to $11,060 for autos and $11,260 for light trucks and vans.  For vehicles with a gross vehicle rating of over 6,000 pounds, the luxury auto limits do apply and are subject to the full benefit of the 100% bonus depreciation.
• Domestic Production Deduction – This deduction was created to encourage manufacturing and production within the U.S. and provides a deduction equal to 9% of the lesser of net income from qualified production activities or 50% of the W-2 wages paid to employees allocated to the domestic production activity. 

Tax Breaks to Take Before They Go

Part of what lies at the heart of the heated debate in state capitals and Washington over the last couple of weeks is a legitimate concern about a pretty simple question: have governments made too many promises about what they should provide without collecting enough money to fulfill them all?

The discussion of this question often leads to a look at income tax rates. Not enough of it, however, focuses on income tax breaks.

So amid all the hubbub, it’s worth stopping to consider how many of these deals you are eligible for (and if you’re old enough, recalling how many of them didn’t exist a few decades ago). On the state level, for instance, it’s possible that a tax deduction or credit for your child’s college savings account is contributing to a shortfall.

At the federal level, the money from 529 savings accounts can come out tax-free as long as they are used for education expenses. Then there’s the $5,000 or $10,000 you might have managed to shield from the tax man in health care, dependent care and commuter accounts, if you’re lucky enough to work for an employer that offers them.

And if President Obama gets his way, the income tax deduction for mortgage interest and charitable contributions for people in the highest tax brackets may get smaller.

If you’re upper middle class and above, take a look at your tax return and consider just how many deductions, set-asides and other breaks you took advantage of. I added up mine and found tens of thousands of dollars, leading to many thousands in tax savings.

Then look at the income figure on your tax forms and ask yourself this: Isn’t it likely that a bunch of legislators are going to figure out how much this is costing and take some of the benefits away? And if so, shouldn’t you be trying to take advantage of them before they disappear?

Reading between the lines in President Obama’s introduction to the 2012 budget, it’s clear how he feels about the policy decisions that gave rise to this crazy quilt. “For too long,” he wrote, “we have tolerated a tax system that’s a complex, inefficient and loophole-riddled mess.”

In fairness, it’s not as if there was some master plan here. Who, after all, would have declared that there should be income caps on taking deductions for student loan interest but that the wealthy should still get all sorts of tax incentives to save for college?

Take those 529 plans, for example, because the tax breaks exist on the federal level and in many states. The tax rules here did not emerge fully formed from the head of some legislator either. Instead, they began mostly as a way to prepay tuition at state universities and evolved into investment accounts that anyone, of any income, could use for any higher education, public or private. Federal taxes on the growth in money that people deposited into these accounts were simply deferred at first; years later, the rules changed and families suddenly did not have to pay any taxes on the gains as long as they used the money for qualified educational expenses. And it didn’t matter how much the money had grown.

As of June 30, 2010, 529 plans contained about $135 billion, according to the College Savings Plans Network, with just $21 billion or so in prepaid plans. And according to the Joint Committee on Taxation, which took a careful look at the plans when it last addressed the rules governing them in 2006, the federal tax waiver on the gains was going to cause a nearly $1 billion annual hit to the federal budget by the middle of this decade.

That number may end up being lower because of the roller-coaster stock market of the last four years. But the amazing thing about 529 accounts is that they often offer tax benefits on the way in as well as on the way out.

How does this work? As of today, most of the states that levy an income tax offer a deduction or credit of varying size to families when they make deposits in their own state’s (and sometimes any state’s) 529 plan. While the deduction generally has an annual dollar cap, you can almost always take advantage of it no matter how much money you make.

In Indiana, for instance, the 48,167 taxpayers who took the credit on their 2009 returns saved about $33 million.

The more you make — or the more a kind grandparent has given to you for your child — the more you can save. That means more opportunities to max out the state tax deductions. Moreover, wealthier people who can save more money earlier in their children’s lives benefit from the compounding of earnings over 15 or 20 years before tuition bills come due. (And by the way, the 15 percent capital gains rate they don’t have to pay upon withdrawal today will probably be higher before too long.)

Joseph Hurley, who runs savingforcollege.com, the leading resource for people doing research on 529 plans, understood why many states offered tax deductions. They needed to increase total balances to get economies of scale so they could drive down the 529 program fees that state residents pay. “But states cannot afford to offer these deductions now,” he said. “It’s free money to people who can take advantage of it, and it is higher-income families who can.”

According to Joan Marshall, who runs Maryland’s 529 savings plans and is chairwoman of the College Savings Plans Network, the states can’t afford not to offer the deductions. Without them, she says, people wouldn’t save in the first place, as is evident from the fact that so many deposits arrive late in the year, near the tax deadline. “And if we have a culture of savings, there is less need for aid later,” she said. “There is a real gain to be had down the road as we help to change behavior. It’s not only a negative drain on state budgets.”

Ms. Marshall added that if 529 plans were truly a tax-free plaything for the well-to-do, it wouldn’t be the case that just 0.67 percent of accounts had more than $100,000 in them. (That said, it’s possible that some wealthy families have more than one account.)

Legislators in North Carolina may have a chance to debate all of this soon. The state once had income restrictions on who could take state tax deductions for contributions to its 529 plan. The cap went away but is scheduled to return in January if elected leaders do not act before then.

This is just one front in the larger battle, though. There has already been plenty of discussion about the possibility of reducing the amount of deductions that higher-income people can claim for charitable contributions and mortgage interest. This is where many of the big budget opportunities lie. In fact, the changes are already coming. One new one is in health care flexible spending accounts, where people can set aside money free of income taxes to pay for expenses that insurance does not. Starting in 2013, you’ll only be able to put $2,500 in those accounts each year. This will hurt middle-class people with chronic conditions; an income cap on who could participate would have made the change more progressive.

But at least this is one sign that legislators are taking government debt seriously. And until more changes arrive, I’d take advantage of every last break and max it out if you’re affluent enough to do so. Because pretty soon, many of them may no longer be available to you.

By RON LIEBER

New York Times

Obama says looking for ways to cut corporate taxes

Reuters) – President Barack Obama said on Monday he was very interested in finding ways to lower U.S. corporate taxes without costing the government money.

WASHINGTON (Reuters) – President Barack Obama said on Monday he was very interested in finding ways to lower U.S. corporate taxes without costing the government money.
At a top marginal rate of 35 percent, corporate income taxes in the United States are among the highest in the world, and big business often complains that it hampers their competitiveness.
Many groups, including Democrats, support lowering the rates, but the sticking point has always been how to pay for it.
“We would be very interested in finding ways to lower the corporate tax rate so that companies that are operating overseas can operate effectively and aren’t put at a competitive disadvantage,” Obama said at a meeting of his economic advisory council. “We’d like to do so and figure out a way to do it that is revenue neutral.”
Democrats in Congress proposed dropping the top corporate income tax rate to near 30 percent several years ago, but the proposal floundered because it was coupled with a tightening of the tax code for multinational companies to fund the cut.
General Electric Co (GE.N) Chief Executive Officer Jeffrey Immelt and Caterpillar Inc (CAT.N) Chairman Jim Owens attended the meeting.
Obama has proposed many of those same ideas in his annual budgets.
“If there are ideas whereby we can lower corporate tax rates in a way that does not massively add to our deficit, but instead revolves around tax loopholes … that is something that we would be very interested in and we think could eliminate uncertainty,” Obama said.
Obama’s tax advisors and many tax experts say that because of deductions, credits and loopholes in the tax code, few corporations actually pay the full 35 percent.
The federal deficit commission, which includes 18 members appointed by Obama and Republicans and Democrats in Congress, is expected to propose changes to the tax code by December 1.

Bush tax cuts: What you need to know

NEW YORK (CNNMoney.com) — There probably aren’t enough earbuds to go around to block out the confusing noise emanating from Washington over the expiring Bush tax cut

While we can’t quiet the partisan shouting, we’ll try to offer clarity on just what it is they’re debating.

What happens on Jan. 1 if Congress does nothing?

Everyone’s federal income and investment tax rates will go back up to where they were before the 2001 tax cuts were passed. In other words, your tax bill next year would increase.

If the tax cuts do expire and tax rates go up, you may notice the difference in your wallet as early as January, when your employer starts to withhold more taxes from your paycheck.

The Tax Policy Center estimates that a married couple with two kids under 13 and a household income of roughly $75,000 could end up paying about $2,600 more in federal income taxes next year than they would if the tax cuts were extended.

But the likelihood of all the tax cuts expiring isn’t high, since both Democrats and Republicans agree on one thing: They want to extend the tax cuts at least for folks making less than $200,000 ($250,000 for joint filers).

What’s the economic argument for extending the tax cuts?

Here’s the main concern of many economists and lawmakers: If Americans’ tax bills go up next year, they will have less money to spend and invest in the economy, and that could erase whatever economic ground has been recovered since the housing crisis sent the country into a tailspin.

“The biggest argument for extending the tax cuts right now is our economy is very weak, and raising taxes during a recession, or the recent weak recovery from the recession, could reverse our economic growth,” Roberton Williams, a senior fellow at the Tax Policy Center, noted in one of the group’s videos.

If the tax cuts are extended, however, taxpayers won’t really notice any change in their bottom line. So it’s unlikely to create any new stimulus for the economy.

That’s in part why some deficit hawks, like Diane Rogers of the Concord Coalition, say the Bush tax cuts should be compared in their effectiveness to other types of tax cuts to make sure the money is well spent.

Overall, extending the tax cuts may prove to be a mixed bag for the economy if they are extended permanently, according to a recent analysis by the Congressional Budget Office. In the short-run, making them permanent might help preserve the recovery, but may actually dampen economic growth in the long run because extending the cuts would add significantly to U.S. debt.

That’s why many who don’t want to let the tax cuts expire right away are only pushing for a one- to two-year extension.

What’s the beef about extending them for the $250,000-and-up crowd?

President Obama and many Democrats have said they want the Bush tax cuts to expire for couples with incomes over $250,000 ($200,000 for individuals).

Their argument: wealthy taxpayers don’t need the extra money, and if they get it they will probably save it and not spend it. That won’t do much to help the economy. By contrast, they say, lower- and middle-income families are more strapped and would be more likely to spend any extra money from a tax cut.

If Obama gets his way, high-income households would see the top two income tax rates increase to 36% (from 33%) and 39.6% (from 35%). In addition, their investment tax rates would go up to 20% from 15%.

But high-income taxpayers would still benefit from the extension of tax cuts for the middle class. Among other things, that’s because the changes made at the lower tax brackets would be preserved for everyone. Two examples: the creation of the 10% tax bracket and the reduced marriage penalty. The marriage penalty used to result in two-earner couples paying more than they would have as single filers.

And, ironically, if the Bush tax cuts do expire for top earners, some might actually find themselves with a somewhat smaller tax bill next year.

Republicans and a small but growing number of Democrats say the cuts should also be extended for high earners, at least temporarily because the economy is too fragile to raise anyone’s taxes.

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Republicans also contend that small business job growth could be hurt because some business owners file at the top two tax rates and they, while a very small minority, generate a lot of small business income. The tax statistics aren’t very clear, however, on the job creation potential among those who report small business income at the top two income tax rates.

What’s at stake for the deficit?

Treasury estimates the costs of making the tax cuts permanent for everyone is $3.7 trillion over 10 years.

Of that, $3 trillion accounts for the cost of extending them for the vast majority of Americans, as the president has proposed. The remaining $700 billion is the cost of extending them permanently for the high-income earners.

The cost would obviously be less if the cuts were extended for only one or two years. There are no formal estimates for a short-term extension, but based on Treasury Department estimates, the cost is likely to range anywhere from $200 billion to $500 billion, depending on whose cuts are extended and for how long.

Those who support extending the tax cuts note that if the cuts expire and the economy suffers as a result, the deficit will get worse because the government will have to borrow more.

So what’s gonna happen?

Um, who knows?

The lack of consensus on the tax cuts isn’t just between the Democrats and the Republicans. It’s within each party as well. And with a midterm election at stake, there’s no predicting yet what, if anything, will be extended, for how long and for whom.

But since both parties support extending the tax cuts at least for the lower- and middle-income families, chances are high that that will happen.

And given that a small but apparently growing number of Democrats now support extending the tax cuts for upper-income folks as well, there’s some chance that could happen too, at least in part.

But few are expecting lawmakers to sign off on any final piece of legislation before the mid-term elections, although the House or Senate may take a vote on their own tax cut bills before that. 

By Jeanne Sahadi

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 |

IRS Posts Revised Form 941 and Instructions for Claiming New Hire Payroll Tax Exemption

MAY 18, 2010

Stuart Rohatiner, CPA, JD

On May 18, the IRS posted a new version of Form 941, Employer’s QUARTERLY Federal Tax Return, and its instructions for claiming the special payroll tax exemption that applies to new workers hired in 2010.

The Hiring Incentives to Restore Employment Act (HIRE Act) created a payroll tax exemption for employers who hire workers who have been unemployed for at least 60 days and who are not replacement hires. For qualifying new employees hired after Feb. 3, 2010, and before Jan. 1, 2011, an employer can claim an exemption equal to the employer’s share of Social Security taxes on wages paid in 2010 after March 19.

On the newly revised Form 941, employers will claim the exemption related to wages paid after March 31 on lines 6a through 6e (or on lines 12c through 12e for the exemption related to wages paid between March 19 and March 31). These lines ask for the number of qualified employees who were first paid exempt wages or tips in the quarter, the number of qualified employees who were paid exempt wages or tips in the quarter, and the amount of the wages and tips paid to qualified employees, which are multiplied by 0.062 (the amount of the employer’s share of Social Security tax). This amount is subtracted from the total Social Security and Medicare tax reported on line 5d.

The exemption for the employer’s share of Social Security taxes on wages paid to eligible employees between March 19 and March 31 is treated on the second quarter Form 941 as an April 1 tax deposit and does not adjust the amount of tax liability reported on lines 10 and 17.

The instructions say that an employer cannot claim the Social Security tax exemption and the work opportunity credit for the same employee. If an employer does not wish to claim the Social Security tax exemption for an eligible employee, the employer omits that employee and his or her wages from lines 6a through 6d (and lines 12c through 12e, if applicable).

To be a qualified employee for purposes of the payroll tax exemption, the employee must have signed Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, (or a similar statement) under penalties of perjury. The employee must not be a replacement hire, unless the worker being replaced separated from service voluntarily or for cause, and the employee cannot be related to the employer or to a 50% owner.

Nickel and dimed by Obama’s microtaxes

May 14, 2010: 9:32 AM ET

Stuart Rohatiner, CPA, JD

(Fortune) — Woven throughout President Barack Obama’s health care reform act are a variety of new taxes on high earners: a 3.8% tax on interest and dividends, a 0.9% increase in the Medicare payroll tax, a $2,500 cap on pretax contributions to flexible savings accounts. Then there are new taxes on the most expensive health insurance plans and on sales of medical equipment like bedpans and catheters. The President’s proposed budget is laden with assorted other goodies, including a limit on deductions for mortgage interest and charitable contributions, and a capital gains hike.

It’s easy to get lost in the maze of new levies. Which is really the point, at least as a political strategy. Call it nickel-and-diming by a President who seems to instinctively understand the electoral dangers of imposing a single broad new levy — even on people he defines as high income. (Manhattan families earning just over $250,000 — not exactly a killing in New York City — that means you.) Even his plan to raise the top two individual income tax rates is marketed as a rollback of unfair tax cuts under President Bush. Some of us would call it a hike.

Not long ago House Democrats were pushing a more overt “millionaire’s tax.” At least the intention was clear. Instead, the White House is pursuing a drip, drip, drip of microtaxes on the nearly 3.5 million households Obama considers wealthy enough to fund his government plans. And, oh, how those nickels and dimes add up. “We estimate that the health reform law will take an additional $52,000 on average from the top 1%” of earners, concluded the nonpartisan Tax Foundation. Households affected by the expiration of the Bush tax cuts — along with other tax hikes in his budget — will pay an additional $17,925 on average. Citizens, especially the so-called wealthy, aren’t going to be happy about the onslaught of new tariffs.

A huge segment of the country has always felt overtaxed. In 1938, when taxes were roughly 17% of income, a Fortune survey found that nearly half of all Americans thought they paid too much relative to what they got in return. That number was remarkably similar — 46% — when Gallup asked the question last year, as taxes were eating up roughly 30% of our paychecks. We can presume, moreover, that those who actually pay federal income taxes — a record 36% do not — will be especially irked by politicians who want them to send more of their hard-earned money to Washington.

In recent years Democrats have enjoyed a reputation as the most trusted party on tax questions. That is now changing, with Republicans gaining the upper hand in the latest NBC News/Wall Street Journal poll. Obama’s tax hikes fuel the mood shift. But the White House’s ambitious spending also plays a role: Americans think half their money is wasted by government.

This is a dangerous political environment for President Obama as he faces his next big economic challenge: what to do about a national debt scheduled to balloon to 77% of GDP in the next decade. It’s hard to microtax your way out of that one, and it’s far from clear that this administration has the stomach for massive cuts to entitlement programs. He can keep squeezing revenue out of the rich, but the top 1% of earners already pay more in federal income taxes than the bottom 95% combined.

That, of course, is why some politicians are floating the idea of a value added tax (VAT) — an embedded sales tax that hides all those nickels and dimes along the production chain. It’s a big revenue raiser that offers the illusion that people won’t really notice a little tax here, a little tax there.

But all that loose change adds up to hundreds and thousands of dollars. Upper-income earners are stirring tax revolts this election year, despite White House efforts to suggest that its collection of taxes won’t be quite so painful. If Democrats pursue a VAT that adds to the tax burden of average Americans, the middle class will sit up and take notice too. And that adds up to a big headache for Democrats — in 2010, 2012, and beyond. 

By Nina Easton, senior editor at large

Tax Havens’ Days Are Numbered

Robert Olsen, 05.03.10

The era of banking secrecy may be coming to an end.

HONG KONG — As Democrats and Republicans haggle over the details of financial reform in the Senate, a new tax law is quietly approaching that will force all overseas banks to reveal the overseas holdings of American account holders.

“I don’t think a lot of people have paid attention to this,” said Scott D. Michel, president of Caplin & Drysdale law firm.

“The whole purpose of this is to put American account holders around the world in a position where they can have no safe haven in any bank that wants to offer U.S. investments to any of its clientele,” he added.

American citizens are required to report all of their worldwide income every year when filing their tax returns. As a part of that process, they are also required to disclose any offshore bank accounts they may have or hold signature authority over.

If an individual falsifies his or her tax claim by concealing their income in offshore accounts, banking secrecy laws in countries like Switzerland have in the past helped to keep that income hidden by making it a crime for the banks and their employees to disclose information about clients.

U.S. lawmakers designed the Foreign Account Tax Compliance Act (FACTA) to “force foreign financial institutions, foreign trusts, and foreign corporations to provide information” on undisclosed assets held by Americans after Dec. 31, 2012. If they fail to do so, the Internal Revenue Service (IRS) can hit the banks with 30% withholding on all income originating from the U.S.

The full details of FACTA have yet to be ironed out between the U.S. Treasury and the IRS, but one of its requirements will include a document for new account holders to sign that waives whatever rights they may have under local banking secrecy laws.

The U.S. estimates that it will raise an additional $8.5 billion in tax revenue over the next 10 years by forcing Americans to disclose income they are hiding from tax collectors.

Spurred by rising fiscal deficits, the United States and other members of the Organization for Economic Cooperation and Development (OECD), particularly Germany and France, have been using a variety of methods to clamp down on tax cheats, tax havens and overseas financial centers.

The most high profile of these were the UBS ( UBS – news – people ) AG case and the OECD’s attempt to name and shame those countries that fail to comply with internationally agreed standards.

Tax havens are usually characterized by extremely low tax rates, strong banking secrecy laws and flexible regulations in terms of licensing, incorporation and supervision. So-called shell companies, trusts and other legal entities are often used to shield assets from overseas authorities.

The OECD had initially singled out 47 jurisdictions that included the likes of Hong Kong, Macau, the Philippines and Malaysia, but hasty commitments to improve transparency along with some backroom deal-making led to all four being removed from the blacklist.

The U.S. tax authorities, however, have recently introduced another far more effective means of collecting information on tax evaders: They pay informers for it.

The IRS Whistleblower Office can pay anywhere between 15% and 30% of the taxes, penalties and interest collected for cases valued at $2 million or more. (See: “Tax Informants Are On The Loose”)

The IRS has yet to make any payments under the new scheme, but that hasn’t dissuaded people like Bradley C. Birkenfeld from trying. Formerly an employee of Switzerland’s largest bank UBS, Birkenfeld was sentenced to 40 months in jail for helping billionaire California real estate developer Igor M. Olenicoff hide $200 million offshore. (See: “April 15 Plea: Pardon Tax Whistleblower”) Motivated in part by the possibility of a reward, Birkenfeld provided evidence to U.S. tax authorities detailing how the secretive Swiss bank helped wealthy Americans hide money offshore.

As a result, UBS was forced to admit wrongdoing, pay a fine of $780 million and to turn over data on as many as 4,450 UBS accounts to the Swiss government, which will pass the information to the U.S.

A number of banks from some of Europe’s best-known tax havens are facing similar investigations. Germany launched over 1,000 tax evasion probes against clients of Credit Suisse ( CS – news – people ) last month. In December the French authorities said that it had the details of 24,000 Swiss bank accounts provided by a former HSBC ( HBC – news – people ) employee.

Fearing the possibility of heavy fines and prosecution, many tax evaders from the U.S., Germany and France have come forward to report their assets.

Michel believes the disclosure of banking secrets will continue to grow. “When you combine the whistleblower regime with the template that the [U.S.] government used in the UBS case, with the information they’re getting with all these voluntary disclosure cases and now FACTA, I think the era of bank secrecy is fairly rapidly eroding in front of our eyes,” he said

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Foreign Investment’s New Landscape

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

Want to Know About Your Refund?