Your Plan
Year-End Planning Doesn’t Have To Be Taxing!

By Earl H. Cohen

Year-end is approaching, and it’s time for that last minute tax planning. This year’s tax planning has been complicated by the lame duck Congress’ failure, so far, to pass new legislation or extend the current Bush-era tax rates. As of December 8, the debate seems to have been concluded between Congress and the White House and Congress is expected to act shortly. As a result of the compromise there is expected to be a two-year extension of the current income tax rates, including the 15% capital gains and dividend rates and the extension of a variety of tax credits. The federal estate tax exemption is expected to go to $5,000,000 for each estate with spouses able to share any unused exemption. The amount of the estate over the exemption will be taxed at a 35% rate. It appears that gift tax rates will be reset to 35%. It looks as if Congressional action this month will eliminate uncertainty for taxpayers, however, with only a few weeks left in 2010, taxpayers still have time to address a few issues.

As to income tax there are a number of issues:

• Even with the likely extension of the Bush-era tax rates, C corps with the ability to make dividend payments are well advised to do so before year-end. For 2010 we’re dealing with rates for dividends from C corps at 15%.
• Although we would usually not suggest letting the “tax tail wag the dog,” getting pending deals done by year-end with a 15% long-term rate may still be wise. Even with the extension of long-term capital gain rates, the “devil is in the details” and there is no way to tell at this time whether AMT or other issues will affect the actual rate. If you have unused capital losses and some appreciated assets, it may make sense to use those losses with the sale of the appreciated capital assets.
• If you’re over 70 ½, remember to take your RMD (Required Minimum Distribution) from IRAs for 2010 before the end of the year. The waiver provided in 2009 will not be extended by Congress. Don’t get caught with a 50% penalty.
• There may not be a better time to convert your traditional IRA to a Roth given the uncertainty in rates and the economy. Beyond tax rates, a bigger concern is that for 2010 only, you can spread the tax cost over your 2011 and 2012 tax returns.
• Watch those expiring credits and other tax breaks. The home energy tax credit, which can reduce your tax bill by up to $1,500, expires on December 31 of this year. It will not likely be extended by Congress. For those with 529 plans, 2010 is the last year that money from a 529 plan can be used, tax free, to buy internet service, a computer or software.
• Direct Charitable Gifts from IRAs for those over 70 ½ were popular for the last several years. While the rule expired at the end of 2009, it is likely, but not guaranteed, that Congress will extend this opportunity at the end of 2010 for last-minute charitable gifts. Brokers indicate that such gifts should be made by December 15 to assure that the transfer is processed, but make sure you watch for Congress’ pronouncement on this planning tool. For those making gifts with non-IRA funds, it may pay to wait until January.
• And, the planning rules for delaying income and speeding up expenses still hold true for many people. If there are ways that you can legitimately delay any income in 2010 that would push you into a higher bracket, it may make sense to do so. Likewise, if you are able to speed up deductible expenses, such as medical treatment, before the end of the year, it might pay to do so, especially if you would not meet the deductibility thresholds in 2011.

As to Federal Estate and Gift Tax there are a number of issues that should be addressed.

As a reminder, in 2001 Congress passed sweeping tax reform that included significant changes to the estate tax. The legislation increased the estate tax exemption to $3.5 million for each estate in 2009 and eliminated the credit for state estate tax. The legislation also repealed the estate tax for one year, 2010, and converted the “step-up” in basis rules to a “modified carry-over” basis scheme. The step-up in basis rule provided that the tax basis for assets that are part of a taxable estate “step-up” in value to the current market value on the death of the owner. This has the result of eliminating tax, at the time of sale, on the gain between the original cost (with some adjustments) of the asset and its value at the date of death. The “carry-over” basis rules would effectively leave the beneficiaries the same basis as the owner and the asset would still be taxed, for estate tax purposes, at the asset’s market value at the date of death. As noted above, without any changes, the federal estate tax exemption would go to $1 million on January 1, 2011 and the gift tax exemption would remain at $1 million for 2011 and later years. The highest estate and gift tax rate would be 55%. Assuming Congress acts on the compromise, the exemption will go to $5,000,000 for each estate and the tax rate for amounts in excess of $5,000,000 will go to 35%.

In the short time remaining this year here are some of the things that should be addressed in your estate and gift plans:

• If your estate plan has not yet been updated, do so now. Your plan must have the flexibility to deal with the new tax regime on January 1, 2011, whether Congress acts as expected or not. For most families, their plans may need to be simplified. Most plans that have not been amended for two or more years are likely to underfund trusts for a surviving spouse as a result of the planning formula that was used.
• For those with estates that are expected to exceed $5,000,000 ($10,000,000 for married couples) serious consideration should be given to making gifts before year end, even if they are taxable. Why? The gift tax rates in 2010 are 35% and there is no certainty yet that the estate tax rates will be reduced to 35%.
• Make gifts to 529 plans for the education of your grandchildren. In 2010 there is NO generation skipping transfer tax. 529 plans are very flexible and low cost.

As always, we always recommend that you work closely with your lawyer and tax advisor before pursuing any particular strategy. For further information on these and other estate and tax planning issues please feel free to call Earl H. Cohen or Jeffrey C. O’Brien at 800-4016-194.