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2010 year end tax planning
2010 year end tax planning
2010 year end tax planning
2010 year end tax planning
2010 year end tax planning
2010 year end tax planning
2010 year end tax planning
2010 year end tax planning
2010 year end tax planning
2010 year end tax planning
2010 year end tax planning
2010 year end tax planning
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2010 year end tax planning

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A great quick guide to ensure you've hit all the major deductions and tax strategies while planning for the end of 2010.

A great quick guide to ensure you've hit all the major deductions and tax strategies while planning for the end of 2010.

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  • 1. 2010 Year-End Tax Planning Guide education / tax planning guide november 2010 summary in brief There is enormous uncertainty about what the future holds for U.S. taxpayers in 2011 and beyond. Policymakers are debating whether to extend tax cuts initiated by President George W. Bush or to allow the cuts to expire on January 1, 2011. Reluctant to tackle the issue before the midterm elections, Congress will take up the question in late November. At the time this guide was published, the outcome of these deliberations was unknown; however, there are still key steps you can take as 2010 draws to a close. In the following pages, you’ll find information, updates and ideas on many important tax topics to consider now. Your Morgan Stanley Smith Barney Financial Advisor can work with you and your tax professional to help you decide on strategies that may be beneficial to you. 2 Timely Strategies for Uncertain Times 4 What Happens If the Tax Cuts Expire? 5 Managing Capital Gains with Capital Losses and Tax Swaps 6 Building and Managing Retirement Savings 7 Other Considerations for Business Owners 8 Preparing for Higher Estate and Gift Taxes 9 Tax-Efficient Gifting Strategies 10 Saving for Education
  • 2. education / tax planning guide 2 morgan stanley smith barney | 2010 Timely Strategies for Uncertain Times 1. capital gains and losses. Consideration With nearly every area of individual taxes in limbo right now, the typical considerations—the ones that guide using your current and past gains and losses to help or assist in minimizing your current and future tax exposure— become magnified. Strategy Your tax professional can run a prelimi- nary analysis of your 2010 tax situation. He or she can look at carryovers of tax losses and advise you as to whether any potential losses on depreciated securi- ties would be more valuable in 2010 or in future years. 2. Portfolio Allocation. Consideration Thevolatilefinancialmarketsmayhave thrown your portfolio allocation out of line. Year-end is a good time to check your asset allocation, and—just as im- portantly—to reassess your long- and short-termgoalsinlightofanychanges in your life and the financial markets. Strategy Reviewyourexistingfinancialplanwith yourFinancialAdvisor—orcreateaplan forthefirsttime.Onceyouhavereviewed your goals, you can work together to access the investment expertise of the Morgan Stanley Smith Barney Global InvestmentCommittee,whichregularly publishesrecommendedassetallocation strategiesformanyinvestmentobjectives. 3. Retirement. Consideration High-income investors now have the opportunity to convert assets from a TraditionalIRAoremployer-sponsored retirement plan to a Roth IRA. With a Rothaccount,theretirementassetsyou are working hard to build now will one daybecomeretirementincome,freeoftax. Strategy To help you decide whether a Roth IRA makes sense for you, your Financial Ad- visor can prepare a Roth Conversion Analysis. This report will show you the after-tax potential future value of your IRA balance, comparing the outcome of your current Traditional IRA with that of a Roth IRA. You’ll also be able to see the wealth planning advantages of “stretching” a Roth IRA over multiple generationsandthebenefitsofincluding income from the conversion over the next two years. With the current tax and legislative environmentpointingtowardatrendof higherpersonalincometaxrates,consider the advantages of a Roth conversion in 2010. You’ll have the option of paying the conversion taxes now, at a poten- tially lower rate, or spreading the tax payment across two years by including half the income in 2011 and half in 2012 at rates in effect in those years. 1 Use current and past gains and losses to minimize current and future tax exposure. 2 Reassess portfolio allocations in light of your long-term goals. 3 Convert retirement assets to a Roth IRA. 4 Accelerate gifting plans. 5 Claim a tax credit for home improvements. 6 Request a retirement plan evaluation for your business. Six Timely Strategies To Consider
  • 3. morgan stanley smith barney | 2010 3 education / tax planning guide 4. Gifting to Individuals and Charities. Consideration After 2010, unless there is legislation to the contrary, estate taxes are scheduled to return to rates that are higher than they have been for many years. If you plantoleaveanestatetoyourheirs,you maywanttostrategicallytransferassets this year, free of gift tax, rather than later, when they may be subject to the higher estate tax rates. Strategies •• In 2010, you can gift up to $13,000 ($26,000 for a married couple) free of gift tax to an individual or nonchari- table entity. Read on to find out how you can accelerate your gifting in the current year; for instance, by contrib- uting to a 529 college savings plan you can remove up to $130,000 (jointly) from your taxable estate.1 •• If you want to use appreciated stock to make a charitable donation, do so before year-end to qualify for a potential income tax deduction this year and avoid paying any applicable capital gains taxes on the apprecia- tion. You can also arrange to contrib- ute long-term appreciated stock to a donor-advised fund, which is a rela- tively low-cost, flexible way to manage charitable giving. 5. Tax Credits. Consideration Ifyoumadeenergy-savingimprovements to your home this year or purchased a new home by April 30, 2010, you may be able to claim a tax credit that could reduceyourtaxliabilitydollar-for-dollar. Strategy Reviewyourreceiptsforhomeimprove- ments with your tax professional to see if you qualify for these credits. 6. Business Owners. Consideration Like individuals, business owners need to prepare for possible tax increases. They may also be affected by the Small BusinessJobsActof2010,whichextends thedepreciationbonusforayear,among other provisions. Strategies •• Business owners may want to revisit certain strategies—including when to take capital gains and losses and whether or not to make installment sales—in light of possible tax increases. •• The extension of the 50% deprecia- tion bonus may allow some companies to preserve or increase cash flow by re- ducing their current tax liability. •• If your company has a 401(k), 403(b) or 457(b) plan, you may be able to offer employees the opportunity to convert their existing retirement account to a Roth account. Review your plan docu- ment or check with your attorney or your plan provider to see if this is an option under your plan. 1 No further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the same five-year period, and the transfer must be reported as a series of five equal annual transfers. If the donor dies within the five- year period, a portion of the transferred amount will be included in the donor’s estate for estate tax purposes.
  • 4. education / tax planning guide 4 morgan stanley smith barney | 2010 What Happens If the Tax Cuts Expire? Type of Tax 2010 2011 (Assuming Bush Tax Cuts Expire after 12/31/10) 2011 (Assuming Tax Rates Proposed by Obama Administration)* Ordinary Income Tax 1st bracket 10% Eliminated 10% 2nd bracket 15 15% 15 3rd bracket 25 28 25 4th bracket 28 31 28 5th bracket 33 36 36 6th bracket 35 39.6 39.6 Short-Term Capital Gains (Holding Period of One Year or Less) Ordinary Income Tax Ordinary Income Tax Ordinary Income Tax Long-Term Capital Gains (Holding Period of More Than One Year) 1st and 2nd brackets 0 10 0 3rd and 4th brackets 15 20 15 5th and 6th brackets 15 20 20 Qualified Dividends 1st and 2nd brackets 0 Ordinary Income Tax 0 3rd and 4th brackets 15 Ordinary Income Tax 15 5th and 6th brackets 15 Ordinary Income Tax 20 Proposed Tax Changes for 2011 I f the entire package of Bush tax cuts expires at the end of the year, you can expect to see numerous changes: Income Taxes. •• Income tax rates for almost all Americans will increase. •• Taxpayers should consider accel- erating income to 2010, before taxes increase, and delaying deductions to offset higher taxes in the coming years. Capital Gains. •• Long-term capital gains will in- crease across the board. •• This year, the top long-term capi- tal gains rate remains at a historically low 15%. Unless extended, this rate is scheduled to sunset in 2011—so you may want to consider taking gains now. •• For investments in taxable broker- age accounts, consider: –– selling appreciated securities this year instead of next year, when taxes may be higher. –– sellingsecuritiesthathavedecreased in value to create a net capital loss thatexceedscapitalgains;theexcess net capital loss can be carried for- ward to 2011 and beyond and used to shelter both short-term gains and gains recognized at the higher rates in those years. Dividends. •• Dividends will be taxed as ordinary income—up from a maximum rate of 15% currently. •• This affects all investors and those in the top tax brackets could see divi- dends taxed at as much as 39.6%—more than double the current rate. •• Clients should review their invest- ments and consider holding high-pay- ing dividend stocks in a tax-deferred account, such as an individual retire- ment account or a 401(k). * This column reflects the Obama proposal, which may or may not be finally adopted as law.
  • 5. morgan stanley smith barney | 2010 5 education / tax planning guide Manage Capital Gains with Capital Losses and Tax Swaps Y ear-endisanidealtimetositdown withyourFinancialAdvisortoreview yourportfolioanduncoveropportunities to harvest capital losses, which can be used to offset capital gains and reduce your income tax liability. Evaluate your holdings for loss candidates, includ- ing equities, fixed income and mutual funds. If you sell securities for a profit during 2010, you can also offset gains by applying unused capital losses from previous years. The Internal Revenue Service (IRS) allows taxpayers to use capital losses to offsetcapitalgainsonadollar-for-dollar basis. For tax reporting purposes, you must first net short-term gains against short-termlosses(securitiesheldforone yearorless)andlong-termgainsagainst long-termlosses(securitiesheldformore than a year). Any remaining gains and losses can be netted against each other. If net capital losses still remain, up to $3,000 may be used to offset ordinary income. Any unused capital losses can be carried forward indefinitely. Considera Tax Swap.Ifyouchoose to sell a security to offset gains, under IRSrules,youcannotdeductlossesfrom the sale of securities in a wash sale. A wash sale occurs when you sell securi- ties at a loss, and within 30 days before or after the sale, you: •• Buy substantially identical securities •• Acquire substantially identical secu- rities in a fully taxable trade, or •• Acquire a contract or option to buy substantially identical securities If you have a long-term conviction in the security sold, you can repurchase it after 31 days. Youcanalsouseataxswaptomaintain yourassetallocationanddiversification objectives, which entails the sale and purchaseofsecuritieswithsimilar—but notidentical—characteristics.Stocksare notconsideredidenticaliftheyhavedif- ferentissuers,andinthecaseofbonds,a differentissuerorsubstantiallydifferent maturities or coupons. AMT Rates. The alternative mini- mum tax (AMT) is a concurrent tax system that follows an alternative set of rules to calculate income tax. AMT disallows some of the exemptions, de- ductions and credits that are used to calculate standard income tax. If you aresubjecttoAMT,youwillowewhich- ever tax is higher—the AMT or your “normal” amount. For2011,theAMTexemptionamount is scheduled to revert to the pre-Bush era ($45,000 married filing jointly and $33,750separately).Ifthishappens,mil- lionsoftaxpayerswillbesubjecttoAMT in 2010 and subsequent years. Thereareanumberofstrategiesthat mayhelpminimizeyourAMTexposure, includinghowyoumanagewithholding on state income taxes, how you time your property tax payments, when you sell exercised stock options—even your investment choices. Speak to your tax professional about the role these strate- gies may play in your situation. Wash Sale Rule: Key Dates Tuesday, November 30, 2010: Last day to “double up” for 2010. Doubling up on a security allows you to recognize a loss without missing any potential ap- preciation during the wash sale period. However, doubling up would increase your risk exposure in that security. Friday, December 31, 2010: Last day you can sell a security this year for a loss. (Note, however, that there may be oper- ational limitations in ensuring that your trans- actions occur on this date, so plan ahead.) Monday, January 31, 2011: If you sold a security for a loss on December 31, 2010, you can avoid the wash sale rules if you wait until January 31, 2011 or later to repurchase the same or substantially similar security. Short-Term Long-Term Total Realized Gain 30,000 25,000 55,000 Realized (Loss) (20,000) (60,000) (80,000) Net Taxable Gain (Loss) $10,000 $(35,000) $(25,000) Netting Gains and Losses Let’s say you realize a short-term gain and loss of $30,000 and $20,000, and a long-term gain and loss of $25,000 and $60,000, respectively, this year. After matching short-term gains and losses as well as long-term gains and losses, you could use $3,000 of the $25,000 net capital loss to offset ordinary income in the current year. The remaining $22,000 capital loss could be carried forward to offset future years’ capital gains and/or ordinary income. Note: This hypothetical example is for illustrative purposes only.
  • 6. education / tax planning guide 6 morgan stanley smith barney | 2010 Building and Managing Retirement Savings Strategies for Individuals Make Your2010 Contributions Now. While contributions to an Individual RetirementAccount(IRA)for2010may bemadethroughApril 15, 2011, waiting until Aprilcoulddepriveyou of months of potential tax-deferredgrowth.The soonerthecontribution ismade,thesooneritcan start working for your retirement account. If youhaveearnedincome, you can contribute up to$5,000for2010orup to$6,000ifyouareage 50orolderbyyear-end. Take Your RMD for 2010. If you are age 70½ or older and haveaTraditional,Simpli- fiedEmployeePension (SEP) or Savings Incentive Match Plan for Employees (SIMPLE) IRA, or are the beneficiary of an Inherited IRA, be sure to take your 2010 Required Mini- mumDistribution(RMD)byDecember 31, 2010. If you turn age 70½ in 2010, you may delay taking your initial RMD until April 1, 2011.2 Be sure to take your RMDs on time to avoid any penalties. 2010 Roth IRA Conversions Carry Added Benefits. This year, regula- torychangesmakeiteasierthaneverto convert a Traditional IRA or employer- sponsored retirement plans to a Roth IRA—even if you didn’t qualify in the past because of your income level or maritalstatus.ThekeybenefitsofaRoth IRA are that, first, dis- tributionsaretax-free3 and,second,thereisno requirement that you muststopcontributions or begin taking with- drawals at a given age. Keep in mind that you will need to pay income tax on the amount converted to a Roth IRA, including pretax contributions and any investment earnings. However, 2010conversionscome withaone-timeofferto help ease the tax bur- den—you can spread your tax payment across two years. Instead of paying all the taxes when you file your taxes for 2010,youhavetheoptiontoincludehalf the income when you file your taxes for 2011 and half when you file your taxes for 2012 at rates in effect in those years. The conversion must be completed by December 31, 2010. Finally, if you convert to a Roth IRA in 2010 and the value of the account decreases due to market activity, you have the option of recharacterizing the account back to a Traditional IRA; in essence, undoing the conversion. Strategies for Business Owners Reevaluate Your Company’s Retire- ment Plan. If your company already offersaretirementplan,therehavebeen significantchangesovertheyearswhich may warrant a review, and potentially anupdate,toyourplan.Alongwithyour Financial Advisor, contact your ERISA attorney or retirement plan administra- tor to make sure you are in compliance in all areas. Also ask specifically about waysyourplancanbeenhancedthrough plan design changes such as automatic enrollment, or the addition of new in- vestment options. YourFinancialAdvisorcanpreparea complimentaryretirementplanevaluation that will assess your current program and determine the ideal type of plan for your business, based on your personal and business goals. Type of Plan Under Age 50 Age 50 or Older Traditional/Roth IRA $5,000 $6,000 401(k)/403(b)/457(b)/SAR-SEP* 16,500 22,000 SIMPLE 11,500 14,000 2010 Retirement Plan Contribution Limits * Only SAR-SEP plans established before 1997 may allow employees to make pretax contributions. Thanks to the Small Business Jobs Act of 2010, if you have a 401(k), 403(b) or 457(b) plan that includes a designated Roth account, you may now be able to complete a Roth conversion within your employer- sponsored plan.
  • 7. morgan stanley smith barney | 2010 7 education / tax planning guide OpenaQualified Retirement Plan by Year-End. Establishing a qualified retirementplanforyouremployeescan helpattractandretaingreatemployees.It canalsoofferimportantwealthbuilding opportunities for you as the proprietor. If you don’t have a company retirement plan, call your Financial Advisor to get onestarted.Ifyourbusinessisoperated on a calendar year basis, the plan has to be established by December 31, 2010 to qualify for a tax deduction for 2010. Explore Retirement Tax Credits. You may qualify for a number of credits anddeductionsthatcanhelpdefraysome of the costs in your plan. For instance, if your plan is new, you may be eligible to take a tax credit of up to 50% of the first $1,000 of qualified start-up costs of the plan. The credit is available for each of the first three years of the plan. You may also be able to deduct certain plan expenses, such as the expenses paid to begin or administer an eligible plan and/or educate employees about their plan. Your tax professional can offer more information on how this provision may affect your situation. 2 If you decide to delay your first RMD until April 1, 2011, you will be required to take two distributions in 2011—one for 2010 by April 1, 2011 and one for 2011 by December 31, 2011. This could result in the distributions being taxed at a higher marginal rate due to the increased income received during the year. 3 Distributions of earnings are tax-free if made at least five years after the year of the taxpayer’s first Roth IRA contribution and after age 59½ or due to death, disability or for a first-time home purchase. Withdrawals of contributions are not taxed. Other Considerations for Business Owners W iththeBushtaxcutssettoexpire, businessownersmaywanttocon- sidertakingcapitalgainsandaccelerating income in 2010 to avoid higher taxes in 2011. Conversely, losses may prove to be more beneficial if held until 2011. Business owners who are in the process of selling their business via an installment sale method should con- sider electing out of that approach and accelerating income in 2010, ahead of potential tax increases. With the Small Business Jobs Act signed by President Obama, business ownersshouldconsiderenhancements thatarenowbeingofferedaspartofthe approved bill: Bonus Depreciation.Forbusinesses of all sizes, the Act extends the tempo- rary 50% depreciation bonus for one additional year. It basically allows that 50% of the basis of qualified property maybedeductedintheyeartheproperty is placed in service and the remaining 50% may be recovered under normal depreciation rules. Bonus depreciation may allow some taxpayers to preserve or increase cash flow by reducing cur- rent tax liability, and it may also enable some companies to increase a loss that can be carried back. A New$30 billion SmallBusiness Lending Fund. Thebillwillestablisha new$30billionSmallBusinessLending Fundwhich—byprovidingcapitaltosmall banks with incentives to increase small businesslending—couldsupportseveral multiples of that amount in new credit. Roth Retirement Account Op- portunities. Employers may be able toofferopportunitiesforemployeesand themselves to convert existing funds in company retirement accounts to a Roth account. One of the key ben- efits of a Roth is that distributions are tax-free.Reviewyourplandocumentor check with your attorney or plan pro- vider to see if this is an option under your plan.
  • 8. education / tax planning guide 8 morgan stanley smith barney | 2010 are transferred more than one genera- tion younger than the donor (such as grandchildren). The GST taxexemption,theamount that transfers free of tax, will be approximately $1 million and the tax rate will be 55%. In addition, the modified carryover tax basis will come to an endonDecember31,2010 and the step-up regime willapplyagainbeginning January 1, 2011. This means that the incometaxbasisofpropertythatpasses from a decedent again will be stepped up to fair market value. Gift Taxes. The federal gift tax will change significantly, too. Although the gifttaxexclusion,theamountthattrans- fersfreeoftax,willremainat$1million, the highest marginal rate will increase from 35% to 55%. What to Do by Year-End. •• Consider making gifts now at a max- imum 35% rate, ahead of scheduled tax increases next year. •• If you want to transfer wealth to grandchildren, you can do so this year without incurring the generation-skip- ping transfer tax, unless there is legisla- tion to the contrary. Such transfers still will be subject to the gift tax. •• If your estate is valued at over $3.5 million, or if you live in a state that im- poses taxes on estates of any value, ask Preparing for Higher Estate and Gift Taxes Estate Taxes. On January 1, 2011, two of the most significant wealth planning taxes—the federal estate tax and the generation-skipping transfer tax, both of whichwererepealed in 2010—are sched- uled to return to the pre-Bush levels, un- less there is legisla- tion to the contrary. That means that the maximum amount you can transfer free of federal estate tax will be only $1 million, and the highest tax rate will jump to 55%. Recall that in 2009, the estate tax exclusion was $3.5 million and the highest marginal rate was 45%. Thegeneration-skippingtransfertax (GST tax) typically applies when assets Type of Tax 2010 2011 (Assuming Bush Tax Cuts Expire after 12/31/10) 2011 (Assuming Tax Rates Proposed by Obama Administration)* Estate Tax Estate Tax Rate Repealed 55% 45% Exemption N/A $1mm $3.5mm Basis Step Up $1.3mm + $3mm (spouse) Full Step Up Full Step Up Generation Skipping Tax Generation Skipping Tax Rate Repealed 55% 45% Lifetime Exemption N/A $1mm $3.5mm Gift Tax Gift Tax Rate 35% 55% 45% Lifetime Exemption $1mm $1mm $1mm Proposed Tax Changes for 2011 A beneficiary review ensures that your information is complete, up-to-date and reflects your current desires. Your Financial Advisor can conduct a beneficiary review—not just for your estate plans or trusts, but for your insurance contracts and retirement accounts, as well. * This column reflects the Obama proposal, which may or may not be finally adopted as law.
  • 9. morgan stanley smith barney | 2010 9 education / tax planning guide Tax-Efficient Gifting Strategies Donate Appreciated Stock for Po- tential Double Tax Savings.Instead of cash, consider donating appreciated stocktoyourfavoritecharity.Ifyouhave owned a stock for more than one year, youcanavoidpayingcapitalgainstaxes, and you may also be able to deduct the fullvalueofthestockfromyourtaxable income.Ifyouwanttokeepthestockin yourportfolio,youcanseparatelyreinvest in the stock. If you wish to donate stock that has lost value, you should sell the shares and donate the proceeds—this way you realize a loss to offset income or gains in your portfolio. Consider the Timing of Deduc- tions. If tax rates increase, it may be more advantageous to hold deductions, suchascharitablecontributions,tooffset higher taxes in the coming years. On the other hand, it may make sense to accelerate deductions this year. There is potential for a larger deduction of a taxpayer’sitemizeddeductions,because itemized deductions are not limited in 2010, but are expected to be in 2011. Complete Any Gift Transfers to Individuals by Year-End 2010. Gift transfers support your beneficia- ries and help reduce the value of your estate and future estate taxes. You can transfer up to $13,000 per recipient in 2010 without incurring any federal gift tax. Spouses together may gift up to $26,000 per recipient. In addition, this might be a good year to consider larger gifts, even taxable ones, since the gift tax rate is at an all-time low. Consider a Donor-Advised Fund. If you are looking to create a legacy of charitablegivingbuthaven’tdetermined wheretocontribute,youmightconsider adonor-advisedfund,whichallowsyou to make a tax-deductible contribution this year, locking in the tax savings, and choose the recipients later. your estate tax attorney what strategies may be beneficial to you. •• Now is a good time to create a grant- or retained annuity trust (GRAT). All else being equal, GRATs perform best when a particular discount rate that must be used in structuring the GRAT is low. The rate for GRATs created in October 2010 was 2.0%—the lowest the rate has ever been. •• Consider the use of an Irrevocable Life Insurance Trust (ILIT) to offset any future estate taxes. You can cre- ate and fund an ILIT with annual gifts to the trust, thereby maximizing the benefits of the annual gift tax exclu- sion.TheILITpurchaseslifeinsurance on your life and uses your gifts to pay the premiums. As long as the trust is properly drafted, the insurance pro- ceeds when paid as a death benefit will not be included in your taxable estate, are exempt from income tax, and can provide immediate cash to pay bills, expenses and taxes. •• The low interest rate environment makes it a great time for intra-family loans as well. This is a simple but often overlooked way to transfer wealth downstream without gift tax consequences.
  • 10. education / tax planning guide 10 morgan stanley smith barney | 2010 Saving for Education A varietyofsavingsplans,taxcredits and deductions are available to help you defray some of the expenses of higher education, and many of them haveyear-enddeadlinesforparticipation. 529 College Savings Plans. A 529 college savings plan is a great way to gift to loved ones. By funding their higher education, you will be helping them to take an important first step toward preparing for the future while potentiallyreducingyourtaxableestate. In addition to the flexibility and con- trol that 529 plans provide the account owner, they offer several tax benefits that may aid in your year-end planning. For example, you can utilize your an- nual federal gift tax exclusion of up to $13,000 ($26,000 jointly) to fund a 529 plan free of gift tax. Moreover, if it suits your estate planning needs, you can accelerate multiple years’ worth of gifts into the current year, removing up to $65,000 ($130,000 jointly) per recipientfromyourtaxableestate.4 Your MorganStanleySmithBarneyFinancial Advisor can help you select the 529 col- lege savings plan that best suits your needs from some of the country’s most respected money management firms.5 If you are one of the millions of peo- ple funding a college savings plan, you know that market conditions may have negatively affected many investment portfolios, including education savings. Now is the time to review plan options with your Financial Advisor and make any necessary adjustments in how your fundsareallocated.6 Ifthebeneficiaryof theaccountisnearingorincollege,your Financial Advisor can also recommend asset allocations to help minimize the impact of a negative market. Education Tax Credits. If you pay for education expenses for yourself, your spouse or a dependent, document yourexpensesanddiscusswithyourtax professional whether you qualify for a taxcredit.Knownbynamessuchasthe Hope Credit and the Lifetime Learning Credit, these credits may help reduce your tax obligation, dollar-for-dollar, based on your expenditures. Deductions. Takeadvantageofthe tuition and fees deduction (included in the pending extenders bill), which may helpreducetheamountofyourincome subjecttotaxbyupto$4,000.Depending on your income, you may also be able to deduct interest on student loans used for higher education. Manyprofessionalsinvestsignificantly in ongoing work-related education. If you do so, you may be able to claim a deduction for these expenses, provided qualifying expenses plus other job and certain miscellaneous expenses add up to more than 2% of your adjusted gross income. Don’t “Double Dip.” You cannot take both deductions and tax credits for the same expense. Ask your tax professional to help you determine what you are qualified for, and to help you choose the one that will give you the lower tax. 4 No further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the same five-year period, and the transfer must be reported as a series of five equal annual transfers. If the donor dies within the five- year period, a portion of the transferred amount will be included in the donor’s estate for estate tax purposes. 5 Before investing, clients should consult with their tax advisor to consider whether tax or other benefits are only available for investments in their home state. 6 The account holder can reallocate the portfolio investments once every calendar year or whenever the designated beneficiary is changed.
  • 11. Planning strategies to discuss with your Financial Advisor and tax professional before year-end. 2010 Year-End Tax Planning Checklist general tax issues Find out if you carryover any losses from the sale of investments. Use this information to determine if you want to use these losses to offset any investment gains from 2010 or in future years. When selling securities, ask your Financial Advisor how to comply with wash sale rules that govern the purchase and sale of similar investments within a 30-day period. Have your tax advisor estimate your adjusted gross income and tax rate now to determine if you have any Alternative Minimum Tax (“AMT”) liability for 2010. If so, you may consider deferring taxable income to 2011 or accelerat- ing or deferring deductions in 2010 to minimize AMT.1 Tell your tax advisor if you purchased any big-ticket items this year or are intending to by year-end. You may qualify for valuable tax credits or deduc- tions if you made energy-saving home improvements, purchased a home, or paid for a college education.2 Fully fund your IRA and company retirement accounts as soon as possible. You have until April 15, 2011, to fund your IRA for 2010. You should con- sult your tax advisor to determine the deadline for contributing to your company retirement plan. If you are age 70½ or older and have a Traditional, SEP, SAR-SEP or SIMPLE IRA, remember to take your Required Minimum Distribution (“RMD”) for 2010. Explore the benefits of a Roth IRA. Tax law changes in 2010 enable all investors to convert to a Roth IRA, which not only provides tax-deferred growth, but also tax-free income in retirement. If you own a business which has a calendar tax year, you have until December 31, 2010, to adopt a qualified plan in order to deduct contributions for 2010. If you miss this deadline, a SEP plan can be established and funded by the due date for filing the plan sponsor’s 2010 tax return (with extensions)— which, if you are a sole proprietor, could be as late as October 15, 2011. Check with your employer if your company’s retirement plan contains a designated Roth account. As a result of the Small Business Jobs Act of 2010, you may be able to complete a Roth conversion within your employer-spon- sored plan. Diversifying your retirement portfolio with a variable annuity may help complement your existing investment strategy by providing a number of tax advantaged benefits—including opportunities to reduce your current tax liability, increase retirement savings, and possibly supplement social securi- ty and/or pension benefits. retirement accounts gifting plans Complete any gift transfers to individuals or use the annual exclusion to make gifts to an Irrevocable Life Insurance Trust by year-end. Not only will this make you feel good, but you will help reduce the value of your estate and future estate taxes. You can transfer up to $13,000 per recipient in 2010 without incurring any federal gift tax. Spouses together may gift up to $26,000 per recipient. If you plan to gift shares of stock to charity, you must act by year-end. By gifting long-term appreciated stock, you can qualify for a potential income tax deduction—or by selling stock that has lost value and donating the proceeds, you can realize a loss to offset other gains. Talk with your Financial Advisor about gifting through a 529 plan. Transfers to 529 plans can help reduce income or future estate taxes. By making an accelerated gift through a 529 plan, you can gift up to $65,000 ($130,000 for couples) per beneficiary.1 Ask your Financial Advisor about the charitable benefits of the Morgan Stanley Smith Barney Global Impact Funding Trust (GIFT), a suite of services designed to help you build your philanthropic legacy through a professionally-managed donor-advised fund and related grant making and reporting tools.2 business owners In light of the expected expiration of the Bush tax cuts after 12/31/10, consider taking capital gains and accelerating income in 2010 to avoid potential higher taxes in 2011. Conversely, losses may prove to be more beneficial if held until 2011. Consider how the new Small Business Jobs Act may benefit your business. The extension of the 50% depreciation bonus may allow your company to preserve or increase cash flow by reducing current tax liability. If you are in the process of selling your business via an installment sale method, consider electing out of that approach and accelerating income in 2010, ahead of potential tax increases. If your company has a 401(k), 403(b) or 457(b) plan, consider offering em- ployees the opportunity to convert their existing retirement account to a Roth account. other issues Use any balance in your employer’s Flexible Spending Account (“FSA”) for qualified medical expenses by year-end 2010. When estimating your con- tributions for next year, consider the increasing costs of uncovered medi- cal expenses and changes in your company’s medical insurance plan. Ask your Financial Advisor for help rebalancing your portfolio to remain in line with your goals, time horizon and risk tolerance. Discuss any new op- portunities for investing that might be appropriate for you. Consider using a securities based loan to help you meet a tax obligation.
  • 12. Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein. Please consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. The offering statement contains this and other important information. To obtain an offering statement, please call your Financial Advisor. Read the offering statement carefully before investing. 1 No further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the same five-year period, and the transfer must be reported as a series of five equal annual transfers. If the donor dies within the five-year period, a portion of the transfer amount will be included in the donor's estate for estate tax purposes. 529 college savings plan funds not used for qualified educational expenses are subject to applicable taxes and penalties. Before investing, investors should consider whether tax or other benefits are only available for investments in the investor’s home-state 529 college savings plan. Variable annuities are sold by prospectus. Investors should carefully consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information and should be read carefully before investing. Variable annuities are long-term investments designed for retirement purposes and may be subject to market fluctuations, investment risk, and possible loss of principal. All guarantees are based on the claims-paying ability of the issuing insurance company. Taxable distributions (and certain deemed distributions) are subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% federal income tax penalty. For clients whose account is carried by Morgan Stanley Smith Barney, insurance products are offered in conjunction with Morgan Stanley Insurance Services Inc. For clients whose account is carried by Citigroup Global Markets Inc., Morgan Stanley Smith Barney offers insurance products in conjunction with SBHU Life Agency, Inc. Since life insurance is medically underwritten, your client should not cancel their current policy until their new policy is in force. A change to their cur- rent policy may incur charges, fees and costs. A new policy will require a medical exam. Surrender charges may be imposed and the period of time for which surrender charges apply may increase with a new policy. Your clients should consult with their own tax advisors regarding any potential tax liability on surrenders. Asset allocation does not assure a profit or protect against loss in declining financial markets. Rebalancing does not protect against a loss in declining financial markets. There may be a potential tax implication with a rebalancing strategy. Please consult your tax advisor before implementing such a strategy. 2 Morgan Stanley Smith Barney GIFT, Inc. is an organization described in Section 501(c) (3), of the Internal Revenue Code of 1986, as amended, and Morgan Stanley Smith Barney Global Fund Trust is a donor-advised fund. Various divisions of Morgan Stanley Smith Barney LLC provide investment manage- ment and administrative services to Morgan Stanley Smith Barney GIFT. © 2010 Morgan Stanley Smith Barney LLC. Member SIPC. GP10-02232P-Y10/10 CLF96000 JV6486374 11/10

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