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Tax Planner


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Tax Planner

  1. 1. 2010-2011Tax Planning guideYear-round strategies to make the tax laws work for you Delap LLP Serving the Pacific Northwest for over 75 years providing assurance, tax, and consulting services 4500 SW Kruse Way, No. 200 Lake Oswego, OR 97035 (503) 697-4118 E-mail: Website:
  2. 2. For tax planning, the only certainty is uncertaintyAs our country starts to recover from the recession, we’re confronted with a great deal of uncertainty in tax laws, the economy and ourpersonal finances. While some new, but temporary, tax breaks have gone into effect this year, others have expired — but could still beextended. Perhaps even more significant, many tax rates are scheduled to go up in 2011 if Congress doesn’t take action.Consequently, saving as much tax as possible will require constant attention to these changes and a highly proactive approach to taxplanning. The more familiar you are with various tax planning strategies, the easier it will be to take advantage of them.To this end, we are pleased to offer this overview of new and proven ways to minimize your tax liability.While we’ve tried to include the tax law changes and strategies most likely to apply to your situation,there are others we don’t have room to cover here. So please check with your tax advisor to find thebest ways to save tax in these uncertain times.ContentsDeductions & AMT 2 Click here Chart 1: Tax deductions vs. credits: What’s the difference? Click hereFamily & Education 4 Click here Case Study 1: Tax-free savings for education add up Click hereInvesting 6 Click here What’s new! Low capital gains and qualified-dividend rates set to expire Dec. 31 Click here Case Study 2: With possible rate increases, deferring a loss could save you taxes Click hereBusiness 8 Click here What’s new! New breaks available for hiring workers Click here What’s new! Health care act provides new tax credit to certain small businesses Click here Chart 2: Tax differences based on business structure Click hereRetirement 12 Click here Chart 3: No increase in retirement plan contribution limits for 2010 Click here What’s new! AGI limits lifted on Roth IRA conversions Click hereEstate Planning 14 Click here Chart 4: Transfer tax exemptions and highest rates Click here What’s new! Step-up in basis changes could increase income taxes for heirs Click hereTax Rates 16 Click here Chart 5: 2010 individual income tax rate schedules Click here Chart 6: 2010 corporate income tax rate schedule Click here
  3. 3. DeDUCTIONs & aMT Minimizing taxes requires smart use of deductionsSince the 16th Amendment was added to the Constitution in 1913, our deductible. But beware of the AMT: If the home equity debt isn’t used for homeincome has been subject to federal tax. What started as a simple idea improvements, the interest isn’t deductiblehas become very complicated, with continually changing tax laws and for AMT purposes.a multitude of limits and exceptions. To keep your income taxes to a Home sale gain exclusion. When you sellminimum, one important strategy is to make smart use of deductions. your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain if you meet certain tests. Warning:The AMT be eligible for a credit of up to $8,000 as a Gain on the sale of a principal residenceBefore taking steps to maximize deduc- “first-time” homebuyer or $6,500 as a “long- generally isn’t excluded from income if thetions, consider the alternative minimum time” homeowner. The credit starts to phase gain is allocable to a period of nonqualifiedtax (AMT) — a separate tax system that out for joint filers with modified adjusted use. Generally, this is any period after 2008limits some deductions and doesn’t permit gross incomes (MAGIs) exceeding $225,000 during which the property isn’t used as yourothers, such as: ($125,000 for single filers). It’s completely principal residence. There’s an exception if eliminated for joint filers with MAGIs exceed- the home is first used as a principal residence State and local income tax deductions, ing $245,000 ($145,000 for single filers). and then converted to nonqualified use. Property tax deductions, and Property tax deduction. Before paying Losses on a principal residence aren’t Miscellaneous itemized deductions subject your bill early to accelerate the itemized deductible. But if part of your home is to the 2% of adjusted gross income (AGI) deduction into 2010, review your AMT rented or used exclusively for your business, floor, including investment advisory fees situation. If you’re subject to the AMT, you’ll the loss attributable to that portion will be and employee business expenses. lose the deduction for the prepayment. deductible, subject to various limitations.You must pay the AMT if your AMT Mortgage interest deduction. You generally Because a second home is ineligible forliability exceeds your regular tax liability. can deduct interest on up to a combined the exclusion, consider converting it toSee Chart 5 on page 16 for AMT rates and total of $1 million of mortgage debt related rental use before selling. It will be con-exemptions, and work with your tax advisor to your principal residence and a second sidered a business asset, and you may beto project whether you could be subject residence. Points paid related to your princi- able to defer tax on any gain through anto the AMT this year or next. You may be pal residence also may be deductible. installment sale or Sec. 1031 (“like-kind”)able to time income and deductions to Home equity debt interest deduction. exchange. Or you may be able to deductavoid the AMT, or at least reduce its impact. Interest on home equity debt used to a loss, but only to the extent attributableHome-related breaks improve your principal residence — and to a decline in value after the conversion.These valuable tax breaks go beyond just interest on home equity debt used for any Debt forgiveness exclusion. Homeownersdeductions: purpose (debt limit of $100,000) — may who receive debt forgiveness in a foreclo- be deductible. So consider using a homeHomebuyers credit. If you purchased a sure or a mortgage workout for a principal equity loan or line of credit to pay off credithome before May 1, 2010 (Oct. 1 if a binding residence generally don’t have to pay cards or auto loans, for which interest isn’tcontract was in place before May 1), you may federal income taxes on that forgiveness. 2 DeDUCTIONs & aMT
  4. 4. Rental income exclusion. If you rent all medical expenses in excess of 10% of your limit. The plan pays or reimburses you foror a portion of your principal residence AGI are deductible. medical expenses not covered by insurance.or second home for less than 15 days, What you don’t use by the end of the plan Also remember that expenses that areyou don’t have to report the income. But year, you generally lose. If you have an HSA, reimbursed (or reimbursable) by insur-expenses associated with the rental aren’t your FSA is limited to funding certain “permit- ance or paid through one of the followingdeductible. ted” expenses. accounts aren’t deductible:Energy-related breaks. A wide variety Charitable donations HSA. If you’re covered by qualified high-of breaks designed to encourage energy Donations to qualified charities are gener- deductible health insurance, a Healthefficiency and conservation are available, ally fully deductible. For large donations, Savings Account (HSA) allows contributionsmany of which have been expanded. Con- discuss with your tax advisor which assets of pretax income (or deductible after-taxsult your tax advisor for details. to give and the best ways to give them. contributions) up to $3,050 for self-only For example:Health care breaks coverage and $6,150 for family coverage.If your medical expenses exceed 7.5% Account holders age 55 and older can Appreciated assets. Publicly traded stockof your AGI, you can deduct the excess contribute an additional $1,000. (The same and other securities you’ve held moreamount. Eligible expenses include: limits will apply in 2011.) than one year are long-term capital gains property, which can make one of the best Health insurance premiums, HSAs bear interest or are invested and can charitable gifts. Why? Because you can grow tax-deferred similar to an IRA. With- Medical and dental services, and deduct the current fair market value and drawals for qualified medical expenses are Prescription drugs. avoid the capital gains tax you’d pay if you tax free, and you can carry over a balance sold the property. Warning: Donations from year to year.Consider “bunching” nonurgent medical of such property are subject to tighterprocedures and other controllable expenses FSA. You can redirect pretax income to an deduction limits. Excess contributionsinto one year to exceed the 7.5% floor. But employer-sponsored Flexible Spending may be carried forward for up to five years.keep in mind that for AMT purposes only Account (FSA) up to an employer-determined CRTs. For a given term, a charitable remain- Chart 1 der trust (CRT) pays an amount to you annu- Tax deductions vs. credits: What’s the difference? ally (some of which may be taxable). At the term’s end, the CRT’s remaining assets pass Both deductions and credits can be powerful tax-saving tools, but they work differently. to one or more charities. When you fund the A tax deduction reduces the amount of income that’s taxed and thus becomes more CRT, you receive an income tax deduction. If valuable the higher the tax bracket. A tax credit reduces the actual tax you owe dollar-for- dollar, providing much more tax savings than a deduction of an equal amount. But many you contribute appreciated assets, you also deductions and credits are subject to income-based limits that reduce or eliminate the may be able to avoid capital gains tax. You tax savings for higher-income taxpayers. can name someone other than yourself as Let’s take a look at how the tax savings can differ, assuming that no income-based income beneficiary or fund the CRT at your limits apply: death, but the tax consequences will be dif- Tax savings from ferent. Warning: Special rules may apply in $1,000 credit 2010; check with your tax advisor for details. $1,000 Sales tax deduction As of this writing, the break allowing you to take an itemized deduction for state and Tax savings from $1,000 deduction local sales taxes in lieu of state and local $330 $350 income taxes isn’t available for 2010. If you $250 $280 live in a state with no or low income tax or if you’ve purchased major items, such as 25% 28% 33% 35% all tax bracket tax bracket tax bracket tax bracket tax brackets cars or boats, check with your tax advisor to see if this break has been extended. ◆ DeDUCTIONs & aMT 3
  5. 5. FaMIlY & eDUCaTION Have children. Save money.If you think those two sentences can’t possibly go together, think again. age 14 — provided families with significant tax savings now offers much more limitedMany tax breaks are available to families. Whether it’s a tax credit or benefits. Today, the kiddie tax applies totax-advantaged savings opportunity, or it’s for child care or education children age 18 and younger, as well as to full-time students under age 24 (unlessexpenses, there’s something for just about everybody. the students provide more than half of their own support from earned income).Child-related tax breaks FSA. You can redirect up to $5,000 of pretax income to an employer-sponsored For children subject to the kiddie tax,Parents have several ways to save tax child and dependent care Flexible Spend- any unearned income beyond $1,900 (fordollars, whether for themselves or their ing Account (FSA). The plan then pays or 2010) is taxed at their parents’ marginalkids, including these favorites: reimburses you for child and dependent rate rather than their own, likely lower,Tax credits. Tax credits reduce your tax bill care expenses. You can’t claim a tax credit rate. Keep this in mind before transferringdollar-for-dollar. (See Chart 1 on page 3.) for expenses reimbursed through an FSA. assets to them.So make sure you’re taking every credit Employing your children. If you own a Education savingsyou’re entitled to. business, consider hiring your children. As If you’re saving for education, payingFor each child under age 17 at the end the business owner, you can deduct their higher education expenses or paying off aof 2010, you may be able to claim a pay, and other tax benefits may apply. student loan, you may enjoy tax breaks:$1,000 credit. But the credit phases out They can earn as much as $5,700 (the 2010for higher-income taxpayers; check with standard deduction for singles) and pay 529 plans. You can either secure currentyour tax advisor for details. zero federal income tax. They can earn an tuition rates with a prepaid tuition program additional $5,000 without paying current or create tax-advantaged savings plans toFor children under age 13 (or other fund college expenses. In addition: tax if they contribute it to a traditional IRA.qualifying dependents), you may be Warning: They must perform actual workeligible for a credit for child or dependent  federal purposes, contributions For and be paid in line with what you’d paycare expenses. The credit is limited to aren’t deductible, but plan assets nonfamily employees for the same work.either $3,000 or $6,000, depending on grow tax-deferred and distributionsthe number of children or dependents. Roth IRAs for teens. Roth IRAs can be perfect used to pay for qualified expenses —The credit is reduced but doesn’t phase for teenagers because they likely have many such as tuition, mandatory fees, books,out altogether for middle- and higher- years to let their accounts grow tax free. The equipment, supplies and, generally,income taxpayers. 2010 contribution limit is the lesser of $5,000 room and board — are income-tax or 100% of earned income, reduced by any free. (State treatment varies.)If you adopt in 2010, you may be able  2010, qualified expenses also include For traditional IRA contributions. (For more onto take a credit or use an employer computers, computer technology and Roth IRAs, see “Roth accounts” on page 12.)adoption assistance program income Internet service. As of this writing, thisexclusion; both are $13,170 per eligible The “kiddie tax” expanded definition expires after 2010;child. An income-based phaseout The income shifting that once — when the check with your tax advisor to see if it’salso applies. “kiddie tax” applied only to those under been extended. 4 FaMIlY & eDUCaTION
  6. 6.  plans typically offer high contribution The limits, and there are no income limits for Case study 1 contributing. Tax-free savings for education add up There’s generally no beneficiary age limit for contributions or distributions. 529 savings plans don’t offer a federal deduction for contributions, and the plans come with a lot of restrictions. Are their tax-deferred growth and tax-free distributions remain in control of the account — You really worth it? They can be — especially if you start early: even after the child is of legal age. When Sophie is born, her parents fund a 529 savings plan with a $5,000 contribution, plans provide estate planning The and they put in another $5,000 on her birthday each year through age 17. benefits: A special break for 529 plans Daniel is born on the same day as Sophie, but his parents wait until his ninth birthday allows you to front-load five years’ worth to start putting money into a 529 plan. They then make the same annual $5,000 of annual gift tax exclusions and make a contributions through age 17 as Sophie’s parents do. $65,000 contribution (or $130,000 if you When Sophie and Daniel turn 18, Sophie’s plan has nearly $103,000 more than split the gift with your spouse). Daniel’s — even though her parents contributed only $45,000 more. And the $73,800 of growth in Sophie’s plan will be completely tax free, as long as allThe biggest downsides may be that your distributions are used to pay for qualified education expenses. Daniel’s planinvestment options — and when you can provides a much smaller tax benefit — only $15,904 of tax-free growth.change them — are limited. Total contributions made by parentsESAs. Like those for 529 plans, for federal Sophie $90,000purposes Coverdell Education Savings Daniel $45,000Account (ESA) contributions aren’t deduct- Balance at age 18ible, but plan assets grow tax-deferredand distributions used to pay qualified Sophie $163,800education expenses are income-tax free. Daniel $60,904 Note: This example is for illustrative purposes only and isn’t a guaranteePerhaps the biggest ESA advantage is of future results. The figures presume a 6% rate of return.that you have direct control over how andwhere your contributions are invested.Another significant advantage has been Education credits. When your child enters Both a credit and tax-free 529 plan orthat tax-free distributions aren’t limited college, you may be able to claim the ESA distribution can be taken as longto college expenses; they also can fund American Opportunity credit (an expanded as expenses paid with the distributionelementary and secondary school costs. version of what was previously known as aren’t used to claim the credit. the Hope credit). It covers 100% of the firstHowever, if Congress doesn’t act to extend If you don’t qualify for one of these credits $2,000 of tuition and related expenses andthis treatment, distributions used for pre- because your income is too high, your child 25% of the next $2,000 of expenses. Thecollege expenses will be taxable starting in might. Or you might be eligible to deduct maximum credit is $2,500 per year for the2011. Additionally, the annual ESA contribu- up to $4,000 of qualified higher education first four years of postsecondary education,tion limit per beneficiary is only $2,000 for tuition and fees — if this break is extended but an income-based phaseout applies.2010, and it will go down to $500 for 2011 if for 2010. (Check with your tax advisor forCongress doesn’t act. (Check with your tax The credit is scheduled to expire after 2010 the latest information.) The deduction isadvisor for the latest information.) Contribu- but may be extended. Check with your tax limited to $2,000 for taxpayers with incomestions are further limited based on income. advisor for the latest information. exceeding certain limits and is unavailable to taxpayers with higher incomes.Generally, contributions can be made If you’re paying postsecondary educationonly for the benefit of a child under expenses beyond the first four years, Student loan interest deduction. Ifage 18. Amounts left in an ESA when check whether you’re eligible for the you’re paying off student loans, you maythe beneficiary turns 30 generally must Lifetime Learning credit (up to $2,000 per be able to deduct up to $2,500 of interestbe distributed within 30 days, and any tax return). An income-based phaseout (per tax return). An income-based phase-earnings will be subject to tax. also applies. out applies. ◆ FaMIlY & eDUCaTION 5
  7. 7. INvesTINg Taxes may take a more prominent role in decisions this yearNumerous factors must be considered before making an investment save more taxes because you’re reducing or eliminating gain that would have been taxeddecision — your goals, time horizon and risk tolerance plus various factors at your higher ordinary-income rate.related to the investment itself. Tax considerations are also important, but Here are some other tax-saving strategiesthey shouldn’t be the primary driver of investment decisions. Still, with rates related to timing:potentially increasing next year, taxes may take a more prominent role. Mind your mutual funds. Mutual funds with high turnover rates can create income taxedCapital gains tax and timing cut tax on any gain. Warning: You have at ordinary-income rates. Choosing fundsWhile time, not timing, is generally the only through 2010 to take advantage of that provide primarily long-term gains cankey to long-term investment success, the 15% rate, unless Congress extends it. save you more tax dollars because of thetiming can have a dramatic impact on (See “What’s new!” below.) lower long-term rates.the tax consequences of investment To determine capital gains tax liability, real- See if a loved one qualifies for the 0%activities. The 15% long-term capital gains ized capital gains are netted against realized rate. The long-term capital gains rate is 0%rate (which also applies to qualified divi- capital losses. First, short-term gains are for gain that would be taxed at 10% or 15%dends) is 20 percentage points lower netted with short-term losses and long-term based on the taxpayer’s ordinary-incomethan the highest ordinary-income rate of gains with long-term losses. Then if, for exam- rate. If you have adult children in one of35%. It generally applies to investments ple, you have a net short-term gain but a net these tax brackets, consider transferringheld for more than 12 months. Holding long-term loss, you can use the long-term appreciated or dividend-producing assetson to an investment until you’ve owned it loss to offset the short-term gain. This can to them so they can enjoy the 0% rate,more than a year may help substantially which also applies to qualified dividends. The 0% rate is also scheduled to expire at What’s new! the end of the year (see “What’s new!” at Low capital gains and qualified-dividend rates set to expire Dec. 31 left), so you may want to act soon. Who’s affected: Investors holding appreciated or dividend-producing assets. Warning: If the child is under age 24, first Key changes: As of this writing, the 15% long-term capital gains rate is scheduled make sure he or she won’t be subject to to return to 20% in 2011. Congress might take action to extend the 15% rate, but the kiddie tax. (See “The ‘kiddie tax’” on extending it for only the middle brackets (and the 0% rate for the lower brackets) page 4.) Also, consider any gift tax conse- has been discussed. The 15% rate also applies to qualified dividends, and, without quences. (See page 14.) Congressional action, in 2011 these dividends will return to being taxed at your marginal ordinary-income rate — which could then be as high as 39.6%. (Check with your tax advisor for the latest information.) Use unrealized losses to absorb gains. If you’ve cashed in some big gains during Planning tips: If as year end approaches it’s looking like tax rates will increase next the year and want to reduce your 2010 tax year, consider whether you should sell highly appreciated assets you’ve held long- term by year end. For some taxpayers it may make sense to recognize gains now liability, before year end look for unrealized rather than risk paying tax at a higher rate next year. If you hold dividend-producing losses in your portfolio and sell them to investments, you’ll also want to consider whether you should make any adjustments offset your gains. But keep in mind those to your portfolio in light of their higher tax cost. losses could be more valuable next year if 6 INvesTINg
  8. 8. tax rates are higher and you have capitalgains again. (See Case Study 2 at right.) Case study 2Avoid wash sales. If you’re trying to With possible rate increases,achieve a tax loss with minimal change in deferring a loss could save you taxesyour portfolio’s asset allocation, keep inmind the wash sale rule. It prevents you Let’s say your portfolio includes $20,000 of a technology stock that you paid onlyfrom taking a loss on a security if you buy a $10,000 for. You’d like to sell it to diversify your portfolio, but you’re concerned about the capital gains tax. You also have $5,000 of an auto industry stock that yousubstantially identical security (or option to paid $15,000 for. You’re thinking about selling both stocks so your $10,000 loss onbuy such a security) within 30 days before the auto stock can offset your $10,000 gain on the tech stock. But you may want toor after you sell the security that created think twice.the loss. You can recognize the loss only If you may have more big gains to recognize next year, you could be better off holdingwhen you sell the replacement security. on to the auto stock and paying capital gains tax on the tech stock sale. Why? The tech stock gain will be taxed at 15%, so offsetting it with the auto stock loss will save youFortunately, there are ways to avoid the $1,500. But if you wait until Jan. 1 to sell the auto stock and use it to offset a $10,000wash sale rule. For example, you may imme- gain next year and your capital gains rate is 20%, it will save you $2,000 in taxes.diately buy securities of a different company Note: The figures presume that the share prices stay the same regardless of whether the sale is in 2010 or the same industry or shares in a mutualfund that holds securities much like the perspective, it may not make sense to sell  Tax-exempt interest from certainones you sold. Or, you can wait 31 days to an investment at a loss if you won’t have private-activity bonds can triggerrepurchase the same security. Alternatively, enough gains to absorb most of it. Plus, the alternative minimum tax (AMT)you can double your purchase and then if you hold on to the investment, it may in some situations.wait 31 days to sell the original portion. recover the lost value.  Corporate bond interest is fully taxableSwap your bonds. With a bond swap, you sell for federal and state purposes. But if you’re ready to divest yourself of aa bond, take a loss and then immediately buy  Bonds (except U.S. savings bonds) with poorly performing stock because you thinkanother bond of similar quality and duration original issue discount (OID) build up it will continue to lose value — or becausefrom a different issuer. Generally, the wash “interest” as they rise toward maturity. your investment objective or risk tolerancesale rule (see above) doesn’t apply because You’re generally considered to earn a has changed — don’t hesitate solely forthe bonds aren’t considered substantially portion of that interest annually — even tax reasons. The nontax reasons for the saleidentical. Thus, you achieve a tax loss with though the bonds don’t pay this interest may outweigh the possible downside of itvirtually no change in economic position. annually — and you must pay tax on it. taking many years to absorb the loss.Loss carryovers Stock options. Before exercising (or post- Other important rulesIf net losses exceed net gains, you can poning exercise of ) options or selling For some types of investments, special rulesdeduct only $3,000 ($1,500 for married stock purchased via an exercise, consult apply, so you have more tax consequencestaxpayers filing separately) of the net your tax advisor about the complicated to think about than just gains and losses:losses per year against ordinary income rules that may trigger AMT liability so you(such as wages, self-employment and Bonds. The tax treatment of bond can plan accordingly. ◆business income, interest, and dividends). income varies:You can carry forward excess losses to future  Interest on U.S. government bonds isyears indefinitely. Loss carryovers can be a taxable on federal returns but generallypowerful tax-saving tool in future years if you exempt on state and local returns.have a large investment portfolio, real estate  Interest on state and local governmentholdings or a closely held business that might bonds is excludible on federal returns.generate substantial future capital gains. If the bonds were issued in your homeIt could, however, take a long time to fully state, interest also may be excludible onabsorb a large loss carryover. So, from a tax your state return. INvesTINg 7
  9. 9. BUsINess Is your company doing all it can to save tax?No business wants to pay more tax than it has to, yet many do just that. Other depreciation-related breaks and strategies also are available:Some don’t take advantage of all the breaks available to them, missingout on valuable deductions and credits. Others fail to plan, paying tax that Section 179 expensing election. The $250,000 first-year Sec. 179 expensingcould be deferred or falling into tax traps. Don’t be among them — review amount is available through 2010. Busi-these ideas with your tax advisor today. ness owners can use the Sec. 179 election to deduct (rather than depreciate over a number of years) the cost of purchasingProjecting income And, if it’s likely you’ll be in a higher tax such things as new equipment, furnitureProjecting your business’s income for bracket next year, the opposite strategies and off-the-shelf computer software.this year and next will allow you to time (accelerating income and deferring deduc-income and deductions to your advantage. tions) may save you more tax. Keep in mind You can claim the election only to offset netIt’s generally better to defer tax. So if you that some income tax rates may go up in income, not to reduce it below zero. Also, theexpect to be in the same or a lower tax 2011. Check with your tax advisor for the break begins to phase out dollar for dollarbracket next year, consider: latest information. when total asset acquisitions for the tax year exceed $800,000. As of this writing, legisla-Deferring income to next year. If your Depreciation tion has been proposed that would increasebusiness uses the cash method of account- For assets with a useful life of more than the expensing and phaseout amountsing, you can defer billing for your prod- one year, you generally must depreciate further. Check with your tax advisor for theucts or services. Or, if you use the accrual the cost over a period of years. In most latest information.method, you can delay shipping products cases you’ll want to use the Modifiedor delivering services. Accelerated Cost Recovery System Breaks that may be extended. As of this (MACRS), instead of the straight-line writing, two valuable breaks haven’t beenAccelerating deductions into the current method, to get a larger deduction in the extended beyond 2009, but they still mayyear. If you’re a cash-basis taxpayer, you early years of an asset’s life.may want to make an estimated state taxpayment before Dec. 31, so you can deduct But if you make moreit this year rather than next. But consider than 40% of the year’sthe alternative minimum tax (AMT) conse- asset purchases inquences first. Both cash- and accrual-basis the last quarter, youtaxpayers can charge expenses on a credit could be subject to thecard and deduct them in the year charged, typically less favorableregardless of when paid. midquarter convention. Careful planning duringWarning: Think twice about these strategies the year can help youif you’re experiencing a low-income year. maximize depreciationTheir negative impact on your cash flow deductions in the yearmay not be worth the potential tax benefit. of purchase. 8 BUsINess
  10. 10. food stamp recipients and disabled vet- What’s new! erans. Last year the eligible groups were New breaks available for hiring workers expanded to include unemployed veterans and disconnected youth, generally if hired Who’s affected: Businesses that have hired or are considering hiring workers in 2010. in 2009 or 2010. The credit equals 40% of Key changes: Under the Hiring Incentives to Restore Employment (HIRE) Act of 2010, the first $6,000 of wages paid to qualify- payroll tax forgiveness essentially exempts qualified employers from having to pay ing employees ($12,000 for wages paid to the 6.2% Social Security tax on certain new hires through the end of 2010. Addition- ally, a tax credit for retaining such new hires can provide qualified employers future qualified veterans). tax savings of up to $1,000 per qualified worker. You can’t take both the Work Opportunity To qualify for payroll tax forgiveness, a worker must be hired after Feb. 3, 2010, and before credit and the payroll tax forgiveness Jan. 1, 2011, and generally must have been unemployed for the 60-day period ending offered under the HIRE Act (see “What’s on his or her start date. Because wages in excess of $106,800 aren’t subject to the Social Security payroll tax, the maximum value of the break per employee is $6,621.60. Of course, new!” at left) for the same employee for in most cases the wages will be lower, and thus the value of the break will be lower. the same year. You can, however, elect to pay the Social Security tax so that you The retention credit applies to workers who are qualified for the purpose of the pay- roll tax forgiveness and who are retained for 52 consecutive weeks. The tax savings can take the credit if, for example, the per qualified retained worker are equal to the lesser of 6.2% of the wages paid to the credit would provide a greater tax benefit. worker during the 52-week retention period or $1,000. Manufacturers’ deduction Planning tips: If you’ve hired workers this year, see if you’re eligible for these breaks. If you’ve been considering hiring new workers but have been hesitating to do so, these The manufacturers’ deduction, also called new tax-saving opportunities may provide a reason to move forward. Many rules and the Section 199 or domestic production limitations apply, however, so it’s important to work closely with your tax advisor. activities deduction, has now been fully phased in, and for 2010 it’s 9% (up from 6%be. First, 50% bonus depreciation may equipment, parking lots, landscaping, in 2009) of the lesser of qualified produc-become available for tangible property with and architectural fees allocated to qualify- tion activities income or taxable income.a recovery period of 20 years or less and ing property. The deduction is also limited by W-2 wagescertain other property. The benefit of a cost segregation study may paid by the taxpayer that are allocable toSecond, a shortened recovery period of be limited in certain circumstances — for domestic production gross receipts.15 years — rather than 39 — may become example, if the business is subject to the The deduction is available to traditionalavailable for qualified leasehold and AMT or located in a state that doesn’t follow manufacturers and to businesses engagedrestaurant improvements, as well as certain federal depreciation rules. in activities such as construction, engi-new construction for qualified restaurant Tax credits neering, architecture, computer softwareproperty and improvements to retail production and agricultural Also note that legislation has Tax credits reduce your business’s tax liabil- The deduction isn’t allowed in determiningbeen proposed that would make Sec. 179 ity dollar-for-dollar. So they’re particularly net earnings from self-employment andexpensing available for qualified leasehold- valuable. generally can’t reduce net income belowimprovement, restaurant and retail- The Research and Development credit, zero. But it can be used against the AMT.improvement property. Check with your as of this writing available only throughtax advisor for the latest information. 2009 but likely to be extended or madeCost segregation study. If you’ve permanent, generally is equal to a portionrecently purchased or built a building or of qualified research expenses. It’s com-are remodeling existing space, consider plicated to calculate, but savings can bea cost segregation study. It identifies substantial, so consult your tax components and related costs The Work Opportunity credit, availablethat can be depreciated much faster and through Aug. 31, 2011, benefits busi-dramatically increase your current nesses hiring employees from certaindeductions. Typical assets that qualify disadvantaged groups, such as ex-felons,include decorative fixtures, security BUsINess 9
  11. 11. type of health insurance you provide, you What’s new! also can offer Flexible Spending Accounts Health care act provides new tax credit to certain small businesses (FSAs). (See “Health care breaks” on page 3.) Who’s affected: Businesses with fewer than 25 full-time equivalent employees (FTEs) Fringe benefits. Some fringe benefits, with average annual wages of less than $50,000. such as group term-life insurance (up to Key changes: The Patient Protection and Affordable Care Act represents a sweeping $50,000), health insurance, parking (up to overhaul of the U.S. health care system. It also includes many tax provisions, most of $230 per month) and employee discounts, which don’t go into effect until 2013 or later. But starting this year, the act provides aren’t included in employee income. Yet many small businesses a new tax credit for purchasing group health coverage. For tax years 2010 to 2013, the maximum credit is 35% of the premiums paid by the the employer still receives a deduction employer. To get the credit, the employer must contribute at least 50% of the total and typically avoids payroll tax as well. premium or of a benchmark premium. Certain small businesses providing health The full credit is available for employers with 10 or fewer FTEs and average annual care coverage to their employees may be wages of less than $25,000. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $50,000. eligible for a new tax credit beginning in 2010. (See “What’s new!” at left.) Planning tips: If you aren’t providing health care coverage, this tax credit might make doing so affordable — and help you attract and retain the best workers. If you’re NQDC. Nonqualified deferred compensa- already providing coverage, it might reduce your 2010 tax bill, freeing up cash to reinvest in the business. tion (NQDC) plans generally aren’t subject to nondiscrimination rules, so they can beAuto-related tax breaks a new SUV or truck that weighs more than used to provide substantial benefits to key 6,000 pounds but no more than 14,000 employees. But the employer generallyYour business vehicle can save you taxes in pounds. The normal Sec. 179 expensing doesn’t get a deduction for NQDC plana number of ways. However, you must abide limits generally apply to vehicles weighing contributions until the employee recog-by strict recordkeeping rules and keep a con- more than 14,000 pounds. nizes the income.temporaneous log of business vs. personalmiles. Vehicle expenses can be deducted NOLs Employee benefitsusing the mileage-rate method (50 cents per Including a variety of benefits in your com- A net operating loss (NOL) occurs whenbusiness mile driven in 2010 — down from pensation package can help you not only operating expenses and other deductions55 cents for 2009) or the actual-cost method attract and retain the best employees, but for the year exceed revenues. Generally,(total out-of-pocket expenses for fuel, insur- also manage your tax liability: an NOL may be carried back two years toance and repairs, plus depreciation). generate a refund. Any loss not absorbed Qualified deferred compensation plans. is carried forward up to 20 years. ButIf you buy or lease hybrid or lean-burn- These include pension, profit-sharing, SEP taxpayers can elect to carry back a 2008technology vehicles, you may be able and 401(k) plans, as well as SIMPLEs. You or 2009 NOL for three, four or five yearsto claim tax credits worth up to $3,400 can enjoy a tax deduction for your contri- instead of two.for cars and light trucks. However, these butions to employees’ accounts, and thecredits phase out once a certain number plans offer tax-deferred savings benefits Generally, taxpayers can elect the longerof a particular vehicle has been sold. for employees. Small employers (generally carryback for only one tax year’s NOL and Under Sec. 179 expensing, you those with 100 or fewer employees) that to offset only 50% of income in the fifth can deduct up to $25,000 of create a retirement plan may be eligible year back (100% in the other four). For the purchase price of for a $500 credit per year for three years. qualifying small businesses, taxpayers can The credit is limited to 50% of qualified apply the longer carryback to both 2008 startup costs. (For more on the benefits and 2009 NOLs, and the 50% limit applies to employees, see page 12.) only to 2009 NOLs. Additional rules apply. HSAs and FSAs. If you provide employees Carrying back an NOL may provide a with qualified high-deductible health needed influx of cash. But carrying the insurance, you can also offer them Health entire loss forward can be more beneficial Savings Accounts (HSAs). Regardless of the in some situations.10 BUsINess
  12. 12. Business structure Asset vs. stock sale. With a corporation, buyer pays a contingent amount based onIncome taxation and owner liability are the sellers typically prefer a stock sale for the the business’s performance. But an install-main factors that differentiate one business capital gains treatment and to avoid double ment sale can backfire. For example:structure from another. Many businesses taxation. Buyers generally want an asset sale  epreciation recapture must be reported Dchoose entities that combine flow-through to maximize future depreciation write-offs. as gain in the year of sale, no matter howtaxation with limited liability, namely limited Taxable sale vs. tax-deferred transfer. much cash the seller receives.liability companies (LLCs) and S corporations. A transfer of ownership of a corporation  tax rates increase in the future, the If(See Chart 2 below to compare the tax can be tax-deferred if made solely overall tax could wind up being more ontreatment for pass-through entities vs. in exchange for stock or securities of an installment sale than on a cash sale.C corporations.) Sometimes it makes sense the recipient corporation in a qualifying (Remember, the favorable 15% rate onto change business structures, but there may reorganization. But the transaction must long-term capital gains is scheduled tobe unwelcome tax consequences, so be sure comply with strict rules. Although it’s end after Dec. 31, 2010. Check with yourto consult your tax advisor. generally better to postpone tax, there tax advisor for the latest information.)Some tax differences between structures are some advantages to a taxable sale: Of course, tax consequences are only onemay provide planning opportunities, such  seller doesn’t have to worry about The of many important considerations whenas those related to salary vs. distributions: the quality of buyer stock or other planning a sale.S corporations. To reduce their employment business risks that might come with a tax-deferred transfer. The self-employedtax, shareholder-employees may want tokeep their salaries relatively low and increase  buyer benefits by receiving a The If you’re self-employed, you can deducttheir distributions of company income stepped-up basis in its acquisition’s 100% of health insurance costs for yourself,(which generally isn’t taxed at the corporate assets and not having to deal with the your spouse and your dependents. Thislevel). But to avoid potential back taxes and seller as a continuing equity owner, above-the-line deduction is limited to thepenalties, shareholder-employees must as it would in a tax-deferred transfer. net income you’ve earned from your tradetake a “reasonable” salary. What’s considered  parties don’t have to meet the technical The or business.“reasonable” is determined by the specific requirements of a tax-deferred transfer. Half of the self-employment tax you payfacts and circumstances, but it’s generally Installment sale. If a taxable sale is chosen, on your self-employment income and allwhat the company would pay an outsider to the transaction may be structured as an contributions you make to a retirementperform the same services. installment sale, due to the buyer’s lack plan and HSA for yourself are also deductedC corporations. Shareholder-employees may of sufficient cash or the seller’s desire to above-the-line. And you may be able toprefer to take more income as salary (which spread the gain over a number of years. deduct home office expenses against youris deductible at the corporate level) because Installment sales are also useful when the self-employment income. ◆the overall tax paid by both the corporationand the shareholder-employee may be less. Chart 2 Tax differences based on business structureWarning: The IRS is cracking down onmisclassification of corporate payments Pass-through entityto shareholder-employees, and Congress C corporation or sole proprietorshipalso has been looking at this issue, sotread carefully. One level of taxation: The business’s Two levels of taxation: The business is income flows through to the owner(s). taxed on income, and then shareholders are taxed on any dividends they receive.Exit planningAll business owners should create an exit Losses flow through to the owner(s). Losses remain at the corporate level.strategy to sell their companies or to pass Top individual tax rate is 35%. Top corporate tax rate is generally 35%1.them on to their children, other family Income distributed as dividends is taxedmembers or key employees. Here are a a second time, generally at 15%.few key tax considerations when selling 1 See Chart 6 on page 16 for exceptions.the business: BUsINess 11
  13. 13. ReTIReMeNT Ensuring your retirement dreams materializeWhatever your age, you must plan carefully to ensure your retirement dreams so will only exacerbate the negative impact on your retirement nest egg —materialize. This means leveraging tax-advantaged savings opportunities. plus your taxable 2010 income willStarting contributions early can make a big difference; older taxpayers may increase compared to what it would be if you had contributed to the plan.need to save more to make up for lost time. It also means avoiding earlywithdrawals and being tax-smart with required minimum distributions. If your employer provides a SIMPLE, it’s required to make contributions (though not necessarily annually). But401(k)s and other employer plans Chart 3 shows the 2010 limit for employee the employee contribution limits areContributing to an employer-sponsored contributions to 401(k), 403(b), 457 and lower than for other employer-sponsoreddefined-contribution plan, such as a 401(k), SARSEP plans. If you’re age 50 or older, you plans. (Also see Chart 3.)403(b), 457, SARSEP or SIMPLE, is usually may be able to make an additional “catch-up”the best first step in retirement planning: contribution. If your employer offers a match, More tax-deferred options contribute at least the amount necessary In certain situations, other tax-deferred Contributions are typically pretax, so to get the maximum employer match and savings options may be available: they reduce your taxable income. avoid missing out on that “free” money. Plan assets can grow tax-deferred — If you’re a business owner or self- Unfortunately, many employers (if their employed. You may be able to set up meaning you pay no income tax until plans allow) have suspended matching a plan that allows you to make much you take distributions. contributions to reduce costs. If yours is larger contributions. Depending on the Your employer may match some or all of among them, don’t use that as an excuse plan, you might not have to make 2010 your contributions — also on a pretax basis. to suspend your own contributions. Doing contributions, or even set up the plan, before year end. Check with your tax Chart 3 advisor for details. No increase in retirement plan contribution limits for 2010 If your employer doesn’t offer a retirement = limit for taxpayers under age 50 $22,000 plan. Consider a traditional IRA. You can = limit for taxpayers age 50 and older likely deduct your contributions, though $16,500 your deduction may be limited based $14,000 on your adjusted gross income (AGI) if $11,500 your spouse participates in an employer- sponsored plan. You can make 2010 $6,000 contributions as late as April 15, 2011. $5,000 Roth accounts Traditional 401(k)s, 403(b)s, SIMPLEs and Roth IRAs 457s and SARSEPs1 A potential downside of tax-deferred sav- 1 Includes Roth versions where applicable. ing is that you’ll have to pay taxes when Note: Other factors may further limit your maximum contribution. you make withdrawals at retirement. Two Source: U.S. Internal Revenue Code retirement plan options allow tax-free12 ReTIReMeNT
  14. 14. subject to current taxes or penalties. Keep What’s new! in mind that, with both these options, you’ll AGI limits lifted on Roth IRA conversions still be losing out on the potential for tax- advantaged growth on those assets. Who’s affected: Taxpayers with adjusted gross incomes (AGIs) exceeding $100,000. Key changes: Before 2010, you couldn’t convert a traditional IRA to a Roth IRA if your Early distribution rules are also important AGI for the year of conversion was more than $100,000. This limit has been eliminated to be aware of if you change jobs or retire beginning in 2010. The converted amount is taxable in the year of the rollover. But for and receive a lump-sum distribution conversions made in 2010, the income can be deferred in equal installments to 2011 from your employer’s retirement plan. To and 2012. avoid the early-withdrawal penalty and Converting a traditional IRA to a Roth IRA can allow you to turn tax-deferred future other negative income tax consequences, growth into tax-free growth. It also can provide estate planning benefits: No Roth IRA request a direct rollover from your old plan distributions are required during your life, so you can let the entire balance continue to grow tax free over your lifetime. If you name your child as beneficiary, he or she to your new plan or IRA. will be subject to the required minimum distribution (RMD) rules upon inheriting the Roth IRA. But distributions will be tax free and spread out over his or her lifetime, and Otherwise, you’ll need to make an indirect funds remaining in the account can continue to grow tax free. (See page 14 for more rollover within 60 days to avoid tax and on estate planning.) potential penalties. Warning: The check Planning tips: Whether a conversion will make sense for you depends on a variety of you receive from your old plan may be net factors, such as your age, whether you can afford to pay the tax on the conversion, your of 20% federal income tax withholding. tax bracket now and expected tax bracket in retirement, and whether you’ll need the IRA If you don’t roll over the gross amount funds in retirement. Your tax advisor can help you determine the best course of action. (which will require you to make up for the withheld amount with other funds), you’lldistributions; the tradeoff is that contri- higher-income earners who are ineligible likely be subject to income tax, and poten-butions to these plans don’t reduce your to contribute to Roth IRAs. tially the 10% penalty, on the difference.current-year taxable income: Early withdrawals1. Roth IRAs. In addition to tax-free distri- Required minimum distributions If you’re facing financial challenges thisbutions, an important benefit is that, unlike Normally once you reach age 70½ you year, it may be tempting to make with-other retirement plans, Roth IRAs don’t must take annual required minimum dis- drawals from your retirement plans. Butrequire you to take distributions during tributions (RMDs) from your IRAs (except generally this should be a last resort. Withyour lifetime. This can provide income tax Roth IRAs) and defined contribution plans. a few exceptions, retirement plan distribu-and estate planning advantages. If you don’t comply, you can owe a penalty tions made before age 59½ are subject to a equal to 50% of the amount you should 10% penalty, in addition to income tax.But Roth IRAs are subject to the same low have withdrawn but didn’t. (Note that theannual contribution limit as traditional This means that, if you’re in the top federal 2009 suspension of RMD rules hasn’t beenIRAs (see Chart 3), and your Roth IRA limit tax bracket of 35%, you can lose close to extended to 2010.) You can avoid the RMDis reduced by any traditional IRA contri- half of your withdrawal to federal taxes and rule for a Roth 401(k) or Roth 403(b) by roll-butions you make for the year. It may be penalties. Even if you’re in a lower bracket, ing the funds into a Roth IRA.further limited based on your AGI. you can lose a substantial amount to taxes So, should you take distributions between and penalties. Additionally, you’ll lose theIf you have a traditional IRA, consider ages 59½ and 70½, or more than the RMD potential tax-deferred future growth onwhether you might benefit from converting after age 70½? Distributions in any year the amount you’ve to a Roth IRA. (See “What’s new!” above.) your tax bracket is low may be beneficial. If you must make an early withdrawal and But also consider the lost tax-deferred2. Roth 401(k)s and Roth 403(b)s. If you you have a Roth account, you may be better growth and, if applicable, whether the dis-participate in a 401(k) or 403(b) plan and off withdrawing from that. You can withdraw tribution could cause your Social Securitythe plan allows it, you may designate some up to your contribution amount free of tax payments to become taxable.or all of your contributions as Roth contri- and penalty. Another option to consider, ifbutions. (Employer matches aren’t eligible.) If you’ve inherited a retirement plan, your employer-sponsored plan allows it, isThere are no AGI limits on designating consult your tax advisor regarding the to take a loan from the plan. You’ll have toRoth 401(k) or 403(b) contributions, so distribution rules that apply to you. ◆ pay it back with interest, but you won’t bethese plans may be especially beneficial for ReTIReMeNT 13
  15. 15. esTaTe PlaNNINg Estate tax law uncertainty makes planning a challengeA one-year repeal of the estate and generation-skipping transfer (GST) Unlimited marital deduction. Your estate generally can deduct the valuetaxes went into effect Jan. 1, but these taxes are scheduled to return in of all assets that pass from you to your2011 — at higher levels than in 2009. As of this writing, the repeal is still spouse at your death, provided he or she is a U.S. citizen. Gifts to your spousein effect, but Congress is expected to make estate tax law changes. This are also tax free, but a limit applies toall adds up to much uncertainty and many planning challenges. noncitizens. GST tax exemption. Except during theTax rates and exemptions you to transfer up to $1 million of taxable repeal, the GST tax generally applies toThe gift tax remains in effect for 2010 — gifts without paying gift tax. When the transfers (both during life and at death)at a top rate of 35% (down from 45% in estate tax is in effect, transfers at death up made to people two generations or more2009). But top rates for the gift tax as well to the estate tax exemption amount minus below you, such as your grandchildren, butas the estate and GST taxes will jump any gift tax exemption used can be made an exemption is available. (See Chart 4 forto 55% in 2011 if Congress doesn’t take free of estate tax. (See Chart 4 below for GST exemption amounts.)action. (Check with your tax advisor for estate tax exemption amounts.)the latest information.) Charitable deduction. There’s no limit on Annual gift tax exclusion. You can exclude this deduction. If you bequeath your entireBecause the estate and GST tax repeal is certain gifts of up to $13,000 per recipient estate to charity, no estate tax will be duetemporary, taking steps to minimize these each year ($26,000 per recipient if your even if you die while the estate tax is intaxes is as important as ever. Fortunately, spouse elects to split the gift with you, or effect. (For more on charitable giving, seeexemptions and other breaks are available you’re giving community property) without “Charitable donations” on page 3.)to help you do just that: using up any of your gift tax exemption. If you gift more than $13,000 during the Warning: State gift and estate tax lawsGift and estate tax exemptions. During year to one person, you must file a gift tax vary, so state tax could be due even whenyour lifetime, the gift tax exemption allows return, even if no tax is due. there’s no federal liability. Chart 4 Transfer tax exemptions and highest rates Gift tax Estate and GST Highest estate, GST Year exemption tax exemptions1 and gift tax rates 2009 $1 million $3.5 million 45% 2010 2 $1 million (repealed) 35% (gift tax only) 20112 $1 million $ 1 million 3 55%4 1 Less any gift tax and generation-skipping transfer (GST) tax exemptions, respectively, already used during life. 2 As of this writing, Congress is expected to take action that could change some or all of these figures. Check with your tax advisor for the latest information. 3 The GST tax exemption is indexed for inflation. 4 The benefits of the graduated gift and estate tax rates and exemptions are phased out for gifts/estates over $10 million. Source: U.S. Internal Revenue Code14 esTaTe PlaNNINg