2008 Presentation created by: Michael E. Kitces, MSFS, MTAX, CFP, CLU, ChFC, RHU, REBC, CASL, CWPP

Transcription

1 Cutting Edge Tax Planning Developments & Opportunities By: Michael E. Kitces, MSFS, MTAX, CFP, CLU, ChFC, RHU, REBC, CASL, CWPP Director of Research, Pinnacle Advisory Group Publisher, The Kitces Report, Blogger, Nerd s Eye View, MichaelKitces, Income & Estate Tax Planning The Sunset of EGTRRA Economic Growth & Tax Relief Reconciliation Act of 2001 ( the Bush tax cuts ) Sunset provisions scheduled to take effect after December 31, Effective January 1, 2011, numerous laws would revert back to pre-egtrra status for both income and estate tax purposes EGTRRA provisions enhanced, accelerated, and modified by numerous additional pieces of legislation throughout the decade, but underlying sunset not altered for most provisions 1

2 The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 Compromise legislation to address the sunset of EGTRRA (and unemployment insurance) Direction of compromise shifted several times through the fall and election season Temporary versus permanent; wealthy versus lower/middle income Ultimate compromise: 2 year extension with a number of caveats Individual Income Taxes Tax brackets extended for two years, through 2012 Scheduled to lapse to pre-egtrra after 2012 Marriage penalty relief extended too 15% bracket + standard deduction Tax Brackets 2013 New Tax Brackets 10% 15% 15% 25% 28% 28% 31% 33% 36% 35% 39.6% Individual Income Taxes Rising income tax brackets still at risk in the future Upper brackets versus lower/mid brackets? Accelerating income and deferring deductions Roth conversion implications 2011 and beyond if tax rates are rising 2010 conversions and the income-splitting election 2

3 Long-Term Capital Gains Current long-term capital gains tax rate of 15% Tax rate of 0% for those who fall into the bottom two tax brackets Extended two years through 2012 Scheduled to lapse to pre-jgtrra rates after % / 10% brackets with 18% / 8% ultra long-term capital gains Long-Term Capital Gains Harvesting Gains 0% versus 15% harvesting Watch out for installment sales NOT Harvesting Losses Benefit is only the time value of money, because cost basis is reset; higher rates can destroy value Dealing with Loss Carryforwards Intra-family transfers & income shifting Qualified Dividends Eligible qualified dividends receive long-term capital gains treatment Must satisfy corporation and holding period requirements Eligible for 15% and 0% rates Was scheduled to sunset at the end of 2010 and revert to ordinary income treatment Extended for two years through the end of 2012 Tax rates remain the same, given no change in long-term capital gains rates 3

4 Qualified Dividends Possible portfolio shifts Taxation of dividend versus bond income after 2012 Planning for closely-held businesses Harvesting dividends at current rates versus retaining cash for business needs Multi-year workout plans for significant retained earnings Alternative Minimum Tax Last AMT patch under American Recovery and Reinvestment Act of 2009 Set 2009 AMT exemption to $70,950 for married couples; $46,700 for singles Lapsed at the end of 2009 Tax Relief Act retroactively reinstated AMT patch for 2010 and extends through 2011 $72,450 for married couples, $47,450 for individuals in 2010 $74,450 for married couples, $48,450 for individuals in 2011 Nonrefundable personal credits also reinstated/extended AMT exemption phaseout still applies for higher income Miscellaneous tax extensions No itemized deduction phaseouts through 2012 No personal exemption phaseouts through 2012 Deduction for state/local sales taxes paid reinstated retroactively for 2010 and extended to 2011 Above-the the-line deduction for qualified tuition and related expenses up to $4,000 extended through 2011 American Opportunity Tax Credit extended through 2012 Expanded Coverdell Education Savings Account contributions and qualified distributions for elementary and secondary school expenses extended through

5 Payroll tax holiday Employee-portion portion of FICA taxes reduced by 2 percentage points for 2011 only Employee pays only 4.2% % = 5.65% in 2011, up to $106,800 wage base Employee still pays 1.45% on excess above wage base Employers still owe 7.65% matching payroll tax amount Self-employed employed individuals also receive reduction; 12.4% for Social Security reduced to 10.4% for 2011 (plus 2.9% for Medicare tax) Tax savings of up to $2,136 when wage base is reached Adjusted withholding tables being released and implemented immediately Self-employed employed individuals may wish to adjust estimated tax payments for 2011 Charitable Distributions from IRAs Qualified Charitable Distributions reinstated retroactively for 2010 and extended for 2011 $100,000 limit per-person person per-year still applies Still must be age 70 ½ or older on date of distribution; still must complete as direct distribution to charity May still be counted as distribution for RMD purposes Special January 2011 election Qualified charitable distribution in January of 2011 may be treated as if it was made on December 31, 2010 Counts towards 2010 limits Applies towards 2010 RMD Charitable Distributions from IRAs Popular tax strategy for those who have large IRAs and wish to avoid being taxed on distributions Also helpful to manage RMD requirements, especially if client intended to make charitable contribution anyway Clients who wish to gift significantly and will exceed $100,000 per-person person threshold in 2011 may wish to act in January to make deemed-2010 contribution However, strategy may still be less effective than available alternatives 5

6 Charitable Distributions from IRAs Client has $100,000 in three different accounts: Cash/checking, IRA, and low-basis appreciated securities Assuming 20% tax rate on capital gains, 40% on ordinary income Contributete Cash Contributete IRA Contribute te Securities Net Cash Value $0 $100,000 $100,000 Net IRA Value $98,000 $0 $98,000 Net Securites Value $80,000 $80,000 $0 Final Spendable Wealth $178,000 $180,000 $198,000 IRA charitable contributions are perceived as avoiding a tax, but offsetting deductions are close to reproducing this value already! Contributing appreciated securities genuinely avoids a tax! Charitable Distributions from IRAs Based on taxes due: Contribute Cash Contribute IRA Taxes Due on Cash $-38,000 $0 $0 Taxes Due on IRA $40,000 $0 $40,000 Taxes Due on Stocks $20,000 $20,000 $-38,000 Net Taxes Owed $22,000 $20,000 $2,000 Contribute Securities Situations where charitable distributions still work well: Client does not itemize Client may never be able to fully utilize the charitable deduction (even with carryforward) Different state tax treatment Capital gains property may never be liquidated (step-up in basis at death) A Word About Estate Taxes Estate tax exemption back to $5 million (indexed for inflation in 2012) through 2012 Top estate, gift, and generation-skipping tax rate at 35% through 2012 Gift tax exemption reunified with estate tax exemption at $5 million Unused estate tax exemption amount at death now portable to surviving spouse (requires estate tax return to be filed) Rules also apply retroactively for 2010; decedents in 2010 may opt out to retain prior 2010 rules (no estate tax + modified carryover cost basis) 2010 decedents have until Sep 17, 2011 to complete filings and make elections 6

7 Summary Most major provisions extended two years through 2012 Rules that lapsed at the end of 2009 only extended 2 years through 2011 (AMT, state/local sales tax deduction, charitable contributions from IRAs) Limited time window for some benefits and deductions still affords planning opportunities to take advantage Delays some immediate urgency for planning around higher tax rates (accelerate income, defer deductions), but risk of rising tax rates still looms Questions? Michael E. Kitces, MSFS, MTAX, CFP, CLU, ChFC, RHU, REBC, CASL, CWPP Director of Research, Pinnacle Advisory Group Publisher, The Kitces Report, Blogger, Nerd s Eye View, MichaelKitces, michael@kitces.com 7