Monday, November 8, 2010

Valuable Estate Planning and Tax Tips from our Friends at the Jewish Community Foundation

10 Important Planning Thoughts for Year-End 2010

The following "10 Important Planning Thoughts for Year-End 2010" are not intended as specific tax advice but rather as a reminder of some of the issues you may want to raise with professional advisors before 12/31/10.

(1) There is no substitute for good professional advice.

Individuals are well-advised to consult with tax and financial planning professionals between now and year-end. Conversations with your estate planning attorneys and/or CPAs are essential. And the discussion should also include your financial planner or broker as well as a philanthropic advisor such as a Jewish Community Foundation planned giving professional. Decisions can be made now and implemented when most beneficial (after Congress acts or fails to act and before year-end).

(2) Run and re-run the numbers under different scenarios.

Tax projections are probably the most common year-end tool used by tax and financial planners estimating taxable income and potential savings using historical data, projected income and expenses and deductions, such as charitable contributions. The wild card this year is determining what the income (and estate and gift) tax rates will be for 2010 and 2011. Alternative scenarios will be necessary and adjustments in both projections and resultant planning strategies should be discussed early to allow for time for change where necessary.

(3) Traditional tax planning is probably not the only answer.

Most years, the mantra from most tax and financial planners is to "defer income to next year and accelerate deductions into this year." This may not be the best approach this year-end, especially if individual tax rates rise in 2011 and future years. The Obama Administration and many congressional Democrats favor letting the 2011 income tax rates rise from 35 percent to 39.6 percent for those making over $250,000 (married) and $200,000 (single). (Note that if Congress fails to act by year-end, income tax rates for all taxpayers would increase.) In addition, there are over 50 other individual income tax provisions in the tax code that could be impacted by tax rate legislation, some of which would have the effect of increasing individual taxes for many. For example, if the "phase-out" to itemized deductions, including the charitable contribution deduction, is reinstated in 2011, this might encourage some donors to accelerate some charitable gifts before year-end 2010. On the other hand, if an individual's tax rate will be substantially higher in 2011, it may be preferable to defer a charitable gift until January.

(4) Accelerate income to 2010.

If tax and financial planners conclude that the best strategy is to accelerate income into 2010 based on specific facts and circumstances, they may suggest certain "one-time-only" strategies such as accelerating receipt of bonus payments traditionally paid in January, generating dividend income or in some cases recognizing gains from certain capital gain assets such as from the sale of stocks and securities.

(5) Those with primarily portfolio income really need to pay attention.

Families with income generated primarily from dividends, capital gains, and other investment income should pay close attention to the year-end tax debate. The effective tax rate on significant dividend and capital gain income could more than double from 2010 to 2011 under some scenarios and as such, income acceleration techniques to maximize potential savings this year-end may be most appropriate. Some thoughts to consider: the after-tax cost to net $1.00 from long-term capital gain increases from $1.18 in 2010 to $1.25 in 2011 and $1.31 in 2013 and later years. The after-tax cost for $1.00 of dividend income could increase to $1.77 in 2013 under current tax rate proposals.

(6) Take advantage of stock market gains, if there are any.

If you have a donor advised fund or family support organization, a great way to add funds to it is through appreciated stock. With the tax rate on capital gains almost certainly set to increase as of January 1, 2011, tax and financial planners may recommend selling stocks and bonds that have appreciated in value. (Remember: for stocks with gains, there is no rule prohibiting investors from buying back the same asset shortly after the sale without adverse tax consequences for those who think there is a potential for future growth.) At least two other points to consider: (a) it is often more advantageous to gift appreciated assets to charity rather than selling the asset; and (b) capital loss carryovers will be more valuable when tax rates are higher (2011 and later years). Bottom line: review your entire portfolio when considering capital asset planning.

(7) This could be the year for a Roth IRA conversion.

There has been much written about converting traditional IRAs to Roth IRAs in 2010 as there is no income limit this year on who can qualify for this transaction. As with other income and estate tax planning, it is essential to run the numbers to see if this strategy makes sense. A further point to consider is that charitable giving can offset some of the additional taxes that will be generated by the Roth IRA conversion. Making significant charitable contributions before the end of 2010 may be a tax-efficient strategy, especially for those who have sufficient assets to pay the Roth IRA conversion and who will consider making what could be a larger than normal charitable donation this year.

(8) Don't forget basic estate planning, even in times of uncertainty.

Continued congressional deadlock over the estate and gift tax makes most crystal ball prognostication over the final outcome cloudy at best. But don't forget the basics such as taking advantage of the annual gift tax exclusion amount of $13,000 per donee ($26,000 where a spouse joins the gift). In addition, a variety of other estate planning techniques remain very attractive in the current low-interest rate environment including charitable lead annuity trusts.

(9) Don't forget about the alternative minimum tax.

For many middle and high-income taxpayers, the alternative minimum tax is an additional factor in tax planning scenarios, often requiring strategies that differ from those for the regular income tax. All things being equal, the AMT may be less of a factor in 2011 and future years if individual income tax rates increase. Again, it is essential to sit down and run the numbers to determine which planning strategies are most appropriate.

(10) Start the conversation with advisors as soon as possible.

Use the remaining weeks before year-end as a time to sit down with trusted advisors to review both short- and long-term charitable giving strategies and objectives. From a tax perspective, 2010 may represent the best time in almost a quarter-century for individuals to address their overall tax, estate, and philanthropic portfolio.