Tax Breaks to Take Advantage of Now

"Plan for what we know, not for what we think might happen" Mitchell A. Drossman, national director of wealth planning strategies at U.S. Trust, advised in a recent New Your Times piece "Take Advantage of Tax Breaks Now, Experts Say". The reason?  That nasty little $1.3 trillion federal budget deficit, and competing proposals about how to address it.

Under legislation passed in December 2010, until the end of 2012, tax rates are predicted to be:

  • 35% top marginal rate for individuals
  • 15% on long-term capital gains and most dividends
  • $5 Million exclusion gift, estate and generation skipping taxes

In 2013, the tax rates are supposed to change to:

 

  • 39.6% top marginal rate for individuals (single taxpayers with income more than $200,000, and joint taxpayers with income more than $250,000)
  • 20% on long-term capital gains
  • dividends taxed at normal income tax rates
  • 3.8% Medicare tax on investment income begins 
  • $1 Million exclusion gift, estate and generation skipping taxes

While the current was scheduled to run through the end of 2012, it is conceivable that he could be changed to affect tax years beginning before 2013. As a result of this, thoughts by tax experts of actions to take now include:

Business Owners:

  • Accelerate income in 2011, by arranging for payment in this tax year as opposed to 2012. Many times business owners don't actively collect receivables towards the end of the year in order to defer income, and thus the tax on that income, into the next year. However, it may be that pain tax in 2011 may give you a lower rate.
  • Business owners may want pay dividends this year or give stock bonuses before year-end.
  • If the business has accounts receivable that have become uncollectible, they can be written off as a bad debt deduction, which might balance out income accelerated into 2011 to take advantage of reduced income tax rates.
  • Consider matching contributions to employees within a profit-sharing plan.
  • Consider gifting a non-controlling interest in a family business to other family members to take advantage of the current $5 million gift tax and generation skipping tax exemption amounts.
  • Review any life insurance policies used to fund buy-outs to determine their ongoing viability - due to changes in market conditions, the policies may need to be reduced, replaced or funded with additional dollars.

Induviduals:

 

 

  • Investors may want to consider making trades before the end of the year to capture any gains at the 15% rate.
  • Up to $3000 of capital losses can be deducted from ordinary income. 
  • Individual taxpayers might want to take advantage of federal and state tax credits for making their homes more energy efficient.
  • Consider large gifts to take advantage of the current $5 million gift tax exemption amount and generation skipping tax exemption amount.
  • Actively review the cost basis reported on investment statements so that it will be correctly reported on any 1099 issued for any transactions during 2011. Beginning in 2011 the form 1099 must show the basis. Correcting any mistakes now can avoid significant headaches come April.
  • Make gifts to grandchildren who have had summer or part time jobs (so that they have earned income) that they can put into a Roth IRA.
  • Review life insurance policies to determine their ongoing viability.

 

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