Making Cents

Tax Alert: Plan to Take Advantage of 2010

Posted by Curtis A. Smith, CFP® on 28 December 2009 | 0 Comments

Tags: Itemized Deductions, Standard Deduction, Alternative Minimum Tax, Marginal Tax Rates, Income Tax, Financial Planning, Core Series, Estate Tax

Do you see a warning light flashing? Americans with high net worth and high incomes are preparing for the likelihood of higher taxes in 2011 and subsequent years. High earners are almost certainly going to take the hit if the EGTRRA and JGTRRA cuts fade away at the end of 2010. Here’s a summary of what’s happening – and a look at what might happen. There are some developments you will want to remember, and some tax breaks you might very well want to exploit.

No phaseouts on itemized deductions and personal exemptions in 2010. This may provide you with an opportunity for some notable tax savings. Historically, high-income taxpayers have been subject to a reduction in the value of itemized deductions and personal exemptions. That has gradually decreased in this decade. In 2010, the phaseouts are gone entirely. In 2011, they are poised to return.(source)

As IRS standard deduction and personal exemption amounts are indexed to inflation, you’ll see very little change there for 2010. The standard deduction for heads of household will rise by $50 to $8,400 for the 2010 tax year. Other standard deductions will stay put, and the personal exemption amount will remain at $3,650 for 2010.(source)

Lower long-term capital gains rates through 2010. Unless Congress decides to extend these Bush-era cuts, capital gains tax rates will revert to pre-2003 levels in 2011. For 2010, the long-term capital gains rate for those in the 10% and 15% tax brackets is 0%. In 2011, it is set to go to 10%. If you fall into the 25%, 28%, 33% or 35% tax brackets, the capital gains rate is 15% in 2010 and 20% in 2011.(source)

The Tax Extenders Act of 2009. The House passed this legislation on December 9, and the Senate is likely to follow suit. The final version of this bill would likely extend the additional standard deduction for real property taxes, the deduction for state and local sales tax, and deductions for tuition/education expenses and teachers' classroom expenses into 2010.(source)

The estate tax. 0% estate taxes in 2010? That was the plan … but the reality is that estate taxes are likely to remain at current levels in 2010 with some retroactive lawmaking. In early December, the House voted to restore the estate tax for 2010; a week later, the Senate voted against temporarily extending 2009 estate tax levels into the coming year. The Senate will almost certainly take up the issue again in January. However, to prevent a complete repeal of the estate tax next year, any new legislation is expected to contain a retroactive provision. So instead of taking effect upon passage, any new estate tax law would likely be made retroactive to January 1, 2010.(source)

The AMT (Alternative Minumum Tax). You know how it works – Congress comes up with another AMT patch at the stroke of midnight and middle-class taxpayers are saved once more. Well, just to make things interesting, the Tax Extenders Act of 2009 doesn’t include an AMT patch for 2010. Many tax professionals think the 2010 patch issue will be addressed early next year, with the patch for the 2010 tax year made retroactive.(source)

How will marginal tax rates rise in 2011? Does anyone think taxes won’t increase in the near future? At present, the marginal tax rates are 10%, 15%, 25%, 28%, 33% and 35%. If Congress doesn’t act by the end of 2010, the tax brackets will reset to 15%, 28%, 31%, 36% and 39.6%. By the way, President Obama and some Democrats have proposed future tax brackets of 10%, 15%, 25%, 28%, 36% and 39.6% for 2011 (that is, only the highest two brackets would revert to pre-EGGTRA levels).(source)

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Prepare Now for Estate Tax Law Changes

Posted by Curtis A. Smith, CFP® on 2 December 2009 | 0 Comments

Tags: Estate Planning, Estate Tax, Life Insurance Trust, GRAT, Gifting, Wills, Power of Attorney, Directive to Physicians, Guardianship

The nonstop discussion of health care reform and the economy this year crowded out discussion surrounding estate tax law sunset, due to expire December 31, 2009. However, it appears likely the estate tax will be continued at 2009 levels through 2010. What does this mean? More than likely, as of this writing, the 2010 estate tax top rate will be 45 percent and the exemption will be $3.5 million per person.

For now, conservative Congressional lawmakers dream of killing the estate tax seems to be dead, at least through 2012. The ever expanding federal spending continues, fueling the need for every tax Congress can dream of and maintain. That means it’s a good time to talk to tax and financial experts about the best ways to pass your holdings to the next generation no matter what happens with the future of the “death tax.”

If you suspect your estate or the estate of relatives you might inherit from may fall prey to the estate tax, it makes sense right now to enlist the help of experts. Assets may be expected to grow over time, and your estate may turn out to be larger than you may think. You should be talking to board-certified estate planning attorneys, as well as fiduciary, fee-only CFP® professionals for solutions to estate tax issues. This is one area where solutions are readily available, procrastination being the largest tax due to your inaction.

Here are some things to keep in mind as you prepare for those conversations:

Give during your lifetime: You can now give $13,000 per calendar year per recipient without paying gift tax or affecting your 1 million dollar lifetime exemption. You can also pay someone's tuition or medical bills directly, or give to a charity, without paying gift tax on the amount, thereby reducing the size of your estate and your eventual estate tax bill after you die.

Check whether your state charges an estate tax: Roughly half of all states charge estate tax, and that’s a recent thing. States previously received a slice of the federal estate tax, which no longer happens, so it’s important to consider the state’s impact when making an estate plan.

Think about a life insurance trust: Whether you need it for estate liquidity or for other purposes, an irrevocable life insurance trust can be created to keep the proceeds of the insurance out of your taxable estate. An added benefit is that such trusts may permit spousal access to the cash value of the policy. Yet note the word “irrevocable” – it means a decision that cannot be changed.

Know if your assets are expected to increase: A grantor-retained annuity trust, or GRAT, is an irrevocable trust popular among families with assets expected to appreciate in value. Such appreciation can be passed on to heirs with minimal tax consequences with proper estate planning. 

The bottom line remains it is always better to have an estate plan, than not to have one! Today, make an appointment to have your wills, power of attorney, directive to physicians, guardianship, and power of attorney for health care drafted by a competent estate attorney in your state. It also pays dividends to consult with your fiduciary fee-only advisor in advance, as this individual can aid in sorting through the many decisions to be made in your estate planning. Begin 2010 on a good note by taking care of this for your family!

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