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Optional Estate Tax for 2010?
The Wall Street Journal is reporting that the Obama administration and Congress are toying with allowing taxpayers to choose between 2009 and 2010 estate tax rules. That would enable people who actually have big estates to not be taxed in 2010, while enabling the rest of us to get date-of-death values as basis -- avoiding the nightmare of trying to figure out what grandpa paid for the Continental Flange stock he bought in 1962 in his E.F. Hutton account. This blog post was featured on Joe Kristan's Tax Update blog, available here. |
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Clients and Friends:
I mentioned in last month's e-newsletter that our family was taking a car trip down to Memphis for a long weekend - what an enjoyable city (but I don't recommend going in August - unless you really like heat and humidity). We visited Graceland, Mud Island, the Civil Rights museum, took in a minor league ball game, and had some of the most delicious barbecue I've ever experienced.
But Labor Day is now behind us, and the end of the year is only a couple of months away. We need to turn our attention to year end tax planning, and the activities taking place in Congress. To continue the "theme" from last month's newsletter (tax changes and financial planning), I've provided some insight below. Further information is always available on our website.
I have included a relevant and entertaining article written by Nick Murray on the cyclical nature of our economy, as well as the press that has accompanied these many ebbs and flows. If you have any concerns about your investments, finances, or retirement planning, get in touch with me, or Kristy, and we'd be happy to set up a time to meet with you and discuss your personal financial situation.
I have also included brief summaries of the many tax law changes that Congress will soon be debating. First, there are the EGTRRA sunset provisions that are set to expire at the end of this year. I have included some of the tax laws that will be impacted. And second, newly passed by the Senate, the Small Business Jobs bill. The bill still requires the approval of the House and the President which is expected to happen soon. This bill is designed to provide small and large enterprises with tax breaks, I have provided an outline on some of these changes.
As always, please contact us if you have any questions about these issues, or any concerns you have about taxes or finances.
Bob Rounsfull |
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Time After Time
I'm looking at a particularly dramatic and effective illustration on the cover of Time magazine. It shows what must be trillions of dollar bills being sucked down into a huge hole in the space/time continuum, as the headline screams, "That Monster Deficit: America's Economic Black Hole."
I'm guessing that your response to this may be something along the lines of, "Yes! That's exactly the problem! That's why my money is in the safety of cash! Say, I subscribe to Time. I need to read that article, because it confirms everything I'm thinking-and fearing! Wonder why I haven't seen that issue!"
You haven't seen it for the simple reason that that particular Time cover appeared on March 5, 1984, a day on which the Dow Jones Industrial Average-which stands at 10,200 as I write, and has actually been as high as 14,000-closed at 1165. You can easily access it-and indeed the whole archive of Time covers-at www.time.com/time/coversearch, or just Google "Time magazine covers." You'll be cued to enter the date you're looking for.
There is a kind of numbing sameness to the cycle of crisis (real or imagined) in the economy and the markets over time. And there is a special kind of black humor that attaches to the particular genius of Time (and its ilk) for putting crisis on its cover (a) when everyone already knows about it and (b) when it is about to cease being a crisis. (I need hardly remind you that in March of 1984 the American equity market was in the nineteenth month of the biggest bull market of all time, which lasted until March of 2000. And that if you let the deficit-or for that matter any popular apocalypse du jour-scare you out of the market, you missed, quite literally, the investment opportunity of a lifetime.)
Like many members of the financial community, I'm a collector of these covers. (It might be fun for you to see if your advisor is a member of this club as well.) We all have our personal favorites, I suppose. My top three are:
"Unemployment: The Biggest Worry" on February 8, 1982, at Dow 833.43. Sound familiar?
"High Anxiety: looming recession, government paralysis and the threat of war ..." on October 15, 1990, at Dow 2,545.05. (This one is especially delicious because a major bottom in the stock market, which has never been breached, had been made on October 11. How's that for perfect-that is, perfectly perverse-timing?)
"The Recession: How Bad Is It?" on January 13, 1992 at Dow 3185.60. This cover features an ingenious graphic of an apple seller in 1992 clothing, edited into a Depression-era photograph; don't miss it. And don't let your enjoyment of it be diluted in the least by the fact that the recession in question had in fact ended in March 1991.
(When inflation returns to the fore as the apocalypse du jour, as it cyclically must at some point, you'll want to check back with a couple of Time cover corkers, on April 8, 1974 and July 17, 1978-both around Dow 840. And the covers concerning oil are always a howl: they rarely miss bubble tops in oil prices by more than a few months.)
Looking at these vivid reminders of the crises of yesteryear-and of how far the economy and the equity market have progressed since each and every one of these insoluble problems got solved-is kind of a fun exercise. But it also communicates a message of critical importance to the long-term, goal-focused investor. To wit, in the deathless words of the great Peter Lynch, "The key to making money in stocks is not getting scared out of them."
Granted, after ten years of essentially no return from equities, after the largest peak-to-trough decline in equity prices in our lifetimes, and especially after the "flash crash" correction of this past spring, we are all susceptible to a kind of equity fatigue-a sense that the stability of our principal, even at the price of zero return, is to be preferred to the terrifying and incomprehensible volatility of equities. It is at such moments when we are most apt to succumb to the kind of graphic catastrophism embodied in these now-laughable magazine covers. Our exhaustion and fear, and journalism's relentless negativity, become a feedback loop.
Seeing things the same pessimistic way most people around you see them, and having the mainstream media confirm your worst fears, is the emotional process that takes most people out of their well-chosen equity portfolios at the worst times. And make no mistake: that process is preponderantly if not purely emotional. Because intellectually, we know in the back of our minds that we're always seeing a movie we've seen before-that, to cite just one instance, we can grow our way out of today's federal deficit along the lines of the way we did in 1984. The intellect, I say again, knows this, and a hundred other positive truths just like it. It's only the emotions which can gin up a rationale for what John Templeton called "among the four most dangerous words in investing: it's different this time."
And on those rare occasions when we can't self-generate enough fear and pessimism, we can always look forward to the next issue of Time.
© 2010 Nick Murray. All rights reserved. Used by permission. |
Scorecard of EGTRRA sunset provisions that apply after 2010
The infamous "EGTRRA sunsets" will soon come to the fore in Washington, and although much of the attention has focused on how tax rates would be affected, the looming sunsets would snuff out or substantially alter many more tax provisions. Although Congress is widely expected either to defer EGTRRA sunset provisions or modify them for 2011, there's no guarantee this will happen, or that all of the sunsets will get some kind of reprieve. To help you get a better handle on exactly what is at stake with the EGTRRA problem, we've prepared a scorecard of what will change beginning after 2010, under current law.
Scorecard of Post-2010 Changes Under EGTRRA Sunset Rules:Here's a capsule review of what's in store if the EGTRRA sunset rules go into effect.
Taxation of capital gains and qualified dividends (Code Sec. 1(h)). Long-term capital gain is taxed at a maximum rate of 20% (18% for assets held more than five years). Dividends paid to individuals are taxed at the same rates that apply to ordinary income.
RIA observation:Note that the sunset rules related to taxation of capital gains and dividends applies under Sec. 303 of P.L. 108-27, as modified by Sec. 102 of PL 109-222, not under EGTRRA, but are included in this article because they impact an important tax rate.
Earned income tax (EITC) credit (Code Sec. 32). There are multiple changes: (a) The beginning of phaseout range for joint returns drops; phaseout of the credit is computed with reference to modified AGI (rather than AGI); earned income for EITC purposes includes exempt income; and EITC is reduced by the AMT.
Credit for household and dependent care expenses (Code Sec. 21). Creditable expenses drops from $3,000 (1 qualifying individual) and $6,000 (2 or more) to $2,400 and $4,800 respectively. The maximum credit percentage drops from 35% to 30%, and the AGI-based percentage reduction begins at $10,000 (instead of $15,000).
Child credit (Code Sec. 24). The maximum credit drops from $1,000 to $500 and the credit is not allowed against AMT. Also, more restrictive rules apply to refundable child credit.
Minimum withholding rate on supplemental wages under flat rate method (Code Sec. 3402). This rate rises from 25% to 28%. (For supplemental wage payments totalling more than $1 million for a calendar year, the rate rises from 35% to 39.6%).
Standard deduction (Code Sec. 63). The standard deduction for married taxpayers filing jointly (and qualified surviving spouses) is 167% (rather than 200%) of the standard deduction for single taxpayers.
Reduction in itemized deductions (Code Sec. 68). Most itemized deductions of higher-income taxpayers are reduced by 3% of AGI above an inflation-adjusted figure, but the reduction can't exceed 80%.
Phaseout of personal exemptions (Code Sec. 151(d)). A higher-income taxpayer's personal exemptions are phased out when AGI exceeds an inflation-adjusted threshold.
Voluntary withholding rate on certain federal payments (e.g., Social Security benefits) (Code Sec. 3402). The rate rises from 7%, 10%, 15%, or 25%, to 7%, 15%, 28%, 31%.
Voluntary withholding rate on unemployment benefits (Code Sec. 3402). This rate rises from 10% to 15%.
Parent's election to include child's unearned income on parent's return (Code Sec. 1(g)(7)(B)(ii)). The parent includes child's gross income in excess of an inflation indexed figure, plus 15% (up from 10%) of the lesser of (a) inflation adjusted standard deduction for dependent child, or (b) the excess of the child's gross income over the amount in (a).
Noncorporate taxpayer's net capital gain and qualified dividend income taxed for AMT purposes at the same rates that apply for regular tax purposes (Code Sec. 55(b)(3)).This rule no longer applies.
Accumulate earnings tax rate (Code Sec. 532) and personal holding company tax rate (Code Sec. 541). Both rise from 15% to 39.6%.
Gain on transfer of property to satisfy pecuniary bequest (Code Sec. 1040). The estate recognizes gain or loss to extent of difference between bequest dollar amount and estate's basis for the property (gain limited in case of certain special use property).
Transfer at death to nonresident alien (Code Sec. 684(a)). No gain is recognized on transfers of appreciated property.
Estate tax (Code Sec. 2001 et seq). The estate tax is reinstated with a top rate of 55%. A 5% surtax on the wealthiest of estates phases out the benefit of graduated rates, with (1) a unified credit exemption equivalent of $1 million, (2) reinstated Code Sec. 2057 deduction for family owned businesses, and (3) credit against State death taxes allowed (instead of deduction allowed in 2009 and earlier years).
Generation skipping transfer (GST) tax (Code Sec. 2631). The GST tax is reinstated, with top rate of 55%, and the GST exemption amount is set at $1 million.
Gift tax (Code Sec. 2505). The top rate increased to 55%.
Treatment of transfers to non-grantor trusts as taxable gifts under Code Sec. 2503 (Code Sec. 2511(c)). This rule no longer applies.
If you have any questions or concerns about these tax provisions, or how you will be affected by them, please contact us. |
New Small Business Bill - What Do Business Owners Need to Know To Cut Their Taxes?
By Dean Zerbe
(From Forbes.com, September 22, 2010)
The House is on the verge of putting its final stamp on the small business tax bill (passed last week by the Senate) and sending it to the President for signature. The bill has several good tax relief provisions that can possibly translate into real dollars in the pockets of business owners. While I will focus on the tax provisions in the bill, readers should be aware that the bill also includes efforts to increase SBA lending and lending to small businesses by banks and other financial institutions.
Money in Your Pocket
Five-year carry-back for general business credits. Normally general business credits can only be carried back for one year (and forward 20 years). The new law will allow a five-year carry back. The carry back is available for small businesses (not publicly traded) that have averaged less than $50 million in gross receipts for the last three years. Partners/shareholders must meet the same test. The provision is effective for credits determined in the taxpayer's first taxable year beginning after December 31, 2009.
What are examples of general business credits? The Research and Development Tax Credit is the big one (there are several dozen) but others of note include: Work Opportunity Credit; Low Income Housing Credit; Disabled Access Credit; Empowerment Zone Hiring Credit; the Employer Provided Child Care Credit; and the ever popular Distilled Spirits Credit.
General business credits for small business not subject to alternative minimum tax. This is huge. I wrote about this provision earlier in some detail. A great number of small and medium businesses are making expenditures that would qualify for a general business credit such as the R&D Tax Credit. However, these businesses are effectively barred from taking most general business credits due to the AMT. In a nutshell - if the business owners are subject to the individual AMT it puts the kibosh on taking most general business credits.
The change in law ends this AMT bar for credits for tax year 2010 for businesses with average gross receipts of $50 million or less for the last three years (Note: small private C corporations also benefit from this change - not just pass-thru). Business owners need to be talking to their tax advisors to revisit whether they are now qualifying for general business credits because of this change in law. In my discussions with accounting firms - often 80% of their business clients cannot take advantage of the general business credits because of the AMT bar - are you one of them? If the answer is yes, you could be sending less money to Washington this year.
Tax Breaks for Purchases of Personal Property (and Some Real Property and Leaseholds)
Section 179 Expensing Expansion. Under current law, Section 179 has allowed small businesses to expense (i.e. deduct immediately rather than depreciate over time) $250,000 of qualifying property (basically tangible personal property and some software) placed in service the taxable year. The $250,000 expensing is phased out if the taxpayer has purchased more than $800,000 in qualifying property for that year.
In discussions with small business owners and accountants I've heard a number of comments that Congress should look at not only increasing the base amount that can be expensed but equally important is revising the phase-out threshold amount. Congress listened. The base that can be deducted now with the new law is increased to $500,000 and the phase-out begins at $2 million - these changes are for 2010 and 2011 tax years.
The new law also expands what counts for qualifying property to include certain real property - qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property (but only up to $250,000).
Accelerated Depreciation - 50%. Continues in place for 2010 current law that had expired on January 1, 2010 allowing a 50-percent depreciation for the first year depreciable property is purchased and placed into service.
Joint Committee on Taxation in their good write-up of the law (always incredibly useful to your writer) provided an example as follows: Assume that in 2009, a taxpayer purchased new depreciable property and places it in service. The property's cost is $1,000 and it is five-year property subject to the half-year convention. The amount of additional first-year depreciation allowed is $500. The remaining $500 of the cost of the property is depreciable under the rules applicable to five-year property. Thus, 20 percent, or $100, is also allowed as a depreciation deduction in 2009. The total depreciation deduction with respect to the property for 2009 is $600. The remaining $400 adjusted basis of the property is recovered through otherwise applicable depreciation rules.
The President recently put forward the idea of 100% depreciation/expensing - with the effective date being proposed as the day of his speech (September 8th 2010). While the 100% depreciation was greeted with hosannahs by many Republicans - it was the devil in the details (the President's proposals to pay for that and other proposals) that has put that idea (and the President's proposals in general from that speech) on the backburner.
Will the 100% depreciation be considered? Possibly - but not before the elections and it may even wait for a new Congress (especially look for it if the Republicans take over the House - now that the President has put it on the table). Business owners should look more to whether it makes sense for them to make new investments now with 50% depreciation under the new law and if 100% happens (and it is retro) - treat it as a windfall. If 100% depreciation is what you need for a purchase decision to make sense economically - it is going to be a while before it is clear whether that will happen.
Encouraging Investments and Start-Ups
Given recent analysis that highlighted the importance of new small businesses as a key to job growth the following two provisions may be helpful:
Section 1202 Stock - 100% Percent Capital Gain Exclusion. In brief, Section 1202 stock is stock for a C corporation whose gross assets do not exceed $50 million and are an active business. The proposal increases the amount of capital gain excluded from 1202 stock (held for at least five years) from 75% exclusion to 100% exclusion (including exclusion from AMT - happy day). WARNING - this provision is only good for stock issued from date of enactment (President signs into law) to January 1, 2011 - a very small window.
Expenditure of Start-Up Costs. Currently under Section 195 of the code a taxpayer can elect to deduct up to $5,000 in start-up costs (but the $5,000 is phased out to the extent that start-up expenditures exceed $50,000 - the Lord giveth and the Lord taketh away). The new law will increase the amount that can be deducted from $5,000 to $10,000 and the phase-out point is now $60,000. Effective tax years beginning after December 31, 2009.
Just a brief note on a few other provisions: The new law provides a cap on penalties for small businesses hit by the 6707A penalty - very welcome news indeed for folks dealing with that issue. In addition, the bill also ends the cell phone wars between business and the IRS by treating the cell phones as business property - and ending the burdensome record keeping and requirements trying to determine percentages of personal v. business use (how many times did I call mom on my business phone?).
Alas the bill is not all sunshine and clover. The bill has an expansion of 1099 reporting requirements to include rental property and also increases penalties for failure to comply with information reporting requirements. My brilliant colleague Ms. Janet Novack has all the details here: http://blogs.forbes.com/janetnovack/2010/09/20/landlord-alert-more-tax-paperwork-on-the-way/?partner=contextstory.
Lastly, on the good side the bill also allows self-employed individuals to deduct the costs of health insurance for themselves, spouse and dependents against SECA taxes (not just income). This is a one-year provision.
The small business tax bill provides business owners and their accountants a good opportunity to sharpen their pencils and save significant tax dollars - improving that bottom line and hopefully leading to new jobs.
For more information on these tax provisions, please contact us. |
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