New! Estate Tax Update
The Job Creation Act of 2010
Beyond 2011: More Tax Increases
Roth IRA Conversion Update
Kiddie Tax Update
Jobs and Growth Tax Relief Reconciliation Act
Tips to Take Advantage of the Tax Relief Act During 2007
Are You Ready For The Roth 401(K) Option?

New! Estate Tax Update

During its late December session, Congress passed, and the President signed into law new Federal Estate and Gift tax provisions that will be effective for at least two years.  Under the new law each person has a $5 million exemption from Federal estate and gift taxes and the $5 million amount is adjusted for inflation in 2012.  This marks a substantial increase to the estate tax exemption amount from the $3.5 million per person in 2009.  Also, the top estate and gift tax rate is now set at only 35%, a substantial reduction from previous levels that ranged as high as 55%.

Finally, the new law has a portability provision, so that if the first spouse does not utilize their $5 million exemption at death, the surviving spouse has the opportunity to add the unused exemption to the survivor’s $5 million exemption at the second death.

Most states like Maryland and the District of Columbia have decoupled from this provision.  Their threshold is a $1 million exemption from state death taxes.  Virginia, by the way, has no state death tax.

The Job Creation Act of 2010

On December 17, 2010, the Tax Relief and Job Creation Act of 2010 was signed into law.  In addition to providing a thirteen-month extension of benefits for the long-term unemployed, the legislation includes a long-anticipated extension of the Bush era tax cuts that were schedule to expire on January 1, 2011.  Other significant provisions include a new alternative minimum tax (AMT) patch, a major modification to the estate tax, and a new one-year payroll tax reduction of 2%.

The act extends existing federal income tax rates for two additional years.  Existing tax rates for long-term capital gains and qualifying dividends are also extended through 2012.  As a result, long-term capital gains and qualifying dividends will continue to be taxed at a rate of no more than 15%.  The act temporarily takes the estate tax exemption (the applicable exclusion amount) down to $5 million per person; the top estate and gift tax rate for the next two years will be 35%.

Beyond 2011: More Tax Increases

One of the most vexing areas for planners, attorneys and CPA's has been estate tax planning. Historically, a long-term undertaking, it has become an annual event in recent years. Please allow me to explain: Under the 2001 Tax Relief Act, the maximum estate tax rate dropped steadily from 55 percent in 2001 to 45 percent in 2009. In conjunction, the amount of property excluded from estate taxes increased to $3.5 million. For 2010, there has been a full repeal of the estate tax (which was very timely for the George Steinbrenner family). However, the estate tax rate is poised to jump back to the pre-2001 level and more importantly the amount of property excluded from estate tax is now scheduled to be $1.0 million.

Resolving the estate tax issue was expected to be a top priority in early 2010, but it has yet to be resolved. Whether an agreement can be reached in 2011 remains to be seen. In the meantime, many taxpayers who'd never considered estate tax planning are going to now give it some serious thought. Our guess?? That the top estate tax rate will eventually settle at 35% with the amount of property excluded from estate tax settling at $5 million.

Our summer newsletter already addressed two major tax increases slated for 2013: The additional .9% Medicare tax and the additional 3.8% tax on investment income. Both provisions will effect taxpayers earning greater than $200,000 (single) or $250,000 (married).

Roth IRA Conversion Update

What's New:
For years prior to 2010, only taxpayers with modified adjusted gross incomes of $100,000 or less were permitted to convert a traditional IRA into a Roth IRA. Beginning in 2010, this restriction will be removed, permitting retirement investors at any income level to move assets in a traditional IRA into a Roth IRA.

What’s the Catch?
You will owe taxes on the converted amounts (with the exception of amounts that you have basis in). For conversions occurring in 2010, none of the amounts are includible in gross income in 2010 – instead half the income resulting from the conversion is includible in gross income in 2011, and half in 2012.

What to Do:
There is no simple answer to the question “Should I convert my traditional IRA to a Roth IRA”? The benefits are many: tax-free buildup in the Roth IRA, ability to leave it tax-free to your heirs, tax-free withdrawals after age 59 ½, no required minimum distributions and reduction of your estate via taxes paid at the Roth’s conversion.

Kiddie Tax Update

What's New:
Students up to age 24 will be subject to the "kiddie tax" starting this year (2008). The kiddie tax applies only to investment income in a child's name above a threshold of $1,700.00. The standard deduction allows the child to take the first $850 tax-free. The second $850 is taxed at the child's lower tax rate.

What's Behind It:
Congress moved to close a loophole allowing families to take advantage of a child's lower tax bracket. The latest revisions to the kiddie tax represent the final nail in the coffin for families trying to shift income from parents in a high tax bracket to children in a lower one.

What to Do:
Families should consider shifting their college savings strategies to avoid paying extra taxes. The new law boosts the appeal of Section 529 plans since the '529' plans are completely tax-exempt -- money inside grows tax free and owners pay no taxes when they withdraw it, so long as the money is spent on higher education.

Jobs and Growth Tax Relief Reconciliation Act

The Jobs and Growth Tax Relief Reconciliation Act was designed to encourage new investment and to create jobs. To achieve those goals, the Act lowered the tax rates on capital gains and dividends, increased the Section 179 deduction, and reduced the marginal tax rates for individuals. Please be sure check back with us for frequent updates.

Individuals:

• Increase in the child tax credit to $1,000.
• Accelerated reductions in tax rates...see new tax table in our newsletter section.
• Reduction of the tax rate on qualified dividends to 15 percent.
• Reduction of long-term capital gains rates to 15 percent (5 percent for low-income taxpayers).
• Roth IRAs and regular IRAs are $4,000 for 2007.

Businesses:

• Additional first-year depreciation deductions equal to 50 percent of property basis (bonus depreciation)
• Section 179 dollar limitation increases to $100,000

Tips to Take Advantage of the Tax Relief Act During 2007

Review your withholdings.
One of the major provisions of tax legislation is the reduction of income tax rates. While your paycheck may be fatter, it's time to make sure enough is being withheld to meet your tax obligation.

Child Tax Credit Checks Increase.
If you expect to receive Child Tax Credits in 2007, look forward to a larger credit. The per child tax credit is $1000. Remember, however, that this credit is dependent on your income and you may not be eligible or only be eligible for part of the benefit.

Look into Dividend Investments.
The Tax Relief Act gives a break on taxes paid for dividends. While corporations still distribute dividends to shareholders after paying taxes on the income, the shareholders who receive these dividends now pay a top tax rate of 15% on this income (down from 38.6%.) Wage earners in the 10-15% bracket would pay only 5%. This change could come with a double benefit; not only will you be able to keep more of your dividend income, but the value of the shares you own could also go up with the increased demand for dividend producing stocks. But be careful, this dividend tax break is not permanent and reverts back to the current law after 2008.

Time to Cash in Your Capital Gains?
The lowest tax rate on dividends also applies to Capital Gains. The current rate is now a maximum of 15%. So if you have a stock that has appreciated, now might be the time to sell. Especially since this tax provision is temporary and is projected to expire after 2008.

Businesses can Expense More of their Capital Purchases.
Small businesses can now expense up to $100,000 of qualified capital expenses under Section 179. This is up from $25,000. Thus, if your business is planning to invest in some equipment and you expect to have a banner year, you may wish to purchase the equipment now and use the capital expense to lower this year's taxes. The key is to make sure the asset you buy applies for the tax benefit.

Married Couples Should Have More in their Pocket.
The standard deduction for married couples is now twice that of a single person. The perceived "marriage penalty" of a standard deduction less than twice that of singles has been eliminated.

Are You Ready For The Roth 401(K) Option?

In 2001, Congress enacted IRC 402A, which permits employers to offer employees the option of treating elective deferrals to 401(k) and 403(b) plans as designated Roth contributions. The sunset requirements of the 2001 law force all provisions to expire after 2010 unless specifically extended by Congress, so this opportunity may not be available for long.

The Code will allow employees to fund their retirement by means of payroll deductions through contributions to a 401(k) or 403 (b) plan, just as before. However, if the employer so elects, employees may have the option of designating whether they want contributions to be excluded from their gross income and pay taxes on distributions as before – or, ready for this, pay taxes now and be able to receive tax- free distributions, just as they would with a Roth IRA.

Most of the rules for the new Roth 401(k) and 403(b) accounts will be the same as their traditional counterparts. The new accounts will still require employer participation, so any employee whose company does not offer the option can’t contribute. There are limits on the amount an employee may contribute: for 2007 that amount is $15,000 and will be adjusted for inflation in succeeding years. Distributions become mandatory once the participant reaches age 70 ½.

Will You Benefit?

How will you know whether a Roth plan is right for you? The first general rule is the younger the worker, the greater the benefit from using a Roth account. If you are more than 15 years from retirement, then a Roth plan should definitely be considered. Time frame is an important consideration, even if you are planning on an early retirement. So the important question is not so much how far you are from retirement, but how long until you need the distributions.

Regardless of age, anyone already contributing to a Roth IRA should participate in designated Roth contributions, particularly if Roth IRA contributions are maxed out already. Remember that designated Roth contributions might not be retained after 2010 so the window for contributions may close quickly.

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