Articles

 

Many tax uncertainties but also unique planning opportunities as 2010 comes to a close

Enrique Lopez, CPA, MST

 

The political trend has created unique tax planning challenges for 2010.  Various tax provisions enacted in 2001 and 2003 reducing taxes are expiring at year-end.  And although the balance of power has just shifted in Congress, there is still uncertainty on where tax rates will end up.  Most tax policy experts do not expect Congress to extend the expiring provisions either in the “lame-duck” session or in 2011.

 

Ideally, tax planning is a year-round exercise.  However, even if it has not been addressed yet, there are still various opportunities for assessing your individual and business tax situation in order to take some steps or perhaps fine-tune your overall plan for creating the best possible tax situation.

 

One approach may seem a bit counterintuitive this year but might make sense depending on your current income and expected 2011 income.  In other years, it is typically better to defer income and accelerate expenses.  Since tax rates will very likely be higher in 2011, there could be good reason for not deferring income into next year and not accelerating expenses into the current year.  The highest tax rate will go from 35% in 2010 to 39.6% in 2011 for “ordinary income.”  The rate for long-term capital gains will go from 15% to 20%.

 

Below are some considerations that may apply to you as an individual taxpayer or as a business owner that are especially important in 2010.

 

Investments and Investors

 

Capital Gains and Losses.  Stocks have generally increased in value over the last several months.  But with many investors carrying over unused capital losses, many generated in the last 3 to 5 years, there are good planning opportunities.  The loss carryovers result from the $3,000 maximum annual deduction of net capital losses.

 

Investors with appreciated stock can take certain steps for obtaining the best possible tax outcome.  For example, an investor with appreciated stock might consider selling before the end of 2010 to enjoy the lower tax rates in 2010.  Long-term capital gains are taxed at a much more favorable rate than short-term capital gains.  The rules for deducting capital losses against capital gains are complex.  The key is to ensure maximum utilization of carryover losses against current year gains.  Ideally, do not use long-term capital losses to offset long-term capital gains.  Instead, using long-term capital losses to offset short-term capital gains would be better as this reduces ordinary income, which is taxed at higher rates.

 

If instead, generating losses in 2010 is a more desirable outcome, selling stocks at a loss in 2010 would accomplish this.  In many instances it may be desirable to generate a loss but not necessarily get rid of the stock indefinitely.  Although “wash sale” rules would prevent an investor from selling a stock to generate a loss and then buying the stock back, there are techniques to partially mitigate the restrictions of “wash sale” rules.

 

Investments should be analyzed carefully to ensure the best possible timing for selling.  Tax considerations should not be the main driver for deciding whether to hold or sell an investment.  An investor’s overall strategy should be the primary driver for making decisions on selling or holding a stock.

 

Roth IRAs.  Taxpayers who have many years before retiring or expect to be in higher tax brackets in the future would benefit from converting traditional IRAs to a Roth IRA.  In 2010, all taxpayers are allowed to convert traditional IRAs to Roth IRAs and spread the resulting tax over two years.  There are two important reasons why it is especially interesting to consider converting your IRAs in 2010. 1) The ability to spread the tax over two years into 2011 and 2012 and 2) with tax rates increasing in 2011, it may be more beneficial to convert to a Roth IRA before the end of the year.  Taxpayers have the option of waiting until April 15, 2011, to decide whether to pay all of the tax in 2010 or in the subsequent two years.  This is very useful, as by then, we might have a good indication of whether rates will be decreased by Congress.

 

Investment Income to Minors.  Over time, a significant amount of tax savings could result from shifting investments to children.  Even though children under 24 (if a full time student) would be subject to their parents’ top tax rate on investment income over $1,900, taxes imposed on children on income below $1,900 could be significantly lower.   This idea could also be a simple but useful tool for accomplishing some estate planning and asset protection measures.

 

 

Business Owners

New Law in 2010.  On September 27, 2010, the President signed into law the Small Business Jobs Act of 2010.  The new legislation contains various significant tax provisions affecting 2010 and 2011.

·         More generous Section 179 expensing ($500,000 limit) and the qualified real property expensing ($250,000 limit) apply for tax years beginning in 2010 and 2011.  In the past, real property expenditures required deprecation over many years.  As long as the asset is purchased and placed into service, the deduction would be allowed

·         Reinstated 50% bonus depreciation

·         Increased $8,000 luxury auto depreciation for qualified property placed in service in 2010

·         Relaxed rules for cell phone use deductions as cell phones are no longer “listed property” (formerly subject to strict substantiation rules) for tax years beginning after 2009

·         Business startup expense deduction increases significantly ($10,000 limit, with $60,000 phase-out threshold) for tax years beginning after 2009 and before 2011

·         Health insurance costs for a taxpayer and family are deductible in computing 2010 self-employment tax

If increased rates for 2011 are not a major concern, and your business files its tax return under the Cash Basis of accounting, consider paying bills in 2010 even if they are not due until 2011.  Accelerating the payment of those bills by only a few days accelerates the tax benefit by one entire year because you would take a deduction with your 2010 return instead of waiting until your 2011 return gets filed. The use of a credit card would be allowed for accomplishing this.  Conversely, by deferring the receipt of income by only a few days, the corresponding tax impact can also be deferred by up to a year as well.  This planning technique should be done with the help of a tax adviser as there could be instances when the acceleration of the expense or the deferral of the income would not be allowed by the Internal Revenue Code.

An overall consideration in your planning is to ensure that whatever techniques you use to decrease your tax position, your techniques fall in line with your overall long term financial and tax planning strategy.  As such it is very important to work with an expert advisor to ensure your goals are well defined and your plan is executed accordingly. 

The above concepts require careful consideration for determining how they apply to each taxpayer’s unique circumstances.  Our firm would welcome questions on how you might benefit from these and other planning ideas. Please feel free to contact me at enrique.lopez@lopezcpas.com or by phone at 773-634-8335.

Enrique Lopez is Principal of Lopez & Co., CPAs, a full-service CPA firm providing closely-held businesses and individuals a range of sophisticated accounting and tax solutions to help them accumulate and preserve wealth.  Lopez & Co., provides services to organizations in various industries such as Engineering, IT, Media, Consulting, Healthcare and others with a domestic and international presence.  Resourceful advisors, Lopez & Co., specializes in delivering these services to organizations that are in their start-up phase, growth stages or that are looking for a successful exit strategy.  For more information about the firm’s services visit www.lopezcpas.com , call 773.634.8335 or email at info@lopezcpas.com