Income tax
Appropriately reducing or postponing the payment of
federal, state, and local income taxes is a critical
component of assembling the capital from which wealth
grows. Although income taxes may seem hopelessly
complex, effective tax planning begins with the concerns
discussed below.
These are:
• Understanding and managing the alternative
minimum tax (AMT).
• Utilizing the tax benefits accorded capital gains
and dividends.
• Planning charitable giving.
• Considering the impact of state taxes.
• Managing the benefits afforded by qualified
retirement plans.
Wealth transfer tax
Effective wealth transfer planning involves an ongoing
process that requires monitoring, updating, and making
adjustments throughout your lifetime as your goals,
objectives, and circumstances change and evolve.
The five major steps of the planning process include:
• Defining your family wealth transfer and charitable
goals and objectives.
• Understanding the available wealth transfer tax
exemptions, exclusions, and planning opportunities.
• Creating or updating your family wealth transfer and
charitable transfer plan.
• Implementing the plan with due consideration to
managing state and federal transfer taxes.
• Revisiting and fine tuning your plans and goals as your
personal circumstances change.
Increasing tax rate environment planning
Individuals are facing the potential for dramatic tax
increases in the coming year. Absent Congressional
action, the Bush tax cuts are set to expire at the end of
2010 and return to those in effect during the Clinton
Administration. From higher individual tax rates to
changes in qualified dividend and capital-gains taxes,
this section focuses on the anticipated changes and
provides planning tips as you prepare for new tax rates.
Multijurisdictional planning considerations
In today’s global environment, it is not uncommon for
individuals and families to have business interests,
investments, and/or homes in more than one state and,
perhaps, in more than one country. Increasingly, these
multijurisdictional interests require careful planning in
order to avoid running afoul of complex and rapidly
evolving tax rules and information reporting
requirements. Some important considerations include:
• Multistate issues and Nexus
• Information reporting requirements for U.S.
persons investing in non-U.S. entities.
• Expatriate considerations.
• Taxation of U.S. owners and beneficiaries of
foreign trusts.
What to Do in 2011
Planning tip # 1: U.S. individuals, S corporations, and
partnerships holding foreign corporation stock may want
to accelerate dividends from those foreign corporations
that benefit from the QDI provisions. In evaluating such
strategies, taxpayers need to take care that such dividends
meet the requirements for QDI treatment and consider
withholding tax and foreign tax credit implications
.
Planning tip # 2: Private companies in the process of
acquiring foreign operations should consider the
potential impact of the new “covered asset acquisition”
rules and the impact of the timing of the transaction in
light of the December 31, 2010, effective date.
Planning tip # 3: Private companies with foreign
operations will want to consider whether the tax
structure for those investments continues to make sense.
A favorable structure for foreign operations depends on
many factors, including: the rates of foreign tax (for both
income tax and withholding tax purposes); the eligibility
for qualified dividend treatment; the type of foreign
income earned and whether such income would be
subject to the Subpart F rules; and the type of assets
held by the foreign business.
Planning tip # 4: Private companies should analyze the
impact of the IRS proposal to report uncertain tax positions
starting in 2010. Although the requirements are not
retroactive, resolution of certain existing tax positions can
relieve uncertainty in future years. This is especially true
with regard to timing issues. Taxpayers should consider
consulting with their tax advisors to review available IRS
procedures, such as ruling requests, advanced pricing
agreements, closing agreements, and the IRS’s Compliance
Assurance Program or Limited Issue Focused Examination
(LIFE) program, which may be utilized to manage tax
uncertainties now and in the future.
Planning tip # 5: Closely monitor state income tax
developments as states deal with budget shortfalls. These
include planning for nexus and apportionment issues as
well as looking for new credit and incentives as states
more aggressively pursue jobs for their constituents.
To schedule an appointment for Tax Management or Planning.
.
2011 Tax Survival Guide
Additional considerations for private operating businesses
With today’s significant new legislative developments and continuing uneven economic recovery, private business owners should reexamine their business operations to reduce potential tax exposures and to explore potential opportunities presented.
These developments include higher tax rates, an ever-widening tax base as federal and state governments need to raise revenues, increased regulatory demands, and continued uncertainty about the economy.
This section focuses on recent developments and planning tips for private operating businesses
Significant spending cuts in entitlements are
highly likely.
The aging of the baby boomers would cause government spending to grow dramatically over time even if health care cost increases were held to the rate of consumer inflation. The increase in federal deficits as a share of the economy projected by the CBO is due entirely to growth in entitlements and interest costs.
This suggests that entitlement spending
Principally spending on Social Security and Medicare will have to be reduced.
Such cuts could have significant impact on your retirement
planning. Various approaches to reducing Social Security
spending include increasing the retirement age, reducing
the inflation adjustment applied to benefits, means-testing
the benefit, and partially privatizing the system.
In the past, when Congress has considered direct benefit
reductions, it protected retirees and those near retirement
by applying changes to individuals below a set age such as
55 years. Adoption of means-testing, which would limit
benefits for higher-income individuals, might be less likely
to contain such protections.
Some significant tax increases also are highly likely.
Although the federal deficit is largely a result of increased
spending commitments attributable to Social Security and
Medicare, tax increases are likely to enter the mix of
solutions. In the past, deficit reduction efforts have
proceeded under a shared sacrifice approach involving a
combination of spending cuts and tax increases. The logic
of such an approach seems compelling when posed in the
context of reducing retirement benefits. The defining
element of the coming budget debate may be a hard-fought
agreement on how much of the solution will come from the
spending side and how much from the tax side.
High-income taxpayers likely will see some combination
of benefit cuts and tax increases targeted at them.
Because higher-income tax rates will revert to their 2000
levels without Congressional action, Democrats would
seem to have a natural advantage in their efforts to
increase those rates. When the choice is to cut taxes or
not, as it was in 2001, high-income taxpayers can benefit;
but when the choice has been presented as increasing top
rates or increasing taxes that impact middle-class
taxpayers, higher-income taxpayers have fared less well.
Many individuals are basing their 2010 and 2011 tax and
wealth plans on the assumption that these higher rates will
take effect in 2011. Recent debates in Congress suggest
the possibility that current top rates could be extended
through 2011. In the Income tax section of this
publication, we discuss some of the planning steps that
you will want to consider if you believe that top rates will
increase in 2011 or 2012.
If Congress pursues benefit reductions, means-testing of
benefits presents a more complex set of choices in defining
whose benefits should be limited. If such a change were
viewed as tantamount to a tax increase on high-income
individuals, then conservatives could be expected to
oppose while liberals might be expected to support it.
If, however, such a change were seen as turning a “social
insurance” program into a “welfare program,” these
positions could be reversed.
Other taxpayers also will have to contribute to
solving our fiscal problems. Recent analyses by the
nonpartisan Tax Policy Center suggest that roughly one-half
of individuals pay no income tax and that reducing the
deficit to acceptable levels by raising only top rates would
require a top rate in excess of 90 percent. Few would see a
90-percent tax rate as appropriate. Philosophically, many
would argue that the benefits of both the deficit spending
that has occurred in the last decade and the rapidly growing
entitlement spending accrue to all citizens, not just those in
the top income tax brackets. They will conclude that
middle-income taxpayers should make some contribution
toward balancing the budget.
In addition, or as an alternative, to raising rates, Congress
may reconsider a number of deductions and credits
provided under current law.
Tax and budget policy experts increasingly are talking
about the growing role of deductions and credits in the
tax system. In effect, they argue that these incentives are
tantamount to federal spending and that in many cases,
such as housing and education, tax incentives may be
more significant than direct spending programs.
Recently enacted tax law changes affecting
individuals
Small Business Jobs Act of 2010
The Small Business Jobs Act (SBJA) of 2010 provides
$12 billion of tax incentives, including an additional year
of bonus depreciation for businesses of all sizes, as well
as enhanced Section 179 expensing rules and other relief
targeted to small businesses.
The tax incentives in the Act most of which are
temporary are paid for with permanent provisions
that require guarantee fees to be sourced like interest for
purposes of the foreign tax credit, impose additional
information reporting and administrative requirements to
close the “tax gap,and make modifications to materials
that qualify for the cellulosic biofuel producer credit.
Additional revenue comes from taxpayer-friendly changes
to the qualified retirement plan rules that expand
opportunities for individuals to convert pre-tax balances in
employer-sponsored retirement plans into designated Roth
accounts.
Extension of enhanced small business expensing.
The Act extends through 2010 the increased Section 179
expensing limit of $250,000 and investment phase-out of
$800,000 originally enacted in the Economic Stimulus Act
of 2008. (The expensing limit and investment phase-out
threshold were later increased to $500,000 and $2 million,
respectively, and extended through 2011 by SBJA 2010.)
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