Mixed news for higher income taxpayers
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 kept ordinary-income and long-term capital gains rates from increasing this year and established “patches” for the AMT that may help reduce or eliminate your 2011 AMT liability. The act also offers some enhanced estate planning opportunities. And it extends and expands a number of other tax breaks. That’s the good news.
But many provisions of the law — including the extensions of the lower income and capital gains tax rates — are set to expire at the end of 2012 unless Congress extends them again. In light of this uncertainty, minimizing your taxes over the next few years will require especially careful planning and timely action, as well as a thorough understanding of various tax-saving strategies.
To this end, we’re pleased to offer this tax planning guide. While it covers the tax law changes and strategies most likely to apply to your situation, there are others we simply don’t have room to include here. So please check with your tax advisor to find out what’s best for you.
Content and Excerpt –
Year-to-Date Review [Page 2] – A tremendous number of variables affect how a particular item of income is taxed and, ultimately, your overall tax liability for the year. And timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability. In other words, tax planning shouldn’t be just a year end activity.
Executive Compensation [Page 6] – Executives are often rewarded for their business acumen with nonqualified deferred compensation (NQDC), stock options or restricted stock. To keep your taxes to a minimum, it’s important to be just as smart when it comes to tax planning for these complicated forms of compensation. This means both understanding the unique rules that apply to each compensation type and taking steps to use them to your advantage.
Investing [Page 8] – The 15% long-term capital gains and qualified dividend rate that had been set to expire after 2010 has been extended — perhaps making taxes on your investments less of a concern for the time being. But the reprieve is only temporary: Without Congressional action, in 2013 the capital gains rate will rise to 20%, and dividends will return to being taxed at ordinary-income rates as high as 39.6%. So there may be actions you’ll want to take now to lock in lower rates while they’re still available.
Real Estate [Page 12] – With some areas of the country starting to rebound, savvy homebuyers and real estate investors are in the hunt for those diamond-in-the rough properties that can yield big returns. Whether you’re looking for a new home or vacation home or a rental or investment property — or you simply want to make the most of your current property — the key is to take advantage of all the tax breaks available to you.
Business Ownership [Page 14] – Business owners have some tax planning concerns that are different from those of an executive who works for a corporation. When a business is a flow-through entity (such as a partnership or an S corporation), owners need to be concerned about how its annual performance will affect their own income tax liability. But they also need to look at how their business can help them achieve their long-term personal financial goals.
Charitable Giving [Page 16] – Not only does giving to charity allow you to do good, but it also can be one of the most flexible tax-saving tools available to you. Why? Because you have complete control over when and how much you give. You can give more in years where you need to maximize your deductions, less in years where you don’t. But take care: Many rules and limits apply that can affect the size of your deduction.
Family & Education [Page 18] – If you’re a parent, you likely want to do everything you can financially for your children, including ensuring they get a top-notch education. But you also want to teach them financial responsibility. If you’re a grandparent, your goals are likely much the same — plus you probably have estate planning on your mind. Knowing how you and your children (or grandchildren) can take advantage of the tax breaks available is an important step toward achieving these goals.
Retirement [Page 20] – Although you’re allowed to contribute only a limited amount to tax-advantaged retirement plans, those tax advantages make the plans especially powerful for taxpayers in the top income tax brackets. So don’t ignore these plans just because what you can invest in them annually may be small compared to what you invest elsewhere. Yet to fully leverage their power, you also need to watch out for inherent tax traps.
Estate Planning [Page 22] – There’s good news and bad news this year when it comes to estate planning. On the positive side, the 2010 Tax Relief act prevents pre-2001 tax act law (lower exemptions and higher rates) from going into effect in 2011 as originally scheduled. The act also provides some new tax-saving opportunities. But, on the negative side, these provisions apply only through 2012 and legislation has been proposed that would end some provisions sooner. (Check with your tax advisor for the latest information.)
Tax Rates [Page 24] – A chart consisting various income tax rate schedules.