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.

The IRS will never ask for this information through a fax or email. As always, whenever you receive a request from any government authority, please forward the letter to us immediately, so we may review the letter and advise you appropriately on the proper course of action. (Click here to view a sample of this fraudulent letter in PDF format.) If you have any questions or concerns, please do not hesitate to contact us.

Many portfolios are now “out of balance” as a result of recent substantial price changes in many asset classes. Therefore, portfolios should be reviewed to determine whether rebalancing is required. It is also critical for portfolios to be reviewed to determine whether investments are appropriately allocated in light of any changes to their individual circumstances. Finally, a down market often presents attractive opportunities to purchase assets that are temporarily beaten down in price at “on sale” prices. We strongly recommend that you contact your current advisor, or contact us, for a review of your portfolio. These markets call for proactive analysis and definitive action — not complacency — in order to avoid repeating the mistakes many investors made in 2008.

Please contact us if you are interested. Rebalancing and portfolio reviews are a relatively simple but valuable component of the investment process.

Ongoing changes in tax laws, an unpredictable economy and uncertainty about the future have made minimizing taxes more difficult than ever. This is especially true for investments, because the 15% rate on qualified dividends and long-term capital gains is set to expire at the end of the year — but could be extended. To complicate matters, some new tax breaks have gone into effect this year, but only on a temporary basis. Also, income and estate tax rates are scheduled to go up in 2011 if Congress doesn’t act.

In this environment, you may need to create plans for multiple scenarios and be ready to move quickly as developments unfold. To this end, we are pleased to offer this overview of various tax-saving strategies you might employ. Of course, there are many others we don’t have room to cover here. So please check with your tax advisor to see which are best for you.

Content and Excerpt -

Year-to-Date Review [Page 2] - The top regular income tax rate on ordinary income (salary, business income, interest and more) for 2010 remains at 35%. The top AMT rate is only 28%, but it typically applies to a higher taxable income base. So it can result in unwelcome tax surprises if you plan only for regular income taxes. Also, income-based phaseouts and other limits can increase your marginal rate for regular-tax or AMT purposes.

Executive Compensation [Page 6] – Many executives are compensated by more than just salary and bonuses: They also receive stock options, restricted stock or nonqualified deferred compensation (NQDC). Careful planning for these more complex forms of compensation is critical to avoid unnecessary tax liability.

Investing [Page 8] – Tax treatment of investments can vary dramatically based on several factors — including type of investment, type of income it produces, how long it’s been held and whether any special limitations or breaks apply. Consequently, planning for investments has always been complicated. But this year, the level of complexity is particularly high because of uncertainty about what might happen with tax rates in 2011. So before you make any investment decisions, consider the potential tax consequences
under multiple scenarios.

Real Estate [Page 12] – Although the real estate market is a lot less rosy than it was a few years ago, real estate can still be a valuable investment — whether it’s your home or vacation home or a rental or investment property. Property ownership also can offer significant tax savings, as long as you take advantage of all the breaks available to you. But watch out for the limitations as well.

Business Ownership [Page 14] – For most business owners, their business is one of their bigger investments — or even their biggest. If you’re among them, special planning is required to ensure your personal financial security. After all, with your business making up a large portion of your portfolio, it may lack both diversity and liquidity.

Charitable Giving [Page 16] – Donations to qualified charities are generally fully deductible. So not only can they provide much-needed support to causes you care about, but they also can be a powerful tax-saving tool. To ensure your gifts do as much as possible for both your favorite charities and your tax bill, discuss with your tax advisor which assets to give and the best ways to give them.

Family & Education [Page 18] – It’s the hope of parents everywhere that their children grow up to be financially secure. The keys to achieving that goal are trifold: 1) teaching children from an early age the value of earning and saving money, 2) ensuring they have the financial resources needed to obtain the best quality education possible, and 3) making tax planning a family affair.

Retirement [Page 20] – For higher-income taxpayers, the contribution limits on most retirement plans may make them seem like more trouble than they’re worth. After all, the plans are subject to a variety of rules, and investment choices can be limited. Yet those in the top tax brackets also have the most tax savings to gain from such plans. The key is to make the most of the opportunities the plans offer and avoid their pitfalls.

Estate Planning [Page 22] – A one-year repeal of the estate and generation-skipping transfer (GST) taxes went into effect Jan. 1, but these taxes are scheduled to return in 2011 — at higher levels than in 2009. As of this writing, the repeal is still in effect, but Congress is expected to make estate tax law changes. This all adds up to much uncertainty and many planning challenges.

Tax Rates [Page 24] – A chart consisting 2009 individual income tax rate schedules.

Download AKM 2010-2011 Tax Planning Guide (pdf)

The practical effect of this is that the broker will report a sales transaction in its entirety if it involves a security purchased on or after January 1, 2011. The I.R.S. will match the broker reporting with the reporting on the tax return and will issue a Notice of Proposed Change if the cost basis does not agree. Therefore, it’s extremely important to make sure that the amount reported by the broker agrees with the amount reported on your tax return.

Brokers will automatically track any securities they purchase for you. For securities that were not purchased by that broker, you will be required to supply them with cost basis information. For instance, you may have inherited securities or securities that were originally purchased through a different broker. Have the cost basis information available and supply it to your broker as soon as possible so that they have it on file in case of a sale.

Several Methods for Determining Cost Basis

You should also be aware that there are many different ways of computing cost basis for a particular sale. Most brokers will use a default of first shares purchased, first shares sold (FIFO), if you do not specify a method. However, this may not be the optimal choice. Other choices include:

• LIFO (last shares purchased are the first ones sold)
• High Cost (highest shares cost are sold first)
• Low Cost (lowest shares cost are sold first)
• Specified lot (this allows you to choose specific lots as being sold, usually identified by purchase date).

You will be required to advise your broker if you choose a method other than the default method for a sale. If you trade by the Internet, you will be required to indicate your cost basis method chosen if other than a default method. Different choices will yield different tax results, so care must be taken in choosing a method. Otherwise, you may end up with an unintended tax result.

What you should do

The new reporting requirements make it critically important for most investors to engage in proactive tax planning.

Determine which shares do not have an associated cost basis, determine such cost basis and supply this information to your broker.
Contact your AKM CPA to discuss your investment goals, tax exposure and other financial issues.
Determine whether it makes sense to issue standing orders on cost basis to your broker or, instead, to determine cost basis on an individual sale basis.
Make sure that your brokers, agents and other advisors have clear instructions from you on how to determine cost basis.

As always, please call your AKM CPA if you would like more details or to plot your strategy for dealing with these new provisions.

One Management Style Does Not Fit All: Three Different Ways of Running a Business

The Clock is Ticking: 10 Last-Minute Tax Moves

Highlights of the New Small-Business Law

Reasonable Comp for a Dynamo

Resume RMDs From Retirement Plans

Facts and Figures

Download AKM Client Information Bulletin Dec 2010

• “You are due a refund.”
• “We could not verify your information.”
• “We suspect an unauthorized transaction on your account.”

Do not respond to such messages. The IRS does not contact taxpayers by email.

Any message purporting to be from the IRS is an attempt at fraud or identity theft.  You should also ignore other emails from unknown parties asking you to provide personal, tax or financial data.  Either delete such messages or, if tax-related, forward to phishing@irs.gov for investigation by the Treasury Inspector General.

Tax Breaks and Incentives:

Enhanced small business expensing (Section 179 expensing). Expensing rules under section 179 of the Internal Revenue Code allow qualifying businesses the option to currently deduct the cost of business machinery and equipment, instead of recovering it via depreciation over a number of years.

For the taxable year beginning in 2010, taxpayers may write off up to $250,000 of these capital expenditures subject to a phase-out once these capital expenditures exceed $800,000. Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.

The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

100% Exclusion of Small Business Capital Gains. Generally, non-corporate taxpayers may exclude 50% of the gain from the sale of qualified small business stock (QSBS) acquired at original issue and held for more than five years. To qualify, it must be stock of a corporation that has gross assets that don’t exceed $50 million, and the corporation must meet active business requirements.

For stock acquired after February 17, 2009 and before January 1, 2011, the exclusion is increased to 75 percent. At the time of sale, however, 28% of the excluded gain will be treated as a tax preference item subject to the alternative minimum tax (AMT).

Under the new law, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after date of enactment and held for more than five years. In addition, the new law eliminates the alternative minimum tax (AMT) preference item attributable for that sale.

General business credits of eligible small businesses for 2010 allowed to be carried back five years. Under current law, a business’ unused general business credit may generally be carried back to offset taxes paid in the previous year, and the remaining amount may be carried forward for 20 years to offset future tax liabilities. This bill extends the one year carry back for general business credits to five years for certain small businesses. Eligible small businesses consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

General business credits of eligible small businesses in 2010 aren’t subject to AMT. Under the Alternative Minimum Tax (AMT), taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.

S corporation holding period. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years following its conversion or face a business-level tax imposed on the built-in gain at the highest corporate rate of 35%. This holding period is reduced where the 7th tax year in the holding period preceded the tax year beginning in 2009 or 2010. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.

Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).

Special rule for long-term contract accounting. Under the new law, the percentage of completion method of accounting is calculated by excluding bonus depreciation from being taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.

Boosted deduction for start-up expenditures. The new law allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

Limitation on penalty for failure to disclose certain reportable transactions (including listed transactions) on a return. The new law limits the penalty to 75% of the decrease in tax resulting from the transaction. The minimum penalty is $10,000 for corporations and $5,000 for individuals (for failure to report a listed transaction, the maximum penalty is $200,000 and $100,000, respectively). These changes are retroactively effective to penalties assessed after Dec. 31, 2006.

Deductibility of health insurance for the purpose of calculating self-employment tax. The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.

Cell phones removed from listed property category. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

Offsets (Revenue Raisers):

Information reporting required for rental property expense payments. For payments made after Dec. 31, 2010, the new law requires persons receiving rental income from real property to file information returns with IRS and service providers reporting payments of $600 or more during the tax year for rental property expenses. Exceptions are provided for individuals renting their principal residences on a temporary basis (including active members of the military), taxpayers whose rental income doesn’t exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs).

Increased information return penalties. Effective for information returns required to be filed after Dec. 31, 2010.

Application of continuous levy to tax liabilities of certain federal contractors. For levies issued after date of enactment, the new law allows IRS to issue levies before a collection due process (CDP) hearing on Federal tax liabilities of Federal contractors (taxpayers would have an opportunity for a CDP hearing within a reasonable time after a levy is issued).

Allow participants in governmental 457 plans to treat elective deferrals as Roth contributions. For tax years beginning after Dec. 31, 2010, the new law will allow retirement savings plans sponsored by state and local governments (governmental 457(b) plans) to include designated Roth accounts. Contributions to Roth accounts are made on an after-tax basis, but distributions of both principal and earnings are generally tax-free.

Allow rollovers from elective deferral plans to designated Roth accounts. The new law allows 401(k), 403(b), and governmental 457(b) plans to permit participants to roll their pre-tax account balances into a designated Roth account. The amount of the rollover will be includible in taxable income except to the extent it is the return of after-tax contributions. If the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. Plans will be able to allow these rollovers immediately as of date of enactment.

Crude tall oil (a waste by-product of the paper manufacturing process) is excluded from eligibility for the cellulosic biofuel producer credit. The new law limits eligibility for the tax credit to fuels that are not highly corrosive (i.e., with an acid number of 25 or less), effective for fuels sold or used after Dec. 31, 2009.

Nonqualified annuity contracts. The new law permits holders of nonqualified annuities (annuity contracts held outside of a qualified retirement plan or IRA) to elect to receive part of the contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis.

Guarantee fees. Amounts received directly or indirectly for guarantees of indebtedness of a U.S. payor issued after date of enactment are sourced, like interest, in the U.S. As a result, amounts paid by U.S. taxpayers to foreign persons will generally be subject to U.S. withholding tax.

Please keep in mind that I’ve described only the highlights of the most important changes in the new law. If you would like more details about any aspect of the new legislation, please do not hesitate to call.