Recent Tax Articles
Tax Planning in Times of Uncertainty
By JOSEPH W. WALLOCH
Uncertainty abounds! "This is the most uncertainty in taxation I have experienced in my lifetime," says Sidney Kess, a national tax expert, CPA and Harvard Law School graduate who has been in tax practice in New York City for more than a half century.
Congress is uncertain what to do about the expiring Bush tax cuts, the Federal Estate Tax, the Alternative Minimum Tax and the extension of expiring tax provisions, to name a few of the tax uncertainties. Congressional inaction that some label "congressional malpractice" on these taxing issues has created monumental confusion and uncertainty.
The president's "Debt Commission" is uncertain how to address the over $100 trillion projected funding deficit - yes, trillion with a T - in Social Security and Medicare in the coming decades. Preliminary discussions indicate that a tax increase of over 26.7 trillion in the coming decades is being considered.
Tax planning in uncertain times calls for assessing the worst case, best case and "most likely" scenarios.
The "most likely" scenario is that taxes will increase in the future. It is not a question of "if" but "when."
Many major taxpayers are accelerating long-term capital gain income into 2010 in order to lock in the current maximum tax rate of 15 percent. If the Bush tax cuts are allowed to expire, the top long-term capital gains tax rate will increase to 20 percent in 2011. The Health Care Act increase of 3.8 percent on investment income scheduled to kick in 2013 will increase the maximum long-term capital gains tax rate to 23.8 percent in 2013, or a 59 percent increase in tax! Major taxpayers planning 2010 acceleration transactions including hedge fund managers with carried interest, and Ralph Lauren, who is planning to sell 25 percent of his business in 2010 to take advantage of the 15 percent long-term capital gains tax rate.
Many taxpayers are converting traditional Individual Retirement Accounts or IRAs and other retirement plans to Roth IRAs in 2010 because of perceived future increased tax rates. The conversion privilege was expanded to all taxpayers in 2010 because of the elimination of any income limitation. The good news is that future income and appreciation in the Roth IRA is not subject to income taxation. The bad news is that the conversion is subject to current income tax hopefully at lower tax rates. However, there is an election to have the income either taxed in 2010 or taxed 50 percent in each of 2011 and 2012.
On the deduction side of the tax equation, many taxpayers are planning to defer deductions into the future where potentially increased tax rates will generate a greater tax benefit. The current top individual income tax rate in 2010 is 35 percent. If the Bush tax cuts are not extended, the top tax rates will increase to 39.6 percent in 2011. In 2013, with the Health Care Act increase of 3.8 percent, the maximum tax rate would increase to 43.4 percent. The current top California tax rate is 10.55 percent. Thus, in 2011 and beyond, the combined federal and California tax would take more than 50 percent of your ordinary income.
Many taxpayers are planning to defer charitable contributions into 2011 in order to maximize their tax benefit. Other taxpayers are strongly considering moving out of a high-tax state like California to lower or "zero income tax" states including Nevada, Washington, Texas and Florida. For example, LeBron James' move to Florida rather than New York is estimated to have saved him more than $12 million in state income tax.
There is currently no federal estate tax in 2010. Thus, very large estates are going untaxed. George Steinbrenner, owner of the New York Yankees, recently passed away. His death in 2010 is estimated to have saved his heirs over $600 million in federal estate taxes.
Congress is now on their August recess. On return, they will continue to ponder postponing the expiration of the Bush tax cuts, fixing the federal estate tax, "patching" the Alternative Minimum Tax, extending certain tax deductions and credits, extending 50 percent bonus depreciation on new property acquisitions, as well as deciding whether or not the maximum tax rate on dividend income will be increased from 15 percent to 39.6 percent.
Joseph W. Walloch is a CPA in Redlands. He has a master's degree in taxation from USC, and was recently named one of "The Top 50 Outstanding Tax Professionals in America" by CPA Magazine
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