2010 Year-End Tax Planning in Uncertain Times

Steve D'Amato, CPA, Tax Senior Manager   email
November 2010

 As the flurry of activity with the November elections fades away, I am reminded of the enormous impact these mid-term elections will have on the already uncertain tax landscape. Congress is scheduled to reconvene on Monday, November 15th, at which time this "lame duck" Congress will have a full agenda with only a short period of time to act. Congress only voted on a few bills in its prior session since it adjourned early in order to campaign, deferring many bills that demand immediate attention.

The federal tax legislation that is still pending includes the scheduled expiration of the "Bush Tax Cuts" at the end of 2010. If these tax cuts are allowed to expire, tax rates are set to increase as follows:

"Extender" items are also pending for 2010, including individual and business provisions that expired in 2009. Some of these items include: the sales tax deduction, the direct IRA charitable distribution of up to $100,000, the R&D tax credit and the alternative minimum tax (AMT) exemption.

It is likely that tax rates will not decrease, but rather increase or remain unchanged in 2011. If tax rates remain unchanged in 2011, you should implement traditional tax planning strategies. These strategies include, but are not limited to, attempting to defer income until 2011, accelerating deductions, utilizing available tax carryovers and closely watching the impact of the AMT.

If tax rates increase in 2011, however, you may want to adopt several alternative tax strategies. Plan your tax strategy based on the latest update of pending tax law changes. Some assumptions might need to be made regarding possible tax changes (what has changed and when it changed) and your projected levels of income and deductions for 2010 and 2011. However, be ready to adjust your plans for any changes made to the tax laws. Proper timing is essential. The tax planning process should begin immediately but, if possible, the implementation of the strategy should be delayed until later in the year. If you do expect tax rates to rise in 2011, the following tax planning strategies should be considered:

• Attempt to accelerate income in 2010. Pay wages or bonuses in 2010, instead of 2011.
• Attempt to defer deductions until 2011. Elect out of the 50 percent bonus depreciation or Section 179 expensing to defer depreciation deductions to higher tax rate years in 2011 and after.
• Pay C Corporation dividends in 2010 when the tax rates are 15 percent, rather than a higher tax rate in 2011.
• If planning to dispose of appreciated stock, or other property, close the sale in 2010 to take advantage of the 15 percent capital gains tax rate, not in 2011 at the 20 percent rate.
• Elect out of an installment sale in 2010 to have the entire gain taxed in 2010 at 15 percent. Further, if you have an installment sale from prior years, try to collect the balance of the payments in 2010 or sell the installment note.
• Sell appreciated stock at the 15 percent tax rate in 2010, then re-purchase the same stock the next day. The 30-day wash sale rule does not apply to gains, only to losses. The effect of this transaction is a step-up in basis of the stock.
• S Corporations should consider making distributions out of "earnings and profits" first, rather than out of its AAA.
• Consider a Roth IRA conversion. The $100,000 adjusted gross income (AGI) threshold does not apply in 2010 for the conversion from a regular IRA to a Roth IRA. If the tax rates remain the same in 2011, then the tax on the amount converted to a Roth IRA can be paid over the next two years (2011 and 2012). If the tax rates increase in 2011, the taxpayer may want to elect out of this two-year deferral and have the full amount taxed in 2010.

Year-end tax planning is more important than ever due to the uncertainty in the legislative landscape and current economic times. By implementing these strategies it will be easier to mitigate your losses and reduce your exposure to risk.

If you have any questions regarding your situation and year-end tax planning, please contact Steve D'Amato.