Our “One and a Half Cents” on the Fourth Quarter – Part Two

January 6, 2011

At Wealth Enhancement Group, financial education has always been a priority and a commitment to our clients and the community. This article summarizes the details of the recent legislation. If you have questions about how these changes impact you personally, we are offering a complimentary 2011 tax planning review for those who are interested.

On December 17, 2010, President Barack Obama signed into law The Reid-McConnell Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The Act is the result of a compromise struck between President Obama and Republican leaders of the Senate and House of Representatives to temporarily extend unemployment benefits, reduce Social Security taxes, extend the “Bush Tax Cuts,” and make a host of other tax changes.

The Act now extends most of the provisions of two separate tax relief laws, which were set to expire, until the end of 2012. It offers citizens a variety of benefits, primarily in the areas of estate tax and individual income tax.

Individual Income Tax Rates
As part of the Bush Tax Cuts extension, the Act extended the expiration date on income tax rates by an additional two years. The current income tax rates (top federal income tax bracket is 35% and the lowest income tax bracket is 10%) will remain the same for the next two years.

By keeping the rates unchanged, 2010 Roth conversions are more valuable. Individuals can opt for the two-year deferral and no additional costs are incurred.

Long-term capital gains and dividend tax rates stay at 15% if your taxable income is in the 25% tax bracket or higher, or 0% if your taxable income is in the 15% tax bracket or lower.

Estate Tax
Under the new tax revisions, the estate tax rates are simply shortened by the Act at the top marginal rate of 35%. The brackets between 18% and 34% remain exactly the same, and the 35% bracket is imposed as the maximum rate.

The exemption amount has been raised to $5 million per person or $10 million per couple. Exemptions are portable between couples. This amount is indexed for inflation in multiples of $10,000 beginning in 2012. Starting January 1, 2013, the applicable exemption amount will revert back to $1 million as it was scheduled to do under previous legislation. The $5 million exemption amount is also applicable to gift taxes and the generation-skipping transfer tax.

As a result, more Roth IRAs and traditional IRAs will pass estate tax-free, and inherited Roth IRAs will be not only income tax-free but also estate tax-free.

Charitable Contributions
Required minimum distributions (RMD) that have not been met in 2010 can still be taken and allocated as a donation to a specific charity until the end of January 2011. If one does not want to donate the IRA distribution to charity, then the 2010 RMD must be taken by year-end as usual. If it is not timely taken, the 50% penalty on the amount not taken will apply.

The Bottom Line
There are plenty of provisions to the Tax Relief Act, including the extension of charitable IRA distributions and land conservation easements, and these changes provide many tax planning opportunities for individuals.

It is important to remember that the Act is essentially a two-year patch to prevent economic damage from tax provisions that are expiring at an inconvenient time. This will all have to be revisited in two years, when the political party balance in Washington may be very different than it is today.

The national tax provisions can be complicated. At Wealth Enhancement Group, our knowledgeable team of specialists can help you better understand the changes and use them for your long-term financial success.


Top Ten Year End Tax Ideas – Part Two

December 28, 2010

1. Take some losses. Even though the stock market is up this year, you still might find that some of your portfolio holdings are at a loss. You can sell those assets and deduct up to $3,000 per year against ordinary income. The remainder carries forward for future use indefinitely. The assets must be held in a non-qualified or “taxable” account, as opposed to IRAs or other tax deferred or tax advantaged plans to deduct these losses.

2. Fund an IRA or Roth IRA (depending on which best fits your situation). Don’t wait, start the tax savings now. If you have funds in a savings account, more than likely you are earning a pitiful interest rate that is also taxable. You can put up to $5,000 ($6,000 if age 50 or older) into a Traditional or Roth IRA, which each have their own separate tax advantages until April 15. Certain income limits do apply.

3. Take a distribution from your retirement plan or convert your retirement plan to a Roth IRA. If your income is lower in 2010 than it will be in 2011, you could take a withdrawal and pay tax at a lower rate this year. You could also convert all or a part of a Traditional IRA or other qualified retirement plan to a Roth IRA now and never have to pay tax on those funds again! Restrictions, penalties and taxes may apply. Unless certain criteria is met, Roth IRA owners must be 59 ½ or older and have held the IRA for 5 years before tax-free withdrawals are permitted. Remember that for the funds you convert to a Roth IRA in 2010, you have the option of electing to spread the taxable income into 2011 and 2012.

4. Get educated! No matter what your age is, now is a good time to look at continuing your education. The American Opportunity Credit provides a tax credit as much $2,500 on the first $4,000 of qualifying tuition and other education expenses. Pay your spring semester tuition or purchase your books before December 31 and you could receive the benefit of extra tax credits (not a deduction!) for this year. This credit is scheduled to change to be less favorable in 2011, so try and maximize the benefits under this year’s rules if possible.

5. Fix-up your house. Making energy efficient improvements (windows, doors, furnaces and much more) and receive a 30 percent tax credit on the first $5,000 of qualifying property purchases (a $1,500 credit). These improvements must be installed by December 31 in order to count for the credit in 2010. Remember that if you already used up all of your credit in 2009, you are ineligible for tax benefits in 2010. If you only used part of the credit, you can still make improvements and take advantage of the unused portion yet this year.

These are simply brief overviews of some of the tax items that you should not only be thinking about, but also trying to take advantage of. There are many favorable tax provisions that will only be in place for a short while. Make sure to call your financial advisor.


Top Ten Year End Tax Ideas – Part One

December 23, 2010

1. Meet with your financial advisor or tax professional. They have a much better feel for your personal situation and can provide strategies for your circumstances. The following ideas, while they can provide significant tax benefits, may or may not make sense in your personal situation. There are so many variables to address that not all of the details can be covered in this article so remember to please consult a professional to maximize these ideas.

2. Be charitable. Make a donation to your favorite charity by December 31. If your charity accepts credit cards, you could charge your donation before year-end to have it count for this year’s tax return.

3. Bunch your itemized deductions. If you are close to being able to “itemize deductions,” but not quite yet over the standard deduction, you might want to make extra charitable deductions, pay state or property taxes, pay January’s mortgage payment or medical expenses in December 2010 to take advantage of tax benefits without doing a whole lot of things differently, just timing your deductions to maximize your tax benefits.

4. Buy something. If you were planning on it anyway, make your purchase in December 2010 instead of January 2011. If you own a business, you should think about purchasing equipment or taking an extra trip to the office supply store to get more deductions this year.

5. Take some gains. Currently, long-term capital gains rates are at historically low rates of zero to 15 percent. It is likely these rates will go up in the future, so it might be beneficial to take advantage of what is currently available.

These are simply brief overviews of some of the tax items that you should not only be thinking about, but also trying to take advantage of. There are many favorable tax provisions that will only be in place for a short while. Make sure to call your financial advisor.


A Different Gift This Holiday Season

December 14, 2010

The year is rapidly coming to a close and many individuals and companies are looking for that perfect organization to contribute to this holiday season. Charitable giving is a fulfilling and meaningful experience, and even though individual donations are down 13.7 percent nationally this year (Source: Businessweek), many are continuing to make a conscious effort to give back and better their community or cause they support.

With any year-end giving, there are many things to take into consideration.

For individuals, charitable giving can be a daunting task if you are unaware how to file the information on your federal tax return and may end up losing you money come tax time. The following is a list of basic charitable giving tips to ensure your contributions pay off on your tax return:

a. Donate cash or property – Contributions are not deductible until an actual payment is made.
b. Contribute to a qualified tax-exempt organization – Individuals must contribute to a charity with 501(c) (3) tax-exempt status to receive tax benefits, unless it is an organization that is not required to by the IRS, such as churches and religious organizations.
c. Itemize deductions – Filing your tax deductions only works for people who are eligible to itemize their deductions.
d. Keep records – Be sure to follow the IRS’s requirements when filing for taxes, including saving canceled checks, acknowledgment letters from the charity, and appraisals for donated property.

Regardless of your how much you give or what charity you choose to support, it is important to talk to your financial or tax advisor – before you donate – about the best approach to maximize your tax savings.


Vacation Properties and Income – Part 2

September 14, 2010

Another way for retirees to generate income from a vacation home is to sell it. By using the federal capital gains exclusion in conjunction with the sale of your primary residence, you can potentially realize tax-free income. Here’s how it works. The basic capital gains exclusion rules state that you must have owned and used the home as your primary residence for at least two years out of the five-year period ending on the date of the sale. If you are married, the full $500,000 exclusion ($250,000 for single homeowners) is available as long as one or both of you satisfies the ownership test (two years) and you both satisfy the use test (primary residence).


Vacation Properties and Income – Part 1

September 9, 2010

If you have a vacation home, you’re already aware of the enjoyment it provides and the benefits it can offer at tax time. But you may not be aware of how vacation property can be used to generate income in retirement or how it can play into an estate plan. In fact, vacation properties offer retirees a number of different options in managing their finances and estate.
Vacation property may be used to generate income in several different ways. The first, and most obvious, is renting it. The IRS allows you to deduct mortgage interest on your primary residence and one additional property up to a limit of $1 million in combined mortgage debt for mortgages taken out after 1987. Current tax rules also allow you to rent out a second home for up to 14 days per year without having to report the rent as income. If you rent for more than 14 days, the home is considered investment property, and rent must be reported as income. Converting the property to an investment property, however, allows you to deduct rental expenses, such as insurance and utilities, if you have a net profit on the property (deductions are limited if you report a loss). You can still use an income-producing property for personal use while maintaining your tax advantages — but only for the greater of 14 days or 10 percent of the total days it is rented. Maintenance days do not count as personal-use days, but use by in-laws or other part-owners does, even if rent is charged.


Sharing Your Wealth

August 24, 2010

The tax laws of the United States encourage gifts by granting tax deductions for them in many cases. If individual citizens voluntarily help meet our country’s needs, their contributions reduce the responsibility of the government. Many would also argue that private support of charitable activities is more efficient than public support.
Due to the tax treatment of charitable contributions, individuals may realize not only immediate tax benefits but also advantages in terms of after-tax cash flow and the size of the estate they may pass on to their heirs. Gifts to charity during one’s lifetime or at death, if structured properly, will reduce the estate tax liability. An additional benefit of lifetime gifts is that an income tax deduction is available within certain percentage limitations.