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.

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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.


Tax-Smart Idea for Managing Your Portfolio #2:

February 23, 2009

Consider Investing in Municipal Bonds

Municipal bonds, or “munis” as they are frequently called, are bonds issued by state or local municipalities to fund public works projects such as new roads, stadiums, bridges or hospitals. A municipal bond can also be issued by legal entities such as a housing authority or a port authority. For this reason, municipals can be an excellent way to invest in the growth and development of your community.

In addition, because the interest earned on municipal bonds is exempt from federal income taxes and may be exempt from state and local taxes (if they are purchased by residents of the issuing municipality), munis have the potential to deliver higher returns on an after-tax basis than similar taxable corporate or government bonds. What this means is that although the interest paid on municipal bonds is typically a lower percentage than is paid on taxable bonds, because it is tax free, it is, in effect, not as low as it appears. A simple calculation known as the “taxable-equivalent yield” can be used when considering an investment in a municipal bond.

For instance, if your income tax rate is 35%, a municipal bond paying 5% interest is actually a better investment than a taxable bond paying interest at 7.7%. Thus, for investors in a high tax bracket, the benefits of using municipal bonds in a fixed-income portfolio can be significant. Municipal bonds are subject to availability and change in price. Subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

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Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, a registered investment advisor.