President Barack Obama recently signed into law a sprawling tax bill that extends cuts for most Americans and that some observers estimate will cost $858 billion over two years. Patricia Thompson, a partner at Providence CPA firm Piccerelli, Gilstein & Co. LLP, has examined the fine print and answered five questions on it.
PBN: How has this legislation helped year-end tax planning for your clients?
THOMPSON: Legislation signed by the president added certainty to the tax code for two years. Well, as much certainty as you can have in taxes. The certainty allows taxpayers to be able to plan their 2010 and 2011 tax situation. They can decide which year income should be generated or which year deductions should be paid. For example, if you know your tax rate is going to be higher in 2011, you might want to move deductions into 2011. If this year is higher, deductions should be accelerated. Many taxpayers are evaluating whether or not to convert some of their IRAs to Roth IRAs. Converting the IRA in 2010 allows the taxpayer to spread the income from the conversion over a two-year period, starting in 2011 and ending in 2012. The taxpayer has the ability to tax the conversion income in 2010. Knowing the 2011 and 2012 tax rates will be helpful to make the decision on which year the income should be taxed.
Taxpayers over the age of 70 1/2 have the ability to transfer up to $100,000 of their traditional IRAs to charity. The transfer would be considered as part of the required minimum distribution. This allows the taxpayer to reduce their income by the amount transferred to the charity that would be considered the required minimum distribution. Taxpayers that made their required minimum distribution before Dec. 17 may have to wait for IRS relief if they want to take advantage of this provision and have the transfer count as the minimum distribution. The IRS has the authority to waive the 60-day rollover requirement where the failure to waive the requirement would be against equity or good conscience.
Taxpayers that have already used their $1 million lifetime gift exclusion may want to wait until January 2011 to make any taxable gifts. Next year the gift and estate tax have a combined exclusion amount of $5 million. This allows taxpayers to use the exclusion amount for either lifetime gifts or transfers at death.
Business owners may want to accelerate the purchase of new equipment into December 2010 rather than purchasing the equipment in early 2011. One of the provisions allows 100 percent write off of new equipment without being limited to taxable income or to the total amount of asset additions. State tax issues would need to be considered.
Noncorporate investors have an extended deadline until Dec. 31, 2011, to purchase qualified small business stock, which would be eligible for 100 percent gain exclusion on a sale as long as the stock was held for more than 5 years. The stock must be issued by a C corporation with total gross assets of $50 million or less and meet a few other requirements.
Business owners who are selling their business don’t need to close by the end of 2010 to take advantage of the lower capital gain tax rates. The lower capital gain tax rates have been extended until 2012.
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
By Emilio DiSpirito IV License Partner | Engel & Völkers Oceanside Leader | The DiSpirito…
Learn More
PBN: What happened with the estate tax, and what if an individual doesn’t choose to apply the estate tax?
THOMPSON: The estate tax has been retroactively reinstated for 2010. The exemption amount is $5 million and the top tax rate is 35 percent. The executor of a person who passed away during 2010 may elect to follow this new provision or apply the previous provision that exempted estates from taxation and required modified carryover basis. Executors of estates for people who passed away before Dec. 17 have until Sept. 17, 2011, to decide which rules to follow. Some of the planning opportunities include the step up in basis, the holding period, Rhode Island basis and potential lawsuits regarding basis allocation.
A provision allowing the portability of unused exemption between spouses applies for deaths occurring after 2010. This is a simplification provision. Some spouses may take advantage of this provision instead of creating trusts to minimize the estate taxes. Trusts are still an important estate planning tool and should be considered.
PBN: What if an individual converted some traditional IRA to a Roth IRA this year? Should that person pay the taxes on it in 2010?
THOMPSON: The decision to pay the taxes in 2010 versus spreading the IRA conversion income over 2011 and 2012 really depends on the taxpayer’s expected income and deductions in the next two years. The taxpayer would want to evaluate which alternative will result in the lowest tax liability. The resolution of the uncertainty of the tax rates for 2011 and 2012 helps in making this decision.
PBN: Any incentives for businesses in the new legislation?
THOMPSON: Some of the more common business incentives are as follows:
- One hundred percent bonus depreciation on eligible new assets acquired after Sept. 8, 2010, and before Jan. 1, 2012.
- Extension of the research and development credit for eligible amounts paid or incurred after Dec. 31, 2009.
- Fifteen-year, straight-line recovery period for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements has been extended through Dec. 31, 2011.
- The work opportunity credit has been extended through Dec. 31, 2011.
- Extension of time to purchase qualified small business stock and have the gain 100 percent excluded from income. See discussion above.
- The increase in the rehabilitation credit from 20 percent to 26 percent for any certified historic structure. The increase applies for qualified rehabilitation expenditures incurred before Jan. 1, 2012.
PBN: Are self-employed individuals eligible for the 2 percent reduction in the Social Security tax on self-employment income?
THOMPSON: Self-employed individuals are eligible for the 2 percent reduction in the Social Security tax. The Social Security portion of the self-employment tax rate will be 10.4 percent. The Medicare portion of the self-employment tax remains at 2.9 percent. Currently, 50 percent of the self-employment tax is deductible to arrive at adjusted gross income. In 2011, the self-employment deduction will be 59.6 percent of the Social Security tax paid plus 50 percent of the Medicare portion of the self employment tax paid.
