February Tax Thoughts and Planning Information - 02/15/2011

General Comment:

My perspective is that tax planning is a collaborative process where the best results are obtained when the client, accountant, attorney, and other trusted advisors as appropriate work together on behalf of the client. A cornerstone of my practice is to share information so that the best result is achieved. Understanding client transactional goals is critical to a successful outcome. This email is intended to identify general information and certain items for further discussion or analysis for the benefit of my clients and other advisors.

IRA Planning Advice:

For individuals who converted to Roth IRAs in 2010, the 2010 Tax Act hasprovided tax rate certainty through 2012. Therefore, it appears that the preferable course of action is to split the conversion income equally over 2011 and 2012 thereby allowing a longer period of time to pay the related income taxes.

With a portable estate tax exclusion of $5 million per person, where appropriate, having a surviving spouse as the designated beneficiary it is less likely that the estate will be subject to estate tax. Increased stretch IRA benefits may also be available if the children or grandchildren are the designated beneficiaries. There are other variables to consider as part of one's distribution planning. The exclusion amount, while an important element, is not necessarily the only or determinative issue. It also follows that Roth IRAs may be more attractive to beneficiaries as they may be both income and estate tax free.

The generation skipping transfer tax exemption although increased to $5 million, is not portable. The gift tax exclusion, also increased to $5 million, is portable. Clients are advised to consult with their estate planning attorney and accountant to determine how best to take advantage of these increased exclusions. Each family's particular facts and circumstances must be considered as in all estate planning before taking action. Review of one's estate plan should include the role of credit shelter or by-pass trust formula provisions.

The 2010 Tax Act, Some Things to Think About:

The 2010 Tax Act [ signed into law on December 17, 2010 ] gives estates of 2010 decedents [ the default rule ] the option of paying estate tax at a 35% tax rate, having an estate tax exemption of $5 million and receiving a full basis step up to fair market value or opting out of the estate tax and receiving a carryover basis. This option is only available for decedent's dying in 2010 as the new law applies to deaths in 2011 and 2012. At this time, the rules after 2012 are unknown. Notwithstanding the many issues involved in this decision, the message for clients is that consultation is necessary and running the numbers is critical. I do not believe there aremany, if any, automatic cookbook type answers here.

Some examples of estate facts executors' may consider in respect of this election include the estate's asset types, characterization of income recognition if the asset such as depreciable real estate was sold before death, expected holding period by beneficiaries of property received, the value of the future depreciation tax shield, passive loss limitations, the number, age, experience and characteristics of beneficiaries, impact of formula clauses and partnership interests with negative capital accounts. The analysis may involve speculative projections about how assets will perform in the future under both normal and stressed conditions. Not necessarily an easy task. The decision may, in certain circumstances, be more involved than it first appears.

California Mandatory E-Pay Penalty Begins:

Beginning January 1, 2011 The Franchise Tax Board began enforcing the mandatory e-pay penalty. This penalty applies to personal income taxpayers whose tax liability is greater than $80,000 or for taxpayers who make an estimated tax or extension payment that exceeds $20,000 for taxable years beginning on or after January 1, 2009. Imposition of the penalty has been deferred until this year. Once either of these conditions is met, all payments regardless of type, amount or tax year must be remitted electronically. Electronic payment methods include Electronic Funds Withdrawal, Web Pay or credit card. The penalty is 1% of the amount paid unless failure to pay electronically was due to reasonable cause and not willful neglect.

Real Estate New IRS Reporting Requirements With Respect to Activity Grouping:

24 years after the enactment of the passive loss limitations the IRS has finally in Revenue Procedure 2010-13 issued disclosure requirements effective for 2011 for grouping a real estate rental property with a business activity in order to treat the two activities as one activity claiming the aggregation to be an appropriate economic unit and thereby convert the rental property from a passive activity into a nonpassive activity. For those benefitting from this tax position, this is an important pronouncement.

This Revenue Procedure does not apply to the rental real estate activities of a taxpayer in a year in which the taxpayer is a real estate professional who has made an aggregation election under the regulation applicable for this technical designation. Individuals and related entities owning rental real estate and businesses are advised to discuss activity grouping as a means of mitigating or managing the impact of the passive loss limitation rules.

Please call me with questions or concerns specific to your situation.