Most folks don’t think much about taxes until around April when they start to ponder what kind of damage the IRS will inflict on them for the prior year. We encourage, beg and cajole our clients to be proactive about taxes, and in so doing we can minimize the damage and also help plan for it. Alas, some folks are just hardwired to procrastinate when it comes to this issue and do little, if any, advance prep for April 15th.
However, this year advance prep will be important. In 2011, ordinary tax rates will be going up for most folks. Capital Gains tax rates will be going up for everyone. This means that the dollar you earn in 2010 will be taxed less than the same dollar earned in 2011, particularly for capital gains. If you have the ability to accelerate taxable income this year, or put off paying tax deductible bills until 2011, you may well be making a 3-5% spread by doing so. That’s a pretty good return in today’s world, and it can be had by almost anyone with a little advance planning. Doing something as simple as not paying your second property tax installment, or perhaps your state estimated tax payments, until 2011 could make you money.
In 2010 anyone can convert an existing IRA to a Roth. This could be a great time to do that if your income is low this year due to the economy or a layoff, and you are in a lower tax bracket. A Roth IRA that does not create tax when drawn out can be a nice thing to have in retirement. In 2011 and beyond tax rates will be higher and a conversion may not make sense under those circumstances.
Since capital gains rates are increasing from 15% in 2010 to 20% in 2011, or if you are in the lowest tax brackets from 0% (that’s no tax for you recent college grads) in 2010 to 10%, if you’ve got something to sell at a gain, this year just might be the time to do it. However, if you have investments to sell at a loss, you may be better off selling them next year when it will offset tax at higher rates.
All this boils down to a bit of advanced planning and calculation, and you will hear me beat this drum louder when we get closer to the end of the year.
Friday, June 25, 2010
Monday, June 21, 2010
Internet Tax scams
From time to time people forward me chain emails related to tax issues that are swirling around the internet, asking me if they are true or not. Lately, a couple of them have been sent to me repeatedly. Let’s deal with them here:
Scam #1
AN EMAIL SAYS THE NEW HEALTH CARE LAW WILL REQUIRE THE VALUE OF EMPLOYER PROVIDED HEALTH CARE TO BE SHOWN ON YOUR W-2 FORMS AND FOR YOU TO BE TAXED ON IT. This is not entirely correct, but also not completely incorrect either. While it is true that the Obamacare law will require employers to disclose the value of employer provided health care benefits on your annual W-2 forms, the law does not make them taxable. Presumably the bill writers wanted all of us to know how much our health care costs are, and will require employers to also show it to IRS. The more cynical amongst you might suspect that taxation will come later…..but it isn’t here now.
Scam #2
AN EMAIL SAYS THAT THE IRS WILL REQUIRE ALL GUN OWNERS TO LIST ALL FIREARMS THEY OWN ON TAX RETURNS AND PAY AN ANNUAL TAX ON THEM. It also usually states that the registration and tax scheme will be imposed by the Senate Finance Committee without ever getting a floor vote in Congress. This one lit up a bunch of my friends, and got my inbox plugged faster than a blackpowder rifle shooting FFg! It’s completely untrue, but actually has some basis for its origin. Apparently a congressman from Rhode Island proposed something very similar in the year 2000, offering up a bill which languished and ultimately died in committee. However even if it had progressed through the system it would have had to have been voted on.
Scam #1
AN EMAIL SAYS THE NEW HEALTH CARE LAW WILL REQUIRE THE VALUE OF EMPLOYER PROVIDED HEALTH CARE TO BE SHOWN ON YOUR W-2 FORMS AND FOR YOU TO BE TAXED ON IT. This is not entirely correct, but also not completely incorrect either. While it is true that the Obamacare law will require employers to disclose the value of employer provided health care benefits on your annual W-2 forms, the law does not make them taxable. Presumably the bill writers wanted all of us to know how much our health care costs are, and will require employers to also show it to IRS. The more cynical amongst you might suspect that taxation will come later…..but it isn’t here now.
Scam #2
AN EMAIL SAYS THAT THE IRS WILL REQUIRE ALL GUN OWNERS TO LIST ALL FIREARMS THEY OWN ON TAX RETURNS AND PAY AN ANNUAL TAX ON THEM. It also usually states that the registration and tax scheme will be imposed by the Senate Finance Committee without ever getting a floor vote in Congress. This one lit up a bunch of my friends, and got my inbox plugged faster than a blackpowder rifle shooting FFg! It’s completely untrue, but actually has some basis for its origin. Apparently a congressman from Rhode Island proposed something very similar in the year 2000, offering up a bill which languished and ultimately died in committee. However even if it had progressed through the system it would have had to have been voted on.
Thursday, June 17, 2010
No Equality, No Justice!
Here in California, the State granted Registered Domestic Partners (RDPs) the same legal status and rights as married couples. For tax purposes, this change forced RDPs to file income tax returns as either married jointly or married filing separately. Anyone who is a RDP must use the married rates on their California state tax return. However since the Federal government does not recognize such unions, for Federal tax purposes RDPs must use the Single (or Head of Household if there is a qualifying dependant) filing status. This causes no small amount of hassle if you are preparing a tax return that is joint with someone for state but single for Federal….
Further, since California is a community property state all items that are considered community income and deductions must be allocated equally between spouses or RDPs if they file separate returns.
What this means is that for Federal tax filing purposes RDPs who live in California will generally claim half of each other’s community income and deductions on each of their Federal tax returns, but instead of using Married Separate rates like married couples would, they will be entitled to use the Single rates. This may well result in a big Federal tax savings for RDPs that is not available to married couples.
Just for laughs I decided to calculate how much tax my wife and I would save if we were able to claim Single (and Head of Household) status on separate returns as RDPs will now be able to do. To my surprise it was over $1,000.
Apparently, antidiscrimination can be ugly too
Further, since California is a community property state all items that are considered community income and deductions must be allocated equally between spouses or RDPs if they file separate returns.
What this means is that for Federal tax filing purposes RDPs who live in California will generally claim half of each other’s community income and deductions on each of their Federal tax returns, but instead of using Married Separate rates like married couples would, they will be entitled to use the Single rates. This may well result in a big Federal tax savings for RDPs that is not available to married couples.
Just for laughs I decided to calculate how much tax my wife and I would save if we were able to claim Single (and Head of Household) status on separate returns as RDPs will now be able to do. To my surprise it was over $1,000.
Apparently, antidiscrimination can be ugly too
Friday, June 11, 2010
Wanted: One dead Billionaire
Ever since the inheritance tax was temporarily repealed on January 1, 2010 (for only one year), there have been many that have called for its reinstatement. Regardless of how you feel about taxing estates, it can be argued that it is inherently unfair for a wealthy person’s estate to completely escape tax simply because that person happened to die in 2010 rather than 2009 or 2011, while other heirs of estates not so fortunate pay such a stiff tax.
While Congress has been promising to fix this leak since last year, like the reaction to the BP disaster in the Gulf, it just goes longer and longer without a solution. There were many assurances early on that even though Congress did not get to it before 12/31/2009, not to worry because they would pass a “fix” that would be retroactive to January 1.
Enter Dan Duncan, a soft spoken farm boy who died unexpectedly in March 2010 at age 77. Dan owned two companies he built in the natural gas business, a 5500 acre Texas ranch stocked with wild game, a gun collection ( I like this guy!), and various boats, cars, jewelry, etc. Dan’s estimated net worth was somewhere around $9 BILLION. Because he died in 2010 Dan’s heirs stand to reap a savings of anywhere between 4-5 Billion dollars if the tax law stays in effect.
If Congress continues to do nothing, the system will benefit a very few wealthy people like Dan’s heirs with a windfall. If Congress tries to pass a law reinstating the “Death Tax” to cover guys like Dan, it has been argued that it would be unconstitutional if it was made retroactive, and although the average small estate may not have the resources to take up a challenge like this in court, a very wealthy one might.
With a few billion dollars at stake I’d bet Dan’s heirs would be willing to do that.
While Congress has been promising to fix this leak since last year, like the reaction to the BP disaster in the Gulf, it just goes longer and longer without a solution. There were many assurances early on that even though Congress did not get to it before 12/31/2009, not to worry because they would pass a “fix” that would be retroactive to January 1.
Enter Dan Duncan, a soft spoken farm boy who died unexpectedly in March 2010 at age 77. Dan owned two companies he built in the natural gas business, a 5500 acre Texas ranch stocked with wild game, a gun collection ( I like this guy!), and various boats, cars, jewelry, etc. Dan’s estimated net worth was somewhere around $9 BILLION. Because he died in 2010 Dan’s heirs stand to reap a savings of anywhere between 4-5 Billion dollars if the tax law stays in effect.
If Congress continues to do nothing, the system will benefit a very few wealthy people like Dan’s heirs with a windfall. If Congress tries to pass a law reinstating the “Death Tax” to cover guys like Dan, it has been argued that it would be unconstitutional if it was made retroactive, and although the average small estate may not have the resources to take up a challenge like this in court, a very wealthy one might.
With a few billion dollars at stake I’d bet Dan’s heirs would be willing to do that.
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