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Post Election Year-End Tax Planning

The results of the recent midterm elections, with the Republicans winning control of the House of Representatives and gaining seats in the Senate, provided some added uncertainty surrounding the expiration of the Bush tax cuts, the estate tax, an AMT patch and the tax extenders package.  It is unclear as to whether action will be taken on these provisions during the lame-duck session of the old Congress or if taxpayers will be waiting for the new Congress to act in January.

The AMT patch, the research and development tax credit, the deduction for state and local sales taxes in lieu of state income taxes, and the additional standard deduction for real property taxes enjoy broad support.  However, the politics surrounding the more contentious provisions could ensnare them.

The estate tax was repealed for 2010. However, without action by Congress, the estate tax returns in 2011 with a $1 million exemption (it was $3.5 million for 2009) and a top tax rate of 55%.  Both Democrats and Republicans agree that the 2011 estate tax levels are not acceptable, but the question of what is the appropriate exemption amount and top tax rate is where disagreement exists.  The most discussed options include a temporary extension of the 2009 exemption and top rate amounts, a permanent extension at the 2009 levels or a larger exemption amount with a more graduated rate structure.

Both the Congress and the President agree that parts of the Bush tax cuts should not expire. However, whether they are extended for some or all taxpayers and whether that extension is temporary or permanent is where the uncertainty persists.  The expiration of the Bush-era tax cuts would result in changes such as:

• the top two tax rates on ordinary income would move from 33% and 35% to 36% and 39.6%
• capital gain tax rates would move from 15% to 20%
• dividend tax rates would move from 15% to as much as 39.6% 
• phase-outs for personal exemptions and itemized deductions would return

The most discussed scenarios include a permanent extension for taxpayers with incomes below $200,000 ($250,000 married couples) with a 1 or 2 year extension for higher-income taxpayers, tax cut expiration for all taxpayers by force of law due to lack of agreement between Congress and the President, or a permanent extension for all taxpayers.

The longer that uncertainty persists on these items, the more difficult it becomes for taxpayers to plan and prepare for these changes.  For example, the uncertainty surrounding the tax rates affects income tax withholding tables used by employers when paying their employees.  A business might start the new year with one set of withholding tables and later be forced to change.  Another issue revolves around the timing of dividends and capital gains in either 2010 or 2011, along with acceleration or deferral of business income.

There is always a degree of uncertainty surrounding year-end planning, but this year is a bigger challenge than in the past.  Considering the uncertainty, we have compiled some ideas that you and your business can apply before the end of the year to save on your 2010 tax bill.

Some tax planning ideas for individuals before the end of the year include:  convert your traditional IRA into a Roth IRA, make energy efficiency improvements to your home, make annual gifts to save gift tax (and estate tax if reinstated), increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year, and realize losses on stock while substantially preserving your investment position.

Some tax planning ideas for your business before the end of the year include:  take advantage of the payroll tax holiday for previously unemployed new hires, purchase new business equipment and machinery to take advantage of 50% bonus depreciation and $500,000 of first-year expensing, claim the new health insurance tax credit for small employers, set up a self-employed retirement plan if you are self-employed and haven't done so yet and increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year.

These are some of the ideas that can be pursued to save on your 2010 tax bill.  We can provide you with further details on any of these.  The post-election impact on your tax plan is still uncertain, but we are closely monitoring the legislation and are ready to assist you with a customized plan for each of the various scenarios.

For more information on this challenging landscape, please contact your HORNE advisor or local HORNE office.  You may also want to attend one of HORNE's Post-Election Tax Update events.  Click here for information and registration details.