June 22, 2009


By Donald S. Paris, CPA, MST

Usually, this time of year, our thoughts are on vacations, going to the beach, and enjoying outside activities. But it is also a great time to get a jump start on tax planning for the remainder of 2009. Here are some key areas to consider:

Federal taxes - On May 11, the Treasury Department released the "Greenbook" containing President Obama’s fiscal year 2010 budget proposals. This Greenbook contains many far reaching tax proposals, including the repeal of the LIFO and lower of cost or market inventory tax accounting methods, ordinary income tax on "carried interests", and much stricter compliance enforcement if you have international business operations, off shore account holdings and foreign bank accounts. For individual taxpayers earning over $200,000 ($250,000 for married couples), the budget proposes a higher 36% and 39.6% tax rates, personal exemption phase outs, and more limitations on itemized deductions. Capital gain rates are proposed to go up to 20%, which also includes qualified dividends; ordinary dividends would be taxed at 39.6%. If you have incurred net operating losses, the new proposed rules would lengthen the carry back period. Now is a good time to review your income tax plan to determine whether any of these changes affect you. For further details please see www.treasury.gov/topics/taxes

State taxes - most states are experiencing significant budget deficits and are seeking ways to generate new tax revenues. To fill in budget gaps, the states are getting extremely aggressive in auditing non-resident taxpayers, seeking more taxes from out of state companies, broadly interpreting nexus, and proposing a variety of state and local taxes. Now is the time to assess your state tax position, ensure compliance with all the state tax rules and determine if you have any unfiled state tax returns. If you have, many states have voluntary disclosure programs, amnesty programs, and other relief provisions available for you to become compliant pay your tax, and have the penalties waived. Each state has a tax web site that provides all the information you need in order for you to get your state tax house in order.

Estate taxes - It seems likely that the federal "death" tax is here to stay. This difficult economy and our desire to preserve our family wealth, makes it more imperative than ever to have an up to date estate tax plan. Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate and generation skipping transfer tax exemption went from $2M to $3.5M this year, with the tax rate at 45%. However, on January 1, 2010, the estate tax is scheduled to be nothing, only to reappear on January 1, 2011 at $1M exemption, at a 55% rate. President Obama and the Democratic majority in Congress are working on various new proposals freezing the exemption at $3.5M with a top rate of 45%. While the laws continue to be work in process, it is prudent that you take advantage of planning opportunities in this current low interest rate environment, and update your estate tax plan. Deep market declines offer opportunities to transfer assets to others with little or no gift taxes, or use of more sophisticated transfer techniques, such as grantor retained annuity trusts (GRATS) charitable lead annuity trusts (CLATS), installment sales or similar vehicles. If most of your estate is in your retirement plan, 401(k) plan or similar vehicle, it is important to ensure that such assets are not allocated to the estate tax exemption and incur income tax unnecessarily. If you live in multiple states, you must consider the state estate tax exemption, which is not the same as for federal purposes. Also, estate planning is not just for taxable estates above the $3.5M level. Your plan should include those in your family with special needs, or elderly parents, so that distribution of your assets makes logical sense give your family dynamic. For this reason, powers of attorney, health care directives, living wills, proper titling of your assets, and document management and retention are vital to ensure an orderly and logical disposition of your estate.

So instead of enjoying that romance or mystery novel this summer, take the time to read up on the fascinating world of taxes and plan for your future. You may even enjoy it!