Tax Planning Circa 2011 FPA Houston December 6, 2011 The Rules We Live By 2010 Tax Relief Act (December 17, 2010) Patient Protection and Affordable Care Act (PPACA) Hiring Incentives to Restore Employment Act of 2010 (HIRE) Small Business Jobs Act of 2010 (September 27, 2010) 1
Ordinary Income Tax Rates We retain the 10% bracket and the top marginal bracket of 35% through 2012 2011 Married Filing Jointly (and surviving spouses) 0 17,000 10 17,001 69,000 15 69,001 139,350 25 139,351 212,300 28 212,301 379,150 33 Over 379,150 35 Special Tax Rates Preferredcapital gains rate through 2012 Preferred capital gains rate through 2012 0% for taxpayers in the 10% 15% bracket 15% for all other taxpayers Qualified dividends through 2012 28% rate for collectibles 25% rate for 1250 recapture remain unchanged without sunset Medicare surtax.9%/3.8% effective January 1, 2013 2
Alternative Minimum Tax AMT patched for two years 2010 and 2011 2011 exemptions $48,450 for singles (in 2011) $74,450 for married couples (in 2011) All nonrefundable personal tax credits apply to AMT in 2010 and 2011 as well Phaseouts, Marriage Penalty, Etc. Full repeal of Limitation on itemized deductions Phase out of personal exemptions Extended through 2012 Married Filing Joint tax brackets remain twice the single brackets through 2012 Child tax credit remains $1,000 through 2012 (was previously scheduled to be reduced in 2011) 3
Credits 2010 rules extended through 2012 for Earned Income tax credit American Opportunity tax credit Child Tax Credit Child and Dependent Care tax credit Energy credits available with reduced benefits 2011 only Extenders The following provisions were extended for two years 2010 and 2011 State and local sales tax deduction Teacher s classroom expense deduction Tax free distributions from IRAs directly to charities Higher education tuition deduction 4
State Tax Considerations Texas residents may need or want to file nonresident income tax returns for out of state business activity or rental property Start statute of limitations Record losses to offset future gains Be sure residents of other states are taking advantage of all credits and deductions Business Provisions Self employed health insurance deduction reduces self employment tax in 2010 only 100% bonus depreciation for purchases between September 9, 2010 and December 31, 2011 50% bonus depreciation for 2012 purchases Section 179 expense $500,000 for 2010 and 2011 ($2 million investment limitation) $125,000 expense/$500,000 investment in 2012 5
Business Provisions Cell phones no longer listed property records not needed to claim deduction Enhanced 1099 reporting requirements repealed S Corporations subject to self employment tax this was rejected by the Senate. No current legislation pending. Tax Law Outlook We are entering a presidential election year. The last major tax law was passed December 17 (2010.) Default is a sunset of tax provisions. 6
Tax Law Outlook Tax & Deficit Reduction Proposal Marginal & capital gain rates rise in 2013 for higher income taxpayers No itemized deductions for taxpayers in marginal rates above 28% Buffet rule Estate tax rules return to 2009 levels Tax Law Outlook S Corporation reasonable compensation S Corporation pass through income taxation Small business audits IRS staffing 7
Avoid mistakes Planning 2011 check withholding and estimated tax payments Traditional deductions remember AMT Consider Roth recharacterizations Planning for 2011 Charitable Contributions Direct transfers to charities in 2011 can replace required minimum distributions Reduces AGI which affects myriad benefit phaseouts Reduces account balances for future RMDs 8
Planning Opportunity AMT Top AMT bracket is 28%, top marginal bracket is 35% Future marginal tax brackets set to increase Consider maximizing AMT See example Planning Opportunities Roth IRA conversions the tax deferral provision is gone, but the ability to convert (regardless of income) remains consider nondeductible IRAs to convert to Roth accounts for high income clients consider partial IRA distributions to manage tax bracket 9
Planning Opportunities Don t forget capital gain harvesting for lower income taxpayers Consider utilizing expiring extender provisions Prepay tuition for tuition deduction Sales tax deduction on specific items, such as autos Planning for 2012 Higher income taxpayers received a reprieve through h 2012 Start planning now to take advantage of rates that will most likely expire in 2013 Staytuned tuned aslegislation will change what we ve discussed today 10
Questions? Janet Davis, CPA, CFP janetdavis@trustedadvisorsconsulting.com 1 877 571 1630 @MyVirtualCPA 11
Bob and Janet Sample Summary Report Case 1 Case 2 Case 3 2011 2012 2011 2012 2011 2012 Income: Wages 420,000 420,000 420,000 420,000 420,000 420,000 Interest & Dividends 3,500 3,500 3,500 3,500 3,500 3,500 Capital Gains & Losses 32,926 32,926 32,926 32,926 32,926 32,926 Other Income 0 0 100,000 0 90,000 0 Total Income 456,426 456,426 556,426 456,426 546,426 456,426 Total Adjustments 0 0 0 0 0 0 Adjusted Gross Income 456,426 456,426 556,426 456,426 546,426 456,426 Personal Exemptions 18,500 19,000 18,500 19,000 18,500 19,000 Itemized Deductions: Charitable Contributions 1,800 1,800 1,800 1,800 1,800 1,800 Taxes 21,000 26,247 21,000 20,787 21,000 20,333 Interest Expense 30,000 30,000 30,000 30,000 30,000 30,000 Total Itemized 52,800 58,047 52,800 52,587 52,800 52,133 Standard Deduction 11,600 11,900 11,600 11,900 11,600 11,900 Total Deductions from AGI 71,300 77,047 71,300 71,587 71,300 71,133 Taxable Income 385,126 379,379 485,126 384,839 475,126 385,293 Regular Tax: Schedule or Table Tax 104,666 102,102 139,666 103,903 136,166 104,053 Alternative Capital Gains Tax 97,990 95,545 132,381 97,347 128,881 97,497 Appropriate Regular Tax 97,990 95,545 132,381 97,347 128,881 97,497 Net Alternative Minimum Tax 14,128 16,573 8,379 14,771 9,079 14,621 Total Federal Taxes 112,118 112,118 140,760 112,118 137,960 112,118 Withholding & Estimated Tax Payments -110,000-110,000-110,000-110,000-110,000-110,000 Total Payments -110,000-110,000-110,000-110,000-110,000-110,000 Net Federal Tax Due 2,118 2,118 30,760 2,118 27,960 2,118 Resident State Tax 16,247 16,008 20,787 16,256 20,333 16,277 Resident State Estimated & W/H -11,000-11,000-11,000-11,000-11,000-11,000 Net Resident State Tax Due 5,247 5,008 9,787 5,256 9,333 5,277 Total Net Tax Due 7,365 7,126 40,547 7,374 37,293 7,395 Marginal Nominal Federal Rate 28 28 28 28 28 28 Marginal Federal Rate with Phaseouts 35 35 28 35 28 35 Marginal Resident State Rate 5 5 5 5 5 5 11-27-11 : 1:23 p.m. Page: 1
2011 Tony and Susan Client Main Worksheet Case 1 Case 2 Filing Status Joint Joint Personal Exemptions 3 3 Ordinary Income 255,000 255,000 Adjusted Gross Income 255,000 255,000 Itemized Deductions 32,000 37,900 Standard Deduction 11,600 11,600 Taxable Income 211,900 206,000 AMTI Net of Exemption 188,050 188,050 Schedule or Table Tax 47,402 45,750 Alternative Capital Gains Tax 46,752 45,100 Tentative Minimum Tax 48,504 48,504 Federal Withholding & Estimated -50,000-50,000 Net Federal Tax -1,496-1,496 State Tax 8,277 8,027 State Estimated & Withholding -12,500-12,500 Total Net Tax Liability -5,719-5,969 11-27-11 : 1:17 p.m. Page: 1
2011 Tony and Susan Client Itemized Deductions Case 1 Case 2 65 or Over? N/A N/A Medical Expense 0 0 AGI Floor -19,125-19,125 Net Deductible Medical 0 0 Other Net Personal Casualty Loss 0 0 10% of AGI -25,500-25,500 Net Deductible Casualty 0 0 State Income Taxes 12,500 12,500 Total State Income Taxes 12,500 12,500 Qualified Vehicle Tax Phased-out N/A N/A Total Income & Vehicle Sales Taxes 12,500 12,500 Higher Tax Amount 12,500 12,500 Property Taxes:Residential 3,500 3,500 Property Taxes: Investment 0 3,500 Other State & Local Taxes 1,000 1,000 Qualified Residence Interest 15,000 15,000 Apply 1998 Tech Corr Casualty Rule Yes Yes Miscellaneous Investment Expenses 0 0 Other Miscellaneous Expense 0 7,500 2% of AGI -5,100-5,100 Net Deductible Miscellaneous Expense 0 2,400 Total Itemized Before Floor 32,000 37,900 Medical, Casualty Inv Int & Gambling 0 0 Itemized w/o Med, Caslty, & Interest 32,000 37,900 3% AGI Floor Post 1990 0 0 Itemized After Floor 32,000 37,900 Total Itemized 32,000 37,900 11-27-11 : 1:17 p.m. Page: 2