Posted: October 31, 2011
Six timely tax tactics for uncertain times
What does the future hold for 2011 and beyond?Bruce Hemmings
What does the future hold for US taxpayers in 2011 and beyond? While there's no crystal ball to accurately answer that question, it's likely that Congress will tackle our taxes now that the midterm elections are behind us. And, with current tax and legislative headwinds trending toward higher personal income tax rates, it's time to talk taxes with your financial advisor and your tax professional. Together, you can evaluate ways to potentially minimize your current tax situation and fend off future tax exposure-before 2010 ends.
Six Timely Tax Tactics for Uncertain Times
1. Capital Gains and Losses
With nearly every area of individual taxes in limbo right now, the typical considerations-the ones that guide using your current and past gains and losses to help in minimizing your current and future tax exposure-become magnified.
Your tax professional can run a preliminary analysis of your 2010 tax situation. He or she can look at carryovers of tax losses and advise you as to whether any potential losses on depreciated securities would be more valuable in 2010 or in future years.
2. Portfolio Allocation
The volatile financial markets may have thrown your portfolio allocation out of line. Year-end is a good time to check your asset allocation, and-just as importantly-to reassess your long- and short-term goals in light of any changes in your life and the financial markets.
Review your existing financial plan with your Financial Advisor-or create a plan for the first time. Once you have reviewed your goals, you can work together to access the investment expertise of the Morgan Stanley Smith Barney Global Investment Committee, which regularly publishes recommended asset allocation strategies for many investment objectives.
High-income investors now have the opportunity to convert assets from a Traditional IRA or employer-sponsored retirement plan to a Roth IRA. With a Roth account, the retirement assets you are working hard to build now will one day become retirement income, free of tax.1 3
To help you decide whether a Roth IRA makes sense for you, your Financial Advisor can prepare a Roth Conversion Analysis. This report will show you the after-tax potential future value of your IRA balance, comparing the outcome of your current Traditional IRA with that of a Roth IRA. You'll also be able to see the wealth planning advantages of "stretching" a Roth IRA over multiple generations and the benefits of including income from the conversion over the next two years.
With the current tax and legislative environment pointing toward a trend of higher personal income tax rates, consider the advantages of a Roth conversion in 2010. You'll have the option of paying the conversion taxes now, at a potentially lower rate, or spreading the tax payment across two years by including half the income in 2011 and half in 2012 at rates in effect in those years.
4. Gifting to Individuals and Charities
After 2010, unless there is legislation to the contrary, estate taxes are scheduled to return to rates that are higher than they have been for many years. If you plan to leave an estate to your heirs, you may want to strategically transfer assets this year, free of gift tax, rather than later, when they may be subject to the higher estate tax rates.
• In 2010, you can gift up to $13,000 ($26,000 for a married couple) free of gift tax to an individual or noncharitable entity. You can accelerate your gifting in the current year; for instance, by contributing to a 529 college savings plan you can remove up to $130,000 (jointly) from your taxable estate.
• If you want to use appreciated stock to make a charitable donation, do so before year-end to qualify for a potential income tax deduction this year and avoid paying any applicable capital gains taxes on the appreciation. You can also arrange to contribute long-term appreciated stock to a donor-advised fund, which is a relatively low-cost, flexible way to manage charitable giving.
5. Tax Credits
If you made energy-saving improvements to your home this year or purchased a new home by April 30, 2010, (if you entered into a binding contract by April 30, 2010, you needed to close (go to settlement) on the home on or before Sept. 30, 2010), you may be able to claim a tax credit that could reduce your tax liability dollar-for-dollar.
Review your receipts for home improvements with your tax professional to see if you qualify for these credits.
6. Business Owners
Like individuals, business owners need to prepare for possible tax increases. They may also be affected by the Small Business Jobs Act of 2010, which extends the depreciation bonus for a year, among other provisions.
• Business owners may want to revisit certain strategies-including when to take capital gains and losses and whether or not to make installment sales-in light of possible tax increases.
• The extension of the 50 percent depreciation bonus may allow some companies to preserve or increase cash flow by reducing their current tax liability.
• If your company has a 401(k), 403(b) or 457(b) plan, you may be able to offer employees the opportunity to convert their existing retirement account to a Roth account. Review your plan document or check with your attorney or your plan provider to see if this is an option under your plan.
1. Distributions of earnings are tax-free if made at least five years after the year of the taxpayer's first Roth IRA contribution and after age 59½ or due to death, disability or for a first-time home purchase. Withdrawals of contributions are not taxed.
2. No further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the same five-year period, and the transfer must be reported as a series of five equal annual transfers. If the donor dies within the five year period, a portion of the transferred amount will be included in the donor's estate for estate tax purposes.
3. If you already have a Traditional IRA with pre-tax dollars (i.e. deductible contributions, rollovers from qualified plans), you should consult your tax advisor about the aggregation rules that will apply if you convert any Traditional IRA to a Roth IRA.
Bruce Hemmings is a Senior Vice President - Wealth Management and Financial Advisor at Morgan Stanley Smith Barney at Centerra. He can be reached at firstname.lastname@example.org or (970) 776-5501.
The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.
Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein.