Outlook 2011, Tax Planning: Big Changes From Tax Bill; Extended Deadlines

New rules from tax bill offer opportunities for advisors to counsel clients; a holiday extends filing deadline to April 18

More On Tax Planning

from The Advisor's Professional Library
  • Selected Provisions of the American Taxpayer Relief Act of 2012 The experts of Tax Facts have produced this comprehensive analysis of selected provisions of the American Taxpayer Relief Act of 2012 (the Act) to provide the most up-to-date information to our subscribers. This supplement analyzes important changes to the tax code with emphasis on how these developments impact Tax Facts’ major areas of focus: Employee Benefits, Insurance, and Investments.
  • Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.

As 2011 begins, there are multiple provisions in The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted on Dec. 17,  that wealth managers and their clients will want to know about and take action upon now. Many of these are excellent reasons to have substantial planning conversations with clients. These are the main considerations:

Taxpayers will have three extra days to file this year, returns are due Monday, April 18, because of Emancipation Day, a holiday on Friday, April 15, that's observed only in Washington. 

Foreign-Account Holders Beware

The IRS warned individuals that had “foreign accounts to properly report income from these accounts and file the appropriate forms on time to avoid stiff penalties," according to a bulletin on Jan. 4. IRS Commissioner Doug Shulman stated: “The IRS has made important strides at stopping tax avoidance using offshore accounts,” adding, “We continue to focus on offshore tax compliance and people with offshore accounts need to pay taxes on income from those accounts.”

Cap Gains and Dividends

The tax on capital gains and dividends, which was to rise to 20% for 2011, was kept at  the current 15% for 2011 and 2012, according to a CCH Special Report released Dec. 28, the “2010 Tax Year-In-Review.”

Business Owners

Clients who own businesses have until Jan. 31, 2011, to implement the payroll tax cut "holiday" that reduces the OASDI tax for employees from 6.2% to 4.2%. The payroll tax cut affects every employee, and is effective on the first $106,800 in wages—providing employees with savings of up to $2,136 for 2011, according to the IRS. Tables for the “Percentage Method of Withholding” are available from the IRS.

Heirs to 2010 Estates Have a Retroactive Choice

Heirs of those who died in 2010 will have a choice to make in 2011 about the tax on assets in those 2010 estates. After the sunset of the estate tax on Dec. 31, 2009, there was no “estate” tax during 2010, but there was a capital gains tax on the estate’s assets, based on a sometimes difficult-to-comply-with “modified carryover basis.”

Now heirs can choose to use either the “modified carryover basis” for the estate’s capital gains or an estate tax that has a higher, $5 million exclusion and a stepped-up basis that is the new provision for the estate tax for 2011 and 2012, according to the December “Personal Planning Strategies,” newsletter from Proskauer. Assets over the $5 million exclusion have a maximum tax rate of 35%. The size of the estate will matter in which choice would be most beneficial to the heirs. For examples of how this would apply, see “Clarity Comes to Estate Planning With Tax Bill's Passage.

Estates in 2011

The estate tax comes back for 2011 and 2012 with a $5 million exclusion, ($10 million for married couples) and a 35% top estate tax bracket. The exclusion is “portable” so that if one spouse dies and doesn’t use the entire $5 million exclusion, the other spouse can combine the remainder with their own $5 million exclusion, according to Proskauer.

Gifts to Children

The gift tax will “reunify” with the estate tax for 2011 and 2012, Proskauer explains in its newsletter. The lifetime gift exclusion climbs to $5 million ($10 million for couples), and a maximum tax rate of 35% for assets above that exclusion limit.

Incentives Return, Retroactively

Other tax “incentives” that had expired at year-end 2009 are back for 2011 and retroactive to 2010, according to the CCH report. These include: “Tax-free distributions from IRAs to charity; state and local sales tax deduction; teacher's classroom expense deduction; and higher education tuition deduction.”

Later Filing in 2011?

The IRS also notes that, because it is catching up with late-breaking developments from the tax bill, filers with “three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns. In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid- to late February to file as well. “

The delay affects:

  • Taxpayers who itemize deductions on Schedule A.
  • Those claiming the Higher Education Tuition and Fees Deduction.
  • Teachers who claim the Educator Expense Deduction.

The IRS said Jan. 4 that it would announce a date soon, “when it can start processing tax returns impacted by the recent tax law changes. In the interim, taxpayers affected by these tax law changes could start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes. Additional information will be available at www.IRS.gov."

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