Year-End Tax Strategies Advisors Can Still Recommend to Clients

Yes, charitable donations, but also gifts to children, for medical care and education

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As year end approaches, there are still a few days to take advantage of some tax and estate planning opportunities that will end with the stroke of midnight on Dec. 31.  The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 created a few atypical year-end action items for some wealth managers and their clients.

Aside from the usual tactics such as realizing losses on securities, donating to charities and maxing out 401(k) and IRA contributions, here are a few, significant, others:

Generation-Skipping Transfer Tax—in 2010, Zero; in 2011, 35% 

For clients who wish to transfer substantial assets to grandchildren, there is a giant tax savings to be had for doing that in 2010. According to the December “Personal Planning Strategies,” newsletter from Proskauer, the Generation-Skipping Transfer (GST) Tax rate for 2010 is zero. This is newly confirmed in the Tax Relief Act. A gift of $100 million to a grandchild in 2010 would result in a net $65 million to that grandchild. But if you wait until Jan. 1 2011, the net transfer to that grandchild would be $44 million—so for a gift that large, the savings is more than $20 million, according to Ben Ledyard (left), director of wealth strategies at Silver Bridge. For details and examples, see Generation-Skipping Tax: How to Save $20 Million Before 2011.

Give Generously to Children

Gifts to children in 2010: Depending on clients’ long-term intent, and gift amount, it may make more sense to give to children in 2010 or wait until 2011. In addition to the annual gift exclusion of $13,000 per individual (or $26,000 per couple), there is the $1 million lifetime exclusion that applies for gifts made in 2010, with a 35% max tax rate for amounts above that. There are also “unlimited transfers for medical expenses and tuition for education without any gift tax consequences if the transfers are made directly to the health care provider and educational institutions, respectively,” according to Proskauer. If clients’ lifetime giving intentions fall under that amount, then 2010 gifts may be the way to go.

But if clients plan to give more than $1 million to their children, waiting until 2011 may be preferable, as it would make the new Tax Relief Act limits applicable. These “reunify” the gift and estate tax provisions. In 2011, the amount clients can exclude is much higher, $5 million for individuals and $10 million for married couples; above those exclusion amounts, a 35% maximum tax rate would apply, Proskauer’s newsletter states. In that case, you may want to wait until 2011 to make the larger gifts.

Roth Conversion and 2010 Treatment For distributions to taxpayers by Dec. 31 2010 and “deposited into a  Roth IRA by March 1, 2011, the taxpayer is treated as having made the rollover or conversion in 2010,” according to the CCH 2010 Tax Year-In-Review. The 2010 conversion provides the taxpayer with “a choice either to recognize the income on the conversion in 2010 or, under a default provision, allow it to be recognized evenly over 2011 and 2012.” Taxes on the conversion “should come from nonretirement assets. If a taxpayer intends on using funds from  the amount rolled over, the withdrawal is subject to a 10% penalty, in addition to the tax, if the taxpayer is under age 59½ and not disabled,” the CCH report states.

Alternative Minimum Tax

Be aware that the Alternative Minimum Tax (AMT) exemptions are higher for 2010 and that the AMT Patch in the Tax Relief Act “allows taxpayers to offset their AMT liability by the full amount of their nonrefundable personal tax credits in 2010 and 2011,” the CCH report notes. For 2010 the exemption is now “$47,450 for single individuals, $72,450 for married couples and surviving spouses, and $36,225 for married individuals filing a separate return.” 

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