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.”
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.”