What a (Tax) Relief: Congress Temporarily Averts Huge Tax Increases

After waiting until almost the last minute, Congress averted tax increases that would have affected taxpayers at all income levels and added some 15 million lower-income workers to the tax rolls.1

Had Congress not passed the 2010 Tax Relief Act (H.R. 4853), tax rates for income, capital gains, dividends, and estates would have reverted to higher pre-2001 levels in 2011. Rates for these taxes were reduced in 2001 and 2003 but were subject to a December 31, 2010, expiration date because of the political climate at the time. The new law pushes their expiration dates to December 31, 2012.

Despite the uncertainty created by yet another temporary tax law, there are many encouraging provisions that result in some of the most favorable tax conditions Americans have seen in a generation.

What’s New and What’s Not?

One-year payroll tax cut. Employees may notice slightly more take-home pay in 2011 because the employee’s share of the Social Security payroll tax has been temporarily reduced from 6.2% to 4.2% of income (on up to $106,800 in taxable wages). The employer’s share (6.2% of an employee’s pay) did not change. For the self-employed, the Social Security payroll tax has been reduced from 12.4% to 10.4%.

Estate tax revival. Although the federal estate tax is back after being repealed in 2010 (for one year only), the new parameters are more generous than those that had been scheduled for 2011 (a $1 million exemption and a 55% top tax rate).

For individuals who leave behind an estate before December 31, 2012, assets in excess of a $5 million applicable exemption will be subject to a top rate of 35%. Married couples who take the appropriate steps may be able to pass up to $10 million tax-free to their heirs.

The new law also brings back the stepped-up basis rules, which allow heirs to calculate their basis in an asset according to its value on the date of inheritance. Heirs who inherited assets in 2010 can elect to use the modified carryover basis rules that were in place for that year (meaning they must calculate capital gains using the decedent’s basis) or they can apply the new $5 million exemption and 35% top rate and use the stepped-up basis rules.

Gift tax reunified with the estate tax. Gifts in excess of the donor’s $5 million lifetime exemption are subject to a maximum 35% rate.

Itemized deductions for high incomes. The repeal of the so-called Pease limitation, which reduces the use of certain deductions for taxpayers with incomes in excess of certain levels, has been extended through 2012.

No phaseout of the personal exemption. High-income taxpayers will be allowed to claim the full personal exemption through 2012. Prior to 2010, the exemption was phased out for taxpayers with incomes in excess of certain thresholds.

Two more years of AMT relief. Middle-income taxpayers may be able to avoid the alternative minimum tax for at least two more years. The AMT was crafted in 1970 to keep wealthy taxpayers from using exemptions and deductions to avoid income taxes, but it has started to affect less affluent taxpayers because the limits aren’t indexed to inflation. The new exemption amounts for 2010 and 2011 are $47,450 and $48,450, respectively, for single filers ($72,450 and $74,450, respectively, for married taxpayers filing jointly).

Capital gains and dividends. Long-term capital gains and qualifying dividends will continue to be taxed at a 0% rate for individuals in the 10% and 15% income tax brackets and at a maximum 15% rate for other taxpayers. After 2012, long-term capital gains will be taxed at a maximum 20% rate and dividends will be taxed as ordinary income.

Income taxes. The 2010 Tax Relief Act includes a two-year extension of the income tax rates that have been in effect since 2003.

These are just the highlights. Several other provisions have been extended. Before you take any action, consult your Naperville tax preparation advisor for information about your situation.

1) The Wall Street Journal, December 17, 2010


The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Related articles

• Death in the Family (turbotax.intuit.com)
• Summary of Federal Tax Law Changes for 2009-2017 (turbotax.intuit.com)

Getting Something for Giving

Americans are very generous when it comes to causes they believe in. In fact, donations by individuals accounted for 75% of the $307.7 billion given to charity in 2008.1 Religious groups, educational institutions, and grant-making foundations were among the top donation recipients.2

If you are interested in making the most of your own charitable gifts, setting up a charitable trust may offer your family and your favorite charity some benefits that you hadn’t considered.
Charitable Remainder Trust

A grantor who places money, securities, property, and other assets in a charitable remainder trust can designate an income beneficiary, even if it is the grantor herself, to receive payment of a specified amount (at least annually) from the trust. At the end of the trust period, which can be for a certain number of years or for the rest of the grantor’s lifetime, the designated charity receives the “remainder” assets, as the name implies.

One key benefit of this strategy is that if the trust is properly executed, you can donate highly appreciated assets without incurring a capital gains tax liability. This may enable you to leverage your gift by donating that portion of the asset value that might otherwise have been consumed by taxes. You may also qualify for an income tax deduction on the estimated present value of the remainder interest that will eventually go to charity.
Charitable Lead Trust

A charitable lead trust takes a nearly opposite approach. The grantor places assets in the trust, which pays an income to the charity. At the end of the trust period, the remaining assets are paid to the grantor or the grantor’s beneficiaries. This can help reduce, or in some cases even eliminate, estate taxes on appreciated assets that eventually go to the grantor’s heirs. The appeal here is that the family can use the assets that might otherwise create a tax liability to benefit a charity without ultimately surrendering control of the assets.

Bear in mind that donations to both types of trusts are irrevocable; therefore, the assets cannot be withdrawn once the trusts are formed. Not all charitable organizations are able to use all possible gifts. It is prudent to check first. The type of organization you select can also affect the tax benefits you receive. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate conservation professional before implementing such strategies.

Charitable trusts may help your charity of choice while also providing you with potential tax benefits. Call today to discuss your need for a planned giving strategy. Susan S. Lewis Ltd, a Naperville Accounting Firm,  endorses the Illinois Charity, www.ShowersOfHope.org, an Illinois Not for Profit dedicated to helping children in need.

1–2) The Wall Street Journal, November 9, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.

Related articles

• Charitable Contributions (turbotax.intuit.com)
• Video: Deducting Charitable Contributions (turbotax.intuit.com)

Searching for Your Ideal Risk Tolerance

Feelings Are Important but Other Considerations Should Guide Decisions

A survey of U.S. households found that about two-thirds were willing to assume some investment risk in order to earn a return. For example, 35% said they were comfortable assuming an average risk burden for an average gain. Another 22% said they would be willing to take above-average or substantial risk as long as the return potential was also above average or substantial.1

These are unsurprising answers. Many people base their ideas about risk tolerance on subjective standards — their feelings — without considering whether their personal circumstances would either exaggerate or mitigate the risk inherent in a particular investment. Feelings are important, but they should play only a supporting role when deciding how much risk is appropriate for your situation.

Nonetheless, if your portfolio is overexposed to risk, your feelings may be your first indication. For example, what was your reaction to the “flash crash” in May 2010? On that day, a trading anomaly caused the Dow Jones Industrial Average to plunge nearly 1,000 points.2 If this event struck terror in your heart, it’s a good indication that you may be carrying too much risk.

Here are some other indications that you could be overexposed to risk.

A large percentage of your net worth could disappear overnight. This is where it’s easy to see that risk tolerance is a personal consideration that extends far beyond the risks that are specific to a particular investment. Consider two hypothetical investors: One has a $5 million net worth; the other’s most significant asset is $100,000 in his 401(k) plan. Each makes a $50,000 investment in the same security. Even though the investment itself poses identical risks to these two individuals, the millionaire is assuming far less risk because even a total loss would amount to only 1% of his net worth. The other investor is taking on needless extra risk by exposing half of his retirement assets to the fate of a single security.

You would need to sell some of your investments to cover a personal financial emergency. If you were faced with a large, unexpected expense and would need to liquidate some of your investments to cover it, it’s probably an indication that you are in over your head.

There are many considerations when evaluating how much risk is appropriate for your portfolio. We can help you evaluate your risk tolerance as it changes over time. Please contact us at 630-548-9600 for additional Naperville Wealth Management options.

1) Investment Company Institute, 2009
2) The Wall Street Journal, May 19, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.

Related articles

• Investing 101: Defining Your Risk Tolerance (mint.com)
• Wealth Matters: An Optimistic Start to Investing in 2011, With Caveats (nytimes.com)

Time to Get Back to RMDs

If you took advantage of the temporary reprieve that allowed you to skip required minimum distributions from traditional IRAs and employer-sponsored retirement plans in 2009, be aware that no such exemption exists for the 2010 tax year. The deadline for taking required minimum distributions for 2010 is December 31, 2010.

Even if you didn’t take advantage of the opportunity to skip your RMD in 2009, you may want to keep reading. Failing to take the appropriate minimum distribution from tax-deferred retirement plans carries one of the highest tax penalties in the tax code.
What Is an RMD?

Tax-deferred retirement vehicles allow participants to defer paying current taxes on their contributions and earnings until they begin taking withdrawals, generally in retirement. To ensure that investors d
on’t postpone their income taxes indefinitely, the tax code stipulates that they must begin taking RMDs from traditional IRAs and qualified retirement plans after reaching age 70½ or face a tax penalty equal to 50% of the amount that should have been withdrawn.

The amount that must be withdrawn in 2010 is calculated based on the account owner’s life expectancy (generally based on an IRS uniform lifetime table) and the account balance(s) on December 31, 2009.
One Time Only

Congress suspended RMDs in 2009 to give investors time to recover from losses they may have experienced in 2008. However, Congress did not extend the suspension of RMDs beyond the 2009 calendar year.

Because RMDs are derived from complex calculations and the tax penalty for mistakes is so high, it may be a good idea to consult a tax professional before taking required minimum distributions. In the meantime, use the table to help calculate the date when RMDs must begin.

Contact Susan S. Lewis for more Naperville Tax Preparation strategies.


The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.

Related articles

• Retiring: Tax Tips (turbotax.intuit.com)
• Boost Your Retirement Savings (turbotax.intuit.com)

Understanding the Potential Benefits of Mutual Funds

Americans overwhelmingly turn to mutual funds for help in reaching their financial goals. Some 87 million investors own mutual fund shares, which equates to about 43% of all U.S. households.1


One reason for the popularity of mutual funds is the fact that they are among the most common offerings in employer-sponsored retirement plans. About two out of every three mutual fund investors own shares inside tax-deferred retirement accounts.2 But this alone may not account for their broad appeal. The fact is, mutual funds offer many attractive characteristics, including some that may help take the complexity and uncertainty out of investing.

Professional Management

Image via Wikipedia

When you purchase shares in a mutual fund, to some extent you are also buying the expertise of the fund manager and the fund management company. Fund managers carefully research, select, and supervise all the assets a mutual fund holds, buying and selling in an attempt to maximize the fund’s return based on its objectives. Although you have a certain dollar amount riding on the fund’s performance, it’s likely that the fund managers have an even bigger stake: their reputations. Of course, there is no guarantee that a professionally managed fund will not lose money.

Diversification

Of all the strategies recommended for managing risk, diversification is near the top. Mutual funds offer the opportunity to invest in a wide range of asset classes, industries, and securities. In fact, some mutual funds invest in hundreds of securities, providing a level of diversification that individual investors might find difficult — and expensive — to duplicate on their own. Diversification does not eliminate the risk of investment loss; it is a method used to help manage investment risk.

Shareholder Privileges

Mutual funds offer high liquidity and flexibility. For instance, if you decide today to redeem shares (held outside an employer’ retirement plan), your funds could be available to you as early as tomorrow. Some funds will even allow you to write checks against your account.

They also enable you to customize your portfolio and quickly make adjustments when your situation calls for reallocation or rebalancing. The return and principal value of mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

No matter what your investment objectives and long-term goals may be, it’s possible that there is a mutual fund that offers what you’re looking for. Taking advantage of the many benefits of mutual funds can help you pursue your financial goals.Start by contacting us at 630-548-9600 to find out more regarding Naperville Financial Services

1–2) Investment Company Institute, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.

Related articles

• Do You Lose Money When Investing in Mutual Funds? (thinkup.waldenu.edu)