tax bracket Long-term capital gains rate by tax year 2007 2008, 2009 and 2010 2011 10 percent 5 percent 0 percent 10 percent 15 percent 5 percent 0 percent 10 percent 25, 28 and 35 percent 15 percent 15 percent 20 percent ]]> http://taxattorneyflorida.com/2010-capital-gain-rates-take-advantage-of-the-lower-rates/feed/ 1 http://taxattorneyflorida.com/throw-momma-from-her-private-jet%e2%80%93not-from-the-train/ http://taxattorneyflorida.com/throw-momma-from-her-private-jet%e2%80%93not-from-the-train/#comments Thu, 26 Aug 2010 19:10:20 +0000 Sarah E. Martello http://taxattorneyflorida.com/?p=171

Give Momma one more year of jet-setting!

New York Times columnist Paul Krugman famously  dubbed the Bush 2001 tax cuts the “Throw Momma From The Train Act”, because the estate tax was eliminated for just one year—2010. But as 2010 grinds on without a federal estate levy, it’s becoming clear that Krugman got it wrong.  Any Momma who would ride the rails (even the pricey Acela) probably isn’t worth shoving to a grisly demise.  It’s the Mommas flying on their private jets who need to pack parachutes or watch their backs. Without a doubt, the one- year lapse in the federal estate is a boon to heirs of the superrich. (At  least four billionaires, including George Steinbrenner have died so far this year.)  But for ordinary families, it is creating all sorts of grief and unintended consequences and might even cost some of them extra federal tax, to say nothing of lawyers’ bills.

One set of problems relates to wills that were written assuming there would be a tax; provisions  in such documents could inadvertently disinherit children or a spouse, or could subject an estate to unnecessary state estate tax.  (For more on these issues, click here. For a map showing 2010 state estate taxes, click here.)

Another set of problems relates to a trade-off Congress made in the 2001 law: In return for eliminating the estate tax in 2010, it also did away with the full “step-up” in basis for capital assets for 2010. In other years,  the basis cost of a  decedent’s capital assets–stocks, bonds, jewelry, real estate, artwork and so on– gets adjusted to its market value at his death, or six months afterward.  (The executor gets a choice.) Conveniently, that allows heirs  to sell all the property immediately with no capital gains income taxes due. But for those dying in 2010, the step-up in assets going to non-spousal heirs is limited to $1.3 million, with another $3 million in step-up allowed for assets left to a spouse.   This means some heirs of estates worth several million could end up paying more in total federal tax than they would have had their benefactor died in 2009, when all assets got a step-up in basis and the first $3.5 million of an estate going to non-spousal heirs was exempt from estate tax. (Amounts left to a citizen-spouse aren’t subject to estate tax, since Uncle Sam figures to get his when the second spouse dies.)  These moderately well-to-do families get hit with extra capital gains taxes because their benefactor died in 2010 instead of 2009, but they don’t save much or any estate tax, compared to 2009

While an unknown number of families may pay more, a greater number of them are having to shoulder a big paperwork and administrative burden.  Assuming capital assets (including a home and stocks) total more than $1.3 million, family members and executors must locate old records showing what assets were purchased for (if such records even exist) and deal with all sorts of complicated and potentially divisive issues such as which assets, going to which heirs,  get allocated the limited basis step-ups…

Considering the complicated nuances, it might be wise to keep Momma – and her private jet – around for another year.

And if that wasn’t enough, you then must decide who is worthy of receiving these precious items that seemingly reflect your indention upon this planet.   After agonizing whether or not leaving a drug-addict daughter a portion of the estate would be more detrimental than gratuitous, we throw in the towel and rationalize that we will worry about it later.

Unfortunately, none of us can cheat death.  We can pretend that it doesn’t exist, but it will be at the expense of our loved ones.  Leaving your loved ones to duke it out is never a good option–absent a twisted sense of humor.

Although daunting, the hassle, headache, and huge legal fees associated with estate planning can be avoided by following a few simple words of advice.

1. Make a list of your assets, dividing them up by category (real property, liquid accounts, family heirlooms, etc.)
2. Make a list of the people you would like to leave something from your estate
3. If there are specific things you want to give a particular person, put that item next to the person’s name
4. Think about how you envision spending your retirement days–do you want to live it up traveling the world or find a modest, comfortable retirement community

Once you have sketched out your big picture objectives, it becomes much easier to ensure that you are getting an estate plan that can carry out your wishes while eliminating unnecessary estate planning documents.

Last, shop around.  When talking to an estate planning attorney, be specific about what you need.  Get a price quote and for good measure, get another opinion.

Below is a starting point for assessing your 2010 tax situation and determining whether or not consulting a tax attorney might help you reduce your bottom line this year.

Basics

Because many tax benefits are tied to or limited by adjusted gross income (AGI) — IRA deductions, for example — a key aspect of tax planning is to estimate both your 2009 and 2010 AGI. Also, when considering whether to accelerate or defer income or deductions, you should be aware of the impact this action may have on your AGI and your ability to maximize itemized deductions that are tied to AGI.

Traditional IRAs:

Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2009 is $5,000. For 2009, a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year, making the total limit $6,000 for these individuals.

Individuals who are active participants in an employer pension plan also may make deductible contributions to an IRA, but their contributions are limited in amount depending on their AGI. For 2009, the AGI phase-out range for deductibility of IRA contributions is between $55,000 and $65,000 of modified AGI for single persons (including heads of households), and between $89,000 and $109,000 of modified AGI for married filing jointly. Above these ranges, no deduction is allowed.

Roth IRA conversions:

Regardless of income, taxpayers can convert traditional IRA accounts to Roth IRA accounts. Previously, taxpayers with modified adjusted gross income over $100,000 could not make the conversion. Also, married persons filing separate returns are now eligible to make the conversion. Note that the converted amounts are includible in income, however, for conversions taking place in 2010, a taxpayer can elect to ratably include the amount over two years in 2011 and 2012.

Lower capital gains rates:

The 15% capital gains rate (0% for taxpayers below the 15% tax bracket) will increase to 20% in 2011. Qualifying dividends taxed at reduced capital gains rates will be taxed at ordinary income rates beginning in 2011.

Lower income tax rates:

Legislation in 2001, reduced the tax rates on ordinary income through 2010.  Accordingly, these rates will likely change beginning in 2011.

2009 Tax Rates: 10%, 15%, 25%, 28%, 31%, and 35%

2010 Tax Rates: 10%, 15%, 25%, 28%, 33%, and 35%

This is the rate at which your last dollar of income is taxed. Although tax brackets are indexed for inflation, if your income increases faster than the inflation adjustment, you may be pushed into a higher bracket. If so, your potential benefit from any tax-saving opportunity is increased (as is the cost of overlooking that opportunity).