You probably just barely recovered from finishing your 2010 income tax returns and facing your personal income tax liability. In order to help you get a jump on 2011, we want to highlight some tax savings opportunities that you may be able to take advantage of as you plan for the current tax year.
Income Tax Provisions
The following provisions were created or extended as a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Act”):
- Maintaining the long term capital gains and dividend tax rate at 15%
- Allowing 100% bonus depreciation allowance for equipment placed in service between September 8, 2010 and December 31, 2011
- Permitting a Section 179 deduction for property placed in service up to $500,000
- Reducing the employee-paid portion of payroll taxes by 2%, which also means that self-employed taxpayers will be subject to employment taxes at an aggregate 10.4% up to the applicable wage base ($106,800)
- Permitting taxpayers to elect through 2011 to deduct State and local sales taxes in lieu of State and local income taxes
Thus, taxpayers should consider – particularly as the President and Congress debate balancing the budget and future tax reform – taking advantage of some of these opportunities. For instance, taxpayers who have appreciated stock positions might liquidate the stock in order to recognize the capital gain at the current preferential rate of 15%. Also, taxpayers with closely held businesses that have foregone paying dividends to avoid paying income tax on the distribution, should consider declaring and paying a dividend to take advantage of the reduced income tax rate (of 15%) on dividends. Additionally, taxpayers operating businesses should be aware of the availability of bonus depreciation and Section 179 deductions to place equipment in service – or upgrade computers and software.
Opportunities with IRAs
A few other opportunities, specifically with regard to Individual Retirement Accounts (IRAs), are available to taxpayers. First, through the end of this year (2011), a taxpayer over the age of 59 ½ may direct the distribution of up to $100,000 from their IRA to a qualified public charity, with such amount counting toward the taxpayer’s required minimum distribution, but being excluded from the taxpayer’s taxable income. While the taxpayer will not receive a charitable deduction for the donation, the exclusion of the distribution from taxable income provides a greater income tax benefit. For taxpayers who have required minimum distributions to satisfy and with charitable intentions, they should strongly consider taking advantage of this limited opportunity.
Also, as noted in our fall Tax Alert, as of January 1, 2010, the income limitations on the ability to convert a traditional IRA to a Roth IRA were eliminated. Thus, any taxpayer may elect to convert a traditional IRA account to a Roth IRA. Qualified distributions from a Roth are not included in gross taxable income and there are no minimum distributions from a taxpayer’s Roth IRA. However, contributions to a Roth IRA are not deductible, and the value of the traditional IRA account that is converted is included in the taxpayer’s taxable income in such year and subject to income tax at current rates. Even with a resulting current tax liability, the conversion may be worth considering if you assume that income tax rates will increase in the future. Thus, by converting to a Roth IRA, it may be possible to “lock in” a lower effective tax rate. Also, by converting a portion of an IRA to a Roth IRA, a taxpayer has “diversified” their IRA assets by providing the opportunity to take distributions from a Roth IRA, which are not subject to income tax, in order to minimize the overall income tax in a given (future) tax year.
Special Provision Affecting S Corporations
C corporations that made an election to be taxed as an S corporation may be subject to tax on the sale of appreciated assets owned at the time the S election is made – the “built in gain tax.” The built in gain tax is imposed upon the sale of an asset within a prescribed time after the S election is made – generally 10 years. However, in 2011, this period is reduced to five years. What this means is that for an S corporation with appreciated assets potentially subject to the built in gain tax, if the S election were made effective 2006 or earlier, the appreciated assets could be sold in the current year (closing prior to December 31, 2011) without the imposition of the built in gain tax. Because the 10-year period is scheduled to become effective as of January 1, 2012, S corporations and their shareholders should consider selling assets that otherwise would be subject to the built in gain tax in the current year.
We hope that this information is helpful to you and we encourage you to contact us if you have any questions on how you might best take advantage of these tax provisions.