4. Maximize 2010 income and capital gains. For many taxpayers, the long-term federal capital gains tax rate is scheduled to increase from 15% to 20% on January 1. Additionally, unless Congress acts, the top income tax rate is scheduled to increase from 35% to 39.6%-a 4.6% increase. Qualified dividends will be taxed as ordinary income, instead of at the 15% rate, so some taxpayers would pay nearly 40 cents (versus the current 15 cents) on a dollar of dividend income.
Clients can take advantage of current lower rates by selling securities and other property that has appreciated in value before year end, by accelerating taxable income into this year and by delaying deductions whenever possible. Retired clients may consider taking distributions in excess of the required minimum this year to take advantage of current rates.
5. Take advantage of the Small Business Jobs Act. The Small Business Jobs Act includes several provisions that can benefit business owners and investors.
Increased IRC Section 179 expense limits. Effective through 2011, businesses that purchase qualifying property under IRC Section 179 can expense up to $500,000 during the year of purchase, up from $250,000. In addition, taxpayers can place into service up to $2 million in property before the $500,000 begins to phase out. The definition of qualified property was expanded to include qualified real property. Up to $250,000 of the total $500,000 which can be expensed under Sec. 179 can be qualified real property. Qualified real property includes, qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property. There are limitations and planning opportunities which should be explored prior to year-end.
Extended bonus depreciation. The additional 50% first-year depreciation deduction that was in effect for 2008 and 2009 was extended for one year for qualified property acquired and placed in service during 2010. Certain long-lived property and transportation property placed in service during 2011 will also qualify.
Business credit carry-back enhancement. For 2010, privately held companies will be able to carry back, for up to five years, unused general business credits to offset both regular and alternative minimum tax liabilities. Only those companies that have average annual gross receipts, for the three-tax-year period preceding the tax year, of no more than $50 million can qualify for this provision.
Small business stock exclusion. In general, no regular tax or alternative minimum tax will be imposed on the sale of qualified small business stock issued and acquired between September 27, 2010, and January 1, 2011, if the stock is held for at least five years.
S Corporation built-in gain. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for ten years or face a built-in gain tax at the highest corporate rate of 35%. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to five years if the fifth tax year in the holding period precedes the tax year beginning in 2011.
In Summary
While these suggestions can help reduce the blow of a potential tax increase, any major changes your clients consider making should be reviewed in the context of their overall financial goals and objectives.
For example, investors who are considering investing in a small business are likely to want to make the investment now and take advantage of 100% relief from capital-gains taxes rather than wait until next year, when the tax break drops to 50%. But investing in a business is a decision not to be taken lightly and investors are unlikely to rush into it just to take advantage of the tax break.
Likewise, individual taxpayers will need to review their personal goals carefully. For example, converting a traditional IRA to a Roth IRA may be a good idea for some taxpayers, but may not be for those who are close to retirement and do not have a long period during which their earnings can grow tax free. Conversions are also not recommended for those who lack the means to pay taxes on the conversion.