Financial Planning Q&A with Jerry Roe

Q) What advice do you give to your clients at this time of year with respect to their tax planning?

A) Review your current tax situation and see if it is where you thought you would be.  You may need to make adjustments in your estimated tax payments if you have had stock or property sales.  Or you may need to reduce estimated tax payments if a planned event did not occur.   You may even be able to reduce taxable income by increasing your contribution to your retirement plan, whether it is an IRA, SIMPLE or 401K plan.  For businesses, we also consider capital expenditure needs and Section 179 Expense.

Q) Is there anything individuals can be doing now to minimize their potential tax burden?

A) Take a look at the tax laws now in effect and see how they pertain to your situation.  If you have been planning on selling a capital asset in the next few years, you may want to sell it in the current year to take advantage of the current low capital gain rates.  Also, you may want to group certain itemized deductions in a year to get the most benefit.  There may be energy tax credits available to you if you are planning on making improvements to your home.  Consideration should be given to Roth IRA conversions depending on income limits.  Next year income limits are lifted, and anyone can consider Roth IRA conversions barring tax law changes.  This is why it might be advisable to see your CPA now and plan ahead.

Q) In your experience, what are the most common mistakes individuals make that can negatively impact their tax situation?

A) Not seeking professional tax advice before a major transaction occurs or if a planned event does not take place.  Whether it is a sale or purchase of property or business, or timing of itemized deductions in a particular year to get the most tax benefit, consulting a tax professional could help save tax dollars. Another mistake is not making estimated tax payments in the amount calculated.  This could result in penalties and interest.  Alternative Minimum Tax applies more often as well.

Q) There has been a lot of news about changes in tax laws.  What do you think are the most likely changes that will impact annual tax planning?

A) It is impossible to predict what Congress and the President will do, but with all the emphasis on health care reform, individuals and businesses alike will have to see how these changes will impact them.  Keep an eye, too, on legislative changes close to becoming law.  You may have to rethink your tax strategies.

Q) The estate tax laws will likely change in the coming months.  Could you explain the current status of the estate tax and what is pending in Congress that may change this?

A) For 2009, the exclusion on an estate is $3.5 million.  In 2010, the estate tax is repealed, so no tax on estates; however, the basis of the deceased is carried over to the heirs.  In 2011, the estate exclusion and taxes revert back to the rates in effect in 2001.  The exclusion will be $1 million.  Many experts believe the health care and energy policies will keep Congress busy until the end of the year and no changes will come about on the estate side.  However, Senate Democrats have proposed a bill with an estate tax exemption level of $5 million, indexed for inflation with a maximum estate tax rate of 35% (current top rate is 45%).

Q) What are the tax advantages available to people who make charitable gifts?

A) A gift to a qualified charitable organization may entitle you to a charitable deduction on your income tax return if you itemize deductions.  The tax savings will depend on your individual tax bracket.  Also, donations to certain organizations may qualify for state tax credits.  Gifts of appreciated property can offer significant tax savings.

Q) There are many options for gift planning.  Could you describe just a couple of the best opportunities?

A) Taxpayers who have reached age 70 and ½ can make a nontaxable distribution of up to $100,000 from their IRA to a qualified charitable organization (QCDs).  For joint filers, each spouse can make a QCD of up to $100,000.  QCDs are limited to the amount of distribution that otherwise would have been taxable, there is no charitable deduction for QCDs and the QCD counts as a required minimum distribution.

Taxpayers can choose to donate remainder interests; this is the legal right to own property at the end of a fixed period of time or at the death of another person.  The right to own the property in the interim is an “estate for a term of years” or a “life estate.”  One of these remainder interests is a charitable remainder trust.  Generally, a charitable remainder trust is required to make annual payments to noncharitable beneficiaries for life or for a term of years and to pay the remainder to charity.  Because this transfer is irrevocable, a charitable deduction is allowed in the year of the transfer. The amount of the deduction is generally the present value of the remainder interest on the date of the gift.  Gifts of remainder interests are subject to the AGI limitations and other restrictions on charitable deductions.

In addition, consideration should be given to the type of assets you hold when making larger gifts.  Gifts of capital gain property offers certain benefits; however, it is limited somewhat by your adjusted gross income.