Summary: Every year in May CPAs from all over the country flock to Las Vegas to attend a tax conference (what did you expect they’d do in Vegas, we’re talking about CPAs). The program, “Tax Strategies for the High Income Individual” is one of the best programs of the year and attendees can glean great planning ideas form scores of expert speakers. Remember Watergate? Well, an undercover operative hired by Practical Planner has pulled off what we’ll call “Welch Gate.” We planted a hidden camera in the offices of Julie Welch, CPA, one of the key speakers at the conference, and bring to you below some of the best tips from the handout materials for the program before the conference takes place! Allen Funt couldn’t done it better.
◙ Partnership Basis Adjustments. A partnership (or an LLC taxed as a partnership) can elect under Code Section 754 to increase (step up) its tax basis. Example: LLC owns a wig business worth $2M but the LLC’s tax basis is only $1M. Jones owns ½ the LLC and dies. Jones’ heirs want to step up their interest in the wig business so if it sold they can avoid a tax haircut. Great planning step. Carol Cantrell of Briggs & Veselka. General partners and managers sing the old Simon and Garfunkel tune: “Slow down you move to fast…” You can always amend the partnership tax return and make the election at a later date. But once the election is made it cannot be changed without IRS consent. Err on the side of caution, if you want to be feeling groovy.
◙ Expensing of Business Assets. CPAs are genetically programmed to latch onto tax bennies like a pit bull on a soup bone. But, tax planning is now about the “new normal,” and that means new strategies. John Connors, Tax Educator Network. Code Section 179 lets you write-off immediately up to $250,000 qualifying property placed into service in 2010, but only $25,000 after 2010. Tangible (e.g., a chair not a contract right), personal (not an essential or immovable part of a building) property. If you don’t have adequate business income to use the write off, it may not be advisable to claim. Everyone thinks that rich folk (income over $100) will be subject to higher tax rates. Higher tax rates might make the depreciation deductions you get in future years more valuable than a current deduction under 179.
◙ C instead of S. This is like a remake of Back to the Future, for accountants. Everyone has organized new businesses as LLCs for years. Folks with S corporations feel left out. Income and deductions flow through to your personal return. But with individual marginal tax rates rising, corporate tax rates possibly declining to help businesses, businesses other than professional service corporations, might wish to convert S corporations to C corporations. John Connors. LLCs might retain hard assets like real estate but incorporate the active business operations. As a C corporation the perquisites of owners will get better treatment too.
◙ Long Term Care Insurance. Like Staples, “That was Easy.” But too many people don’t address it in their planning. Martin Finn, CPA of Lavelle & Finn. Check out a possible federal and state tax deduction or credit for the purchase. Get creative. Evaluate the role of permanent life insurance as part of long term care planning. Life insurance can enable your heirs to recover what was paid for your health care costs so it is perhaps another approach to replenish the estate.
◙ Funding Junior. Consider an ongoing aggressive gift program so that once a child attains age 18 they can fund over ½ their support. Their income won’t be subject to the Kiddie Tax and will be taxed at lower rates. Janet Hagy, CPA of Hagy & Associates. Don’t trust junior use Richard Oshins, Esq.’s favorite -- a beneficiary defective trust (BDIT). Crummey powers can make the child taxable as the grantor of a trust funded by mom and dad.
◙ Don’t Forget Fido. Pet lovers don’t forget to plan for Fido (sorry Elvis!). Pet lover Rachel Hirschfeld, Esq.. Critters are considered property in the eyes of the law, even if you treat Fido better than your son. Consider setting up a trust to care for Fido after you’re gone.
◙ A Moving Experience. Evaluate whether your old or new state has a better tax rate and sell appreciated stock accordingly. Vern Hoven and Sharon Kreider. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no income taxes. If you’re selling out a really large position, is it worth moving first? Pension withdrawals may offer similar planning opportunities.
◙ Smart Charity. Planning a charitable bequest under your will? Consider making the gift now to remove the asset from your estate plus garner an income tax deduction. Lawrence Katzenstein, Esq., of Thompson Coburn. With no estate tax, or if the $3.5 million exclusion is reinstated, few people will pay an estate tax. Update your durable power to permit payment of the intended bequests during your lifetime to obtain an income tax deduction when there is no estate tax deduction. If the gift is to be a prepayment of the bequest in the will, be certain that the documentation confirms that fact.
◙ Employee Savings. Occasional business trips to states other than where you reside could trigger income tax filing obligations in those states. Mark Klein, Esq. of Hodgson Russ, LLP. Worse, if you don’t file on time you could lose the ability to claim a credit for tax paid to that other state on your home state income tax return, you could be whipsawed between two state tax systems taxing the same income, and you could face criminal charges. Ouch! If you’re getting a payment on ending your employment and moving, analyze how a severance payment based on past services, versus one buying out remaining contract rights, might be taxed by each state.
◙ Estate Planning Nirvana. Most advisers are obsessed with maximizing valuation reductions for gift and estate tax purposes using discounts for lack of marketability and control. But the estate tax Holy Grail is really the leverage obtained from using grantor trusts over long time. Estate Guru Richard Oshins. With grantor trusts the grantor pays the income tax on earnings which inure to a trust for the named beneficiary. Stephen Siegel, The Siegel Group.
◙ S Corporations. If an S corporation is engaged in more than one type of business, distribute each business into a wholly owned S corporation subsidiary (affectionately, a Qsub) or an LLC. These will be disregarded for tax purposes, but you’ll insulate the liability of each business from the other and prevent a domino effect. Sydney Traum, JD, CP.
◙ Business Tips. If your business exports, look into using an IC-DISC to benefit from dividends taxed at a low 15% (proposed to be changed to 20%) instead of ordinary income tax rates. If you use an equity arrangement to compensate a key executive and values are out of whack by year end you can unwind the transaction if you do so during the same tax year. Carolyn Turnbull, CPA of Moore Stephens Tiller, LLC.
◙ Deductions. Maximize net operating losses by identifying business related deductions like income taxes, interest and professional fees. Rev. Rul. 70-40. If you’re suing try to characterize settlement proceeds as non-taxable as relating to physical injury. IRC Sec. 104. Structure settlements as employment discrimination and related matters so that the legal fees can be deducted from adjusted gross income (AGI), called “above the line.” Otherwise legal fees will be subject to limitations and reductions that might reduce or eliminate them entirely.
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