2011 Tax Changes: Facts, Opportunities And Lessons

Amid widespread concern about 2011 tax increases, Congress surprised taxpayers in late December by actually reducing taxes for the next two years. What should a prudent person do now, and what can we learn from the evolving tax legislation?

While income tax changes for 2011 do not ultimately have much impact on high-net-worth taxpayers, new transfer tax rules have the potential to dramatically reduce their tax burdens.

Gift And Estate Tax Changes

Facts

In recent years, the gift and estate taxes have not been unified. This meant that while an individual could leave a $3.5 million estate to his heirs without incurring any transfer taxes, he could make lifetime gifts of only $1 million before paying gift taxes, which recently ranged as high as 45 percent.

The two transfer taxes have been reunified, and the transferable amount has increased. In 2011 and 2012 only, individuals can transfer up to $5 million free of transfer taxes, either during their lifetimes or at death. If the first spouse to die does not transfer this amount to third parties, the executor can make an election on the estate tax return to allow the surviving spouse to take advantage of the unused portion. This feature, known as portability, does not apply to the amount exempt from the generation-skipping transfer tax, which affects transfers to recipients who are more than one generation below the transferor.

These changes significantly reduce the number of individuals the gift and estate taxes will impact for the next two years. However, it’s prudent to remember that the current rules apply only through the end of 2012.

Opportunities

For many people, the ability to transfer more wealth without incurring tax will shift the focus of estate planning from primarily financial motives to a greater emphasis on non-financial goals. Individuals now have more flexibility to decide who should receive which assets, and whether those assets should pass in trust or outright, without regard to the tax consequences.

The new rules also make lifetime transfers much more appealing. Because the rules are not permanent, and predicting future legislation is nearly impossible, it may be prudent to transfer as much as possible now. Under current legislation, on January 1, 2013 the $5 million that can be passed free of transfer taxes will revert to $1 million, and the top transfer tax rate will increase to 55 percent from 35 percent.

While saving tax can be a great motivator, some still hesitate to make large lifetime gifts. However, doing so can provide the donor with the additional pleasure of seeing the recipient enjoy the gift. If there is any concern about giving large amounts outright to beneficiaries who might not be ready to handle the associated responsibility, trusts can help control the beneficiaries’ access to the funds.

For the highest of high-net-worth individuals, the decision to make lifetime gifts should be easy. For wealthy individuals with fewer assets, the decision to give can be more difficult. A financial planner can run various cash flow projection scenarios to determine an appropriate amount. By considering adverse scenarios, which assume low investment returns, high spending and long life expectancies, a financial planner can help clients determine a minimum amount to retain in order to avoid outliving their assets.

Although married couples can bestow a total of $10 million free of transfer taxes, they can also use a variety of techniques, such as intra-family loans to grantor trusts, grantor retained annuity trusts, charitable lead trusts and transfers of family limited partnership interests, to greatly increase the amount of assets transferred.

Even individuals who have no intention of making gifts during the next two years should review their estate plans to ensure that their objectives are being met, given the recent changes in the law. Many estate plans developed under the old rules would, under the new rules, place more money than necessary in trusts that impose unnecessary restrictions on the assets. But if you change your estate plan, keep in mind that the law currently keeps the new rules in place only through 2012.

Lessons

Many planners, including those of us at Palisades Hudson, recommended that clients consider making taxable gifts in 2010 to take advantage of the 35 percent gift tax rate that was scheduled to increase to 55 percent in 2011. In our case, we waited until the end of the year before having our clients make any taxable gifts. This strategy proved very helpful, because when the law was changed in December, it became advantageous to delay making any taxable gifts until at least 2011. We advised therefore our clients to wait.

At the end of 2009, few anticipated that large estates would face no estate tax at all in 2010. Within the last few years, estates with very similar sizes and structures have incurred wildly different estate tax liabilities.

Given this uncertainty and tendency toward rapid change, it is important that estate-planning documents give executors as much flexibility as possible.

Income Tax Changes

Facts

The biggest news in income taxes for 2011 is not what has changed, but what has stayed the same. If the Bush-era tax cuts had expired, the top federal income tax rate would have increased to 39.6 percent from 35 percent, and the long-term capital gains tax rate would have increased to 20 percent from 15 percent.

The existing income tax rates have been extended through 2012, and although the Making Work Pay tax credit (up to $400 for individuals and $800 for married couples in 2010) has expired, a cut in payroll taxes resulted in an increase in most people’s take-home pay. For 2011 only, the Social Security withholding rate, which applies to the first $106,800 of earned income, has decreased from 6.2 percent to 4.2 percent. This cut means that, as long as a taxpayer earns more than $20,000, she will have more money in her pocket each week during 2011 than she did in 2010.

These changes, together with other small modifications to certain deductions, tax credits and miscellaneous tax rules effective in 2011, will have little overall impact on the average high-income earner. However, for self-employed individuals, a number of tax changes affecting small businesses could substantially reduce current tax burdens. The Wall Street Journal has compiled a detailed account of the 2011 changes and tax extensions, available here.

Opportunities

By extending existing income tax rates through 2012, the government provided some certainty to individuals who converted their traditional IRAs to Roth IRAs during 2010. A special rule, applicable in 2010 only, allowed taxpayers to defer the tax on 2010 IRA conversions by reporting half of the income in 2011 and half in 2012. This option was much less appealing when income taxes were scheduled to increase in 2011. Now, all else being equal, the option to spread the tax over 2011 and 2012 should be the choice for most taxpayers.

A traditional tax-planning strategy involves accelerating deductions and delaying income to minimize the amount of taxable income in the current year, and thus postpone tax payments. Conversely, when tax rates are scheduled to increase, accelerating income and delaying deductions becomes the appropriate game plan. To the extent possible, taxpayers should try to shift income to 2011 and 2012 and delay deductions until 2013. Deductions are worth more when taxes are higher, and gross income is worth less.

Despite the tough stock market from late 2007 through early 2009, investors who diligently sold positions at a loss and reinvested in similar securities to maintain their market exposure now have huge unrealized gains in many of their positions. Planning to sell these investments before 2013 could be a logical strategy in many cases. In addition, taxpayers migh

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The 10 Minute Income Tax Tune-Up

Are You Needlessly Over-paying Your Income Taxes?

The “Ten Minute Income Tax Tune-Up”

Income Taxes (hereafter IT) generally are the largest single bill in your life. They are a BIG annual and non-amortizing expense. Income taxes comprise 30%-40% of your daily labor, ’till the day you die. Income taxes are thus The Forever Bill.

But IT are also, by definition, a variable expense. IT can, and must, be proactively monitored and managed throughout the entire course of the year. A tax plan is always a part of your business plan. Makes sense, right?

The following IT Savings Worksheet illustrates a gross income of $1 million. But the entire $1 million is taxable ordinary income. Ouch. The Tax Man cometh. It’s not what you earn. It’s what you keep. The 8 simple steps below will save you big money:

Tax Tune-Up / Tax Savings Worksheet

1. Gross Income: $1,000,000.00

2. Gross Business Expenses: $400,000.00

3. Net Business Income Before Taxes: $600,000.00

4 Tax Bracket – 40%

5. Lifestyle Costs $200,000.00 – Your personal expenses.

This $200,000 is after-tax consumption, and is NOT tax-deductible.

6. Reportable Gross Income: $333,000

Lifestyle Costs divided by the inverse of your tax bracket. In Florida, your Income Tax Bracket is a maximum of 40%. The Inverse of your bracket is.60. Divide.60 into your Lifestyle Costs, which is #5 above. This is the Gross Income that you must report on your Personal 1040 Tax Return to live the $200,000 lifestyle that you have chosen in # 5. So, the correct Gross Income on your Personal 1040 is: $333,000.00

Please note that Step 6 is The Key: Only bring home the pre-tax $333,000 that is needed to pay for your after-tax lifestyle costs of $200,000.

7. Amount available for Pre-Tax Savings (#3 minus #6): $267,000

8. IT saved in this example: $106,800.00

Number 7 above x 40% (combined state and federal tax bracket).

In this hypothetical example, you paid $133,200 in IT (40% x Reportable Income of $333,000). Before this Tax Tune-Up, you were going to pay $240,000 in IT (40% x $600,000). But, instead of reportable Income of $600,000, you reported $333,000, and left $267,000 in the corporation as pre-tax income. By keeping $267,000 in your Corporation pre-tax, you have saved $106,800 of otherwise-lost IT dollars. (40% x $267,000).

You then add this 106,800 of “soft” tax dollars saved… to your “hard”, after-tax dollars of $160,200 (60% of $267,000). This equals a 66% rate of return, tax free ($106,800 / $160,200). Recapturing 40% In “dead” tax dollars on your net, after-tax 60% is a 66% rate of return, tax-free. All because you reported $333,000 of income, just enough to pay for your $200,000 lifestyle costs, while keeping the remaining $267,000 in your Corporation.

The instant that you utilize IT Reduction as part of your Business Plan… You earn a 66% tax free rate of return. This 66% rate of return is “instant” the moment that you deploy the $267,000 into a legal tax deduction inside your Corporation.

The happy ending for you is that you continue to lead the lifestyle that you want ($200,000). We simply did NOT bring $267,000 out of your corporation as taxable income. You reported income of $333,000, not $600,000. That saved you forty percent on $267,000 of Income = $106,800. The non-reportable $267,000 was put to work inside your Corporation in a legitimate tax-deduction that became an Asset. Converting otherwise-lost “dead” tax dollars into Assets. Simple, Legal, Smart.

Think about it: You just made 66%, instantly, and tax-free. There is no reporting of income. You simply “recaptured” otherwise-lost IT dollars. That’s not a taxable event. That’s just smart business. By recapturing “dead” IT dollars, you add forty cents of new-found “soft” money to your “hard,” after-tax sixty cents; and that earns you sixty-six percent, tax-free. In the end, your Corporation has an Asset, instead of a cancelled check from the IRS.

Call me at 772 – 643 – 4850 if you have questions about this math and would like me to do The Ten Minute Tune-Up for you. Also ask me for my free Guide to Tax Free Investing.

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Tax Reform’s Points of Reference

The suggested ways in modern times to balance concerns with efficiency, equity and administrative simplicity and reliability referring to tax systems have evolved considerably. Remarkably, the system of voluntary compliance yields not a very high percentage of tax revenue liabilities actually due, especially when viewed relative to other countries. That speaks not very well of Albanians’ tax system basic values. But there is episodic concern, that the system of voluntary compliance will be decreasingly effective over time and the nation will be driven to transactions taxes unless a strong tax system replaces the current tax system.

According to that concern I have some standards that may be applied to tax reform proposals for my country.

1. Will tax reform improve the performance of the economy?

By far the most important aspect of economic performance is the rate of economic growth because that growth determines future living standards. The most important way the tax system affects economic growth is through the rate of saving, investment, entrepreneurship and human capital investment.

2. Will tax reform affect the size of government?

Tax reforms that more closely tie the payment of taxes to expenditures will promote a more effective and efficient government. A new large broad-based VAT, may just be piled on top of the existing taxes and used to raise revenue to grow government. This is what has happened in many European countries and is a major detriment to their economic performance.

3. Will a new tax structure affect cooperation between local and central tax powers?

Tax reforms can affect the tax system in many ways. Some types of tax reforms would implement taxes heavily relied on by state and local government, e.g. retail sales taxes (or VAT). We should favor those that strengthen central and devolve authority and resources to state and local government and private institutions to the extent possible.

4. Will a new tax structure likely endure?

We have had 5 major tax reforms or fundamental tax reforms in the last two decades, approximately one in every legislature. We should be concerned that we might move to a better tax system only to undo it shortly thereafter. In 1993, the trade-off was lower rates for a broader base. That was slightly undone in 1998, and dramatically so in 2003, whereas in the last three years, rates have been reduced. A more stable tax system would reduce uncertainty and, in its own way, be less complex.

5. Over time, will tax reform contribute to a prosperous, stable democracy?

Are we likely to see a change in the ratio of taxpayers to people receiving income from government? We now have a much higher ratio of people who are net income recipients to people who are taxpayers than in any previous time in our history, reflecting not only transfers but other features of the income tax itself. Fortunately, that number is still well under 50 percent. But as we move through time, as the retired population grows, the baby boom generation and Albanian emigrants abroad approaches retirement and then retires, the fraction of the population in any given year who are receiving more than they are paying will grow. We must deal with this both on the tax side (underground economy, chary of too many off the income tax rolls) and, especially, on the transfer payment side and do so soon, or we will get into a spiral of higher benefits, higher tax rates, a weaker economy, and ever-greater political conflict between taxpayers and transfer recipients.

Key decisions for design tax system

With these standards (questions, we can ask in designing a tax system, what are the major decisions that need to be made?

There are four decisions: the choices of tax base, tax rate(s), the unit of account and the time period of account (see insert). We outlined above why it is important to keep the rate(s) as low as possible to minimize the distortions to the economy.

What about the tax base?

It is generally understood that a pure income tax would tax saving twice: first when it is earned as part of income and again when it earns a return in the form of interest or dividends. An alternative way to think about this is that present consumption is taxed once while future consumption is taxed twice because the bulk of saving is done for the purpose of future consumption, for example, during retirement.

Most fundamental reforms are designed to redress the severe distortion of saving and capital formation caused by the current system of income taxation. Most other countries rely much more heavily on taxes on consumption so-called indirect consumption taxes such as sales taxes and value-added taxes and income tax systems that exempt large amounts of saving from the tax base – thereby leaving most households’ tax base as income minus all saving (i.e., only that part of income that is consumed). Most of their corporate taxes have various features that allow more rapid write-off of investment.

Now consider the separate corporate and personal income tax and a individual putting his saving in corporate equities. The individual first pay taxes on his own income, their consumption plus saving. That is tax one. He save some of that after-tax income in the form of corporate equities. But the corporation pays corporate taxes (on behalf of the family as a shareholder). That is a second tax. Then the individual pays taxes again when it receives dividends or capital gains (in this case one has to net out inflation, deferral, the possibly lower tax rate, incomplete loss offset, and so on to determine the true effective tax rate). That is a third tax on the saving. If the individual is fortunate enough to accumulate over its lifetime enough to leave a taxable estate, the saving may be taxed a fourth time. Of course, there are numerous exceptions to this rule.

The empirical studies developed in last two decades by finance experts, strongly endorses an (explicitly or implicitly) integrated business and personal tax which taxes broad consumption at low rates. There are several approaches to implementing such a system.

What is likely to be gained by moving to one of these tax systems? Will it be worth the substantial political capital and transition costs to various families, firms, industries, and economic disruption that accompany any major tax change? The answer, in my opinion, is that the gains are potentially quite large. Some of these experts estimates long-run gains in consumption of 10% from replacing the current corporate and personal income taxes with a broad-based, direct or indirect tax on consumption or consumed income. This occurs because the increased saving and capital formation increase wages and future income. These are large potential gains, on the order of a decade’s worth of per capita consumption growth.

It is hard to find another policy reform with that large a potential payoff. In this regard, the recent rate reductions and dividend and estate tax relief are steps in the right direction. If a fundamental overhaul of the tax

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Increasing The After Tax Income Of Your Early Education Increasing The After Tax Income Of Your Early Education Company

Most US tax payers overpay their taxes.
The 2015 IRS tax code has 74,608 pages, and it is constantly changing.
You should always pay your tax bill.
You should never pay a bill that isn’t yours to pay.
Here’s how it works.

Don’t just send your numbers to your CPA firm and wait to get your tax news. I’m involved in conversations with the owners and executives of early education companies most every day. Many times I hear that these smart, successful people are not telling their CPAs about expenses that can be written-off on their company tax returns. Here are some of the most commonly missed.

1. Software / Subscriptions:

In some years, the IRS has allowed this item to be expensed in one year. In others, it has been allowed under Depreciation. If you are trying in increase the market value of your EEC (Early Education Company), ask your CPA if it can be included in Depreciation. Part of increasing the market value of your EEC (Early Education Company), is creating the highest EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) possible. Subscriptions to magazines can be deducted as well. It may not seem like a lot of money to worry about, but none us drive down the street throwing $100 bills out the window. Tell your CPA. Keep the money.

2. Auto Expense:

You have three options here.

1. Mileage – This is an easy one to skip, because nobody wants to keep up with it. However, the IRS allows write-offs for mileage, tolls and parking. The 2015 IRS mileage reimbursement rate is 57.5 cents per mile.

2. If your company is leasing a car for you, you can deduct the lease payments.

3. If your company is buying the car, you can deduct the interest on the car loan and depreciation on the vehicle.

3. Home Office:

The key to this one is that you must have a room or part of a room that is designated solely as your office. Your CPA should ask you what percentage of your home is “office space”. If, for example, your office equals 10% of the total square footage of your house, then your CPA should also write-off 10% of your rent or mortgage, insurance, utilities… etc.

4. Furniture:

Office-furniture purchases can be expensed or depreciated. Either way, it’s still better for you. Again, adding it to depreciation increases your EBITDA and helps to increase the market value of your EEC.

5. Office Supplies:

Most people remember the supplies purchased for the centers or schools, but not everyone keeps receipts for the supplies used at the home office. It’s easy to overlook these supplies because they are sometimes purchased in smaller quantities when you’re running personal errands. However, paper, pens, sticky notes add up over a year.

6. Office Equipment:

At work or in the home office, printers, copiers, computers, scanners, routers, fax machines, power strips are also tax deductible. Again, these items can be expensed in one year or depreciated over a few years… whatever is best for you.

7. Travel / Meals and Entertainment:

Hotel rooms travel (plains, trains and automobiles) and tips to your cab driver or the bellboy are all 100% deductible. Restaurant bills are 50% deductible.

8. Insurance:

Your EEC can pay for your health insurance, and it is 100% deductible. There are conditions here, but ask your CPA.

Remember, a dollar saved is the same as a dollar earned. You work really hard for your money. There is no reason to give it away after you’ve done that hardest part of the work.

(Legal Disclaimer: Always consult the proper professionals before taking action. By and before the use of the information provided herein, reader agrees that BFS┬« is not responsible for viewer’s actions related to said information.)

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Tax and Financial Strategy for Canadians – Donate, Recover Your Taxed Income and Invest

An early start in your tax and financial planning will Canadian taxpayers to save money that later serves to invest wisely. Learning about tax credit opportunities in the beginning of the year as part of your financial planning can make you save money later on. Tax planning always involves taking decisions early that later will have a n effect in how much money do you save. One way to save in taxes and give your financial planning a boost is with the “Donate, recover your taxed income, and invest” strategy.

This strategy can help you to keep more of your hard-earned dollars and boost your family’s net worth. The Income Tax Act allows Canadian taxpayers to make donations to registered charities and then claim up to 50% of the amount donated. If you take advantage of a donation, your tax refund will increase as much as twice the size you thought it was. It lets you to recover close to 30% of our salary income withheld by the government as income tax. It is like having a raise every year of 30%.

Personally, part of our tax and financial planning has been participating with Mission Life Financial, helping us to finance AIDS pharmaceuticals donated to a registered Canadian charity. After hours of research, analysis and due diligence, I decided to take part in this tax saving strategy with the following very successful results: In 2008, I got a tax credit of Cdn$8,977.23, and in 2009, the tax credit was Cdn$8,544.24. For 2010 I already donated and I’m expecting a tax credit close to Cdn$21,729.

The questions you might have now are: What we’ve done with this money? How much of these money has used to fuel our financial planning strategy? How much our net worth has increased? I’ll tell you that the 2008 tax credit helped me to juggle the economic downturn where, thanks God, I became unemployed; therefore, we didn’t do any investment. With 2009 tax credit, I learned how to invest in tax liens in USA and started investing in tax liens in Indiana’s commissioner’s sales. We foreclosed in 4 properties, and today, our net worth increased exponentially. With 2010 tax credit, we are planning to do the same: Invest in tax liens.

Managing and building personal wealth is very important and can start with this excellent tax and financial planning strategy. Having the funds available for investment purposes it’s often a challenge but participating in a tax saving program like Mission Life Financial could be the mean of freeing capital or cash that otherwise is not available. Donating, recovering your hard-earned income, and invest; again and again, year after year, it’s very simple and an easy strategy to do. If I have been able to do it, any Canadian taxpayer can do the same. It is not rocket science. It is decision taking action.

Nancy Rojas invites you to read and learn more about tax refunds and t

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