FEDERAL TAX LAW UPDATE FOR 2010

Tax Rates

2010 2011Ordinary Income 35% 39.6%

Capital Gain 15% 20%

Qualified Dividends 15% 39.6%

AMT

2009 2010Exemption Amount 70,950 45,000

(joint filers)

AMT Rate: 26-28%

Healthcare Legislation – How Will We Pay for It?

H.R. 3902 5.4% surtax on AGI > $500,000

(1 MM for joint filers)

Senate 40% excise tax on insurers of “cadillac plans”

additional 0.9% payroll tax on wages over 200k

Business Tax Breaks

50% bonus depreciation ended 12/31/09

Section 179 – Cap EX may be expensed up to $134k (down from $250k in 2009)

5-year carryback for 2008 and 2009 for business tax losses

Deferral of Business COD

Applies only to debt forgiven during 2009 or 2010

Deferral until 2014 with 5 year spread

Election required by borrower

Insolvency exception still applies

Employer Owned Life Insurance

Life insurance proceeds in excess of basis are taxable

Exceptions Insured is employee within 12 months of death Insured is HC or director at time policy issued Payable to insured’s family / beneficiary Used to purchase equity of insured

Notice and Consent Must be writing Prior to issuance of policy

COBRA Subsidy

65% subsidy for COBRA coverage for involuntary terminated employees between September 1, 2008 and February 28, 2010

Employer claims credit against payroll taxes

Home buyer $8,000 Tax Credit

Extended to purchases of principal residence closing before May 1, 2010

Also applies to purchases that close prior to July 1, 2010 if purchase agreement is signed prior to May 1, 2010

Phases out starting with AGI of $125,000 for individual filers (AGI of 225,000 for joint)

IRA Distributions to Charity

$100,000 exclusion expired 12/31/09

House has passed extension through 2010

Nonspouse Beneficiary Rollovers

Starting 2010 plans required to permit nonspouse beneficiaries to elect transfer to IRA

60 day roll over rule does not apply

Required Minimum Distribution

Required Beginning Date

2009 Waiver

2010 RMDs recommence

Family Limited Partnership

Device to gift assets to next generation at substantial valuation discount

Independent Business Purpose required

Best if used to gift interests in family business

Foreign Financial Account Reporting

Signature authority / beneficial interest in foreign financial accounts

Aggregate value in excess of $10,000

FBAR due June 30 of succeeding year

October 15, 2009 was due date under IRS Voluntary Disclosure Program

IRS Audit Rates

1% of individuals

3% of individuals with income of $200,000

6.5% of individuals with income of $1 million

Schedule C (sole proprietorship) attract IRS audits

Conventional and Roth IRAs

TAX TREATMENTConventional IRA – Deduction upon contribution and taxed as ordinary income when funds

withdrawnRoth IRA – No deduction on contribution and no tax upon withdrawal

INCOME RESTRICTIONSConventional IRA – None, if not in an employer sponsored plan. If in employer sponsored

plan, $65,000 (ind.), $109,000 (Married Filing Jointly)Roth IRA – $120,000 (ind.), $176,000 (Married Filing Jointly)

CONTRIBUTION RESTRICTIONS - $5,000/yr. ($6,000/yr. if over 50)Conventional IRA – cannot contribute if over the age of 70 1/2Roth IRA – can contribute until death

MINIMUM REQUIRED DISTRIBUTIONS (MRD)Conventional IRA – starting April 1, in the year after turning 70 1/2Roth IRA – no MRD

Conversions of Conventional IRA to Roth IRA

No income restrictions (previously $100,000)

Conversion triggers income tax

Conversions in 2010 can have income recognized 50% in 2011 and 50% in 2012, or all in 2010

Highest marginal income tax rate is currently 35%

Highest marginal income tax rate is scheduled to be 39.6% in 2011

Factors to Consider in Conversions

Rising tax rates

Lower income levels now

Higher rates of return

Longer time frame before withdrawals

Need to withdraw during lifetime

Exposure to State and Federal estate tax

Purpose of conversion (personal or for children)

Ability to pay tax outside of retirement assets

Use of loss carryovers or charitable deduction carry forwards

Recharacterization

Can be completed up until the date the tax return is

due (including all extensions) if reported on the return

Suggestion: Create multiple Roth IRAs broken up by asset classes to retain the “winners” and recharacterize the “losers.”

Recharacterization will be eligible for conversion in year following the first conversion and not until 30 days after the recharacterization

Tax upon the Disposition of Life Insurance

Revenue Ruling 2009-13 and 2009-14

Rev Rul. 2009-13

Situation #1 – A is the insured, the beneficiary is member of A’s family, A had incidents of ownership (right to change beneficiary, take loan, surrender policy). Surrendered for $78,000 which included $10,000 of “cost of insurance” deductions taken by insurer through the date of surrender. Premiums of $64,000 had been paid.

Income is $14,000 ($78,000 - $64,000).

It is ordinary income.

Tax upon the Disposition of Life Insurance

Rev Rul. 2009-13 (cont.)

Situation #2 – A is the insured, the beneficiary is member of A’s family, A had incidents of ownership. $78,000 cash surrender value, $64,000 in premiums paid and a $10,000 cost of insurance. The policy is sold to B (unrelated to A) for $80,000

Insurance with cash value consists of investment and insurance components. Cash value is value of the investment characteristic, and the cost of insurance is the value of the insurance portion. Basis for taxpayer is the premium paid ($64,000) minus the cost of insurance ($10,000). Result is a gain of $26,000 ($80,000-$54,000).

Of that $26,000, $14,000 is ordinary income ($78,000-$64,000), the balance is capital gain.

Tax upon the Disposition of Life Insurance

Rev Rul. 2009-13 (cont.)

Situation #3 – A is the insured, the beneficiary is member of A’s family, A had incidents of ownership. Policy was 15 year term no cash surrender value. Premiums were $45,000 ($500/monthly). Policy was sold to B (unrelated to A) for $20,000.

Basis is the amount paid minus the cost of insurance. Cost of insurance is presumed to be the premium for term policies. In this case the sale occurred half way through the month, so the “basis” was $250. Income is amount paid minus unused premium so there is a $19,750 of income.

There was no inside build-up of value, so no ordinary income. All of the income is capital gain.

Tax upon the Disposition of Life Insurance

Rev. Rul. 2009-14

Situation #1 - A is the insured of a 15 year level term policy ($500/mo. premium). B purchased the policy from A for $20,000 with 7+ years remaining on term. B has no risk of economic loss at A’s death, no insurable interest in A’s life and the policy was purchased by B as an investment. B pays $9,000 in premiums before A dies and B is paid the death benefit of $100,000.

The sale from A to B is a transfer for a valuable consideration. The exclusion from income is limited to actual consideration paid ($20,000) and any amounts paid thereafter ($9,000). Therefore B’s exclusion is $29,000 out of $100,000 and he has $71,000 of income.

The $71,000 is ordinary income, not capital gain.

Tax upon the Disposition of Life Insurance

Rev. Rul. 2009-14 (cont.)

Situation #2 – A is the insured of a 15 year level term policy ($500/mo. premium). B purchased the policy from A for $20,000 with 7+ years remaining on term. B has no risk of economic loss at A’s death, no insurable interest in A’s life and the policy was purchased by B as an investment. B pays $9,000 in premiums. A does not die, instead, B sells to C (unrelated to A) for $30,000.

B paid $20,000 for the policy and $9,000 in additional premiums, so his basis is $29,000. The income therefore is $1,000 ($30,000-$29,000).

Because B has purchased the insurance as an investment, it is a capital investment and therefore the income is capital gain.

Situation #3 – Same as #1 except B is foreign corporation.

The results are the same as Scenario #1, there is $71,000 worth of ordinary income to the corporation.

New Estate Tax Law

HR 436 – 1/9/2009, $3.5million unified credit, 45% tax rate, eliminate FLLP discounts

HR 498 – 1/14/2009, 15% capital gains permanent, $5 million unified credit by 2015 plus inflation, portability

HR 2023 – 4/22/09, $2 million unified credit, restore state tax credit, raise rates on large estate, portability

Taxpayer Certainty and Relief Act of 2009 – 3/26/2009 - $3.5 million unified credit plus inflation, 45% tax rate, make numerous EGTRRA tax cuts permanent, portability

Lincoln-Kyl Amendment to the Senate budget bill – 4/1/09 - $5 million unified credit, 35% tax rate, portability

Pay-As-You-Go Bill – 6/17/09, $3.5 million unified credit, 45% tax rate

HR 4363, HR 533, HR 205, HR 99 all call for repeal of estate tax effective 1/1/10.

2010 Budget

Disclaimer

IRS CIRCULAR 230 DISCLAIMER: To the extent that this written communication may address certain tax issues, this written communication is not intended or written to be used, and cannot be used by any persons to avoid any potential tax penalties that may be asserted by the Internal Revenue Service. In addition, this communication may not be used by anyone in promoting, marketing or recommending the transaction or matter addressed herein.