Legislative Update: Federal Tax and Additional Provisions

EisnerAmper 2010 Private Wealth & Family Office Summit

Today’s Speakers

Tom Earley, Tax Partner, Closely Held Businesses

Brent Lipschultz, Tax Partner, International Wealth Advisory Services

Barbara Taibi, Director, Personal Wealth Advisory Services

Observations: 2010 Mid Term elections

• Shift in Republicans and Democrats in the House and Senate

• Leadership: Senate and House Majority and Minority

• House Ways and Means and Senate Finance Committees

• Legislative Calendar to December 31

• Possible 2010 Legislative Action

• Other Comments

Possible Tax Increase in 2011

• If Bush Tax Cuts Expire December 31, 2010 Tax Liabilities Increase for Most Americans. In 2011 -

– Top individual rates increase from 35% to 39.6%

– Long term capital gain rate increases from 15% to 20%

– Top dividend rate increases from 15% to 39.6%

– Gift tax rates increase from 35% to 55%

– Estate tax top rate of 55%

– Estate tax exemption of $1 million

– Generation skipping transfer tax returns

• Social Security and Medicare tax will increase for certain taxpayers in 2013

2010 Action Steps: Considerations Presuming Tax Rates Are Increasing in 2011

• The Following Comments are Fact Specific

• Accelerate income to 2010, Delay Deductions to 2011 – Exercise stock options, accelerate bonuses

– Avoid compensation deferrals to post 2010

– Sell long term assets (real estate, investment assets, business interests); 15% tax rate on gain

– Redeem savings bonds for interest at lower rate

– If decision made to convert to a Roth IRA, consider 100% income recognition in 2010. Part 2010 recognition may be an alternative

– Rollover provision of 401(k) to Roth 401(k)

– IRA distributions in excess of required minimum distributions

– Short sale against the box

– Delay deductions until 2011 when tax rates increase

2010 Action Steps: Considerations Presuming Tax Rates Are Increasing in 2011

• Other Issues to Consider

– The 3% haircut (reduction) of certain itemized deductions returns in 2011

– Deductions can be limited up to 80% of the total

– Observation: The 3% limitation does not exist in 2010; accelerate charitable contributions into 2010 and deduct 100%

• Alternative Minimum Tax

• State and Local Income Tax, and Adjustments to Federal Income

Accelerate Dividend Income Into 2010

• 2010 C-corporation Dividends and Tax Rates

– 15% for qualified dividends, or

– 0% to extent the income of a married couple filing jointly does not exceed $68,000, $34,000 if single or married filing separately, and $45,500 if head of household

– 2010 C-corporation distribution is treated as

• (i) taxable dividend to the extent of a Company’s current or accumulated earnings and profits (E&P), then

• (ii) tax-free basis recovery in excess of E&P, then as a

• (iii) capital gain to extent basis is exhausted

Accelerate Dividend Income Into 2010

• No Corporate Deduction for Dividend Distributions – Could be a benefit if planning to convert to an S-corporation

• Future Dividends Could be Taxed at a 39.6% Rate in 2011

– And up to 43.4% in 2013 when the 3.8% net investment surtax under the Health Care Act is effective

• Other Favorable Effects With 2010 Dividend Distributions

– Reduce Accumulated Earnings Tax for the Company

– Establish a dividend paying record so that future compensation paid will be easier to defend as reasonable compensation

– Minimize exposure to personal holding company rules

• Discuss Opportunities With Shareholders, Prepare Distribution Resolution documentation

2010 Small Business Jobs Act

• 50% Bonus Depreciation

– Effective for the full year in 2010, expires December 31. Applies to all asset purchases

– Estimated tax may be overstated in 2010 since extension of bonus depreciation was not known until September 2010; review 4th quarter estimates

2010 Small Business Jobs Act

• Section 179 Expense

– 2010 deduction increased from $250,000 - $500,000

– Phase –out increased from $800,000 to $2 million

– Qualified Real Property allowed for Section 179 expense

• Review 4th quarter 2010 Projections

– Opportunity to reduce tax considering purchases and Section 179 rules

2010 Small Business Tax Act

• Small Business Credits

– 2010 allows general business credits from eligible small businesses to offset Alternative Minimum tax

– Eligible small businesses include

• non-publicly traded corporations, partnerships and sole proprietorships whose gross receipts are under 5 million for last 3 years

2010 Small Business Tax Act

• Qualified Small Business Stock (QSBS)

– Can now exclude 100% of gain on QSBS acquired between 9/27/2010 and 1/01/2011, and where held for 5 years

– Applies to both regular and AMT tax

– Applies to non-corporate taxpayers

2010/2011 Gift and Estate Tax Update

• 2010 – no estate tax but only limited step up of assets, $3 million to spouse and $1.3 million to others

• 2011 – $1 million exemption and 55% top rate

– Possibility of retroactive estate tax legislation

– Bipartisan support for $3.5 million exemption and 45% top rate

2010/2011 Gift and Estate Tax Update

• Gift Tax

– Lowest rate in decades - 35% top gift tax rate and NO Generation Skipping Tax

– Use 2010 annual exclusions, make gifts before December 31

• Better to pay 35% gift tax in 2010, remove asset and tax paid from the estate, avoid 55% estate tax (on the asset gifted) in the future

• Qualified Disclaimer if retroactivity of gift tax reinstatement is a concern

2010/2011 Gift and Estate Tax Update

• Generation Skipping Transfer Tax Trusts (GSTTs)

• If trust distributions are subject to GST tax you need to think about making distributions in 2010; no GST tax

– However, if congress retroactively reinstates the gift or GST tax in 2010, these distributions would be subject to the tax

– Consider Qualified Disclaimer as solution

• If setting up new Dynasty trusts exercise care. As there is no GST in 2010 it is possible distributions may then be subject to GST in future

• GRAT’s – very attractive due to low AFR rates (2% in November), and with depressed property values

Closing the Tax Gap: The Impact on Individuals and Families

• Tax Gap Estimated to be $345 Billion

• What is Government’s Plan to Reduce Gap ?

– Increase of Holistic Audits through Global High Wealth Industry Group (“Wealth Squad”)

– Offshore Financial Accounts and Voluntary Compliance Programs

– Security (stock) basis reporting effective January 1, 2011

– Payments made to Corporate Vendors will require reporting beginning in 2012

– Economic Substance Doctrine codified and effective in 2010

– Reporting of uncertain tax positions for corporations

Closing the Tax Gap: Minimizing Your Exposures

• How to Protect Your Nest Egg

– Review Transactions Documentation. Document Business Purpose and Economics of Transactions

– Maintain workpapers, including bank statements, for 6 years

– Review entity(ies) compliance

– Obtain valuations for asset transfers

– Review personal balance sheet and entities to determine compliance with foreign information reporting; seek counsel if deficient

– Review 1099 reporting systems and prepare for 2012

– Companies with assets exceeding $100 million (in 2010) should seek tax counsel to assist in disclosure of uncertain tax positions

International Trends and Issues:The Globally Mobile Family and Individual

• Steady decline of foreigners obtaining US work visas

• Many Americans exiting foreign banking institutions

• Increase in international assignment program costs by an additional 1% beginning in 2013 due to Medicare Hospital Insurance Tax

• IRS forming a special task force to examine tax returns claiming foreign earned income exclusion claims

• Continuing IRS voluntary compliance programs despite formal program closure in October 2009

• New reporting requirement in 2011 for individuals who hold more than $50,000 in “specified foreign assets”- this supplements the FBAR reporting

International Trends and Issues:The Globally Mobile Family and Individual

• 2011 reporting requirement for individuals holding more than $50,000 in “specified foreign assets” (an additional FBAR reporting)

• New proposed FBAR regulations (not yet finalized)

• 30% net withholding tax on payments to foreign entities beginning in 2013, on payments of certain US source income when made to a foreign financial institution

• U.S. citizens and long term green card holders relinquishing their citizenship or green card may be subject to an “Exit Tax”

• Statute of limitations remains open, and increased reporting penalties, for failure to file international returns

• U.S. high net worth investors focusing increasingly on both direct investments and fund-based investments in emerging economies such as PRC, Brazil, Central Europe, and elsewhere

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.

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