2010 Year End Tax Planning

This year end is bringing numerous challenges on tax planning. If Congress does nothing to the tax law, which right now appears unlikely, nearly everyone will pay higher taxes on the same income in 2011. So, the normal strategy would be to accelerate income and delay expenses. However, since we have no idea what Congress and the President may do, anything along that strategy is pure guess work.

There are a few items, however, worth considering. Now, please understand this, I barely know enough to complete my own taxes and I always tell others to check with their own tax advisor as each person’s situation is different. So, please, check with your tax advisor about these issues to make certain they apply to your situation. These items listed below are with a little help from my friends at BKD and PWC.

  • Consider converting your IRA to a Roth. You have the option of changing your mind later on as well as defer paying the tax on the conversion over the next two years.
  • If your estate is large enough, consider making tax free gifts of $13,000 ($26,000 for married couples) to family members or others
  • Consider making large taxable gifts, since the gift tax rate in 2010 is relatively low at 35% versus the maximum rate which is scheduled to be 55% in 2011.
  • Since there is no Generation Skipping tax in 2010, consider outright gifts to grandchildren.
  • Consider low interest rate loans to family members since the applicable rates are so low.
  • Be careful about the timing of paying state taxes. A significant change in income from one year to the next could create a large AMT issue if state income taxes are properly included in any year end planning.

I have been involved in the sale of numerous businesses over the years. There are a number of tax issues that were challenges to the deal that could have been resolved if adequate planning had taken place before the sale. Typically, a 2-3 year head start before the sale can make a significant difference in the amount of net proceeds to be received in a transaction. And it’s never too early to start thinking and working with the end game in mind.

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