Tax considerations and planning for the new year

December 28, 2009
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The dawning of the new year is a good time to reflect on the past year and plan for the upcoming year. Some resolutions can actually be realized if the appropriate effort and planning is expended. Tax planning is no different than the other resolutions we make at the start of a new year.

One provision set to sunset Dec. 31 is the ability to make a contribution of up to $100,000 of the IRA retirement value to a qualifying charitable organization without the need to pay income tax on the deemed distribution of the funds, since the charity receives the proceeds from the IRA trustee/custodian.

This legislation was enacted in 2006 for tax years 2006 and 2007, and was then extended in 2008 for contributions made in 2008 and 2009. A current version of tax extenders making its way through Congress includes a one-year extension of this provision for 2010.

The provisions of the law enable IRA account owners over age 70½ to make tax-free distributions of up to $100,000 directly to a qualified charitable organization. The attractiveness of the provisions is that, in addition to counting toward the minimum distribution requirements, the contribution is not subject to the normal rules limiting charitable contributions as a percentage of a taxpayer’s adjusted gross income. Since it is shown above the line (as an adjustment to gross income and not deducted as an itemized deduction), the distribution isn’t taxed in states that do not consider itemized deductions in determining income subject to state income tax.

The provisions allow these distributions from Traditional IRAs and Roth IRAs, but not from SEP IRAs, SIMPLE IRAs or employer-sponsored retirement plans. Also, to receive tax-free treatment, a taxpayer’s donation must be made to a qualified charity, which doesn't include certain types of charitable giving such as gifts to grant-making foundations, charitable gift annuities and donor-advised funds.

The taxpayer’s gift must be made directly from the qualifying retirement account to the charity. If you make a qualified contribution to a charity for the 2009 tax year, a taxpayer will see this contribution as a regular IRA distribution on Form 1099-R. However, under the Form 1040, the ultimate tax reporting results in no net income attributable to the distribution earmarked as the charitable contribution.

The IRS announced recently the inflation adjustments for certain deductions, exemptions, etc. Most had little if no adjustment due to the low level of inflation experienced this past year. Personal exemptions and standard deductions for most taxpayers remained unchanged for 2010 as compared to 2009. Certain taxpayers may need to evaluate the level of the exemptions claimed for withholding tax purposes for the 2010 tax year.

The health care legislation that is in process may likely have some tax items of significance that may impact income taxes, though the final look of any package and its tax-related provisions won’t be fully known until a final package is agreed to and goes through the final legislative processes. Other tax legislation may also impact 2010 as many legislative priorities have items of tax significance within them.

For 2009, the impact of the alternative minimum tax surprising many taxpayers as the AMT patch issue does not need to be handled by Congress this December (as it has in some prior years). The 2009 AMT patch was included in the stimulus package (American Recovery and Reinvestment Act) enacted last winter. Though, even with the patch out there to help avoid the AMT application to many taxpayers, more and more taxpayers are finding themselves caught in the trap of the AMT each year.

The impact of AMT tax schedule having rates and tax base floors that were put in place in the 1986 Tax Reform Act and with not obtaining the benefit of the regular tax systems’ indexation of brackets, etc., has left this tax affecting primarily middle-income earners and not the high-earning taxpayers that it was meant to catch. Taxpayers with certain itemized deductions such as state and local income taxes as well as property taxes find themselves vulnerable to the AMT. Given the economic environment and state trying to plug budget gaps with tax increases, the AMT will likely continue to capture more taxpayers.

The onset of a new year is a good time to revaluate certain elective deductions, such as 401(k) or 403(b) deductions from wages. The inflation factors that impact social security benefits, social security taxes and retirement benefits, among other items, have resulted in a flat (no change) result for 2010, compared to 2009. That means that FICA payroll taxes (employee and employer share) will remain at the same level for 2010 as was applicable for 2009 with a maximum wage base of $106,800.

This means that for those age 49 or under that a $16,500 potential annual deferral (subject to the specific limitations) is available under a 401(k) plan or a 403(b) plan is available for an employee, and those 50 and over can elect to defer up to $22,000 (subject to the limitations and based on the regular $16,500 amount plus the catch-up amount of $5,500 for those 50 and over). IRA contribution limits remain at $5,000 for those 49 and under, and $6,000 for those 50 and older. Simple IRA limits are set at $11,500 for those 49 and under and $14,000 for those 50 and over. SEP IRA contribution limits are set at $49,000 for 2010 based on a maximum amount of earnings of $245,000.

For the 2010 tax year, the financial press has started to discuss the opportunity of converting regular IRAs to Roth IRAs. In other years, there are specific income limitations that must be met in order for a taxpayer to complete a rollover from a regular IRA to a Roth IRA. The advantage of the Roth IRA designation is that the distributions at age 59½ and later are non-taxable, whereas distributions from a regular IRA may be taxable at the taxpayer’s marginal income tax rate (subject to any adjustments from Form 8606 that may exist from a prior non-deductible contributions to the IRA account).

A number of considerations are needed to make a decision on whether to take advantage of IRA conversion provisions. This may involve current and future tax rates (which are difficult to predict with any certainty with the continuous changes in rates and with the additional new entitlements and recent government borrowing), the level of investment returns, and other factors.

The estate tax is scheduled to sunset for the 2010 tax year. Under legislation that reduced estate tax rates enacted during the Bush administration earlier this decade, estate tax rates were reduced and certain exemptions and credits were increased, with the tax eliminated for deaths occurring in 2010.

The bet in Washington, D.C., is that estate tax is likely to be restored for 2010 and is the subject of tax legislation currently moving through Congress.

William F. Roth is a tax partner with the local office of BDO Seidman LLP. The views expressed above are those of the author and not necessarily those of BDO Seidman LLP. The comments expressed above are general in nature and are not to be considered as any specific tax or accounting advice and cannot be relied upon for the purpose of avoiding penalties. Readers are urged to consult with their professional advisers before acting on any items discussed herein.

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