Death and taxes a time to strategize and review

December 11, 2011
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The year is quickly coming to a close. The year-end holiday period traditionally brings a time when we reflect on what we accomplished and didn’t accomplish in the past 12 months. It gives us the opportunity to set new goals for the coming year. That internal reflection process is why many of us set New Year’s resolutions that seem to be soon forgotten.

It was Benjamin Franklin who wrote: “In this world nothing can be said to be certain, except death and taxes.” But despite the certainty of paying taxes, we have the ability to plan and strategize and therefore ease the pain of the tax bite. There are effective and permitted methods of reducing taxes.

In keeping with the holiday spirit, here are some year-end stocking stuffers that can keep some of that hard-earned cash from making its way out of your wallet.

Giving is a hallmark of the holiday season. Many of us make gifts to family and friends and to charitable organizations. For those readers who are charitably inclined, reviewing charitable contributions and the timing of them can yield benefits (tangible and intangible), and can position those contributions to achieve a federal income tax deduction.

An often-overlooked provision is the charitable gift of shares of appreciated securities of public companies held for more than one year. The charitable deduction for such gifts is the fair market value of the shares without the requirement to recognize the gain as taxable income. If the stock market has been kind to you this year, this planning may be something to dig into a little deeper and to review with your professional advisers. There are specific limitations and reporting required of such contributions, so make sure these items are considered.

This stocking stuffer will provide benefits in your retirement years. Most of us have some type of employee contribution retirement plan, such as a 401(k). The Internal Revenue Service recently adjusted the 2012 limits for 401(k) plans. For 2012, the limit has been raised to $17,000. For those over 50, an additional $5,500 can be contributed over and above the $17,000 limitation. Many of us don’t take full advantage of these plans. Some recent surveys have indicated only about 5 percent maximize their 401(k) plan contributions. As we all know, most employers match employee contributions, at least for some of the employee contribution. The match is the equivalent of an instant return on the investment. Taking advantage of the employer match should rank high on everyone’s list.

This next item may help build the chimney to hang the stocking. The 100 percent deduction for certain qualified asset additions for business is set to expire at the end of 2011. The expense threshold is being adjusted downward to 50 percent for 2012. The President’s job proposals in September included a proposal to extend the 100 percent expense deduction for the 2012 tax year. At the present time, it is not clear what, if any, portions of the proposed jobs legislation will make their way through Congress and onto the President’s desk this year.

To qualify for bonus depreciation, an asset must satisfy certain criteria. Tithe property must have a recovery period of 20 years or less under normal federal tax depreciation rules; the original use of the property must commence with the taxpayer claiming the deduction; and the property must generally be acquired and placed into service before January 1, 2012. There are some other considerations and requirements that should be taken into account, and these should be reviewed with professional advisers to confirm whether a specific asset purchase is eligible for the 100 percent expensing.

Certain other depreciation provisions are set to expire at the end of the year. This includes the 15 straight line depreciation provisions for certain qualified leasehold improvements, restaurant and retail improvements

There are additional tax provisions that may soon vanish. Some may say that the Grinch has something to do with this, and as a result, there may be some disappointment in Whoville. Many businesses may be affected by the expiring provisions. Many of the provisions have seen this happen in the past. The provisions often are renewed for a year or two and then expire if not renewed. Once again, we are faced with that prospect and the lingering question: Will they be renewed or will they finally expire forever?

Included in this category are certain tax credits tied to wages that are set to expire at year end and that include the Work Opportunity Tax Credit and the Research and Experimentation Tax Credit. They have been on the short list before, only to be given a second chance. That may be the result again, but we need to wait and see.

The single biggest expiring provision is the famous or infamous (depending on your point of view) alternative minimum tax credit patch. This provision affects a large share of taxpayers including most middle-class taxpayers. Every year or two, the AMT patch is set to expire, only to be renewed at the 11th hour. The AMT patch expires for tax years after 2011. If the AMT patch expires and is not renewed, its expiration alone will result in a nearly $70B tax increase for 2012. My bet is that Congress and the White House likely can’t handle the political fallout in an election year (2012) if the AMT patch is not renewed.

We have covered the “taxes” part of Benjamin’s Franklin’s famous quote and we should spend a moment or two to focus on the death comment, too. The impact of death on a family can be significant in both emotional and monetary terms. With the approach of the year end, it may be an appropriate time to take a few minutes to review estate and trust documents. It may have been years since the critical documents were updated or tweaked for any changes in law or life situations. Too often, the documents are not reflective of more recent legal, tax and life developments.

For those of us with minor children, thinking about designating guardians for them is probably the most important thing we can update. This is not a task we are comfortable with thinking or talking about. However, it is one that is critical in making sure that if something unforeseen happens, our intentions are clearly stated. It is important that this is communicated in the appropriate documents and, hopefully, also communicated with our loved ones and the prospective guardians. That process can provide a sense of peace of mind. And that peace of mind provides a good and clear conscience. And as Benjamin Franklin also said, “A good conscience is a continual Christmas.”

William F. Roth III is a tax partner with BDO USA LLP. The views expressed are the author’s and not necessarily of BDO USA. The comments are general and not to be considered specific tax or accounting advice and cannot be relied upon for the purposes of avoiding penalties.

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