Tredway, Lumsdaine and Doyle LLP

We hope that you are doing well and that you had a wonderful holiday season.  As we have done for the past few years as the New Year begins we notify you of certain acts of Congress, the Courts and IRS (and some cases the failure to act) that we believe require your attention.  This is a brief summary of some of the changes in the law that occurred on January 1, 2010, and what you can do to learn more about these changes.  Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable for you, your family and your investments.

No estate tax in 2010.

Much to the consternation of tax practitioners, Congress let the estate tax lapse beginning January 1, 2010.  This means as of this publication there is no estate or generation skipping transfer tax.  The estate tax is then scheduled to return in 2011 at pre 2001 levels meaning that we will have an estate tax exemption of only 1 million rather than 3.5 million with the maximum tax rate reinstated to 55%.  Many believe the estate tax will be reinstated retro active to January 1, 2010 by Congress this year.  Because of the unpredictability of Congress we can only plan based current law.  Note the gift tax remains with the $1 million lifetime exclusion and $13,000 annual exclusions.    The gift tax rate has been reduced to 35%.

You may recall that most married couple’s estate planning documents that include tax planning (sometimes referred to as an ABC trust or Marital trust) divide the trust estate at the death of the first spouse into tow or more sub-trusts.  One trust is equal to the deceased spouse’s unused estate tax exemption trust (sometimes called the “credit shelter” or “bypass” trust) escapes tax because it takes advantage of the estate tax exemption of the spouse dying first.  The estate exemption trust also escapes estate taxation when the surviving spouse passes away, but is subject to estate tax when the surviving spouse dies.  This is the common way most married couples have disposed of their wealth for many year.  We continue to believe that this method is appropriate for most of our clients.  However, the elimination of the estate tax for only this year (2010) suggests that it may be appropriate for you to contact us to determine if your documents should be modified in light of those changes to the law.

It may be uncertain how the provisions of your estate planning documents will be interpreted if there is no estate tax (especially if we did not prepare your trust document). This is because several provisions of your documents may be phrased in terms of tax concepts, such as the estate tax exemption amount and marital deduction. Because those tax concepts are not in the law this year, there may be some question as to what your documents mean and how your property is disposed of. That in turn may cause tax questions to arise. Based on this, a short amendment may be necessary to your trust document to clarify some of these issues.

Another change that occurred on January 1, 2010 relates to the income tax basis of inherited assets. Income tax basis is the value from which gain or loss on assets sold is measured. Under the law up until this year, the income tax basis of an asset is changed to its current value when its owner dies, as a general rule. But this year, this automatic change in basis will not occur. Rather the deceased owner’s income tax basis in assets will “carry over” to the persons who inherit the assets. It may be appropriate for your documents to be revised in order to take into account the possibility of carryover basis if anyone passes away in 2010. Contact us if you have any questions or concerns.

New opportunity to convert to Roth IRA.

This year is a pivotal one for retirement planning, as it is the first year in which taxpayers may convert funds in regular IRAs (as well as qualified plan funds) to Roth IRAs regardless of their income level. Such a conversion may be desirable because distributions from both Roth IRAs may be tax-free if several conditions are met, and a Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) from Roth IRAs after he or she reaches age 70 ½. However, even if Roth distributions are tax-free, a 10% penalty may apply. Plus, the conversion itself will be fully taxed, assuming the rollover is being made with pre-tax dollars (money that was deductible when contributed to an IRA, or money that wasn’t taxed to an employee when contributed to the qualified employer sponsored retirement plan) and the earnings on those pre-taxed dollars. For example, an individual in the 28% federal tax bracket who rolls over %100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA will owe $28,000 of tax. So the individual would be paying tax now for the future privilege of tax-free withdrawals and freedom from the RMD rules. We encourage each of our clients to review this decision carefully with their financial advisors.

Homebuyer credit extended and liberalized.

A new law enacted last November extended and generally liberalized the tax credit for first-time homebuyers, making it a much more flexible tax-saving tool. Before the new law, the credit was to have expired for homes purchased after November 30, 2009. The new law extended the credit to apply to a principal residence bought before May 1, 2010; it also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May, 1 2010, to close on the purchase of the principal residence before July 1, 2010. Also, effective for purchases after November 6, 2009, the new law allows existing homeowners who meet certain conditions to qualify for a reduced credit of up to $6,500. For purchases after November 6, 2009, the phase out rules have been eased. These are the rules that cause the credit to be reduced or eliminated as modified adjusted gross income exceeds certain levels. Much higher income levels are now allowed before there is any reduction of the credit. On the negative side, a credit cannot be claimed for a home whose purchase price exceeds $800,000.

New lease on life for COBRA subsidy.

In December of last year, the 65% COBRA premium subsidy that was enacted in February of 2009 got a new lease on life. Under the original provision, employees who were involuntarily terminated after Aug. 31, 2008 and before Jan. 1, 2010, and who elected COBRA health continuation coverage, became entitled to receive a 65% subsidy on their COBRA premiums. For periods of COBRA coverage beginning after Feb. 16, 2009, the involuntarily terminated employee was treated as having paid the required COBRA premium if the individual paid 35% of the premium amount. The employer (or, in some cases, multiemployer health plan or insurer) could recover the other 65% by taking the subsidy amount as a credit on its quarterly employment tax return. The December 2009 legislation added another six months to the maximum period that the COBRA subsidy can run (i.e., to a total of 15 months). In addition, it extended the up-to-15 month COBRA premium subsidy to workers (and their eligible family members) who lose their jobs during the first two months of 2010.

Standard mileage rates down for 2010.

The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 50¢ per mile for business travel after 2009. That’s 5¢ less than the 55¢ allowance for business mileage during 2009. Further, the rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 16.5¢ per mile, down 7.5¢ from the 24¢ per mile allowance for 2009.

New option to choose longer carryback period for net operating loss (NOL).

A new law enacted last November makes it easier for most businesses to get immediate tax savings from NOLs. It does so by allowing certain NOLs to be carried back to earlier, more profitable years. In these tough economic times, that’s good news for businesses who have suffered losses recently after better years when high taxes were paid. Specifically, the new law generally permits any business to increase the carryback period for an applicable NOL to 3, 4, or 5 years from 2 years (however, businesses getting certain federal bailout funds are not eligible). An applicable NOL is a business’s NOL for any tax year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010. Generally, an election may be made for only one tax year. The amount of the NOL that can be carried back to the 5th tax year before the loss year can’t be more than 50% of a business’s taxable income for that 5th preceding tax year determined without taking into account any NOL for the loss year or for any tax year after the loss year.

As a valued client, colleague or friend of the firm we encourage you to call upon us for advice in these ever changing times. I can be reached by our contact form on our contact page or by telephone at  (949) 756-0684.

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