After the Election – Key Tax Planning Ideas before the End of 2008
The historic election of Barack Obama has not only ushered in a new era in American politics but has also created a late fall/early winter, busy season for accountants as substantial changes in the tax law in 2009 appear in the offing. Many taxpayers will be required to take action this year to take maximum advantage under the current system.
There is not space in this column to examine in detail all of the various strategies that advisers must consider; these strategies will be covered in greater depth in The Best Individual Tax Update Courseby Surgent McCoy (BITU) and The Best Federal Tax Update Courseby Surgent McCoy (BFTU) in the near future. A new two-hour self-study course on 2008 year-end strategies will be available on our website, www.cpenow.com, on Nov. 25. Surgent McCoy will also have a two-hour webcast on this topic available on December 3. Consult our website for further information about these products, plus a four-hour live seminar offered by select state societies in January 2009 that analyzes various planning opportunities that take root in 2009 and beyond. Below we point out, in bullet-form, some of the areas we anticipate will be impacted by the changing environment, assuming the “current” proposals do not significantly change
Individuals
Increase in the highest two ordinary income-tax brackets in 2009: part of 33 percent bracket goes to 36 percent and 35 percent bracket goes to 39.6 percent
- Accelerate ordinary income to 2008. Special attention must be paid to the AMT because certain 33 percent bracket taxpayers who are in the AMT and in the exemption phase-out range may find deferral a better option. Higher income taxpayers in the AMT will not be adversely affected by an acceleration this year.
- Roth IRA may more be attractive than a traditional IRA contribution to a taxpayer who had a relatively bad year as they are in a lower tax bracket in 2008 and will be in a higher tax bracket in later years when distributions are taken. Many taxpayers who have had a bad year and are in a lower tax rate for 2008 may want to roll over traditional IRAs to a Roth IRA if the AGI is $100,000 or less.
- If AGI is less than $159,000, contribute to Roth IRA rather than traditional IRA.
- Make nondeductible contribution to IRA if AGI exceeds $159,000. This can be rolled over to a Roth IRA in 2010.
- Use the §454(b) election to accelerate U.S. savings bond income.
Increase in capital gains and qualifying dividend tax rate: maximum rate for certain taxpayers in the highest two brackets increases from 15 percent to 20 percent
- Accelerate sales of business or other sales at a gain to lock-in lower tax rate. Repurchase gain securities as there is no wash sale rule for gains.
- Pay a dividend from C and S corporations to take advantage of 2008 favorable rates and to reduce earnings and profits so that fewer later distributions will be taxed at the higher rate.
- Arrange for dispositions of underwater real estate ventures to pick up excess of liabilities over basis at favorable rates.
- Take short-term capital gains now rather than early in 2009.
- Defer capital losses rather than offset current lower-taxed, long-term capital gains so they may offset higher-taxed, long-term gains in later year.
- Sell partially worthless investments to recognize loss.
- Elect out of current installment sales treatment, or get out of old installment sales by selling the notes or making substantial modifications of such notes to accelerate gain.
- Gift property that has declined in value to family members in lower tax brackets, including zero-percent bracket on capital gains and qualifying dividends. Transfer reduced value of remainder interest by transferring residence in a QPRT.
Investments
- Tax-exempt bonds will become more valuable.
- Capital gains and qualifying dividend-paying property are still advantaged over taxable interest-paying obligations.
- Move into second home to grandfather §121 exclusion on gains from sale of principal residence.
- Defer taking minimum required distributions to late December in case two-year holiday is enacted.
Social Security (enhanced taxable wage base for those making more than $250,000 and application of Social Security tax to pass-through income of a service S corporation)
- Accelerate tax on substantially unvested property by making §83(b) election to reduce tax base.
- Consider converting non-service LLCs and partnerships to S corporations to create pass-through income not subject to self-employment tax.
Business
- Cash method businesses should consider accelerating income.
- Accrual non-C corporation taxpayers should consider accelerating income by seeking prepayments or by discounting accounts receivable.
- Defer deductions: consider not electing §179 expense, bonus depreciation, choosing straight-line depreciation over MACRS.
- Redeem stock treated as a dividend to family member in a zero-percent bracket to shift basis to higher-bracket shareholders and remove earnings and profits.
- Make dividend distributions and loan back to C corporations and S corporations with C earnings and profits.
- Use Incentive Stock Options that are not subject to Social Security tax but can produce capital gain income rather than ordinary income; they are more useful in a higher ordinary tax rate and enhanced Social Security tax structure.
- One intriguing proposal is the zero-tax bracket for gains derived from the sale of a start-up or small business; the bracket is apparently independent of the tax profile of the seller but based on the character of the business. No working definition of “small” or “start-up” has yet emerged. This could encourage a wind-down of existing business to create a start-up situation or to splinter existing businesses to meet the threshold for small businesses and to multiply the number of potential gains subject to this favorable tax treatment.
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