Call off the Tax Planning: Bush Tax Cuts Likely to Be Extended

Last Updated Nov 14, 2010 8:28 PM EST

What was billed as the Great Year-End Tax Wrestle seems to be ending with a whimper instead of a bang. The White House might surrender to the Republicans and their own Democratic conservatives. Odds are, Bush's tax cuts for the wealthy will continue, at a 10-year cost of nearly $700 billion. The revenue loss would compound the deficits that conservatives supposedly just voted against.

It's still possible that Obama will stand and fight, but we haven't yet heard a lot of fiery words. The debate might be over whether these tax rates will be permanent, as the Republicans want, or temporary, as the White House wants. Extending all the tax cuts, including those for the middle and upper-middle classes, will cost $3.7 trillion.

So hold off on executing any fancy tax plans now. Accountants have been telling their high-earning clients to pull their bonuses into tax year 2010, to avoid the risk of higher rates in 2011. Today, that risk seems miniscule. Set up the bonus, just to be on the safe side, but don't pull the trigger yet. If rates stay low in 2011 they'll almost certainly stay low in 2012 as well. Taxes don't rise in a presidential election year.

If you're thinking of converting a traditional, taxable Individual Retirement Account into a Roth IRA, do it before the end of the year. You'll owe income taxes on whatever sum you roll over -- normally, paid in the current year. But this year, you have a one-time chance to spread the income and taxes over two years, 2010 and 2011.

If you have stock market losses, turn them into a tax shelter. Sell the dog stocks or mutual funds now. You can use the losses to offset any realized capital gains, including gains distributed to shareholders by mutual funds.

If you love the particular stock or fund, you can buy it back in 30 days. More likely, you'll discover that you're tired of that loser and want to play with something else. You can buy a different stock or fund immediately. If you own a traditional mutual fund, you can sell and buy an equivalent exchange-traded fund -- also without a 30-day wait. That keeps you in the market, to capture any unexpected surge. Up to $3,000 in capital losses can be used to offset ordinary income, with excess losses carried forward into future years.

If you own shares in a mutual fund, don't sell until you've collected this year's dividend, usually (but not always) paid in December. If you're buying a fund, wait until after the dividend date. Otherwise, you'll be buying into a tax.

On estate taxes, Republicans are unlikely to get as much as they want. This year, they threw the super-rich a tax holiday. All inheritances, no matter how large, passed estate-tax free. Five billionaires did their heirs the favor of dying "on time" -- gas pipeline mogul Dan Duncan, real estate developer Walter Shorenstein, grain heiress Mary Jane Cargill, TV pioneer John Kluge, and Yankees owner George Steinbrenner, who always knew a deal when he saw it.

If Congress doesn't act, estate taxes will rise to 55 percent next year on the amount of the estate that exceeds $1 million ($2 million, for a married couple). The Democrats have proposed a $3.5 million exemption ($7 million for couples), with a 45 percent tax rate on the excess. Ideally, Republicans don't want to tax the super-rich at all. If the budget demands it, some Republicans have mentioned letting $5 million pass to heirs tax free ($10 million for couples) with a 35 percent rate on the excess.

The arguments that favor keep the estate tax are pretty good. Only 0.2 percent of wealthy estates paid a tax in 2009, according to the Tax Policy Center. There's no evidence that the tax breaks up small businesses or family farms, despite the heated rhetoric you hear. In 2009, tax collections reduced the federal deficit by $14 billion, all of it raised from the people who can best afford to pay. The 2010 tax holiday might as well have been called "The Help Poor Paris Hilton" law.

Opponents of the tax claim that rich people will stop working, once they've collected the most they can pass along. Hmmm. Have any of you noticed any Wall Street bankers or entrepreneurs retiring happily on a piddling $7 million when they could become billionaires? Me neither. In truth, the only people who might quit working are the inheritors who plan to live the soft life on daddy's money.

One warning to the happy heirs of 2010: For this year only, the estate will owe taxes on any inherited capital gains. For example, say that your grandmother died and left you stock worth $100 share. And say that she paid only $2. When you sell that stock, you'll be taxed on the $98 increase in price. There's a $1.3 million exemption from the tax, and an additional $3 million exemption for property left to a spouse. Still, this new tax will hit many estates that, under the old law, wouldn't have paid taxes at all. In all previous years, inherited capital gains passed tax free. They'll pass tax-free again, in 2011 and future years.

Lawyers faced with the capital gains tax on 2010 estates have punted -- delaying filing tax returns until the IRS puts out the regulations. They're hoping that Congress will change the law again, so this tax will never have to be paid. For the rich, hope and opportunity never die.

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  • Jane Quinn

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