Alan L. Spiegel, Jr., is an attorney with McLario, Helm & Bertling, S.C., specializing in family law and estate planning.
Throughout the course of a tough economic year, many pundits and professionals of all types had hoped that individuals and businesses would have some degree of certainty as to the state of the tax code as 2010 drew to a close. Unfortunately, fiscal uncertainty still reigns supreme in both Washington, D.C. and Madison, leaving taxpayers in all walks of life facing unclear year-end decisions. A broad look at the state of the economy and the things we do know about the tax code, however, should encourage individuals to take note of a couple of key opportunities for tax savings before year's end.
Under the Obama administration’s proposed budget for Fiscal Year 2011, the two highest tax brackets will increase from 33% and 35% to 36% and 39.6%, respectively. In addition, the reduced rates of 0-15% currently afforded to some capital gains will be stretched to include rates up to 20%. This proposal would effectively repeal the "Bush Tax Cuts" that established the current tax rates. Although the proposed budget has not yet been approved and is likely to face strong opposition in a Republican-controlled House of Representatives and a notably more conservative Senate, no one expects taxes to be lower in 2011 than they are in 2010, so efforts by taxpayers to reduce taxable income going forward are well-advised.
One extremely useful strategy available to taxpayers at year's end is to reduce income or turn excess income into deductions through charitable giving. Focusing specifically on stocks and other securities, the best approach depends on the historical performance of the security, with strategies for "winner" and "loser" securities focusing on minimizing taxable income for the taxpayer.
If you own a security that has appreciated in value so that cashing in that security would result in significant taxable income, an alternative to cashing it in is to donate the security itself to a favorite charity. Instead of paying capital gains tax on the sale price of the security minus the purchase price (cost basis), the taxpayer is permitted to deduct the fair-market value of the security from his or her other income, resulting in a reduction in taxable income and overall tax burden. The taxpayer's future income would be further reduced by the charity being responsible for any dividend income created by the security, creating an ongoing tax benefit to the taxpayer.
Conversely, if you own a security that has lost value since it was purchased, you would be wise to first cash out the security to take advantage of the tax-reducing capital loss. Once the loss is realized, you could then gift the sale proceeds to the charity of your choice for further reduction of your taxable income.
In regard to both "winner" and "loser" securities, prudent tax planning generally seeks to minimize taxable income before seeking less valuable itemized deductions, and both of the above strategies do just that. As always, individuals and business should consult their tax professional before making any investment or tax decision, but a conversation with that professional before year's end could be a great investment of time, resulting in tax savings in 2010 and beyond.
You can review the previous issue of LifeTimes by clicking the link below:
Spring 2010: What You Need to Know about Funeral Pre-planning
Fall 2009: Let the Spirit of Giving Brighten Your Holidays
Spring 2009: Estate Planning Essentials — What You Need to Know
Fall 2008: A Year-end Check-up for Your Financial Health
Spring 2008: Is a Charitable Remainder Trust Right for You?
Fall 2007: Do You Really Need a Will?
Spring 2007: Exercise Your “Will Power”
Fall 2006: Save Taxes with Year-end Giving
Community Memorial Foundation promotes and enhances the health of all individuals in our community through the development and management of resources in collaboration with the mission of Community Memorial Hospital.
The articles in LifeTimes are for information only. Talk to your tax, financial or legal advisor to make decisions best for your own situation.
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