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The Planning Advantage: How Your Tax Strategy Can Position You to Improve Your Financial Position


Doerr_MartinHave you put financial planning on the back-burner? Now is the time to look for ways to cut your losses and gain tax advantages that can give individuals and businesses leverage needed to weather the financial storm. Cathy Goldsticker and Martin Doerr discuss smart tax planning strategies to improve your financial posture.

In any economy, smart tax planning can protect income and provide opportunities for businesses to maintain their financial well being. In a tough economy, partnering with a tax professional who can help you devise a strategic plan can help you avoid surprises and can provide a critical advantage.

“We are in terrible financial times. There are lots of losses in the marketplace and income is down for many people,” says Cathy Goldsticker, member, tax services, Brown Smith Wallace LLC, St. Louis, Mo.

Rather than putting tax planning at the bottom of the agenda, start thinking about ways to cut your losses and gain tax advantages through deductions and other smart investment moves.

“There are important tax planning decisions that can be made now, and over the next year, that can give individuals and businesses more leverage as they weather the financial storm,” says Martin Doerr, member in charge, tax services, Brown Smith Wallace.

Smart Business spoke with Doerr and Goldsticker about smart tax planning strategies to consider implementing before the end of 2011, and what to be aware of for 2012.

When Should a Traditional IRA be Converted to a Roth IRA, and What are the Pros and Cons?

If your traditional IRA has lost substantial value, consider converting it to a Roth IRA this year because the tax on the conversion is based on fair market value. Because that has dropped in 2011, the tax cost of the conversion will be lower.

The benefit of converting an IRA to a Roth IRA is the ability to grow the investment with tax-free earnings and later withdraw the money without paying tax. The flip side is recharacterizing a Roth IRA back to a traditional IRA if the Roth has lost significant value since making the conversion to a Roth. If the IRA was converted to a Roth IRA in 2011, it can be recharacterized in the same tax year. You have until the extended due date of your 2011 tax return to do this (Oct. 15, 2012).

On the other hand, if you are 59½ or older and the value of your traditional IRA has plummeted, consider liquidating the investment if the value is less than your tax basis (your nondeductible contributions), as doing so would earn you a miscellaneous itemized tax deduction.

There are many issues to consider, including the impact on AMT, so talk to your accountant about whether this strategy makes sense for you.

How Can an Investor Make the Most of Stocks That Have Lost Value?

Many people have stock market losses that will carry forward, and there may be no tax advantage in generating more losses in 2011. You might sell gain stocks to use up those losses, then repurchase them immediately. There is no ‘wash sale’ rule for gains.

The success of this plan depends on the investment portfolio, strategy and market view. Whether you think there is more appreciation left in gain stocks now, or you want to move out of those stocks and into different ones, if you have losses to use, there is effectively no tax when gain stocks are sold. And you will have higher basis in your stocks, which may be helpful if capital gain rates increase in the future.

How Can Someone Take Advantage of the $5 Million Gift Exemption?

The current lifetime gift limit is $5 million per taxpayer, so a husband-wife household can take advantage of a combined $10 million tax-free gift. These limits apply to tax years 2011 and 2012, and given the fluctuation of rules, this is a great opportunity for high net worth taxpayers to pass on their wealth to their children.

What Tax Benefits are Available for 2011 Capital Purchases?

Now is the time to invest in qualifying business equipment and still realize the 100 percent bonus depreciation. New equipment such as technology, furniture and, in certain cases, leasehold improvements, can be written off. That makes 2011 a great year to put new equipment in service or make construction improvements. Bonus depreciation is scheduled to reduce to 50 percent for 2012, and after that, it is not yet known if it will be renewed.

How Do Income Tax Rates for 2011 Compare to Potential Rates in 2012?

Income tax rates are scheduled to remain the same, with slight adjustments based on the Consumer Price Index. However, if you have qualifying deductions, it’s best to use those in 2011 to realize tax savings sooner.

On the other hand, if you have income that can be deferred, it would be wise to defer that until next year and pay that tax later.

What Planning Can be Done to Minimize the Alternative Minimum Tax?

This burdensome tax can be an unpleasant surprise for many people. The AMT exemption, approximately $74,000 for couples in 2011, is up slightly from 2010 but is scheduled to drop considerably next year. Even with the larger exemption, care should be taken to capture and protect all of your tax deductions. For example, if you have substantial deductions and you are in AMT, consider deferring, if you can without penalty, state taxes, real estate taxes and investment expenses until 2012, since none of these is deductible against AMT.

However, if your 2011 regular tax is larger than your AMT, accelerate, if possible, payment in 2011 for state income tax, real estate tax and investment expenses.

Is Charitable Giving Still a Beneficial Tax Planning Activity?

Whether or not you are subject to AMT, continue charitable giving if your heart is there for the organization. Assuming you still want to support the nonprofit, there are options. For example, if you are 70½ years or older, you can make a donation directly from your IRA, which allows you to offset taxable income.  <<

MARTIN DOERR is member in charge, tax services, at Brown Smith Wallace LLC, St. Louis, Mo. Reach him at or (314) 983-1350. CATHY GOLDSTICKER is member, tax services at Brown Smith Wallace. Reach her at or (314) 983-1274

Kristen Hampshire of Smart Business Magazine conducted this interview.

© 2011 Smart Business Network Inc. Reprinted from the November 2011 issue of Smart Business St. Louis.



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