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Dear Clients and Friends of SingerLewak: As we approach the end of another very eventful year (with more action every day), it is again time to review your tax and financial situation and evaluate strategies that may help minimize your tax burden. Once December 31st has come and gone, your tax liability will be pretty much set in stone, and there will be relatively little opportunity to change it.   While implicit in year-end planning just as it is throughout the year, it bears repeating that pursuing tax benefits for items that don't further your business goals or otherwise contribute to your quality of life (e.g., retirement, gifts to loved ones, charity, etc.) are generally counterproductive and should be avoided.  Just as importantly,  each taxpayer's situation is different and no action should be taken on any of these points without discussing your specific circumstances with us first.

I. YEAR-END TAX PLANNING FOR INDIVIDUALS
Year-end tax planning typically falls into two general groups: (1) traditional time-proven strategies and (2) new opportunities and pitfalls that have arisen from recent changes to the tax laws.  Tax planning can help most taxpayers save money (some, of course, more than others). How much you can save depends on your own particular circumstances. Note:   As you've undoubtedly heard, tax rates are set to rise in 2011 unless Congress decides to extend the Bush tax cuts.  Given President Obama's comments just this week (announcing an anticipated 2-year temporary extension), what looked unlikely just a few weeks ago will probably happen after all.  However, if for some reason  Congress does not go along, individual rates will be as follows:   Top ordinary income tax rates Top Capital gains tax rates Qualified dividend income tax rates Interest income tax rates 2010 35% 15% 15% 35% 2011 & 2012 39.6% 20% ordinary ordinary 2013 39.6%A 20%B ordinaryB ordinaryB

A – Plus an additional 0.9% Medicare tax on employee compensation in excess of $250,000 for joint or surviving spouse returns ($125,000 for married filing separate, $200,000 for all others). B – Plus an additional 3.8% tax on the lesser of net investment income or the excess of modified AGI over $250,000 for joint or surviving spouse returns ($125,000 for married filing separate, $200,000 for all others). So, unless you expect your 2011 income to be substantially less than 2010's, deferring taxable income to 2011 may be of questionable value if negotiations fall through.

A. INCOME AND DEDUCTION SHIFTING
One of the most fundamental year-end tax planning techniques involves income shifting.  The traditional approach  would involve attempting to accelerate deductible expenses into 2010 and deferring income (if economically feasible) into 2011 or later years.  However, given the uncertainty about tax rates for 2011 and later years, this may cause more harm than good. Caveat:  Shifting income is not always a matter of simply delaying receipt of funds. Applicable rules may require you to recognize certain types of income when you have earned the right to receive it, even if you arrange for its delayed payment. Ultimately, deferring or accelerating your income and expenses will depend on your own individual set of facts.   Some of the items that may be controllable include:
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Year-end Bonuses Real Estate Taxes Charitable Contributions State and Local Income Taxes Real Estate Sales Retirement Plan Contributions and Distributions Medical Expenses

B. PORTFOLIO TIMING
As we reach the end of 2010, it’s also a good time to review your investment positions and (in light of possible changes to ordinary income, capital gains, and qualified dividend tax rates) determine whether it makes sense to recognize gains and/or losses in 2010 vs. 2011. As we all (unfortunately) know, the stock market underwent a number of substantial swings in 2010, so a careful review of your portfolio records for the entire year can make a difference in not only what you might buy or sell in December (or perhaps January), but also what estimated taxes you might need to pay in the closing days of 2010. Capital losses can generally be used to fully offset capital gains. Capital losses incurred in excess of capital gains can also be used to offset up to $3,000 in ordinary income (or $1,500 for a married couple filing separately). In calculating gains or losses for purposes of year-end planning, remember that, for tax purposes, it's not how much your investments have gone down for the year, but rather how much gain or loss you’ve realized since purchasing them. Moreover, if you acquired them as gifts or inheritance, their purchase price may depend on what someone else paid for them (or their value at the time of the death if inherited before 2010). Please also be aware that the “wash-sale” rules will generally hinder those who hope to generate tax losses by selling devalued assets and reacquiring them within 30 days of the sale.

C. RETIREMENT PLANNING
Year-end planning for 2010 also involves maximizing annual contributions to your retirement plan accounts, since one year's limit cannot be added to the next if not taken in time. While contributions to IRAs may be applied retroactively if made before the filing deadline, an individuals' elective deferral contribution made as an employee to a qualified plan must be made no later than the end of the calendar year. Maximizing allowable contributions to your retirement plan (or plans) before year-end also allows you to reduce your adjusted gross income (“AGI”) in direct proportion to those contributions. This, in turn, may give you the benefit of increasing the deductibility of medical and other deductions subject to AGI floors. As many 401(k) plan account owners have realized in 2010, managing a tax-deferred retirement account is not (to quote Ron Popeil) a matter of “set it and forget it.” Although sheltered from current taxation, a 401(k) or other defined contribution plan also requires careful management of the performance of those investments and reallocation of assets whenever appropriate. Unfortunately, losses on any 401(k) plan are not tax deductible; nor can they offset capital gains in non-tax sheltered accounts.

D. PRESERVING WEALTH & GIFT-GIVING
There are three main transfer taxes: the gift tax, estate tax, and generation-skipping transfer (“GST”) tax. Estate taxes are levied on a taxpayer's estate at the time of death, while gift taxes are based on gifts made during a taxpayer's lifetime. The GST tax is an additional tax applied to transfers of assets to grandchildren or other family members that skip a generation. The estate tax and GST tax (but not the gift tax) are repealed in 2010 before coming back in 2011 with higher rates and lower exemptions. However, regardless of future laws and regulations, there are strategies that can help you minimize your tax burden, so please call us for a more thorough discussion that addresses your own particular circumstances. During 2010, you can also transfer up to $13,000 per recipient, without incurring gift tax (or GST tax) on the amounts transferred. Married couples may gift up to $26,000 per recipient. This strategy not only reduces the possibility a hefty estate tax later, but also moves earnings arising from those gifts out of your taxable income into that of the recipient (which might be taxed at a lower rate). In general, you can also avoid gift taxes by paying tuition and medical expenses for a loved one (subject to certain restrictions). As long as you make payments directly to the provider, you can pay these expenses gift-tax free without using up your annual exclusion. 1. Taxable Gifts – To the extent you're so inclined (and have substantial assets), it might also be worthwhile to consider making taxable gifts to loved ones during 2010. The reason for this is the fact that taxable gifts made in 2010 are subject to a 35% rate that jumps to 55% in 2011, as well as the return of the GST in 2010. Moreover, all of the assets (as well as any tax paid on the taxable transfers) will generally be excluded from the donor's future estate that (depending on its ultimate value) is likely to be subject to higher tax rates in the future. Note: To make even better use of this strategy, transferring appreciating assets will also remove future appreciation from the donor's estate.   Estate Tax – Exemption Estate Tax – Top Tax Rate Gift Tax – Exemption Gift Tax – Top Tax Rate GST Tax – Exemption GST Tax – Top Tax Rate 2010 n/a n/a $1 million 35% n/a n/a 2011 $1 million 55% $1 million 55% $1 million 55%

Note:   Along with the likely (but not yet finalized) extension of the Bush tax cuts noted above, President Obama announced a tentative compromise that would increase the estate tax exemption to $5 million and decrease the top rate to 35%.

E. ALTERNATIVE MINIMUM TAX
Congress has not as of yet enacted a “patch”  to the alternative minimum tax (“AMT”) for 2010. Unless Congress acts to enact an AMT patch for 2010, the exempt amounts will fall to $33,750 for individuals, $45,000 for married couples filing jointly, and $22,500 for married individuals filing separately. Your year-end planning should include accounting for a lack of an AMT patch in the case that Congress does not act.

F. 2010 TAX LAW CHANGES
As the tax law changes, so must individual tax planning; and this year is no exception. While fundamental techniques should not be overlooked, attention to tax legislation is equally important for most taxpayers. Tax legislation in 2010 renewed or enhanced many benefits for individual taxpayers, some only for 2010 and others for both 2010 and later years. As a result, maximizing these tax benefits for 2010 and beyond requires effective and immediate tax planning. Here are a few items to consider for the remainder of 2010: 1. Small business stock – You may recall last year's increase in the exclusion on the gain from the sale of Qualified Small Business Stock (“QSP”) from 50% to 75% for stock bought at original issue after February 17, 2009 and before January 1, 2011. If that piqued your interest, you'll be even happier to know that the Small Business Jobs Act of 2010 further increased (on a temporary basis) the exclusion to 100% of the gain recognized on QSP stock issued after September 27, 2010 and before January 1, 2011. Under the new law, the excluded gain also doesn't count as an AMT preference item, but the five-year holding period continues to apply. The maximum amount of gain exclusion is the greater of (1) 10 times the stock’s tax basis or (2) $10 million. Roth IRAs – The general premise of Roth IRAs is fairly straightforward: Nondeductible contributions grow tax-free and qualified distributions are also tax-free when made (1) at least 5 years after the account owner/spouse made a Roth IRA contribution and (2) after age 59½, after death, on account of disability, or  for a first-time home purchase. However, there is much more than that to consider when it comes to your year-end planning:
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For tax years beginning after 2009, a conversion from a traditional to a Roth IRA can be made without regard to income or filing status. Consequently, married individuals filing separately, as well as those with adjusted gross incomes greater than $100,000, are no longer precluded from making a Roth IRA conversion. Note: a conversion is treated as a taxable distribution, but is not subject to the 10% federal (or 2.5% California) early withdrawal penalty. In addition to the income limitation on Roth IRA conversions being permanently repealed, there is also a special tax treatment available for 2010 conversions only. Conversion income in 2010 is recognized ratably in 2011 and 2012, unless you make an election to recognize all of the income in 2010. Moreover, there are several reasons why you might want to take the opportunity to convert to a Roth IRA, other than the tax-free withdrawals and not being subject to required minimum distributions during your lifetime. These include the recent devaluation of your IRA investments, hedging against future tax rate increases, offsetting any current year net operating losses, or estate planning.

 

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Self-employed health insurance – For a self-employed individual taxpayer's first year starting after December 31, 2009, they may deduct (both for income tax and self-employment tax purposes) the cost of health insurance for themselves, their spouses, dependents, and children under age 27. Payroll tax credit - For 2009 and 2010, workers received a credit of 6.2% of their earned income, limited to $400 for single filers and $800 for taxpayers filing joint returns. The credit starts phasing out at $75,000 of AGI (for singles) and $150,000 for joint filers. W-2 employees will receive the credit through lower income tax withholdings in each paycheck. The self-employed may reduce their quarterly estimated payments. Tax credit for college tuition - The American Opportunity Credit was added by the 2009 economic stimulus bill to enhance the Hope Scholarship Credit for 2009 and 2010. The new credit offers up to $2,500 per student for the student's first four years of postsecondary education, not just the first two years (as was the case with the Hope Credit). It is also 40% refundable and allowed against AMT. The credit begins to phase out at $80,000 of AGI for single filers and $160,000 for joint filers. Residential energy property - The “American Recovery and Reinvestment Act of 2009” provided taxpayers with new and/or expanded energy investment incentives. Among these are:
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Extension and modification of the credit for nonbusiness energy property - Raised the 10% credit rate to 30% for the purchase of qualified energy efficiency improvements to existing homes. Provided that all energy property otherwise eligible for the $50, $100, or $150 credits is instead eligible for a 30% credit on expenditures for such property. Removed the $500 lifetime cap (and the $200 lifetime cap with respect to windows) and replaced it with an aggregate cap of $1,500 in the case of property placed in service after December 31, 2008 and prior to January 1, 2011. Credit for residential energy efficient property - Eliminated the credit caps for solar hot water, geothermal, and wind property and eliminated the reduction in credits for property using subsidized energy financing. Credits are provided at 30% of the cost of qualifying expenditures.

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II. YEAR-END TAX PLANNING FOR BUSINESSES
The economic downturn has continued to make this past year very challenging for many businesses, small and large.  While not a panacea, tax planning can present unique opportunities for taxpayers to manage their income tax liability.

A. BUSINESS STRUCTURE
The structure of your business determines how it will be taxed. C corporation earnings give rise to two levels of tax (first at the corporate level and again at the individual level when the income is distributed in the form of dividends).  However, income, deductions, gains, losses, and credits of S corporations, partnerships and limited liability companies (“LLCs”) generally pass through to their owners and are reported on their individual income tax returns. Therefore, not only is the structure of the business important, but with pass through entities, the individual tax circumstances of their owners is a particularly significant factor in year-end tax planning.

B. ACCOUNTING METHODS
The accounting method used by your business is a major consideration in evaluating year-end tax planning strategies. An accounting method is important to tax planning because it affects the timing of recognition of income and deductions between years. Cash-basis businesses that anticipate being in the same or lower tax bracket next year may be able to reduce their 2010 taxable income by deferring income to 2011 and accelerating deductions into this year. To do so, cashbasis businesses can delay billing clients or customers (for example, wait until early January) for services and products so that payment is not received until 2011, and paying otherwise deductible expenses before year-end. Alternatively, if you anticipate your business’s taxable income to be lower in 2010, you may want to accelerate income into 2010 and defer deductions until next year by encouraging customers to pay before year-end and paying otherwise deductible expenses just after year-end.  Note however, that certain manipulative schemes generally will not work (e.g., waiting until January 2nd to deposit a check received in December, or refusing payments received until just after December 31). For accrual basis taxpayers, the right to receive income, rather than actual receipt, generally determines the year of inclusion in income. Expenses are deductible in the year in which all events (including economic performance) have occurred that establish the liability of an amount. Accrual method businesses might consider deferring income by delaying the shipment of products or provision of services until the beginning of the 2011 tax year if they anticipate a lower effective tax rate in the next year, or by prepaying certain expenses for which economic performance will occur relatively soon after year-end.

C. DEDUCTIONS & CREDITS
Deduction planning is an integral aspect of year-end business tax planning. There are many important deductions beyond those for mundane operating expenses that may benefit many small businesses by lowering their tax liability. 1. Domestic production activities deduction - The “domestic production activities deduction” benefits a broad array of businesses, including (but not limited to) construction, engineering, architecture, and farming. For 2010, the deduction generally equals 9% (an increase from 6% in 2009) of the lesser of (1) qualified production activities income for the tax year or (2) taxable income that does not take the deduction into account for the tax year. In addition, the deduction cannot exceed 50% of W-2 wages allocable to “domestic production gross receipts.” The deduction applies for both regular and AMT purposes. Cancellation of debt income - Taxpayers may generally defer cancellation of debt (“COD”) income arising in 2009 and 2010 (where it effectively represents the repurchase of that business debt at a discount).  The deferred COD income will be recognized ratably over five years beginning in 2014. Bonus depreciation - The Small Business Jobs Act of 2010 extended 50% bonus depreciation of the adjusted basis of qualifying property through 2010. This applies to property purchased and placed in service during the 2010 calendar year and covers eligible “new” property with a depreciable life of 20 years or less. Enhanced expensing - Most small businesses are eligible for the “section 179” deduction, a generous tax break that enables businesses to immediately deduct equipment purchases that otherwise would have to be depreciated over a number of years, subject to certain limitations. The Small Business Jobs Act of 2010 also extended (and improved) enhanced expensing through 2011.   Under this provision, businesses may immediately deduct up to $500,000 for qualifying equipment purchases, including computers and software.  However, the property must be used more than 50% for businesses to qualify for this benefit.  The property can be either new or used, but in all cases must be your business's first use of that property and must be placed into service by December 31, 2011.  In addition,  taxpayers can elect to use up to one-half of the $500,000 deduction limit for certain types of qualified real property. 5. Compensation and bonus deductions - If your business maintains a qualified retirement plan, consider maximizing 2010 contributions to it, since the contributions are tax deductible in the year that they are made to plan participants. For employees with 401(k) balances especially hard hit by the recent downturn in the markets, these contributions will take on an added luster this year. In addition, paying year-end bonuses in December or January can create a significant compensation-based business deduction. Accrual businesses can take a deduction in 2009 for bonuses not actually paid to employees until 2010 as long as (1) the employee does not own more than 50% in value of the business (if a C corporation generally any ownership in a pass through will prevent a current accrued deduction to that person), (2) the bonus is properly accrued on the company's books before the end of 2010, and (3) the bonus is paid within the first 2½ months of  2011.

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III. FINAL THOUGHTS
With the complexity of the tax law, understanding what tax planning provisions to incorporate into your year-end tax planning strategy can be a daunting task.  In addition, the impact that the current financial crisis has had on the value of our homes, debt management, investment portfolios, and retirement savings adds to the difficulty.   While this letter hopefully gives you a heads up on at least several strategies on which you might follow through before year-end, there are many more techniques that can be used depending on your specific situation. Finally, we can't overemphasize that effective planning must take into consideration all of the taxpayer’s particular facts and circumstances.  What might be prudent for one person might actually be counterproductive for someone else.  Please call us so we can help do what’s best for you.  We welcome any questions or feedback you may have.

CONTACT US!
As always, please call if you would like to discuss any of these items further.

Please click here to find out more about our Tax+ program.

Your Tax Partners,

Mark G. Cook, Partner Steven J. Cupingood, Partner John A. Eckweiler, Partner Dan B. Faulk, Partner Andrew L. Gantman, Partner Donald G. Leve, Partner Richard A. Linder, Partner David Neighbors, Partner Todd Northrop, Partner Javier Ramirez, Partner Thomas E. Wendler, Partner Jon Widdowson, Partner Michael Wu, Partner

 
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.

Notice: Opinions, conclusions, and other information in this message are not intended to represent recommendations or advice to you or any other person. Each person's circumstances are unique, and we strongly suggest you discuss your specific situation with your professional advisor before taking any action based on the information herein or information to which this message refers.

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