There’s one thing you really need to know about the new rules on cost basis: If you haven’t had a conversation with your broker about how you want your basis to be calculated, it’s time.
Cost basis is one of those topics that make all but the most hardy investors roll their eyes or go completely blank. And with good reason: It’s stupidly complicated. Not only is the cost basis itself difficult to figure out (what with splits and spinoffs and multiple purchase dates), but the tax code lets you choose among different ways of calculating cost basis that vary depending on if the security is a stock or a fund. Figuring out whether to do first-in, first-out, or specific-share identification, is enough to make your head spin, yet the amount of tax that you owe can vary wildly depending which method you choose, especially if you’ve been buying regularly over the years at different prices.
By Amy Feldman
NEW YORK, Feb 28 (Reuters Tax & Accounting) – The big news for estate planners in the U.S. tax legislation passed last year isn’t the $5 million estate-tax exemption — though that number is far higher than expected — it’s the $5 million lifetime gift-tax exclusion. That is so much higher than it has been historically, and provides so many opportunities for estate planning for the ultra-rich, that planners for high-net-worth clients are salivating.
“I don’t think anybody in Congress realized this,” said Michael Gooen, a tax and estate attorney at Lowenstein Sandler. The point is that not only will the $5 million estate-tax exemption ($10 million for a couple) remove the vast majority of formerly taxable estates from the estate tax, but rather that the higher gift-tax exclusion means that people with far larger estates than that — think $50 million, $100 million, and up — have the ability to shift assets out of their estates tax-free while they’re alive. “You are going to see a flurry of estate planning,” Gooen said.
For those whose loved ones died in 2010, this is the time to wrap up their estates. Last year was an unusual year — the estate tax disappeared altogether to the benefit of some and the detriment of others. But in its absence, a different capital gains tax emerged. That means anyone sorting out a 2010 estate now gets to choose which tax to pay.
The choices are to pay the estate tax under its new rules, which allows for a $5 million exemption and a maximum tax rate of 35 percent, or to opt out of the estate tax and elect what’s known as “carryover basis.” The answer you might think — to opt out of the estate tax — is likely the poor choice for the vast majority of people.
It’s hardly a secret that state budgets are tight. Still, when budgetarily-beleaguered Illinois raised its individual income tax rate to 5 percent from 3 percent, it raised eyebrows — and questions about what other states might follow.
The Tax Foundation, in a recent research report, notes that fewer states raised taxes in 2010 than had been expected to do so, but that with the temporary federal stimulus aid ending mid-year and many states in budgetary trouble, “2011 may be a year of dramatic tax increases.”
Since 2006, a popular tax rule had permitted those aged 70-and-a-half or older to donate up to $100,000 from their Individual Retirement Accounts to charity. Last year, as the tax flux dragged on, no one knew whether this provision would stay or go.
At the 11th hour, the December tax legislation gave it the okay: The provision was both extended through the end of 2011 and permitted retroactively for 2010. Given the delays, the deadline to do this and have it count for 2010 has been pushed out till Jan. 31. If you’ve got the funds and it makes financial sense, you could make two IRA-to-charity rollovers this year, counting one donation for 2010 and one for 2011.
It was a perhaps inevitable problem after the market downturn: Charitable trusts that are underwater.
Charitable remainder trusts, or CRTs, are typically used by wealthy people who want to give a seven-figure gift to charity, and still retain an interest in the donation. They work like this: First, the donor puts the asset into a trust for charity. Then, the donor gets the income from the trust, and a charitable donation for tax purposes. At the end of the trust’s term, the asset (that is, the “remainder”) goes to charity.
If you run a business, and haven’t been paying attention to the depreciation rules in the tax bill, now’s the time to take a look as there are quite substantial tax incentives for buying new property that you can take advantage of this year and next only.
The so-called “bonus depreciation” rules, which allow businesses to expense part or all of their purchases of new assets immediately, rather than depreciating them over many years, have been extended and expanded. For the rest of 2010 and through 2011, bonus depreciation is set at 100 percent; in 2012, the bonus depreciation goes back to 50 percent, and, after that, it’s slated to disappear.
Estate taxes affect very few people, but for those with seven- or eight-figure estates that are impacted, the end of this year is a crazy, crazy time.
That’s because going from a year with no estate tax (as 2010, oddly, was) to a year in which the estate tax is back (but with a $5 million exemption and large gifting possibilities) raises all kinds of quandaries for those who are very ill and for their families.
The tax flux appears to be over.
On Monday evening, President Obama announced the outlines of the deal that had been reached between Republicans, who wanted to see the Bush tax cuts extended for all taxpayers — including the wealthiest — and Democrats, who wanted those tax breaks to expire for couples who make more than $250,000 a year and singles who earn over $200,000 a year.
The agreement taking shape would keep the Bush tax cuts in place for all taxpayers for two years, bringing the discussion back in time for the next Presidential election; extend unemployment insurance for 13 months; cut payroll taxes for all workers for one year; extend a slew of tax credits for middle-class Americans; and reinstate the estate tax at a higher exemption and a lower rate.
The end of the year is in sight. But with taxes still in flux, it’s easy to succumb to your own worst instincts and just block out all the noise: After all, how can you even think about your own year-end tax planning when you don’t know what the rules are, and may not know till after the end of the year?
“People can get paralyzed, and not take any action,” says Rich Kohan, principal of personal financial services at PricewaterhouseCoopers.