for start-up expenses for 2010; and allowed a
self-employment FICA tax deduction for 2010
health insurance costs.
The Patient Protection Act of 2010 provides for a small-employer health care tax
credit starting in 2010. Also, effective Jan. 1,
2011, use of flexible spending accounts to
reimburse for over-the-counter medications
without a prescription will be prohibited, irrespective of when funds were deposited into
It has become a growing problem. Unfortu-
nately, Congress has been woefully late in ret-
roactively passing an AMT “patch” that effec-
tively raises the level of income exempt from
the AMT and therefore lowers the reach of the
AMT. For 2009, the AMT patch was $70,950
($46,750 for singles). For 2010 at press time,
it had been set to drop to $45,000 ($33,750).
Ironically, congressional action in the lame-
duck session may also impact on 2011 AMT li-
ability, since the higher the regular tax liability
caused by higher tax rates, the fewer taxpayers
now allows 401(k) and 403(b) plans to permit
participants to transfer pre-tax qualified dis-
tributions into a designated Roth IRA within
the plan, effective for distributions after Sept.
27, 2010. What’s more, the income on all 2010
reconversions will automatically be deferred
into 2011 and 2012 unless an election to rec-
ognize it in 2010 is made.
Once the decision is made to accelerate or
defer a particular deduction, some attention
needs to be paid to the rules on when a particular expense is considered deductible. The
rules vary, and double-checking them before
incurring or deferring a particular year-end
expense is often prudent.
Pre-paying expenses, such as real estate
taxes or mortgage interest, does not necessarily translate into a larger deduction. A legal
obligation to do so is also required. Prepaying medical expenses before the medical services are performed also won’t win an earlier deduction, with the exception of certain
lump-sum payments required to be paid for
institutional care. Nor are pledges to make a
charitable deduction the equivalent of actually making a charitable donation.
However, those who pay a spring college
tuition bill in late December, instead of early
January, will be able to use the payment for
a 2010 American Opportunity Tax Credit
(which may revert to the lower-level Hope
Credit in 2011 if Congress does not renew
it). Mailing versus receipt, trade date versus
settlement date and other fine points round
off rules peculiar to year-end planning that
are always worth a second look.
In constructing a
strategy, those deductions
that are new for 2010 also
should not be overlooked.
in theory will be subject to the AM T.
Irrespective of congressional action, however, certain year-end planning techniques
only work if no AMT is anticipated. For example, standard deduction and personal
exemption are not permitted for the AMT,
so that year-end attempts to use them are
fruitless. Miscellaneous itemized deductions
also are not allowed. State, local and foreign
property and income taxes, too, are removed
as deductions against the AMT unless they
are business expenses. And while deductions
for medical expenses are allowed, they are
subject to a higher AGI floor.
Year-end tax planning is incomplete without
a look at Alternative Minimum Tax exposure.
Since 2010 is the first year that taxpayers with
adjusted gross income of more than $100,000
can convert their traditional IRAs into Roth
IRAs, the year-end timing of conversions
takes on added importance. To add to its importance, the Small Business Jobs Act of 2010
sponsored retirement plan must make the
distribution in 2010. The conversion may
occur directly, through a trustee-to-trustee
transfer, or indirectly, via a distribution to
the taxpayer that the taxpayer deposits into a
Roth IRA within 60 days. While the distribution must happen in 2010 to qualify as a 2010
rollover or conversion, the deposit may take
place in 2011, as long it occurs within 60 days
of the distribution.
Taxpayers who in hindsight don’t like the
result of their Roth conversion can recharacterize it. Recharacterizing an IRA contribution requires transferring amounts previously contributed to a traditional or Roth IRA
(plus any resulting net income or minus any
resulting net loss) to another IRA of the opposite type and electing to treat the amounts
as transferred to the second IRA at the time
they were actually contributed to the first
IRA. Taxpayers have until Oct. 17, 2011, to
recharacterize a 2010 rollover or conversion
While moving from recharacterizing an IRA
to the rescission of an entire transaction as
a year-end planning technique may at first
seem like a giant leap, both recharacteriza-tion and “rescission” carry the theme of “
do-overs.” The trigger for elevating rescissions to
star status this past year was LTR 201008033.
That ruling allowed a rescission of a complete
sale of a subsidiary because two requirements
were satisfied: The rescission occurred in the
same year as the transaction, and the parties
returned to a position as if the transaction
The news that has been made by this ruling
is not over the doctrine of rescission per se,
which has been around since a 1940 Fourth
Circuit case. Rather, the ruling breaks ground
by not requiring that the rescission be motivated by a defect in the initial underlying
transaction. In other words, planners may
now be free to use hindsight to undo a transaction that the taxpayer simply regrets as a
business or investment decision.
It is inevitable that this expansion of the
rescission doctrine will be tested. One central issue will revolve around how to determine when a transaction will be considered
to be treated as if it never happened. In any
event, for those who wish to test this development this year, remember that the rescission
must occur in the same year as the original
Especially as the result of congressional
brinkmanship on tax provisions that are essential components in determining year-end
tax strategies, the remainder of December
promises to be a busy period for many practitioners.
Nevertheless, the finality of December 31
also has its benefits, with an entirely new tax
year ahead that promises exciting new challenges and opportunities. AT
DROP YOUR FILTERS
Part of our value as advisors also comes from
our ability to hear the information that clients share with us openly and without our
own filters. This is extremely difficult to do.
Our filters — the way we habitually take in
and interpret information — often express
our personal value system. Remember, this
is your client’s plan, not yours.
I’ll use the same young couple as an ex-
ample. During our discovery meeting, when
I didn’t hear anything about college among
the goals, I sputtered, “Surely you will want to
provide for Charley and Sally’s college educa-
tion!” The father looked me straight in the eye
and calmly but firmly told me that that was
not their intention. “Kids today don’t appreci-
ate their education until it means enough for
them to earn it,” he said. “Nope, we are not
providing for their college.”
I was placing my values on them. This was a
goal I had — and I had never met a couple who
didn’t share it. Fortunately for me, my new
clients did not feel that I was commenting on
their value system (although they could have)
and we were able to move along successfully. I
recall this experience often to remind me not
to superimpose my values on my clients.
WHAT CLIENTS VALUE
A couple of weeks ago, I read that a man paid
$23,750 for Winston Churchill’s gold-mount-ed dentures. He also owns the microphone
that Churchill used to announce the end of
WWII. I pictured having these choppers in
my home, showing them off at dinner parties.
No — doesn’t work for me. The value for this
buyer is not having the dentures or the microphone, but owning a piece of history.
Knowing what our clients ultimately value
helps to make our relationship with them
more successful. As I worked with that young
couple, I learned that their motivation for saving and investing was somehow recapturing
the childhood they experienced and giving
some of that to their kids. As a consequence,
I consistently used that as the benchmark toward their success.
I still can’t relate to buying a stuffed horse
for $266,000, but I can understand spending
that money to own a little bit of history, particularly if you got to pet the horse when he
was alive and kicking. AT