Accounting Today - December 13 2010

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 the account.

Strategy
FROM PAGE 14

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.

TIMING

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
comprehensive year-end
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.

AMT

Year-end tax planning is incomplete without a look at Alternative Minimum Tax exposure.

ROTH CONVERSIONS

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

RESCISSIONS

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 never happened.

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 transaction.

CONCLUSION

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

Value
FROM PAGE 18

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