Making tax sense in 2011

By Judith McGee The Daily Record Newswire In late December, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The action marked the end of the sunset of the Bush tax cuts. The new act extends many Bush provisions for two years. Now Americans can breathe a sigh of relief: Tax rates didn't ascend to pre-Bush highs. Here are highlights: Federal income tax 10 percent is the lowest federal income tax bracket. 25 percent, 28 percent, 33 percent and 35 percent brackets were extended through 2012. The dividend tax rate for people under the 25 percent tax bracket is 0 percent; at 25 percent and above, it's 15 percent. Certain child care credits were extended to $3,000 for one child and $6,000 for two or more children. Relief of the marriage penalty was extended temporarily. The existing system for student loan interest deductions was kept subject to income limits. The alternative minimum tax, which remains problematic, got another patch. Unemployment insurance was extended. The FICA payroll tax was temporarily reduced from 6.2 percent to 4.2 percent.What were they thinking? For those over age 70-1/2, qualified charitable distributions from an IRA were extended up to $100,000. Estate taxes This was a shock for many people. Both political parties had been arguing about the estate tax bill. Who would have thought that such a change would be signed into law? We feared that the old, pre-Bush tax-cut law would reduce the $3.5 million excluded from federal estate tax computations to the previous $1 million. Instead, for the next two years, an individual can pass up to $5 million to a non-spouse or a non-charitable beneficiary who is a U.S. citizen, free of federal estate tax. The new estate tax law decreases the estate tax rate from 55 percent to 35 percent, eliminating all the brackets above 35 percent in the current unified credit table on assets exceeding the $5 million exemption. What is most shocking is that a surviving spouse can use the unused amount of a pre-deceased spouse's exemption. So, an estate of $10 million would pay no federal estate tax. Oregon and Washington tax estates according to state tax law and do not correspond with the federal estate tax laws. Strategies for an environment with low interest rates Planners are catching up with the new tax laws and the present financial environment. Low interest rates offer opportunities for transferring wealth to family members or selling assets, including businesses, to others. Marge and John want to help their son, Mark, buy a new home. Mark hasn't saved enough for a down payment. A low-interest loan secured by a second trust deed on the new home is a possible solution. With interest rates low, it's an affordable solution for the parents and their son. The children can take advantage of depressed housing prices. A secured loan approach has advantages. As the property appreciates, all benefits go to the children -- not to the parents -- for inclusion in their estates. Using a loan instead of a gift preserves the parents' gift tax annual exclusion ($13,000 in 2011) and exemptions for other transactions. Choosing a loan rate depends on the term of the loan and the current Applicable Federal Rate. It's not always a good idea to choose the cheapest rate. Consider the term of the loan. A longer term may be better even if the rate is a little higher. We now understand which tax rates can be used in planning for 2011 and 2012. Congress will wage debate on funding for budgets and escalating debt. Tax laws continue to be in flux, but taxpayers now have an opportunity to meet their advisers and revise game plans. ---------- Judith McGee is the chairwoman and CEO of McGee Financial Strategies Inc., an independent registered investment adviser. She is a co-branch manager of, and offers securities through, Raymond James Financial Services Inc. in Portland. Contact her at 503-597-2222 or judith@mcgeenet.com. Published: Thu, Mar 31, 2011