Dear Clients & Other Friends:

I have discussed in previous emails how our tax regime is currently built around a series of tax provisions that have near-term expiration dates.  Many of these provisions, such as the itemized deduction for sales tax, have been extended numerous times.  This short-term tax legislation really hit a peak with the 2010 extension of the "Bush tax cuts" for 2 more years and the $5 million estate tax exclusion, also limited to 2 years.

Obviously this makes long-term tax planning very difficult.  I also believe it encourages us to focus on  short-term issues at the expense of long-term planning - in all areas of our financial lives, not just the tax area.  This short-term view is not productive.

With many major tax provisions expiring in 2011 and 2012, Congress will be faced with some very difficult decisions.  It is not encouraging that we are entering this period with such a polarized Congress, combined with a presidential election year.

But we do need to plan.  Therefore I wanted to recap in this newsletter the major provisions that are expiring in 2011 and 2012.   With the current Congressional climate, we cannot assume any will be extended.  You may want to take advantage of a particular tax provision before it expires.

Expiring 12/31/2011

Individual

·         Above-the-line deduction for certain expenses of school teachers

·         Deduction of mortgage insurance premiums as qualified residence interest

·         Election to deduct sales taxes instead of state income tax as an itemized deduction

·         Above-the-line deduction for qualified tuition and related expenses

·         Personal energy property credit of up to $500

·         Ability to use certain nonrefundable personal credits against both regular tax and AMT

·         Credit for construction of new energy-efficient homes

·         Energy-efficient appliances credit

·         Expanded adoption credit: will be reduced and made non-refundable

·         Increased AMT exemption (will cause more people to be subject to Alternative Minimum Tax)

·         Liberalized charitable deduction rules for conservation easements

·         Ability of individuals age 70 ½ and older to make charitable distributions of up to $100,000 per year from their IRAs

·         Temporary 2% reduction to the employee's share of the FICA tax rate

·         Temporary 2% reduction to the self-employment tax rate

·         Acquisition date for Qualified Small Business Stock to qualify for 100% gain exclusion

Business

·         Research and experimentation expense credit

·         New market tax credit

·         Work opportunity credit

·         Enhanced charitable deduction for contributions of food inventory

·         Enhanced charitable deduction for contributions of book inventories to schools

·         Enhanced charitable deduction for corporate contributions of computer equipment for educational purposes

·         Special basis adjustments provision for shareholders of S corporations making charitable contributions of property

·         Extended exclusion for employer-provided mass transit and parking benefits

·         5 year recognition period for S corporation built-in gains tax (reverts to 10 years)

·         15 year depreciation and Section 179 expensing of qualified leasehold improvements, qualified restaurant property and qualified retail improvements

·         100% bonus depreciation for qualified property

·         Increase in Section 179 deduction to $500,000: reverts to $125,000

Expiring 12/31/2012

Individual

·         Reduced capital gain rates

·         Dividends taxed at capital gain rates

·         Reduced tax rates: tax brackets will go from 10/25/28/33/35% back up to 15/28/31/36/39.6%

·         Elimination of the marriage penalty: the top of the 15% tax bracket for joint taxpayers will revert from 200% of the amount applicable to single taxpayers to 167%

·         Exclusion of income from the discharge of indebtedness for a personal residence

·         Repeal of the limitation on itemized deductions: the 3% phase-out of itemized deduction returns for higher income filers

·         Repeal of the phase-out of personal exemptions for higher income filers

·         American Opportunity Credit for education expense

·         Extended period to deduct student loan interest: will be limited to the first 60 months of interest

·         Increased contribution limit of $2000 for Coverdell Education Savings Accounts: will revert to $500

·         Increased dependent care credit

·         Increased child tax credit

·         Increased earned income credit

·         Expanded adoption credit: will be limited to only special need adoptions

·         35% maximum estate, gift, and generation skipping transfer (GST) tax rate: will revert to a maximum tax rate of 55%

·         $5 million estate, gift and GST exclusion: reverts to $1,000,000

·         Family owned business deduction for estate taxes

Business

·         50% bonus depreciation for qualified property

·         Increase in Section 179 deduction to $125,000: reverts to $25,000

·         Exclusion of up to $5,250 of employer-provided adoption assistance

Since these expiration dates are already in place, taxes will increase across the board if Congress is unable to come to a compromise on the tax issues.  This is a case where even inaction creates action.  It will be an interesting couple of years.

As always, please contact me if you have any questions.

Thanks,

Tim

Disclaimer: By nature of a newsletter, this information is in summary form and does not necessarily detail every requirement, restriction or tax planning opportunity.  Prior to executing any tax strategy, you should consider non-tax implications - you may cost yourself more than you save in taxes.  Please use this information with these limitations in mind.  If you are considering executing a particular tax strategy, please contact me so we can discuss the specifics.

          Tim Jacobsen, CPA
 Strader Hallett & Co., P.S.
    Certified Public Accountants

5209 Corporate Center Court Southeast
Lacey, Washington   98503

(360) 456-2100 ext 134
(360) 456-2590  fax
www.StraderHallett.com

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