Blog Entries by Sheryl Rowling, CEO of Total Rebalance Expert

Tax Tips After the New Tax Bill

By Sheryl Rowling, CEO of Total Rebalance Expert on Wednesday, January 5th, 2011

Prior to the end of the year, I presented a webinar titled “5 Year-End Tax Saving Strategies for your Clients’ Portfolios.” How do the provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act impact my previous advice?

Roth conversions: Based on a one-time lifting of the $100,000 AGI limitation, as well as the two-year deferral of conversion taxes, many clients implemented Roth conversions in 2010. For clients that converted to IRAs to Roth in 2010, the new tax law means:

  • Clients might want to consider “un-converting” to avoid bunching the tax into [at most] two years. The $100,000 AGI limitation has been eliminated, so IRAs can now be converted over time – even for high earning taxpayers.
  • Clients will most likely benefit from paying half of the conversion tax in 2011 and 2012, since the tax rates will not increase during these two years.          

Avoiding capital gain tax increases: To the extent clients recognized gains during 2010 to avoid paying higher taxes in 2011, this cannot be undone. However, capital gains rates did not decline as a result of the new law and they are still scheduled to increase after 2012. If a client was considering electing out of installment sale treatment (for sales originating in 2010), knowing that rates will not increase for two years might discourage the election.

Preparing for the Medicare surtax: The Medicare surtax of 3.8 percent on investment income is still slated to take effect in 2013. My previous recommendations to consider municipal bonds, minimize investment income and pursue location optimization within clients’ accounts are still valid.

Harvesting tax losses: An ongoing regimen of opportunistically harvesting tax losses can help ensure that clients’ current tax liabilities are minimized.

Avoiding capital gain distributions: Although capital gain distributions tended to be immaterial in 2010, they could be material in 2011. It is always recommended to consider capital gain distribution avoidance for funds expected to post material gains at year-end.

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