1. 2010 Year-End
Tax Planning Guide
education / tax planning guide november 2010
summary in brief
There is enormous uncertainty about what the future
holds for U.S. taxpayers in 2011 and beyond. Policymakers
are debating whether to extend tax cuts initiated by
President George W. Bush or to allow the cuts to expire
on January 1, 2011. Reluctant to tackle the issue before the
midterm elections, Congress will take up the question in
late November.
At the time this guide was published, the outcome of
these deliberations was unknown; however, there are
still key steps you can take as 2010 draws to a close. In
the following pages, you’ll find information, updates and
ideas on many important tax topics to consider now.
Your Morgan Stanley Smith Barney Financial Advisor
can work with you and your tax professional to help you
decide on strategies that may be beneficial to you.
2 Timely Strategies for Uncertain Times
4 What Happens If the Tax Cuts Expire?
5 Managing Capital Gains with
Capital Losses and Tax Swaps
6 Building and Managing
Retirement Savings
7 Other Considerations for
Business Owners
8 Preparing for Higher Estate
and Gift Taxes
9 Tax-Efficient Gifting Strategies
10 Saving for Education
2. education / tax planning guide
2 morgan stanley smith barney | 2010
Timely Strategies
for Uncertain Times
1. capital gains and losses.
Consideration
With nearly every area of individual
taxes in limbo right now, the typical
considerations—the ones that guide
using your current and past gains and
losses to help or assist in minimizing
your current and future tax exposure—
become magnified.
Strategy
Your tax professional can run a prelimi-
nary analysis of your 2010 tax situation.
He or she can look at carryovers of tax
losses and advise you as to whether any
potential losses on depreciated securi-
ties would be more valuable in 2010 or
in future years.
2. Portfolio Allocation.
Consideration
Thevolatilefinancialmarketsmayhave
thrown your portfolio allocation out of
line. Year-end is a good time to check
your asset allocation, and—just as im-
portantly—to reassess your long- and
short-termgoalsinlightofanychanges
in your life and the financial markets.
Strategy
Reviewyourexistingfinancialplanwith
yourFinancialAdvisor—orcreateaplan
forthefirsttime.Onceyouhavereviewed
your goals, you can work together to
access the investment expertise of the
Morgan Stanley Smith Barney Global
InvestmentCommittee,whichregularly
publishesrecommendedassetallocation
strategiesformanyinvestmentobjectives.
3. Retirement.
Consideration
High-income investors now have the
opportunity to convert assets from a
TraditionalIRAoremployer-sponsored
retirement plan to a Roth IRA. With a
Rothaccount,theretirementassetsyou
are working hard to build now will one
daybecomeretirementincome,freeoftax.
Strategy
To help you decide whether a Roth IRA
makes sense for you, your Financial Ad-
visor can prepare a Roth Conversion
Analysis. This report will show you the
after-tax potential future value of your
IRA balance, comparing the outcome
of your current Traditional IRA with
that of a Roth IRA. You’ll also be able to
see the wealth planning advantages of
“stretching” a Roth IRA over multiple
generationsandthebenefitsofincluding
income from the conversion over the
next two years.
With the current tax and legislative
environmentpointingtowardatrendof
higherpersonalincometaxrates,consider
the advantages of a Roth conversion in
2010. You’ll have the option of paying
the conversion taxes now, at a poten-
tially lower rate, or spreading the tax
payment across two years by including
half the income in 2011 and half in 2012
at rates in effect in those years.
1
Use current and past gains and losses to
minimize current and future tax exposure.
2 Reassess portfolio allocations in light
of your long-term goals.
3 Convert retirement assets to a Roth IRA.
4 Accelerate gifting plans.
5 Claim a tax credit for home improvements.
6 Request a retirement plan evaluation
for your business.
Six Timely Strategies To Consider
3. morgan stanley smith barney | 2010 3
education / tax planning guide
4. Gifting to Individuals
and Charities.
Consideration
After 2010, unless there is legislation to
the contrary, estate taxes are scheduled
to return to rates that are higher than
they have been for many years. If you
plantoleaveanestatetoyourheirs,you
maywanttostrategicallytransferassets
this year, free of gift tax, rather than
later, when they may be subject to the
higher estate tax rates.
Strategies
•• In 2010, you can gift up to $13,000
($26,000 for a married couple) free of
gift tax to an individual or nonchari-
table entity. Read on to find out how
you can accelerate your gifting in the
current year; for instance, by contrib-
uting to a 529 college savings plan you
can remove up to $130,000 (jointly)
from your taxable estate.1
•• If you want to use appreciated
stock to make a charitable donation,
do so before year-end to qualify for a
potential income tax deduction this
year and avoid paying any applicable
capital gains taxes on the apprecia-
tion. You can also arrange to contrib-
ute long-term appreciated stock to a
donor-advised fund, which is a rela-
tively low-cost, flexible way to manage
charitable giving.
5. Tax Credits.
Consideration
Ifyoumadeenergy-savingimprovements
to your home this year or purchased a
new home by April 30, 2010, you may
be able to claim a tax credit that could
reduceyourtaxliabilitydollar-for-dollar.
Strategy
Reviewyourreceiptsforhomeimprove-
ments with your tax professional to see
if you qualify for these credits.
6. Business Owners.
Consideration
Like individuals, business owners need
to prepare for possible tax increases.
They may also be affected by the Small
BusinessJobsActof2010,whichextends
thedepreciationbonusforayear,among
other provisions.
Strategies
•• Business owners may want to revisit
certain strategies—including when
to take capital gains and losses and
whether or not to make installment
sales—in light of possible tax increases.
•• The extension of the 50% deprecia-
tion bonus may allow some companies
to preserve or increase cash flow by re-
ducing their current tax liability.
•• If your company has a 401(k), 403(b)
or 457(b) plan, you may be able to offer
employees the opportunity to convert
their existing retirement account to a
Roth account. Review your plan docu-
ment or check with your attorney or
your plan provider to see if this is an
option under your plan.
1 No further annual exclusion gifts and/or
generation-skipping transfers to the same
beneficiary may be made over the same
five-year period, and the transfer must be
reported as a series of five equal annual
transfers. If the donor dies within the five-
year period, a portion of the transferred
amount will be included in the donor’s
estate for estate tax purposes.
4. education / tax planning guide
4 morgan stanley smith barney | 2010
What Happens If the
Tax Cuts Expire?
Type of Tax 2010
2011
(Assuming Bush Tax Cuts
Expire after 12/31/10)
2011
(Assuming Tax Rates Proposed
by Obama Administration)*
Ordinary Income Tax
1st bracket 10% Eliminated 10%
2nd bracket 15 15% 15
3rd bracket 25 28 25
4th bracket 28 31 28
5th bracket 33 36 36
6th bracket 35 39.6 39.6
Short-Term Capital Gains (Holding Period of One Year or Less)
Ordinary Income Tax Ordinary Income Tax Ordinary Income Tax
Long-Term Capital Gains (Holding Period of More Than One Year)
1st and 2nd brackets 0 10 0
3rd and 4th brackets 15 20 15
5th and 6th brackets 15 20 20
Qualified Dividends
1st and 2nd brackets 0 Ordinary Income Tax 0
3rd and 4th brackets 15 Ordinary Income Tax 15
5th and 6th brackets 15 Ordinary Income Tax 20
Proposed Tax Changes for 2011
I f the entire package of Bush tax cuts
expires at the end of the year, you can
expect to see numerous changes:
Income Taxes.
•• Income tax rates for almost all
Americans will increase.
•• Taxpayers should consider accel-
erating income to 2010, before taxes
increase, and delaying deductions to
offset higher taxes in the coming years.
Capital Gains.
•• Long-term capital gains will in-
crease across the board.
•• This year, the top long-term capi-
tal gains rate remains at a historically
low 15%. Unless extended, this rate is
scheduled to sunset in 2011—so you
may want to consider taking gains now.
•• For investments in taxable broker-
age accounts, consider:
–– selling appreciated securities this
year instead of next year, when taxes
may be higher.
–– sellingsecuritiesthathavedecreased
in value to create a net capital loss
thatexceedscapitalgains;theexcess
net capital loss can be carried for-
ward to 2011 and beyond and used
to shelter both short-term gains and
gains recognized at the higher rates
in those years.
Dividends.
•• Dividends will be taxed as ordinary
income—up from a maximum rate of
15% currently.
•• This affects all investors and those
in the top tax brackets could see divi-
dends taxed at as much as 39.6%—more
than double the current rate.
•• Clients should review their invest-
ments and consider holding high-pay-
ing dividend stocks in a tax-deferred
account, such as an individual retire-
ment account or a 401(k).
* This column reflects the Obama proposal, which may or may not be finally adopted as law.
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education / tax planning guide
Manage Capital
Gains with Capital
Losses and Tax Swaps
Y ear-endisanidealtimetositdown
withyourFinancialAdvisortoreview
yourportfolioanduncoveropportunities
to harvest capital losses, which can be
used to offset capital gains and reduce
your income tax liability. Evaluate your
holdings for loss candidates, includ-
ing equities, fixed income and mutual
funds. If you sell securities for a profit
during 2010, you can also offset gains
by applying unused capital losses from
previous years.
The Internal Revenue Service (IRS)
allows taxpayers to use capital losses to
offsetcapitalgainsonadollar-for-dollar
basis. For tax reporting purposes, you
must first net short-term gains against
short-termlosses(securitiesheldforone
yearorless)andlong-termgainsagainst
long-termlosses(securitiesheldformore
than a year). Any remaining gains and
losses can be netted against each other.
If net capital losses still remain, up to
$3,000 may be used to offset ordinary
income. Any unused capital losses can
be carried forward indefinitely.
Considera Tax Swap.Ifyouchoose
to sell a security to offset gains, under
IRSrules,youcannotdeductlossesfrom
the sale of securities in a wash sale. A
wash sale occurs when you sell securi-
ties at a loss, and within 30 days before
or after the sale, you:
•• Buy substantially identical securities
•• Acquire substantially identical secu-
rities in a fully taxable trade, or
•• Acquire a contract or option to buy
substantially identical securities
If you have a long-term conviction in
the security sold, you can repurchase
it after 31 days.
Youcanalsouseataxswaptomaintain
yourassetallocationanddiversification
objectives, which entails the sale and
purchaseofsecuritieswithsimilar—but
notidentical—characteristics.Stocksare
notconsideredidenticaliftheyhavedif-
ferentissuers,andinthecaseofbonds,a
differentissuerorsubstantiallydifferent
maturities or coupons.
AMT Rates. The alternative mini-
mum tax (AMT) is a concurrent tax
system that follows an alternative set
of rules to calculate income tax. AMT
disallows some of the exemptions, de-
ductions and credits that are used to
calculate standard income tax. If you
aresubjecttoAMT,youwillowewhich-
ever tax is higher—the AMT or your
“normal” amount.
For2011,theAMTexemptionamount
is scheduled to revert to the pre-Bush
era ($45,000 married filing jointly and
$33,750separately).Ifthishappens,mil-
lionsoftaxpayerswillbesubjecttoAMT
in 2010 and subsequent years.
Thereareanumberofstrategiesthat
mayhelpminimizeyourAMTexposure,
includinghowyoumanagewithholding
on state income taxes, how you time
your property tax payments, when you
sell exercised stock options—even your
investment choices. Speak to your tax
professional about the role these strate-
gies may play in your situation.
Wash Sale Rule: Key Dates
Tuesday, November 30, 2010: Last day
to “double up” for 2010. Doubling up
on a security allows you to recognize a
loss without missing any potential ap-
preciation during the wash sale period.
However, doubling up would increase
your risk exposure in that security.
Friday, December 31, 2010: Last day
you can sell a security this year for a
loss. (Note, however, that there may be oper-
ational limitations in ensuring that your trans-
actions occur on this date, so plan ahead.)
Monday, January 31, 2011: If you sold
a security for a loss on December 31,
2010, you can avoid the wash sale rules
if you wait until January 31, 2011 or later
to repurchase the same or substantially
similar security.
Short-Term Long-Term Total
Realized Gain 30,000 25,000 55,000
Realized (Loss) (20,000) (60,000) (80,000)
Net Taxable Gain (Loss) $10,000 $(35,000) $(25,000)
Netting Gains and Losses
Let’s say you realize a short-term gain
and loss of $30,000 and $20,000, and a
long-term gain and loss of $25,000 and
$60,000, respectively, this year.
After matching short-term gains and
losses as well as long-term gains and losses,
you could use $3,000 of the $25,000 net
capital loss to offset ordinary income in
the current year. The remaining $22,000
capital loss could be carried forward to
offset future years’ capital gains and/or
ordinary income.
Note: This hypothetical example is for illustrative purposes only.
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Building and Managing
Retirement Savings
Strategies for Individuals
Make Your2010 Contributions Now.
While contributions to an Individual
RetirementAccount(IRA)for2010may
bemadethroughApril
15, 2011, waiting until
Aprilcoulddepriveyou
of months of potential
tax-deferredgrowth.The
soonerthecontribution
ismade,thesooneritcan
start working for your
retirement account. If
youhaveearnedincome,
you can contribute up
to$5,000for2010orup
to$6,000ifyouareage
50orolderbyyear-end.
Take Your RMD
for 2010. If you are
age 70½ or older and
haveaTraditional,Simpli-
fiedEmployeePension
(SEP) or Savings Incentive Match Plan
for Employees (SIMPLE) IRA, or are
the beneficiary of an Inherited IRA, be
sure to take your 2010 Required Mini-
mumDistribution(RMD)byDecember
31, 2010. If you turn age 70½ in 2010,
you may delay taking your initial RMD
until April 1, 2011.2
Be sure to take your
RMDs on time to avoid any penalties.
2010 Roth IRA Conversions Carry
Added Benefits. This year, regula-
torychangesmakeiteasierthaneverto
convert a Traditional IRA or employer-
sponsored retirement plans to a Roth
IRA—even if you didn’t qualify in the
past because of your income level or
maritalstatus.ThekeybenefitsofaRoth
IRA are that, first, dis-
tributionsaretax-free3
and,second,thereisno
requirement that you
muststopcontributions
or begin taking with-
drawals at a given age.
Keep in mind that
you will need to pay
income tax on the
amount converted to
a Roth IRA, including
pretax contributions
and any investment
earnings. However,
2010conversionscome
withaone-timeofferto
help ease the tax bur-
den—you can spread your tax payment
across two years. Instead of paying all
the taxes when you file your taxes for
2010,youhavetheoptiontoincludehalf
the income when you file your taxes for
2011 and half when you file your taxes
for 2012 at rates in effect in those years.
The conversion must be completed by
December 31, 2010.
Finally, if you convert to a Roth IRA
in 2010 and the value of the account
decreases due to market activity, you
have the option of recharacterizing the
account back to a Traditional IRA; in
essence, undoing the conversion.
Strategies for Business Owners
Reevaluate Your Company’s Retire-
ment Plan. If your company already
offersaretirementplan,therehavebeen
significantchangesovertheyearswhich
may warrant a review, and potentially
anupdate,toyourplan.Alongwithyour
Financial Advisor, contact your ERISA
attorney or retirement plan administra-
tor to make sure you are in compliance
in all areas. Also ask specifically about
waysyourplancanbeenhancedthrough
plan design changes such as automatic
enrollment, or the addition of new in-
vestment options.
YourFinancialAdvisorcanpreparea
complimentaryretirementplanevaluation
that will assess your current program
and determine the ideal type of plan for
your business, based on your personal
and business goals.
Type of Plan Under Age 50 Age 50 or Older
Traditional/Roth IRA $5,000 $6,000
401(k)/403(b)/457(b)/SAR-SEP* 16,500 22,000
SIMPLE 11,500 14,000
2010 Retirement Plan Contribution Limits
* Only SAR-SEP plans established before 1997 may allow employees to make pretax contributions.
Thanks to the
Small Business
Jobs Act of 2010, if
you have a 401(k),
403(b) or 457(b)
plan that includes
a designated Roth
account, you may
now be able to
complete a Roth
conversion within
your employer-
sponsored plan.
7. morgan stanley smith barney | 2010 7
education / tax planning guide
OpenaQualified Retirement Plan
by Year-End. Establishing a qualified
retirementplanforyouremployeescan
helpattractandretaingreatemployees.It
canalsoofferimportantwealthbuilding
opportunities for you as the proprietor.
If you don’t have a company retirement
plan, call your Financial Advisor to get
onestarted.Ifyourbusinessisoperated
on a calendar year basis, the plan has
to be established by December 31, 2010
to qualify for a tax deduction for 2010.
Explore Retirement Tax Credits.
You may qualify for a number of credits
anddeductionsthatcanhelpdefraysome
of the costs in your plan. For instance,
if your plan is new, you may be eligible
to take a tax credit of up to 50% of the
first $1,000 of qualified start-up costs
of the plan. The credit is available for
each of the first three years of the plan.
You may also be able to deduct certain
plan expenses, such as the expenses
paid to begin or administer an eligible
plan and/or educate employees about
their plan. Your tax professional can
offer more information on how this
provision may affect your situation.
2 If you decide to delay your first RMD until
April 1, 2011, you will be required to take
two distributions in 2011—one for 2010 by
April 1, 2011 and one for 2011 by December
31, 2011. This could result in the distributions
being taxed at a higher marginal rate due to
the increased income received during
the year.
3 Distributions of earnings are tax-free if
made at least five years after the year of the
taxpayer’s first Roth IRA contribution and
after age 59½ or due to death, disability or
for a first-time home purchase. Withdrawals
of contributions are not taxed.
Other Considerations
for Business Owners
W iththeBushtaxcutssettoexpire,
businessownersmaywanttocon-
sidertakingcapitalgainsandaccelerating
income in 2010 to avoid higher taxes
in 2011. Conversely, losses may prove
to be more beneficial if held until 2011.
Business owners who are in the
process of selling their business via
an installment sale method should con-
sider electing out of that approach and
accelerating income in 2010, ahead of
potential tax increases.
With the Small Business Jobs Act
signed by President Obama, business
ownersshouldconsiderenhancements
thatarenowbeingofferedaspartofthe
approved bill:
Bonus Depreciation.Forbusinesses
of all sizes, the Act extends the tempo-
rary 50% depreciation bonus for one
additional year. It basically allows that
50% of the basis of qualified property
maybedeductedintheyeartheproperty
is placed in service and the remaining
50% may be recovered under normal
depreciation rules. Bonus depreciation
may allow some taxpayers to preserve
or increase cash flow by reducing cur-
rent tax liability, and it may also enable
some companies to increase a loss that
can be carried back.
A New$30 billion SmallBusiness
Lending Fund. Thebillwillestablisha
new$30billionSmallBusinessLending
Fundwhich—byprovidingcapitaltosmall
banks with incentives to increase small
businesslending—couldsupportseveral
multiples of that amount in new credit.
Roth Retirement Account Op-
portunities. Employers may be able
toofferopportunitiesforemployeesand
themselves to convert existing funds
in company retirement accounts to
a Roth account. One of the key ben-
efits of a Roth is that distributions are
tax-free.Reviewyourplandocumentor
check with your attorney or plan pro-
vider to see if this is an option under
your plan.
8. education / tax planning guide
8 morgan stanley smith barney | 2010
are transferred more than one genera-
tion younger than the donor (such as
grandchildren). The GST
taxexemption,theamount
that transfers free of tax,
will be approximately $1
million and the tax rate
will be 55%. In addition,
the modified carryover
tax basis will come to an
endonDecember31,2010
and the step-up regime
willapplyagainbeginning
January 1, 2011. This means that the
incometaxbasisofpropertythatpasses
from a decedent again will be stepped
up to fair market value.
Gift Taxes. The federal gift tax will
change significantly, too. Although the
gifttaxexclusion,theamountthattrans-
fersfreeoftax,willremainat$1million,
the highest marginal rate will increase
from 35% to 55%.
What to Do by Year-End.
•• Consider making gifts now at a max-
imum 35% rate, ahead of scheduled tax
increases next year.
•• If you want to transfer wealth to
grandchildren, you can do so this year
without incurring the generation-skip-
ping transfer tax, unless there is legisla-
tion to the contrary. Such transfers still
will be subject to the gift tax.
•• If your estate is valued at over $3.5
million, or if you live in a state that im-
poses taxes on estates of any value, ask
Preparing for Higher
Estate and Gift Taxes
Estate Taxes. On January 1, 2011, two
of the most significant wealth planning
taxes—the federal
estate tax and the
generation-skipping
transfer tax, both of
whichwererepealed
in 2010—are sched-
uled to return to the
pre-Bush levels, un-
less there is legisla-
tion to the contrary.
That means that the
maximum amount you can transfer
free of federal estate tax will be only
$1 million, and the highest tax rate will
jump to 55%. Recall that in 2009, the
estate tax exclusion was $3.5 million
and the highest marginal rate was 45%.
Thegeneration-skippingtransfertax
(GST tax) typically applies when assets
Type of Tax 2010
2011
(Assuming Bush Tax Cuts
Expire after 12/31/10)
2011
(Assuming Tax Rates
Proposed by Obama
Administration)*
Estate Tax
Estate Tax Rate Repealed 55% 45%
Exemption N/A $1mm $3.5mm
Basis Step Up
$1.3mm + $3mm
(spouse)
Full Step Up Full Step Up
Generation Skipping Tax
Generation
Skipping Tax Rate
Repealed 55% 45%
Lifetime Exemption N/A $1mm $3.5mm
Gift Tax
Gift Tax Rate 35% 55% 45%
Lifetime Exemption $1mm $1mm $1mm
Proposed Tax Changes for 2011
A beneficiary review ensures that your information
is complete, up-to-date and reflects your current
desires. Your Financial Advisor can conduct a
beneficiary review—not just for your estate plans
or trusts, but for your insurance contracts and
retirement accounts, as well.
* This column reflects the Obama proposal, which may or may not be finally adopted as law.
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education / tax planning guide
Tax-Efficient
Gifting Strategies
Donate Appreciated Stock for Po-
tential Double Tax Savings.Instead
of cash, consider donating appreciated
stocktoyourfavoritecharity.Ifyouhave
owned a stock for more than one year,
youcanavoidpayingcapitalgainstaxes,
and you may also be able to deduct the
fullvalueofthestockfromyourtaxable
income.Ifyouwanttokeepthestockin
yourportfolio,youcanseparatelyreinvest
in the stock. If you wish to donate stock
that has lost value, you should sell the
shares and donate the proceeds—this
way you realize a loss to offset income
or gains in your portfolio.
Consider the Timing of Deduc-
tions. If tax rates increase, it may be
more advantageous to hold deductions,
suchascharitablecontributions,tooffset
higher taxes in the coming years. On
the other hand, it may make sense to
accelerate deductions this year. There
is potential for a larger deduction of a
taxpayer’sitemizeddeductions,because
itemized deductions are not limited in
2010, but are expected to be in 2011.
Complete Any Gift Transfers
to Individuals by Year-End 2010.
Gift transfers support your beneficia-
ries and help reduce the value of your
estate and future estate taxes. You can
transfer up to $13,000 per recipient in
2010 without incurring any federal gift
tax. Spouses together may gift up to
$26,000 per recipient. In addition, this
might be a good year to consider larger
gifts, even taxable ones, since the gift
tax rate is at an all-time low.
Consider a Donor-Advised Fund.
If you are looking to create a legacy of
charitablegivingbuthaven’tdetermined
wheretocontribute,youmightconsider
adonor-advisedfund,whichallowsyou
to make a tax-deductible contribution
this year, locking in the tax savings, and
choose the recipients later.
your estate tax attorney what strategies
may be beneficial to you.
•• Now is a good time to create a grant-
or retained annuity trust (GRAT). All
else being equal, GRATs perform best
when a particular discount rate that
must be used in structuring the GRAT
is low. The rate for GRATs created in
October 2010 was 2.0%—the lowest the
rate has ever been.
•• Consider the use of an Irrevocable
Life Insurance Trust (ILIT) to offset
any future estate taxes. You can cre-
ate and fund an ILIT with annual gifts
to the trust, thereby maximizing the
benefits of the annual gift tax exclu-
sion.TheILITpurchaseslifeinsurance
on your life and uses your gifts to pay
the premiums. As long as the trust is
properly drafted, the insurance pro-
ceeds when paid as a death benefit will
not be included in your taxable estate,
are exempt from income tax, and can
provide immediate cash to pay bills,
expenses and taxes.
•• The low interest rate environment
makes it a great time for intra-family
loans as well. This is a simple but
often overlooked way to transfer
wealth downstream without gift tax
consequences.
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10 morgan stanley smith barney | 2010
Saving for Education
A varietyofsavingsplans,taxcredits
and deductions are available to
help you defray some of the expenses
of higher education, and many of them
haveyear-enddeadlinesforparticipation.
529 College Savings Plans. A
529 college savings plan is a great way
to gift to loved ones. By funding their
higher education, you will be helping
them to take an important first step
toward preparing for the future while
potentiallyreducingyourtaxableestate.
In addition to the flexibility and con-
trol that 529 plans provide the account
owner, they offer several tax benefits
that may aid in your year-end planning.
For example, you can utilize your an-
nual federal gift tax exclusion of up
to $13,000 ($26,000 jointly) to fund a
529 plan free of gift tax. Moreover, if it
suits your estate planning needs, you
can accelerate multiple years’ worth
of gifts into the current year, removing
up to $65,000 ($130,000 jointly) per
recipientfromyourtaxableestate.4
Your
MorganStanleySmithBarneyFinancial
Advisor can help you select the 529 col-
lege savings plan that best suits your
needs from some of the country’s most
respected money management firms.5
If you are one of the millions of peo-
ple funding a college savings plan, you
know that market conditions may have
negatively affected many investment
portfolios, including education savings.
Now is the time to review plan options
with your Financial Advisor and make
any necessary adjustments in how your
fundsareallocated.6
Ifthebeneficiaryof
theaccountisnearingorincollege,your
Financial Advisor can also recommend
asset allocations to help minimize the
impact of a negative market.
Education Tax Credits. If you
pay for education expenses for yourself,
your spouse or a dependent, document
yourexpensesanddiscusswithyourtax
professional whether you qualify for a
taxcredit.Knownbynamessuchasthe
Hope Credit and the Lifetime Learning
Credit, these credits may help reduce
your tax obligation, dollar-for-dollar,
based on your expenditures.
Deductions. Takeadvantageofthe
tuition and fees deduction (included in
the pending extenders bill), which may
helpreducetheamountofyourincome
subjecttotaxbyupto$4,000.Depending
on your income, you may also be able to
deduct interest on student loans used
for higher education.
Manyprofessionalsinvestsignificantly
in ongoing work-related education. If
you do so, you may be able to claim a
deduction for these expenses, provided
qualifying expenses plus other job and
certain miscellaneous expenses add
up to more than 2% of your adjusted
gross income.
Don’t “Double Dip.” You cannot
take both deductions and tax credits
for the same expense. Ask your tax
professional to help you determine
what you are qualified for, and to help
you choose the one that will give you
the lower tax.
4 No further annual exclusion gifts and/or
generation-skipping transfers to the same
beneficiary may be made over the same
five-year period, and the transfer must be
reported as a series of five equal annual
transfers. If the donor dies within the five-
year period, a portion of the transferred
amount will be included in the donor’s
estate for estate tax purposes.
5 Before investing, clients should consult
with their tax advisor to consider whether
tax or other benefits are only available for
investments in their home state.
6 The account holder can reallocate the
portfolio investments once every calendar
year or whenever the designated beneficiary
is changed.
11. Planning strategies to discuss with your Financial Advisor and tax professional before year-end.
2010 Year-End Tax Planning Checklist
general tax issues
Find out if you carryover any losses from the sale of investments. Use this
information to determine if you want to use these losses to offset any
investment gains from 2010 or in future years.
When selling securities, ask your Financial Advisor how to comply with
wash sale rules that govern the purchase and sale of similar investments
within a 30-day period.
Have your tax advisor estimate your adjusted gross income and tax rate now
to determine if you have any Alternative Minimum Tax (“AMT”) liability for
2010. If so, you may consider deferring taxable income to 2011 or accelerat-
ing or deferring deductions in 2010 to minimize AMT.1
Tell your tax advisor if you purchased any big-ticket items this year or are
intending to by year-end. You may qualify for valuable tax credits or deduc-
tions if you made energy-saving home improvements, purchased a home, or
paid for a college education.2
Fully fund your IRA and company retirement accounts as soon as possible.
You have until April 15, 2011, to fund your IRA for 2010. You should con-
sult your tax advisor to determine the deadline for contributing to your
company retirement plan.
If you are age 70½ or older and have a Traditional, SEP, SAR-SEP or
SIMPLE IRA, remember to take your Required Minimum Distribution
(“RMD”) for 2010.
Explore the benefits of a Roth IRA. Tax law changes in 2010 enable all
investors to convert to a Roth IRA, which not only provides tax-deferred
growth, but also tax-free income in retirement.
If you own a business which has a calendar tax year, you have until December
31, 2010, to adopt a qualified plan in order to deduct contributions for 2010.
If you miss this deadline, a SEP plan can be established and funded by the
due date for filing the plan sponsor’s 2010 tax return (with extensions)—
which, if you are a sole proprietor, could be as late as October 15, 2011.
Check with your employer if your company’s retirement plan contains a
designated Roth account. As a result of the Small Business Jobs Act of 2010,
you may be able to complete a Roth conversion within your employer-spon-
sored plan.
Diversifying your retirement portfolio with a variable annuity may help
complement your existing investment strategy by providing a number of tax
advantaged benefits—including opportunities to reduce your current tax
liability, increase retirement savings, and possibly supplement social securi-
ty and/or pension benefits.
retirement accounts
gifting plans
Complete any gift transfers to individuals or use the annual exclusion to
make gifts to an Irrevocable Life Insurance Trust by year-end. Not only will
this make you feel good, but you will help reduce the value of your estate
and future estate taxes. You can transfer up to $13,000 per recipient in
2010 without incurring any federal gift tax. Spouses together may gift up
to $26,000 per recipient.
If you plan to gift shares of stock to charity, you must act by year-end. By
gifting long-term appreciated stock, you can qualify for a potential income
tax deduction—or by selling stock that has lost value and donating the
proceeds, you can realize a loss to offset other gains.
Talk with your Financial Advisor about gifting through a 529 plan. Transfers
to 529 plans can help reduce income or future estate taxes. By making an
accelerated gift through a 529 plan, you can gift up to $65,000 ($130,000
for couples) per beneficiary.1
Ask your Financial Advisor about the charitable benefits of the Morgan Stanley
Smith Barney Global Impact Funding Trust (GIFT), a suite of services designed
to help you build your philanthropic legacy through a professionally-managed
donor-advised fund and related grant making and reporting tools.2
business owners
In light of the expected expiration of the Bush tax cuts after 12/31/10,
consider taking capital gains and accelerating income in 2010 to avoid
potential higher taxes in 2011. Conversely, losses may prove to be more
beneficial if held until 2011.
Consider how the new Small Business Jobs Act may benefit your business.
The extension of the 50% depreciation bonus may allow your company to
preserve or increase cash flow by reducing current tax liability.
If you are in the process of selling your business via an installment sale
method, consider electing out of that approach and accelerating income in
2010, ahead of potential tax increases.
If your company has a 401(k), 403(b) or 457(b) plan, consider offering em-
ployees the opportunity to convert their existing retirement account to a
Roth account.
other issues
Use any balance in your employer’s Flexible Spending Account (“FSA”) for
qualified medical expenses by year-end 2010. When estimating your con-
tributions for next year, consider the increasing costs of uncovered medi-
cal expenses and changes in your company’s medical insurance plan.
Ask your Financial Advisor for help rebalancing your portfolio to remain in
line with your goals, time horizon and risk tolerance. Discuss any new op-
portunities for investing that might be appropriate for you.
Consider using a securities based loan to help you meet a tax obligation.