Ep 13: Tax Law Tips 2010 | The RocketLawyer Podcast

00:00 Introductions. This week Charley and Juli are joined by Greg Herman-Giddens, a North Carolina tax attorney. It’s late January, which means it’s tax season for individuals and business owners. Good thing we have an expert to guide us through the paperwork. Greg’s practice specializes in income tax planning, as well as handling tax issues in estate planning and administration.

01:40 Taxes were big news last year, but was it all just sound and fury? Will we notice a lot of changes when we’re filing our 2010 returns? Surprisingly, for all the tax talk in late 2010, the extension of the Bush-era tax cuts means the tax laws are mostly the same this year as they were last year. Hey, at least it’s consistent.

02:57 Estate planning and regular income taxes have a lot of crossover: individuals have to take income tax considerations into account during the estate planning process, especially when it comes to real estate. Even if you have modest means and your estate won’t be subject to estate taxes, there are income issues to be considered, especially for your beneficiaries. For example, your home is typically your biggest asset, which means you may want to consult a tax attorney or estate planning attorney before having a real estate lawyer draw up a deed.

05:27 We ask Greg the most basic tax filing question: should we itemize or use the standard deduction? According to Greg, the best way to figure it out is to try it both ways, by calculating returns using both methods (this is where software comes in handy). If you’re still confused on where you stand, there is one trend you can look to: renters typically claim standard deductions, while home-owners itemize. However, don’t just take our word for it, since your return really does depend on your personal situation. The exemption rates and deduction amounts have been extended, but that doesn’t mean you should necessarily file the same as last year, especially if your circumstances have changed.

07:50 The person who does the estate planning is not the one who has to deal with the estate taxes. Estate administrators got off easy in 2010 when there was no estate tax, but what can we expect for the future? For one thing, most of us won’t have to deal with estate taxes at all— with the exemption amount now at $5 million ($10 million for married couples), estate taxes will only affect less than 1% of the US population. However, if you do fall into this pool, one of the most common ways for married couples to save on estate taxes is to set up a trust that shelters the exemption amount of the first spouse. The survivor can use it for their lifetime, and then the remainder is passed on tax-free to children and heirs when the surviving spouse dies.

For the rest of us, it’s easiest to start with simple estate plans like Wills, and then as the estate grows, start using more complex tools like Living Trusts to safeguard assets. It’s a particularly good idea to review your estate plan every year, to take advantage of any new tax laws. But as Greg wryly notes, it’s hard enough to get people to do their estate plans in the first place, let alone come back to them.

11:41 We mentioned earlier that the home is often an individual’s biggest asset. Their second biggest asset is typically an individual retirement account, or IRA. IRAs aren’t just piggy banks though— they have usage requirements, like required minimum distributions. After explaining how the amounts are calculated, Greg tells us where he sees problems arising, namely, when people try to incorporate their IRAs into their estate plans. A year after one spouse dies, the surviving spouse can take out distributions no matter what their age is. Alternatively, they can do a roll-over and delay those distributions until they are 70 1/2. Unfortunately, non-spouse beneficiaries can’t do roll-overs, so you may need to create a trust. Whatever you do, make sure your trusts are set up properly. Since the rules have changed, if you have an older trust, make sure it’s updated to incorporate newer laws

17:01 We switch gears from retirement to college education. President Obama’s State of the Union Address last week emphasized the need for more and better education in the US. Ah, but how to afford this education? Fortunately there are a number of tax credits available to students and teachers, such as the American Opportunity Tax Credit, as well as deductions. Greg clues us in to one of the most powerful ways to save on education— the 529 college savings plan. In some states you can get tax deductions just for putting money into this account, but in all cases, when you use the funds in the account for qualified education expenses, you aren’t taxed on the distributions. You can save a lot, but you have to do a lot of research first.

19:58 We finally get around to the pesky question of the AMT. The AMT (short for “alternative minimum tax”) used to be a way to force the wealthy to pay taxes, but the problem now is that middle-class taxpayers are hit by the AMT, which hasn’t kept pace with inflation. This year’s patch increases the exemption amount to $72,000 for married couples. If you fall over this limit, you won’t be able to itemize all your deductions. The lesson here is to really plan ahead, so you can accelerate certain items of income or pay as much state and income taxes as you can ahead of time. It may be a little too late to do any AMT planning for your 2010 return, but you can definitely get a jump on 2011.

24:00 We ask Greg for his tax law predictions for 2011. Look out for the federal gift tax: while the exemption is $5 million, if you make a gift over $13,000 you’ll have to report it on a gift tax return (IRS form 709). Charitable contributions and gifts to your spouse aren’t subject to this limit.

For more great tax planning tips from Greg Herman-Giddens, check out his estate planning blog at http://www.ncestateplanningblog.com. While it focuses on North Carolina, it’s applicable to pretty much everybody paying taxes in the US (federal taxes are federal taxes, after all). Asset protection, income tax issues, estate tax, estate planning issues, elder law and more. If you need legal help, you can go to his firm’s site at http://www.trustcounselpa.com. And as always, you can follow us on Twitter and Facebook, as well as through our blogs Legally Easy and Rocket Lawyer Press. See you next time!