2009 Lane Reports

Tax Planning Under the New President

The Lane Report, January 2009
Thursday, January 1, 2009
by Jeffrey A. Miller

With President-Elect Barrack Obama strolling into the New Year along the beaches of Hawaii, one has to wonder: will our own personal "tax picture" look as heavenly in 2009 and beyond? Mr. Obama campaigned on "change" and specific tax reforms. Additionally, several new tax laws have been enacted this year, the most recent one signed by President Bush on December 23, 2008. How does all of this affect your personal tax planning? Here is what you should be thinking about as you begin your tax planning for 2009.

Obama's Pledged Tax Reforms

In the current recession, it is uncertain how quickly Mr. Obama will push to enact the tax reforms he campaigned on. While some feel he will wait a while, prudent planning considers the likelihood that he may decide to redirect at least some tax dollars to those in need as soon as possible.

Individual Income Taxes. The top two income tax brackets would increase under Mr. Obama's proposed plan, up to the prior law's maximum rate of 39.6%. Additionally, "high-income" taxpayers (single taxpayers with incomes above $200,000 and married taxpayers with incomes above $250,000) might also receive a payroll (FICA) tax increase, equivalent to an additional two to four percent of income). Income tax planning will be ever more important in 2009 and the years ahead.

Long-term Capital Gains and Losses. High-income taxpayers are also expected to see an increase in the capital gains tax rate from 15% to 20%. Accordingly, for that reason, in the future it will be increasingly important for high-income taxpayers to offset capital gains with capital losses.

Qualified Dividends. The qualified dividend tax rate for high income taxpayers would similarly increase from 15% to 20%. Despite this expected increase, there is some comfort in knowing that a rate of 20% is still less than the ordinary income rates (up to 39.6%) that applied earlier this decade.

Other Scheduled Tax Changes and New Tax Laws for 2009

Estate Tax Exclusion. In 2009, the amount excludable from a decedent's estate (assuming no lifetime taxable gifts were made) will increase from $2 million to $3.5 million. The current federal estate tax rate will be 45 percent. One caveat: life insurance death benefits are generally includible in a decedent's taxable estate, so many people who think they are exempt from estate taxes may, in fact, be closer than they think to paying substantial estate taxes. Finally, at the state level, many more states (including Illinois) will "decouple" from the federal system in 2009. So, a decedent's estate could be "exempt" from federal estate taxes in 2009, but owe state death taxes, especially if proper planning isn't done in advance.

Annual Gifting. The annual exclusion for gifting will increase to $13,000 per person in 2009, or $26,000 per person for gifts made by a married couple. This is an often overlooked method for transferring wealth. With that in mind, 2009 looks to be a great year for transferring wealth, given the depressed values in many long-term assets (such as real estate, closely-held businesses, or stocks). Working with an advisor to get the most "bang for your buck" is always prudent.

IRA and Retirement Plan Contributions. In 2009, the maximum annual contribution for IRAs remains at $5,000 (or $6,000 if age 50 or older). For SIMPLE plans, the maximum contribution increases to $11,500 (or $14,000 if age 50 or older). For 401(k) plans, the maximum contribution increases to $16,500 (or $22,000 if age 50 or older). As current income tax rates increase, so do the income tax advantages for contributing as much as possible to retirement plans.

No IRA Required Minimum Distributions for 2009. Because of market corrections, Congress has "suspended" required minimum distributions for IRAs in 2009, whether from traditional IRAs or inherited IRAs. Required minimum distributions are scheduled to resume in 2010, using the IRS distribution factors that would apply for that year. As there are many nuances to these rules depending upon your specific facts and circumstances, and penalties apply for noncompliance, you should ask a tax professional to double-check your intended distributions (or skipped distributions) for 2009 and 2010.

"Kiddie" Tax Laws Now Include Adult Children. For tax year 2008 and future years, a child age 17 or under (at the end of the year) may have income taxed at his or her parents' marginal rate if the child's investment ("unearned") income exceeds $1,800 (inflation adjusted). Moreover, in the year the child turns 18, kiddie taxes will apply if the child's earned income is less than half of the child's overall support. Finally, where the adult child is age 19, 20, 21, 22 or 23 at the end of the year, the kiddie tax will apply if the child is a full-time student (unless the child is married and files jointly).

Tax Strategies

Take Advantage of Low Capital Gains Rates. For the last few years, we have been telling clients that we will probably never see capital gains tax rates this low again in our lifetimes. Especially with the federal and state budget deficits growing in today's recession, the "need" to raise tax rates is substantial. You might recall that just a decade ago, in 1997, capital gains rates were "lowered" to 28%. Keeping a "big picture" perspective, capital gains rates, whether at 15% or 20%, are still a "good deal." Especially if you need to diversify your investments or may need to draw upon investments for cash flow purposes, selling capital assets held for more than a year makes good tax sense. Take a serious look at low-basis stock, including stocks that were gifted to you, inherited by you many years ago, or received from the sale of a business.

Analyze Taxable vs. Tax-Free Bonds. Changing interest rates impact the "after-tax yield" of taxable bond investments. Interest rates have dropped substantially this year. As a result, a proper analysis of both taxable and tax-free bonds in your portfolio will help ensure that you are receiving the best after-tax yield on your money. Both state tax and federal tax implications should be considered as well as your current income needs. Seeking professional investment and tax advice is crucial to help ensure that you are maximizing your total after-tax yields.

Review Taxable vs. Tax-Deferred Accounts. Regular "taxable" investment accounts as well as tax-deferred investment accounts should be reviewed to make sure they are working as tax-efficiently as possible. It's going to take every ounce of savvy investing to help our portfolios recover as quickly as possible from the huge market declines that occurred in 2008. Tax-efficient investing considers not only what you own but "where" you own your investments. Simply put, even if you own good investments, you may be paying too much tax if you hold them in the "wrong" account. Here, too, professional guidance can make a world of difference.


The one thing that is constant in our world is change. This is ever so true with tax laws, especially when changing from one party's administration to another. Reviewing your income tax planning and investments at least once a year is necessary these days to help ensure that you don't leave any tax benefits on the table or that you don't pay any more taxes than are necessary.

Since the biggest potential tax rates exist with estate or death taxes (at both the state and federal levels), 2009 is definitely a year where you should not only review your will or trust with your attorney, but also take a serious look at the ways you can reduce your taxable estate. Giving a bonus to a trusted employee is one thing, but I haven't met anyone yet who enjoyed giving a "tax bonus" to the government. Rather than give an unexpected bonus to the IRS or your state's department of revenue, a little planning will help ensure that you instead give, or leave, the most assets to family, friends and charities. And that's a "tax picture" suitable for framing.

Please call on us to assist you in making the most of your tax situation. (312) 372-1040

Jeffrey A. Miller is Of Counsel with the Law Offices of Marc J.  Lane, A Professional Corporation.  Mr. Miller received his undergraduate degree from the University of Illinois.  Mr. Miller received his law degree and his masters of laws (LLM) in taxation, with honors, from IIT Chicago-Kent College of Law.  Mr. Miller is also a Certified Public Accountant and a Certified Financial Planner.

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