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Tax cuts -- yes; tax simplification -- no: How the 2001 tax cut will affect you and your business. (Roundtable).

At first blush, the Bush tax cut appears very simple. It gives individual taxpayers an across-the-board income tax reduction, the first since 1986 and the largest since 1981. It phases out the federal estate tax over 10 years. But without further Congressional action, the tax returns full force in 2011. In Oregon, the legislature did some tax tweaking as well, adding tax credits for farmers, increasing the federal tax subtraction for individuals from $3,000 to $5,000 and changing the standard deduction.

Now that the tax experts have had time to crunch some numbers, Oregon Business convened a panel of CPAs to talk about the financial planning alternatives and challenges.

Participants: Daniel O'Leary, CPA, senior tax manager with Andersen; Cheryl Perkins, CPA, shareholder with Perkins & Company; Scott Remington, CPA, head of the Portland tax department for Grant Thornton; Heidi Ruckwardt, CPA. manager with PricewaterhouseCoopers; and Suzanne Taylor. CPA, partner with Moss-Adams.

Oregon Business: What are the hot topics facing your clients?

Taylor: The questions that have come up regarding estate planning have been, "What do I do now?" The best advice is to continue to plan for the moment and to review it, because the tax laws are going to change significantly over the next 10 years. Actually, I would say the next four years, because another administration will change the whole thing again.

Remington: We are advising clients to continue planning as they're doing right now. Yes, the estate tax exemptions are going up from $675,000 this year to $3.5 million in 2009. Yes, there will be full repeal in 2010. But, do you really want to trust that the government isn't going to bring it all back in 2011? The second thing is with regard to so-called AB trusts that are set up right now (see Tax terms 101, p. 31). With the exemption increasing so rapidly, unless some of these plans are redrafted, you could all of a sudden be leaving everything to the B trust and nothing to the A trust.

Perkins: I think you also have to look at the age of the client. This repeal of the estate tax is not until 2010. We have a lot of elderly clients who are unlikely to live to that date. I don't think that anybody with significant wealth -- I would define that as over $3 million or so -- really thinks we are going to have repeal. If they want to pass the maximum assets to their children, they should still engage in significant lifetime giving.

Another area getting a lot of attention is financial planning for college. The Oregon Legislature helped parents by increasing the age at which the beneficiary must receive the proceeds of a custodial account -- from 21 to 25. But there are also other options now: educational IRAs and Sec. 529 plans.

Perkins: The education savings plans are going to be much more attractive for clients. For one thing, you don't have any income limits on who can set them up. With the tax relief bill making distributions used for qualified education purposes tax exempt -- tax free as opposed to taxable -- they just got better.

Ruckwardt: With all of these education plans, make sure that you understand the impact on any financial aid you may be expecting. It doesn't really pertain to a lot of our clients, because their adjusted gross income is over $200,000, and they wouldn't qualify. But for the middle-income families these amounts that are set aside will impact their ability to get financial aid in the future.

With deferred phase-in of the tax-rate reductions and the Alternative Minimum Tax (AMT) still an issue, what are you telling your clients when they call and want to know about prepaying a deduction in a year with higher tax rates and deferring income to a future year when the tax rates are lower?

O'Leary: A fairly typical question you get in December is: "Should I prepay my state tax?" The answer always is that it is not intuitive. You have to run the numbers. You can talk all you want about the 39.6% top federal income tax rate coming down to 35%. But without any real repeal of the AMT, as those rates [for regular federal income tax and for AMT] get closer to each other, most of my clients are at the point where any incremental decrease in the regular tax rate has no benefit to them at all. They are in AMT, and this just pushes them further into AMT. Ever since 1986, we haven't been able to do this off the top of our head. Thank God for software.

Remington: We can't do this on the back of a napkin anymore. For the people who have been doing returns by hand, spend the $40, go through the interview schedules that those software programs provide.

How does business benefit from the new tax law?

O'Leary: I have had a lot of clients say: "This bill is heavily weighted toward individual clients, and there is really no benefit for businesses." But it is amazing how many of their businesses are operated as either an LLC or a partnership or an S corporation. Given that more and more companies are forming as some type of pass-through entity, if you are a pass-through entity at the business level, and there is a decrease in the individual income tax rates, you are benefiting on your individual tax return.

Perkins: I do think there is major relief in the area of retirement plans. Under the current law, the maximum an employer can contribute to all qualified profit-sharing and money-purchase pension plans for a single employee is $35,000. This amount is now increased to $40,000. In addition, the maximum compensation that could be used for calculating the contribution to a retirement plan is currently $170,000 for a single participant. This amount is increased to $200,000. Under the old law, the maximum contribution to a profit-sharing plan was 15% of compensation. This amount is increased to 25% of compensation. Under the old law, an employer often adopted both a money-purchase pension plan and a profit-sharing plan to contribute the maximum $35,000 for an employee. Now that the limit for deductions to profit-sharing plans is 25% of compensation, employers might want to consider terminating their money purchase plans.

There were some tax changes passed in Salem this year as well.

Perkins: There was a bill that passed but was vetoed by Governor Kitzhaber to reduce the capital gains tax from 9% to 4%. I think we will continue to see clients moving across the river to Washington ahead of the sale of their businesses.

Taylor: A lot of folks move to Vancouver when they are planning for retirement, before they sell a business or before they start pulling out of their pension.

O'Leary: It is sad, though, because a lot of the clients who do that are truly Oregonians. A lot of them have a long history here. They really struggle with doing that. But paying 9% on capital gains, when you pencil it out, it's hard to remain loyal to your home state.

Patricia Buescher is a CPA and freelance writer. She's past president of the Oregon Society of Certified Public Accountants.

PATRICIA BUESCHER, who convened a panel of accountants to produce the Oregon Business Tax Roundtable, is a writer and a CPA who worked in public practice for 28 years. On studying the new tax laws before the roundtable discussion, Buescher says: "Having sold my practice in July, I was able for the first time to study a tax bill without worrying about how the provisions would affect specific clients."


AB trust: A trust that allows couples to reduce estate taxes. The beneficiary of the A trust is usually the surviving spouse. The beneficiary of the B trust is usually the couple's adult children. When the first spouse dies, his/her property is split between the A and B trusts. The B trust beneficiaries receive their property with the condition that the surviving spouse is entitled to any income the trust generates. When the surviving spouse dies, the property in the B trust passes directly to the beneficiaries and is not included in the surviving spouse's estate.

Alternative minimum tax (AMT): A method of calculating federal income tax designed to prevent taxpayers from escaping tax liability by using certain tax deductions. Taxpayers are subject to the AMT if the calculation results in a tax greater than the regular tax calculation.

Custodial account: An account created under the Uniform Gift to Minors Act. Minors cannot make transactions without the approval of the custodian who manages the account until the age of majority.

Education IRA: A tax-favored savings plan under which the taxpayer may contribute up to $500 ($2,000 after 2001) per year per eligible beneficiary. Contributions are not deductible. Earnings are tax free and withdrawals are tax free if used to pay for qualified education expenses.

Estate tax exemption: The value of assets that can be transferred at death to beneficiaries, free of inheritance tax.

Limited liability company (LLC): A business that offers its owners the limited personal liability of a corporation and the choice of being taxed as a partnership or a corporation.

Money-purchase pension plan: A tax-qualified retirement plan in which employer contributions are mandatory and not dependent on profits. The contribution is usually a percentage of the participant's compensation.

Partnership: A business not subject to taxation. Income, expenses, gains and losses flow through to the individual partners and are reported on their personal income tax returns.

Profit-sharing plan: A tax-qualified retirement plan in which employer contributions are discretionary, usually based on the employer's profits.

S corporation: A corporation in which income and losses are reported on the shareholders' individual income tax returns.
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Author:Buescher, Patricia
Publication:Oregon Business
Article Type:Brief Article
Geographic Code:1USA
Date:Nov 1, 2001
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