March 2010

DEADLINES APPROACHING
Income Tax. We ask those of you for whom we prepare individual income tax returns to please remember that only a few weeks remain until the April 15 filing deadline.   We encourage you to furnish your tax information to us at your earliest convenience so that your return (or extension and related estimated payment of tax) will not be a part of the hectic scramble of the last few weeks of the filing season.		IRA and HSA Contributions. If you are making an individual retirement account (IRA) or health savings account (HSA) contribution for the year 2009 and have not already done so, you will need to make your deposits on or before April 15, 2010. April 15, 2010 is the last available date even if you obtain an extension to file your individual income tax return.This deadline applies to IRAs(Roth and Traditional) and to HSAs. Please let us know if you have any questions about your HSAs, IRAs, or other retirement accounts.
________________________________________________________   The President’s Tax Increase Proposals
The Obama Administration’s fiscal year 2011 budget includes proposed 2011 tax increases that would significantly increase the income taxes on higher income taxpayers, on the oil and gas industry, on oil and gas royalty income, and on businesses in general. The proposed tax increases allow the current individual tax rates to continue for taxpayers earning up to $250,000, but increase rates on those with taxable incomes above $250,000. Additionally, itemized deductions equal to three percent of adjusted gross income would be disallowed – that is, only those deductions in excess of the three-percent threshold would reduce taxable income. Although taxable income would be taxed at rates up to 39.6 percent (or more when alternative minimum tax is triggered), the benefit of itemized deductions would be limited to 28 percent. Also, the federal capital gains tax rate for individuals with taxable incomes above $250,000 would increase from 15 to 20 percent. Taxpayers with incomes up to $250,000 would keep the 15 percent rate. Coupled with Louisiana’s stated top tax rate of six percent on capital gains, high-income taxpayers would have a combined capital gains tax rate of approximately 24 percent, as federal and Louisiana income taxes are each deductible in computing the other. The budget proposal is particularly hard on the oil and gas industry and its royalty owners and, as a result, on northwest Louisiana. It would eliminate the deduction for percentage depletion for oil and gas income and the immediate deduction of intangible drilling and development expense. Unlike the rate increases that only affect those over the $250,000 income level, the elimination of percentage depletion would be a significant tax increase on all oil and gas royalty and working interest owners, most of whom are below the $250,000 income level. The elimination of the intangible drilling and development deduction would also have significant adverse impact on the drilling industry nationally and on our area. (At the end		of 2009, about 10 percent of the nation’s active drilling rigs were in northwest Louisiana and east Texas – about five percent were in DeSoto Parish.) Other major business tax increases proposed include the taxation of carried interests in the oil and gas industry as ordinary income and, significant to retail businesses, the repeal of the Last-in-First-Out (LIFO) inventory accounting method. The definition of “Independent Contractor” would also be changed to collect more employment taxes. For estate taxes, the President’s budget presumes that the 2009 estate tax rates and exemption levels will be reinstated retroactively effective January 1, 2010 and will continue unchanged in 2011. It also proposes valuation rules which would limit valuation discounts for minority interests in closely held entities and tightens the rules for grantor retained annuity trusts. Budget proposals are, of course, a long way from new law. They do, however, indicate the plans of the Administration. If the Administration is successful with its proposed increases, taxpayers who anticipate future taxable income levels of over $250,000 should probably consider, for their 2010 year-end planning, reversing their usual plans and accelerating income, both ordinary and capital gains, and accelerating itemized deductions while deferring business deductions. Those who anticipate taxable estates and who are using family investment entities in gifting programs might want to accelerate the use of their gift tax exemption ($1 million for individuals, $2 million for a couple) to consume the exemption while lack of control and marketability discounts remain significant. As always, we will be pleased to discuss income tax or estate tax planning with you.
______________________________________________ Part-Time Businesses and Retirement Plans
The front-page article in the accompanying Alert discusses one-person 401(k) plans for self-employed persons. It illustrates a total contribution of $54,500 for a person over age 50 ($49,000 for under age 50) to a tax-deferred retirement plan for an individual with pre-tax earnings of $162,500. While $49,000 and $54,500 result in impressive (approximately 32 percent) tax deferral ratios, part-time business tax deferral ratios can, for many small businesses, reach 100 percent.   For example, assume that Joe Jones (age 50 at calendar year-end) works full time and participates in his employer’s pension and profit-sharing plans. He is able to meet his cost of living from his net-of-tax salary or “take home” pay from his employment. Additionally, he has self-employment income of $27,500 per year from an unrelated business operated from his home. Joe has been paying income tax at 33 percent on that self-employment income and saving what was left after taxes, or $18,425.   If Joe were to adopt and fund a profit-sharing plan with a 401(k) feature for his part-time business, he could defer the income tax on and save for retirement the entire $27,500. His deduction for his contributions to the plan would be computed as follows:   A. A profit-sharing contribution of 20 percent of the $27,500 of net earnings from self-employment or, $5,500, plus   B. An amount contributed under the 401(k) feature of the plan, which is limited to the net earnings from self-employment of $27,500 minus the profit-sharing contribution of $5,500, or $22,000. The general limit for the 401(k) contribution is the lesser of (1) $49,000 minus the profit sharing contribution, (2) $16,500 ($22,000 if over age 50, or (3) net earnings from the business less the profit sharing contribution.		In Joe’s case, the limitation from (2) and (3), (which are, in this case, the same) would apply. Thus, Joe’s total deduction would be the profit-sharing contribution of $5,500 and the 401(k) feature contribution of $22,000 for a total deduction of $27,500. Joe’s taxable income from his sideline business would be zero. If Joe were less than age 50 at December 31 of the calendar year, he could receive a total income from his business of $20,625 and have an equal deduction [($20,625 x .20 = $4,125) + $16,500 = $20,625)] for the retirement savings of $20,625 and zero taxable income from the business.   The above example uses a profit-sharing contribution combined with 401(k) deferral to illustrate the limits. If the self-employment income in the example were less than the 401(k) deferral maximum of $16,500 ($22,000 if participant is age 50 or older), the full self-employment income could be contributed to the 401(k) portion of the plan without making a profit-sharing contribution.   If the taxpayer has employees in the sideline business, they must be included in the 401(k) plan. Also, if Joe contributes to a 401(k) plan with his full-time employer, that contribution must be aggregated with the sideline 401(k) contribution and the sum of the two deferrals cannot exceed $16,500 ($22,000 if participant is age 50 or older).   Self-employed retirement plans are very attractive tax reduction vehicles for anyone who is saving and has (or the spouse has) self-employment income from an activity with no employees. One-person plans are simple and inexpensive to adopt and do not require significant cost for administration.   Over long periods of time, tax shelters for sideline or small businesses can aid significantly in obtaining financial security. We will be pleased to discuss pretax saving with you and to answer your questions.
______________________________________ LESS PAPER?
Electronic data storage is, of course, becoming more and more prevalent and affordable. Many of us receive our bank statements in electronic format rather than on paper. Investment portfolio reports are likewise available in electronic format, alleviating the use of paper copies and some of the attendant problems of storage. And, as you might expect, we are storing more and more of our firm’s file information electronically rather than on paper. A spin-off benefit of electronic data storage is that we are easily able to provide you a copy of your income tax returns as a portable document format (PDF) file.     If you are interested in receiving an electronic copy of the returns that we prepare for you please let us know.