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Had Congress not passed the 2010 Tax Relief Act (H.R. 4853), tax rates for income, capital gains, dividends, and estates would have reverted to higher pre-2001 levels in 2011. Rates for these taxes were reduced in 2001 and 2003 but were subject to a December 31, 2010, expiration date because of the political climate at the time. The new law pushes their expiration dates to December 31, 2012.

Despite the uncertainty created by yet another temporary tax law, there are many encouraging provisions that result in some of the most favorable tax conditions Americans have seen in a generation.

What’s New and What’s Not?

One-year payroll tax cut. Employees may notice slightly more take-home pay in 2011 because the employee’s share of the Social Security payroll tax has been temporarily reduced from 6.2% to 4.2% of income (on up to $106,800 in taxable wages). The employer’s share (6.2% of an employee’s pay) did not change. For the self-employed, the Social Security payroll tax has been reduced from 12.4% to 10.4%.

Estate tax revival. Although the federal estate tax is back after being repealed in 2010 (for one year only), the new parameters are more generous than those that had been scheduled for 2011 (a $1 million exemption and a 55% top tax rate).

For individuals who leave behind an estate before December 31, 2012, assets in excess of a $5 million applicable exemption will be subject to a top rate of 35%. Married couples who take the appropriate steps may be able to pass up to $10 million tax-free to their heirs.

The new law also brings back the stepped-up basis rules, which allow heirs to calculate their basis in an asset according to its value on the date of inheritance. Heirs who inherited assets in 2010 can elect to use the modified carryover basis rules that were in place for that year (meaning they must calculate capital gains using the decedent’s basis) or they can apply the new $5 million exemption and 35% top rate and use the stepped-up basis rules.

Gift tax reunified with the estate tax. Gifts in excess of the donor’s $5 million lifetime exemption are subject to a maximum 35% rate.

Itemized deductions for high incomes. The repeal of the so-called Pease limitation, which reduces the use of certain deductions for taxpayers with incomes in excess of certain levels, has been extended through 2012.

No phaseout of the personal exemption. High-income taxpayers will be allowed to claim the full personal exemption through 2012. Prior to 2010, the exemption was phased out for taxpayers with incomes in excess of certain thresholds.

Two more years of AMT relief. Middle-income taxpayers may be able to avoid the alternative minimum tax for at least two more years. The AMT was crafted in 1970 to keep wealthy taxpayers from using exemptions and deductions to avoid income taxes, but it has started to affect less affluent taxpayers because the limits aren’t indexed to inflation. The new exemption amounts for 2010 and 2011 are $47,450 and $48,450, respectively, for single filers ($72,450 and $74,450, respectively, for married taxpayers filing jointly).

Capital gains and dividends. Long-term capital gains and qualifying dividends will continue to be taxed at a 0% rate for individuals in the 10% and 15% income tax brackets and at a maximum 15% rate for other taxpayers. After 2012, long-term capital gains will be taxed at a maximum 20% rate and dividends will be taxed as ordinary income.

Income taxes. The 2010 Tax Relief Act includes a two-year extension of the income tax rates that have been in effect since 2003. These are the 2011 income limits:²

These are just the highlights. Several other provisions have been extended. Before you take any action, consult your tax advisor for information about your situation.

1) The Wall Street Journal, December 17, 2010
2) CCH, 2010 (Income limits are projected. Actual limits may vary.)

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

We can’t know whether any of these people postponed their retirement dates because they got a late start on their saving goals. But as you can see in the table, even five years can make a big difference.

Everyone knows that procrastination is the enemy, yet not only do we all do it, sometimes we have no choice. Effective time management often requires us to put off one task until another is finished. Rather than wrestle with the inevitability of procrastination, a more useful exercise might be to examine why we procrastinate.

Not Knowing What to Do

Many people correctly assume that they don’t know much about finances, but one of the benefits of working with a professional is access to strategies and education. Although there is no assurance that working with a financial professional will improve investment results, a professional who focuses on your overall objectives can help you consider options that could have a substantial effect on your long-term financial situation.

Afraid to Act

Waiting until your fears subside before deciding to act could be the stepping stone to two classic mistakes: basing your investment decisions on emotion and failing to recognize the opportunity cost of waiting. Risk is an inherent aspect of investing, and few people can assume risk without at least some fear. But inaction is also risky because time is one of the key ingredients to financial success. Procrastination can carry a high opportunity cost by decreasing the amount of time that your investments have available for compounding.

Life Happens

The day-to-day demands of having a career, raising a family, and caring for a home often take precedence over investment needs. Most people schedule time to get the oil changed, visit the dentist, and get their hair done. Why not then schedule regular appointments to review investment matters and measure progress toward financial goals?

Squandering time is one mistake that many people may never recover from. If you’ve been meaning to get around to some aspect of preparing for your financial future, now is the best time to get started.

1) Employee Benefit Research Institute, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Although many caregivers help their family members out of love, there is overwhelming evidence that caregivers pay a dear price for their compassion. Nearly half reported increased financial worries and having to use sick time or vacation hours to provide care (see table).²

One especially telling statistic: More than four in 10 caregivers said they felt as though they had no choice about whether to assume the role of caregiver.³ This may indicate that little or no preparation took place before caregiving began. Yet when it comes to their own potential need for long-term care, 55% of Americans say that their greatest concern is becoming a burden to family members.⁴

Fortunately, you can start developing a strategy today that could help you provide for your own care and avoid becoming a burden to your loved ones.

Recalculate Retirement Needs

The obvious reason for having to turn to family members for care is money — or, more accurately, a lack of money. The national average cost for nursing-home care is $74,208 per year.⁵ How likely are you to need specialized care? Forty-three percent of people who reach age 65 will eventually spend time in a nursing home.⁶

If your retirement-needs calculations don’t take the potential need for long-term care into account, it may be time to evaluate your options for covering the potential costs. If you have a family member who may need care, the earlier you begin to prepare, the greater the possibility that you may be able to reduce the effect on your own finances and lifestyle.

Talk About It

Whether you are a caregiver or a care recipient, a financial professional can open a dialogue that helps preserve dignity and harmony while also coordinating decisions about common concerns, such as which care options are appropriate, whether the care recipient should move, how to manage property and possessions, and how to handle legacy issues.

Because it could be years before you find out whether you need living assistance, the most prudent approach could be to assume that you will and to begin preparing now. If it turns out that you don’t need care, there’s no penalty for being prepared.

1, 3) National Alliance for Caregiving, 2009
2) Money, September 2010
4) Journal of Financial Planning, June 2010
5–6) 2010 Field Guide, National Underwriter (2009 costs, latest year for which data was available)

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Employment is typical of a class of economic indicators, called lagging indicators, that are poor at predicting how the economy will perform in the near future. However, when it comes to providing confirmation that a particular trend is in place — whether it be a recovery or a recession — lagging indicators can play a vital role. Here’s a roundup of some common lagging indicators and why they can provide useful information for investment decisions.

Employment

Rising unemployment is usually one of the final signals that a recession has begun, and rising employment is among the last indications that an economy is recovering. In both situations, it’s difficult to miss the influence of human emotion in the business cycle. During a slowdown or a recession, employers may cut back on other expenses in order to avoid layoffs for as long as possible. And when conditions begin to improve, employers may avoid hiring until they are confident that the recovery is sufficient to justify additional labor costs.

Corporate Earnings

Earnings are a lagging indicator because they reveal past performance. Most publicly traded companies release their quarterly earnings one month or more after the quarter has ended. So even though stock prices are technically a leading indicator, actual corporate earnings performance may say little about what to expect in the future. However, if economic activity seems to be faltering, yet no recession has been officially declared, economists may look at earnings and other measurements of business revenue for confirmation.

The Conference Board Lagging Index^®

Perhaps the most important lagging indicator, which actually gets little attention, is The Conference Board Lagging Economic Index. As with other lagging indicators, this index is most useful when compared with leading and coincident indicators. Coincidentally, The Conference Board also produces coincident and leading indexes, which makes comparisons convenient.

The lagging index tracks average duration of unemployment, manufacturing and trade inventories to sales ratio, labor cost per unit of manufacturing output, the average prime rate, outstanding commercial and industrial loans, ratio of consumer credit outstanding to personal income, and the consumer price index for services.¹ Changes in these seven variables are averaged to arrive at an index value.

Although some experts consider the lagging index to be a lackluster source of information, economists tend to pay close attention when it shows something other than a confirmation of the direction of the leading and coincident measures. A divergence suggests that the stock market may have misinterpreted the direction of the economy.

Lagging indicators rarely make headline news, but they are an important source of information. We can help you keep an eye on these and other indicators.

1) The Conference Board, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

This says a lot about what is important to charitable givers. During a time when many consumers and organizations were looking for ways to cut expenses, individual donors apparently decided that giving was not an expense worth cutting. In a survey of wealthy individuals from around the world, Americans were more likely than Europeans or Asians to say that the ability to give to charity was one of the benefits of wealth.²

Where do Americans get their penchant for philanthropy? Although Americans may indeed be generous, it would be an oversimplification to say that they lead the world in philanthropy because they are more generous. U.S. tax law treats charitable giving more favorably than do tax laws in many nations. One example is the way in which certain types of charitable trusts can be used to help reap even greater tax benefits.

Charitable Remainder Trust

A properly structured charitable remainder trust provides the opportunity to receive tax benefits and a potential income from an asset donated to charity. A grantor who places money, securities, property, and/or other assets in a charitable remainder trust can designate an income beneficiary, even if it is the grantor himself (or herself), to receive payment of a specified amount (at least annually) from the trust. Upon the grantor’s death, the trust assets are transferred to the designated charity and won’t be counted as part of the grantor’s estate for estate tax purposes. The grantor may also qualify for an income tax deduction on the estimated present value of the remainder interest that will eventually go to charity.

Charitable Lead Trust

A charitable lead trust takes a nearly opposite tack. The grantor places an asset in an irrevocable trust on behalf of a designated charity, and any income generated by the asset during the trust period goes to the charity. After the trust period, the remaining trust assets are passed to the grantor or the grantor’s designated beneficiaries. This eliminates current capital gains taxes on the donated assets, a valuable benefit when the donated assets have experienced high appreciation. This strategy also could potentially reduce estate taxes because the trust assets are no longer considered part of the grantor’s estate.

Keep in mind that donations to both types of charitable trusts are irrevocable; therefore, the assets cannot be withdrawn once the trusts are formed. Also, some charitable organizations may not be able to use all possible gifts. It is prudent to check first. The type of organization you select can also affect the tax benefits you receive.

The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate conservation professional and your legal and tax advisors before implementing such strategies.

Giving to a good cause and benefiting your family’s financial situation are not necessarily mutually exclusive. An examination of your charitable giving desires and financial situation may reveal some overlooked opportunities.

1) Giving USA Foundation, 2010
2) The Wall Street Journal, May 24, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Business owners may have more options for sheltering income from current taxes than ordinary wage earners. One option is setting up a solo defined-benefit plan. This plan offers self-employed individuals and some business owners a tax-advantaged opportunity to target an annual retirement benefit that is comparable with their pre-retirement incomes.

Like the Big Guys

A solo defined-benefit (DB) plan is not unlike the pension plans offered by large corporations. The participant chooses a retirement income target and then an actuary calculates the annual contributions that would be required to meet the target. In 2010, the target benefit amount may not exceed the lesser of $195,000 or 100% of the participant’s average annual income for the past three years.

Once the plan is in place, the participant is required to make the annual contributions until the plan is fully funded. Contributions are generally tax deductible, and any earnings accumulate on a tax-deferred basis. It wouldn’t be unusual for a business owner to put $100,000 a year in a solo DB plan.

There are some rules and drawbacks, as well. Although there is some leeway for a participant to secure a temporary waiver of his or her contribution for a plan year if paying the full amount would cause a “substantial business hardship,” failing to meet the funding requirements typically results in an excise tax.² Also, the tax code generally requires a company offering a DB plan to make contributions for all employees. There are exceptions for employees younger than 21 and those who have not worked at least 1,000 hours during any 12-month period. Before you take any specific action, be sure to consult with your tax professional.

As with most other retirement plans, there are fees associated with setting up and maintaining a solo defined-benefit plan. There is an initial plan setup fee and an annual fee for actuarial services, which are required to ensure that the investments are on track to reach the funding requirements.

1) Gallup, 2010
2) CCH, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

This material is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate.