Congress just passed a tax reconciliation act that provides $70 bill in tax cuts, while once again putting off any permanent action on Alternative Minimum Tax reform in favor of providing yet another one year stop-gap measure. While this will keep 15 million taxpayers from facing the AMT for 2006, it still leaves those same taxpayers facing AMT in 2007 unless Congress acts again. On other fronts the new tax bill:

• Extends the capital gains tax cuts
• Enhances small business expensing
• Extends the Subpart F active financing exception
• Changes income limitations on Roth IRA conversions
• Extends the reach of the “kiddie tax” and more

CCH editors have prepared a complete Tax Briefing on the Tax Increase Prevention and Reconciliation Act that provides the full details on what tax cuts were included, as well as the revenue raisers the Congress included in the Act to reduce the impact on the federal budget.

As more taxpayers put trusts and other estate planning tools to work, tax practitioners are seeing more use of Form 1041, the fiduciary income tax return. The IRS notes the numbers for Form 1041 are growing every year. Practitioners are seeing an increased need to understand the ins and outs of these returns, as well as the tax fundamentals of trusts and estates that are necessary to put together an accurate Form 1041. A lifetime of planning and hard work can come down to proper compliance on Form 1041. CCH's 1041 Preparation and Planning Guide by Sidney Kess, J.D., CPA and Barbara Weltman, J.D.,provides a concise, practical, line-by-line guide to the 1041. In this month's Focus on Tax we offer you Chapter 1 from the Guide which discusses the fundamentals of taxation for trusts and estates and serves as a primer on the basics for the Fiduciary Income Tax Return.

 

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Beat the market. Invest aggressively for high returns. Use big gains to balance down years and short-term losses. Sound familiar? All estate and wealth planners hear from clients who are chasing those big gains and looking for those portfolio fattening strategies that will give substantial performance leaps above the market as a whole. But what is the real risk involved to the underlying assets in the portfolio when clients go chasing the high gains promised by this year’s hottest fund manager? And can those big gains still keep them ahead of more conservative investors when the down years come? Probably not, according to Stephen Holt Abernathy in a recent article in CCH’s Journal of Retirement Planning. Abernathy notes that portfolios that place significant portions of their assets at high risk can be crippled by losing years that are, of course, a statistical certainty for almost any investment strategy and particularly for high-risk ones. Abernathy uses examples and sample calculations to walk advisors through some simple mathematical exercises that will demonstrate to clients the potential damaging effects of committing too much of their assets to aggressive investment strategies. At the same time, Abernathy uses his examples to show how those boring, conservative investment strategies can come out ahead over the long term.

 

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In recent years, some local governments have taken aggressive stances on valuing real and personal property for businesses to boost revenue. One defense taxpayers can take against overvalued property tax assessments is to argue for obsolescence. Careful documentation of both functional and economic obsolescence can reduce a property tax assessment based on a cost method of valuation. Greg Leahy, an international tax manager for Actuant Corp. in Milwaukee, walks practitioners through the opportunities and pitfalls of obsolescence arguments in a recent issue of CCH’s Journal of State Taxation. Leahy outlines how both functional and economic obsolescence work, as well as giving practical tips on how to present your arguments to assessors. He also notes the necessity of having back-up arguments and careful strategies for how to frame the arguments for obsolescence in a way that will make assessors comfortable with the methods used.

 

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Code Sec. 368 outlines transactions considered as reorganizations that generally will result in deferral of tax on gains built into the assets and the receipt of stock of the participating corporations. One of the tax planning tools used in such reorganizations is the “disregarded entity,” a relatively new concept in taxation. These are often single-member LLCs, QSubs or qualified REIT subsidiaries (QRSs), notes Stephen L. Owen in a recent issue of CCH’s Journal of Passthrough Entities. Owen, a partner with DLA Piper Rudnick Gray Cary US LLP, outlines strategies for effectively using disregarded entities in corporate reorgs to achieve tax and non-tax advantages. His article offers eight examples with accompanying explanations of how taxability is determined in each transaction.

 

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