Money: Recapping the tax changes of 2010

When the famous Greek philosopher Heraclitus constructed his doctrine of change being central to the universe, with the thesis that “nothing endures but change,” he might have been peering into the future, witnessing the state of our tax and legislative system in the U.S., circa 2010.
There were many changes that occurred over the course of the year, so I thought it would be helpful to list the major ones. Some of these changes are temporary, while others appear to be permanent, but all of us will be affected in one way or another.
Roth IRA conversions opened to all
The first change of note was the elimination of the income limitation on Roth IRA conversions and the one-time special tax election for 2010. I consider this change to present a unique opportunity to save a sizable sum in taxes.
It used to be that any person or couple making more than $100,000 per year was restricted from converting a traditional retirement account into a Roth IRA. This is no longer the case. Anyone can now convert and pay the taxes up front in exchange for a tax-free retirement account. The special one-time election allows you to spread the taxable income from the conversion over the next two years — half in 2011 and half in 2012.
(And, as it appears likely that the Bush tax cuts will be extended, spreading the taxable income over the next two years makes even more sense and is a gift to you from the IRS — just in time for Christmas.)
Estate tax eliminated for now
Another change at the beginning of the year was the temporary elimination — the sunset, as it was called — of the estate tax. In January, I wrote a column titled “Not even death, taxes are certain in extraordinary times” (Press-Banner, Jan. 22, Page 10).
At the time of that writing, I (and many experts) thought it probable that Congress would act to reinstate the tax and make it retroactive to the beginning of this year. But as Congress was consumed with the new health care legislation and the midterm elections, it became increasingly clear that wasn’t going to be the case. The family of now-deceased New York Yankees owner George Steinbrenner can breathe a bit easier as we head into the New Year. Due to this particular tax anomaly, they saved an estimated $500 million they otherwise would have paid to the government.
(With last week’s compromise between President Obama and the congressional Republicans, it appears increasingly likely, although still uncertain, that this tax will be reinstated in 2011, with a $5 million exemption and a 35 percent tax rate.)
Health care’s tax impact
In the middle of the year, we had the new health care legislation that was passed into law. While many of the changes are several election cycles away, meaning that you should expect to see some modifications, a major new Medicare tax was announced for individuals making more than $200,000 and couples making more than $250,000.
For the first time, Medicare taxes will be imposed on “unearned income” at a rate of 3.8 percent. Historically, the Medicare tax was assessed only on wages, so this change punctuates a departure from customary tax policy. These taxes are set to take effect in 2013 and beyond.
A change without a change
Perhaps the biggest change that will affect all of us was last week’s agreement between the president and Republicans — that there wouldn’t be any change at all.
It appears likely (but not certain as of this writing) that the Bush tax cuts will be extended another two years for everyone, not just for those making less than that magical number of $250,000. If that’s the case, it means that long-term capital gains rates and dividend tax rates will remain at 15 percent and tax brackets will remain unchanged for everyone, with the highest marginal federal tax bracket at 35 percent.
Many of these changes will in some way influence the decisions you make with your money, so it’s important to stay abreast of any updates. Be sure to discuss these changes with your own CPA and financial adviser to see what they might mean for you and your financial life.
Orion Melehan is a certified financial planner for LMC Financial Services in Scotts Valley. Contact him at 454-8042 or or***@lm**********.com.
Securities and investment advisory services offered through SagePoint Financial Inc. member FINRA/SIPC a registered investment advisor. LMC Financial Services is not affiliated with SagePoint Financial Inc. or registered as a broker/dealer.