AMT rescue for 2010 and 2011

First, a quick reminder of what the Alternative Minimum Tax (AMT) is:

This is the tax that Congress imposed over four decades ago, when very rich people with clever advisors were able to pay $0 taxes. Unfortunately, it was never indexed for inflation and has, especially over the last decade, grabbed more and more taxpayers. This has led to several patches, including the law just passed by Congress.

Today, the tax has a 28% rate and removes many deductions, such state income taxes, most exemptions and then adds in other items, or “preferences”, like the spread on incentive stock options purchased but not yet sold.

For the new law, middle class taxpayers are rescued from the AMT – at least for 2010 and 2011.

That is, the compromise tax package from Congress boosts the exemption levels for the AMT to cover over 20 million middle-income taxpayers.

Someday, perhaps an inflation adjustment will be added…..

Tax planning and 2011 estate tax law

While we await more details, recent action by Congress has the Bush tax cuts continuing for two more years, making the 2010 to 2011 tax planning straight forward – much like past years.

The new law provides relief on the AMT, no reduction in deductions and other benefits, which we plan to review in greater detail.

Also, it appears that, rather than return to a $1 million unified credit for estate taxes, at least a $3.5 million, if not a $5 million, credit and perhaps as low as a 35% tax rate will be the law next year.

Until we have more, please consider this summary of Tax planning: 2010 tips and traps, and 2011 changes

For 2010, some old provisions return and some new changes require action now:

2010 conversion to a Roth IRA has no income limit and two years to pay the taxes (please see to convert or not to convert).

Certain advantages in 2009 are lost for 2010 (see tax planning 2009 tips and traps and 2010 changes):
• AMT patch falls back;
• Casualty and theft loss limits fall back;
• Educator and tuition and fees deductions against adjusted gross income are not available;
• Deduction of state and local sales taxes ends;
• Exclusion of $2,400 of unemployment income ends; and
• Exclusion of income from qualified distributions from IRAs to charities ends.

However, some still apply in 2010:
• New home buyer credit (through the extended date)
• Energy Credit for solar power, fuel cells and certain energy efficient improvements are Schedule A deductions. There are two types of credit depending on what improvements were made to your home and taking the deductions requires you to have documentation.
• A tax refund can be used to buy U.S. Series I bonds.
• Note that a dependent child’s income is taxed when it exceeds $1,900.
• Educator’s Expense

Note that not all states accept the IRS changes, so the information and outcome could be different.

As we said before, tax planning involves a multi-year view to optimize what you end up paying.

You should also review your mortgage when you review tax information.

Investment planning: health care reform and opportunities

Any change will hurt some and benefit others. For investing, selecting the former to sell and the latter to buy will be crucial as the health care reform become implemented.

It is not typical for me to reference self-serving statements from managers, but the following links are well written and make you consider options for investing (in or outside of the Artio fund):

Artio Sector, Spotlight-Healthcare And see also Forbes on healthcare, personal finance, investing ideas and small-caps

The white paper published by Artio Smallcap Fund concludes with this summary:

All four of these investment themes have particular relevance in the smallcap arena. We believe each represents compelling investment potential over the long-term, given the growing need for cost reduction in the healthcare sector. We continue to explore these and other investment ideas related to healthcare trends in the Artio US Smallcap Fund.

What do you think? Let me know.

Let us know if you have questions or comments. Thanks,

Steven