When markets are volatile, sticking to a long-term investing strategy can be a challenge. To keep the ups and downs in perspective, it might help to look at past market cycles to see how recent market action compares.

Bears versus bulls

Corrections of 10% or more and bear markets of at least 20% are a regular occurrence. Since 1929, there have been 18 previous 20%-plus bear markets (not including 2011 market action). Losses on the S&P 500 in those markets ranged from almost 21% in 1948-1949 to 83% during 1930-1932; the average loss for all 18 bears was 37%.*

However, since 1929, the average bull market has tended to last almost twice as long as the average bear, and has produced average gains of about 79%.* Individual bull market gains have ranged from 21.4% at the end of 2001 to the nearly 302% increase registered during the 1990s.* The worst annual loss--47%--occurred in 1931, but the all-time best annual return--a capital appreciation gain of just under 47%--happened just two years later in 1933.**

Points of reference

This year has seen extreme volatility, with weeks and even days when swings of several hundred points in both directions on the Dow seemed to become commonplace. In the first week of August alone, 2 of the Dow's 11 best days in history alternated with 2 of its 11 worst daily point losses ever.***

While by no means normal, the highs and lows are hardly unprecedented. Even though the 634-point drop on August 8 felt historic, it didn't begin to match the real record-holders. The single biggest daily decline occurred in September 2008, when the Dow fell 778 points. The biggest percentage drop was October 1987's "Black Monday," when the Dow fell almost 23%; that makes the Dow's 5.5% loss on August 8 of this year seem relatively tame by comparison. And August 8 was followed by the Dow's 10th best day ever, with a gain of 430 points. While that upward movement may seem exceptional, the Dow's best day ever came during the dark days of October 2008, when a 936-point move up on October 13 represented a gain of more than 11% in a single day.***

Stocks versus bonds

The last decade has been a challenging one for stocks. Between 2001 and 2010, the S&P 500 had an average annual total return of just 1.4%, while the equivalent figure for Treasury bonds was 6.6%.**** For much of that time, interest rates were falling, helping bonds to outperform stocks. However, interest rates are now at record lows, and rising rates could change the relative performance of stocks and bonds.

Many experts predict that the global economic recovery will continue to create an uncertain investing environment in coming years, with both strong rallies and strong downdrafts. While there may be ongoing volatility in the markets that needs to be monitored, it's important to keep things in perspective; your ability to meet your long-term goals could be affected if you change your overall game plan with every new headline.

Past performance is no guarantee of future results. Market indices listed are unmanaged and are not available for direct investment. All investing involves risk, including the risk of loss of principal, and there can be no guarantee that any investment strategy will be successful. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The Standard & Poor's 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.

DATA SOURCES: *Bull and bear market time frames, gains/losses: all calculations based on data from the Stock Trader's Almanac 2011 for the Standard & Poor's 500.

**1931 and 1933 annual stock returns: based on Ibbotson SBBI data for capital appreciation of S&P 500.

***Based on data from the Stock Trader's Almanac 2011 .

**** 10-year rolling stock returns: based on Ibbotson SBBI data for annual total returns between 2001 and 2010 of S&P 500 and an index of U.S. Treasury bonds with an approximate 20-year maturity.

IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”). The enactment of this legislation provides unprecedented estate planning opportunities for 2011 and 2012.

The most notable change under the Act is that the exemption amount for gifts and generation-skipping transfers is now the same as for estates, $5 million per individual ($10 million for a married couple). The Act also reduced the marginal estate, gift and GST tax rates to 35%. For the next two years, the estate, gift, and GST exemptions are reunified at $5 million.

With the applicable gift tax exclusion increased from $1 million in 2010 to $5 million in 2011 and 2012, there is an extremely attractive option available where one can gift a significant amounts of wealth during his/her life time in 2011 and 2012. A couple that now has a combined exemption of $10 million is able to gift up to $10 million if no previous taxable gifts were made.

One potential drawback on gifting is basis. With a gift, the donee generally takes the same basis as the donor. With an inheritance, the heir generally receives the inherited property with a stepped up or stepped down basis. This is one of many considerations that need to be taken into account with this new gifting opportunity.

The additional amount of gift exemption amount also opens up new opportunities for dynasty trust planning, family limited partnerships and grantor retained annuity trusts (GRATs).  For example, a gift of $10 million to a trust for the benefit of children and their descendants can be exempted from both gift and GST taxes.

Estate plans should be updated in light of the new reunified $5 million exemption equivalent (basic exclusion amount) for estate and gift taxation. Because the Act is structured to end on January 1, 2013, it is important for you to review your estate plan to determine whether any updates are needed. If Congress does not act to change the law before 2013, the unified credit amount for gift and estate taxes will revert back to $1 million per individual, while the GST exemption will return to $1.3 million per individual. A maximum marginal rate of 55% will apply to all types of transfers.

Even if your assets are under $5 million, it is still prudent to visit the issue of estate planning. Many states, including Washington State, have their own estate tax regimes. Washington State’s estate exemption is $2 million. This means a person that passes away in 2012 with $3 million of estate will be exempt from federal estate tax, but will be subject to Washington’s estate tax. With careful planning, Washington estate tax can be avoided or minimized.

Please contact us if you would like to discuss estate planning opportunities.

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 TRA”) was enacted on December 17, 2010. The legislation postpones certain sunset provisions under The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) relating to federal individual income-tax rates (commonly referred to as the Bush-era tax cuts). The Act contains numerous business-related provisions, such as incentives for businesses to invest in machinery and equipment, as well as several other tax breaks for individuals.

Much of the new law simply retains favorable tax rules that applied in prior years. It includes a temporary extension of favorable dividend and long term capital gains rates, as well as estate-tax relief. The Act also provides a two-year AMT “patch”, and a two percentage point reduction in employee paid payroll taxes (and self employment tax) for 2011. Following is a summary of the Act’s key provisions.

Individual-taxpayers Provisions

• The 2010 TRA retains the more favorable 2010 individual marginal tax rates for 2011 and 2012: 10%, 15%, 25%, 28%, 33% and 35%. The 2011 rates were scheduled to be 15%, 28%, 31%, 36%, and 39.6%.
• Marriage penalty relief is extended through 2012.
• Favorable tax rates (15% for most taxpayers, 0% for those in the 10% or 15% tax brackets) on net capital gains are extended for two years, though 2012.
• Qualified dividends continue to be subject to the same maximum rates as net capital gains through 2012.
• The Act extends the 100% capital gain exclusion for qualified small business stock (QSBS) through 2011.
• For 2011 only, employees will pay a 4.2% (instead of 6.2%) Social Security Tax on wages up to $106,800. Similarly, the new law reduces the tax rate for the Social Security portion of self employment tax on self employment net earnings up to $106,800.
• The Act delays the sunset provisions relating to the limitation on itemized deductions and personal exemptions for certain higher income taxpayers for two years, through 2012.
• The maximum available credits for both the Child Tax Credit and Dependent Care Credit are extended through December 31, 2012.
• The American Opportunity Tax Credit (formerly the Hope Credit) is extended for 2011 and 2012.
• The maximum per beneficiary contribution limitation of $2,000 for Coverdell Education Savings Accounts (ESAs) is extended through 2012.
• The above-the-line qualified tuition deduction is retroactively reinstated and extended for 2010 and 2011.
• The $2,500-a-year limitation for deducting higher education student loan interest (including higher income phase out limits) is extended through 2012.
• The 2010 TRA retroactively applies (to 2010 and extends through 2011) an “AMT patch,” raising the exemption amounts before an individual is subject to AMT.
• The favorable changes made by prior law to the adoption credit, which is available to individuals who adopt an eligible child, are extended through 2012.
• The Act retroactively extends the election for taxpayers to claim an itemized deduction for state and local general sales tax, instead of a deduction for state and local income taxes, through 2011.
• Certain energy credits are extended for nonbusiness energy property placed in service by December 31, 2011, although credit rates, dollar and lifetime limits revert to prior, less favorable levels.
• The Act retroactively reinstates and extends the deduction available to K–12 teachers (and certain other educators) for eligible out of pocket expenses for supplies and equipment for 2010, and through 2011.
• The tax-free treatment (up to $100,000 a year) of IRA charitable distributions by persons age 70½ or older is retroactively reinstated and extended for 2010 and 2011.

Provisions Affecting Business Taxpayers

The 2010 TRA includes several tax incentives aimed at spurring business investment in machinery, equipment, and other assets.

• The new law generally allows businesses to deduct 100% of the cost of qualified property acquired and placed in service after September 8, 2010, and before January 1, 2012 (conditions apply). Note that the new law does not place a dollar limit on the amount of qualified property eligible for the 100% write-off.
• The new law allows businesses to make an election to write off 50% of the cost of qualified property placed in service during 2012 (and 2013 for certain longer lived and transportation property).
• The new law sets the dollar limitation on property eligible for the Section 179 expensing election at $125,000, as indexed for inflation, for the 2012 tax year. The $125,000 limit will be reduced dollar for dollar as the cost of Section 179-eligible property placed in service during the 2012 tax year exceeds $500,000, as indexed for inflation.
• Various business credits have been extended by the Act, including the research credit, Work-opportunity credit, differential wage credit, and the credit for employer provided child care.
• The penalty tax rate applicable to accumulated earnings will be 15% (instead of 20%) for tax years beginning before 2013.
• The Act retroactively extends for 2010 and 2011 the rules permitting a C corporation to claim an enhanced deduction for contributions of computers and book inventories to public schools.
• Under the Act, employers may continue to provide employees up to $5,250 of educational assistance free of federal income tax through 2012.
• The Act also contains provisions relating to enhanced income tax free benefits from an employer’s adoption-assistance program.

Estate-, Gift-, and GST-tax Provisions

For 2010, 2011, and 2012, the 2010 TRA provides a more favorable tax rate and exemption amount than those previously scheduled to go into effect for 2011 and beyond.

• The Act reduces the impact of estate and gift taxes in 2011 and 2012 by increasing the exemption amount to $5 million (subject to a potential inflation adjustment in 2012) and reducing the top gift- and estate-tax rate to 35%.
• Due to the $5 million exemption, the estate- and gift-tax rate in 2011 and 2012 is effectively a flat 35%.
• The Act also subjects the estates of individuals who died in 2010 to estate tax (with a $5 million exemption amount and a 35% rate) unless the estate’s executor elects to have certain “carryover basis” rules apply.
• The new law allows a deceased spouse’s executor to elect to transfer any unused estate-tax exemption to the surviving spouse. This provision is effective for 2011 and 2012.
• The Act reinstated the GST tax, effective for 2010, and set the exemption to equal the $5 million estate- and gift-tax exemption amount for 2010, 2011, and 2012 (subject to inflation adjustment in 2012). Note that the applicable GST-tax rate for 2010 is 0%, effectively keeping the repeal of the GST tax in place. In 2011 and later, the GST-tax rate returns to the highest federal estate-tax rate.

We can help you determine how the new law affects you.

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for small business, paid for with various revenue raisers. Here's a brief overview of the tax changes in the new law.

Tax breaks and incentives
Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Jobs Act law, taxpayers could expense up to $250,000 of qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.

The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

100% exclusion of gain from the sale of small business stock for qualifying stock acquired after date of enactment and before Jan. 1, 2011. Before the 2009 Recovery Act, individuals could exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). To qualify, QSBS must meet a number of conditions (e.g., it must be stock of a corporation that has gross assets that don't exceed $50 million, and the corporation must meet active business requirements). Under the 2009 Recovery Act, the percentage exclusion for gain on QSBS sold by an individual was increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the new law, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after date of enactment and held for more than five years. In addition, the new law eliminates the alternative minimum tax (AMT) preference item attributable for that sale.

General business credits of eligible small businesses for 2010 allowed to be carried back five years. Generally, a business's unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under the new law, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years. Eligible small businesses consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

General business credits of eligible small businesses in 2010 aren't subject to AMT. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.

S corporation holding period. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years following its conversion or face a business-level tax imposed on the built-in gain at the highest corporate rate of 35%. This holding period is reduced where the 7th tax year in the holding period preceded the tax year beginning in 2009 or 2010. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.

Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).

Special rule for long-term contract accounting. The new law provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.

Boosted deduction for start-up expenditures. The new law allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

Limitation on penalty for failure to disclose certain reportable transactions (including listed transactions) on a return. The new law limits the penalty to 75% of the decrease in tax resulting from the transaction. The minimum penalty is $10,000 for corporations and $5,000 for individuals (for failure to report a listed transaction, the maximum penalty is $200,000 and $100,000, respectively). These changes are retroactively effective to penalties assessed after Dec. 31, 2006.

Deductibility of health insurance for the purpose of calculating self-employment tax. The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.

Cell phones removed from listed property category. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

Offsets (revenue raisers)
Information reporting required for rental property expense payments. For payments made after Dec. 31, 2010, the new law requires persons receiving rental income from real property to file information returns with IRS and service providers reporting payments of $600 or more during the tax year for rental property expenses. Exceptions are provided for individuals renting their principal residences on a temporary basis (including active members of the military), taxpayers whose rental income doesn't exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs).

Increased information return penalties. Effective for information returns required to be filed after Dec. 31, 2010.

Application of continuous levy to tax liabilities of certain federal contractors. For levies issued after date of enactment, the new law allows IRS to issue levies before a collection due process (CDP) hearing on Federal tax liabilities of Federal contractors (taxpayers would have an opportunity for a CDP hearing within a reasonable time after a levy is issued).

Allow participants in governmental 457 plans to treat elective deferrals as Roth contributions. For tax years beginning after Dec. 31, 2010, the new law will allow retirement savings plans sponsored by state and local governments (governmental 457(b) plans) to include designated Roth accounts. Contributions to Roth accounts are made on an after-tax basis, but distributions of both principal and earnings are generally tax-free.

Allow rollovers from elective deferral plans to designated Roth accounts. The new law allows 401(k), 403(b), and governmental 457(b) plans to permit participants to roll their pre-tax account balances into a designated Roth account. The amount of the rollover will be includible in taxable income except to the extent it is the return of after-tax contributions. If the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. Plans will be able to allow these rollovers immediately as of date of enactment.

Crude tall oil (a waste by-product of the paper manufacturing process) is excluded from eligibility for the cellulosic biofuel producer credit. The new law limits eligibility for the tax credit to fuels that are not highly corrosive (i.e., with an acid number of 25 or less), effective for fuels sold or used after Dec. 31, 2009.

Nonqualified annuity contracts. The new law permits holders of nonqualified annuities (annuity contracts held outside of a qualified retirement plan or IRA) to elect to receive part of the contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis.

Guarantee fees. Amounts received directly or indirectly for guarantees of indebtedness of a U.S. payor issued after date of enactment are sourced, like interest, in the U.S. As a result, amounts paid by U.S. taxpayers to foreign persons will generally be subject to U.S. withholding tax.

Please keep in mind that these are only the highlights of the most important changes in the new law. If you would like more details about any aspect of the new legislation, please do not hesitate to contact us.

The financial reform bill recently signed into law is an attempt to address some of the problems that contributed to the 2008 financial crisis. The legislation, officially known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, is considered the most wide-ranging overhaul of the U.S. financial system since the aftermath of the Great Depression. Because the problems it addresses are complex, the legislation itself is complex; much of the real impact will be felt only after regulations are developed to implement the law's provisions. Also, some provisions, such as those dealing with lending practices, will have a direct impact on individuals and investors; others will primarily affect the ways in which Wall Street functions. This is only a brief summary of some key provisions; consult your financial professional to see how these changes may affect you.

Credit and lending practices are revised

The Act requires originators of residential mortgages to disclose any conflicts of interest and compare costs and benefits of mortgages offered to a potential borrower. Lenders also will be required to verify whether, based on income, credit history, and other data, a borrower has a reasonable ability to repay a loan plus its associated taxes, insurance, and other costs. This could mean that self-employed people and others whose income is undocumented or irregular will need better documentation to qualify for a loan.

Lenders will no longer be able to give loan officers financial incentives that induce them to steer customers to a mortgage with a higher interest rate simply to increase their own commission. Their ability to impose prepayment penalties when a borrower repays a loan early also will be more limited, and a holder of a hybrid adjustable rate mortgage must receive notice of any change in the interest rate six months in advance.

Lenders are prohibited from refinancing an existing mortgage unless the new mortgage offers a net benefit to the borrower, and they may not coerce or induce an appraiser to make a faulty appraisal of a property's value. Loan applicants must receive a copy of the appraisal on the property no later than three days prior to the closing.

High-cost mortgages are subject to special regulations. Any balloon payments on high-cost mortgages cannot be more than twice as large as the average of earlier payments, and a borrower must receive qualified counseling on the advisability of a high-cost mortgage before credit can be extended.

Homeowners who are unable to make mortgage payments as a result of losing their jobs or because of a medical condition may now qualify for up to $50,000 in assistance loaned through HUD's existing Emergency Mortgage Assistance Fund.

Increased protection of bank deposits becomes permanent

During the financial crisis, the Federal Deposit Insurance Corp. (FDIC) temporarily increased from $100,000 to $250,000 the amount it will insure on deposit accounts in FDIC-insured banks. The $250,000 limit is now permanent

Greater transparency and accountability for investments and related services

Institutional investors' inability to determine the amount of global financial exposure to derivatives--investments based on the value of other investments--contributed to the panic at the height of the financial crisis. Over-the-counter derivatives must now be traded on a public exchange, and trades must be cleared through a registered clearinghouse. Nonstandard derivatives can still be traded privately, but must be reported to a central authority in order to increase regulators' ability to monitor the overall level of activity.

Hedge funds and private-equity advisors will be required to register with the Securities and Exchange Commission (SEC) and disclose to the commission information such as investment positions and the amount of leverage involved. Also, the $1 million minimum net worth required to be an accredited investor eligible to invest in such funds will no longer include a principal residence, and that $1 million threshold will be reviewed every four years.

Credit rating firms, which were criticized for being too lax in their evaluations of securities based on subprime mortgages, will be subject to oversight by the SEC, which can fine those that issue too many faulty ratings over time. Also, investors will now have the right to sue an agency for issuing ratings it knew or should have known were flawed.

Shareholders of public companies will have the right to a nonbinding vote on compensation for the company's executives. Also, protections for people reporting securities law violations have been enhanced. Whistle-blowers with information that leads to monetary sanctions of more than $1 million will be eligible for 10 percent to 30 percent of the funds collected from the offender; if an employer retaliates, a whistle-blower can sue without waiting until administrative remedies have been exhausted.

An Investor Advocate office will be established within the SEC to help individual investors resolve significant problems and to promote investor interests.

Risky banking practices are addressed

Banks will be required to hold additional capital to cover potential losses, and some securities are no longer acceptable as vehicles for capital reserves held by large banks. Banks also will be required to retain at least 5 percent of a loan on their books if the loan is sold and/or repackaged with other loans and securitized. (However, some relatively low-risk mortgages, such as fully documented loans with a fixed interest rate, are exempted.)

Banks also will be more limited in their ability to engage in proprietary trading in their own accounts, which could represent a conflict of interest with their responsibility to their clients. They also will have to set up separate operations to handle their most risky derivative trades, such as swaps. A bank will not be permitted to invest more than 3 percent of its core capital in hedge funds and private equity, but it may still organize and offer them as long as certain conditions are met.

A Consumer Financial Protection Bureau overseen by the Federal Reserve will be created to regulate consumer financial products and services.

Systemic risk will be monitored, and liquidation of large banks will be overseen

A new Financial Stability Oversight Council is charged with assessing and managing risks that could threaten the entire U.S. financial system. Also, the FDIC will manage the liquidation of a bank whose failure the Treasury Secretary determines would disrupt the stability of the nation's financial system. That will include firing corporate management responsible for the failure and prohibiting any payments to shareholders until all other claims are paid. The FDIC may borrow from an Orderly Liquidation Fund to pay for a liquidation, but those costs must be replenished not from taxpayer funds but from claims on the bank and, if necessary, assessments on large financial institutions. The Act does not permit the Federal Reserve or the FDIC to lend to or provide a guarantee for individual or insolvent companies or banks, but both may lend funds to provide liquidity.

Early in 2010, the Washington State Legislature passed a number of laws that have current or future tax impact for businesses and individuals.  For a list of changes, please click here http://dor.wa.gov/Docs/Pubs/Misc/LegislativeTaxUpdate.pdf.

Hidden in the various changes are two provisions that dramatically change the taxation of companies that do business in Washington State.   The first provision is the new “Economic Nexus” rule.  This revises the criteria to establish “nexus” in Washington State, thereby subjecting itself to Washington taxation.   For example, an out of state company who sells to Washington State customers but otherwise maintains no physical presence in the State is now subject to Washington taxation if its Washington sales are more than $250,000.  The same company could, prior to the enactment of this provision, avoid Washington State taxation by not maintaining any physical presence in Washington State regardless of the amount of its Washington sales. 

The second big change is the new apportionment method that must be used for businesses that report B&O tax under certain classifications, such as the “Service and Other Activities” classification. 
Apportionment is a way to allocate business income and expenses for companies that do business in multiple states.  The new apportionment method calls for the use of a single receipts factor, where the numerator is the total gross income of the business attributed to Washington, and the denominator is the total gross income worldwide.  Based on a temporary rule (WAC 458-20-19402), income is attributed based on a cascading method, with the first determining factor being where the customer received the benefit of the service.   This contrasts drastically with the previous apportionment method, which was based on the cost of doing business.

Both provisions are effective June 1, 2010.  Companies need to act now to analyze the impact these changes will have on their operations and bottom line.  Please contact us if you would like to discuss how these changes will impact you.

The “Hiring Incentives to Restore Employment Act of 2010” (The HIRE Act) was signed into law earlier this year. It provides tax benefits to businesses that hire and retain unemployed workers in 2010. Since the law’s enactment, the IRS has issued guidance as to how the new law affects employers. Here is a summary.

Payroll Tax Holiday

A key element of the HIRE Act is a payroll tax holiday relating to Social Security taxes:

• The HIRE Act relieves employers of the obligation to pay their share of Social Security (i.e., OASDI) employment taxes on qualifying wages paid to certain newly hired employees if the law’s requirements are met.
• An employer’s potential maximum tax benefit is $6,621: 6.2% of the employee’s wages up to $106,800 — the maximum amount of wages subject to Social Security taxes (in 2010).
• Workers hired after February 3, 2010, and before January 1, 2011, are eligible for the payroll tax forgiveness if certain conditions are met.
• However, only wages paid after March 18 qualify to receive the exemption for payroll taxes.
• The new employee cannot be a replacement for a former employee unless the former employee was terminated for cause or left voluntarily. Following a layoff, when business activity picks up again, the payroll tax exemption may apply with respect to the hiring of a new employee by the employer
• Employers must obtain signed affidavits (Form W-11 or its equivalent) from the workers certifying that they have not been employed for more than 40 hours during the 60-day period ending on the date employment began.
• No minimum weekly hour work requirement for new employees must be met in order for an employer to be eligible for the payroll tax break.
• There is no limit on the total amount of payroll tax an employer may be forgiven.
• The payroll tax break doesn’t reduce payroll taxes paid during the first calendar quarter of 2010. Instead, the tax reduction is treated as a payment against the employer’s second quarter Social Security tax liability.
• In addition to income taxes, employers are still required to withhold the employee’s 6.2% share of Social Security taxes.
• The reduced tax withholding will have no bearing on an employee’s future Social Security benefits.
• The employee’s and the employer’s share of Medicare taxes (1.45% each — on all wages) continues to apply.
• For workers that are otherwise eligible for the Work Opportunity Tax Credit (WOTC), the employer must select between the WOTC or the Social Security payroll tax reduction benefit under the HIRE Act; both cannot be claimed.

Retention Credit

The HIRE Act also offers employers a tax credit for retaining the workers they hire.

• The amount of the tax credit that the employer may generally claim for each newly hired workers retained for at least 52 weeks is equal to the lesser of:
  • $1,000, or
  • 6.2% of wages paid to the retained worker during the 52-week period.
• Accordingly, the credit for a retained worker will be $1,000 if the retained employee’s wages during the 52-consecutive-week period exceeds a little over $16,000.
• The credit is only applicable to the extent the amount of wages paid to the employee during the last 26 weeks of the 52-week period is at least 80% of the amount paid during the first 26 weeks of the period.
• The tax credit under the HIRE Act is claimed in the tax year in which the employee first satisfies the requirement of working 52 consecutive weeks for the employer.
• The employee cannot be a relative of the employer in order for either tax benefit to be claimed.

Sec. 179 Expensing

The HIRE Act also extends the 2009 enhanced expensing rules for small businesses under IRC Section 179 for tax years beginning in 2010. Under the expensing rules, qualifying businesses have the option to currently deduct the cost of business machinery and equipment, rather than depreciating it over a number of years.

• The HIRE Act provides that, for tax years beginning in 2010, a business may expense up to a maximum amount of $250,000.
• The expensing election amount begins to phase out when a business purchases expensing-eligible assets in excess of $800,000.

• These limits are in keeping with expensing levels in 2008 and 2009, which had expired.

• Prior to the HIRE Act’s enactment, expensing limits for 2010 were $134,000 of qualifying assets, with a phaseout beginning in excess of $530,000 of qualifying assets.
• The election applies to most non-real estate assets

If we can be of assistance to you in applying the HIRE Act’s provisions to your business, let us know.

The Patient Protection and Affordable Care Act (the “Act”, as amended) was recently signed into law. The Act will affect nearly every individual and business in the U.S.

The Act generally requires most individuals to have at least a minimum level of essential health care coverage (or imposes penalties on individuals who fail to do so). Under the new law, lower income individuals (with income up to 400% of the poverty level) may be entitled to receive tax credits and cost-sharing reductions to help pay for the coverage.

Employer Responsibilities

The Act also contains numerous provisions affecting employers.

Employer Shared Responsibility. While the Act does not require employers to provide minimum essential health coverage to employees, it encourages them to do so by offering penalties and incentives.

Employer Penalty. The new law exacts a penalty on larger employers (at least 50 full-time or full-time equivalent employees during the prior year) who fail to provide adequate coverage. If the employer doesn’t offer minimum essential coverage to employees and at least one employee receives a premium tax credit or cost-sharing reduction, it will be assessed a penalty of $2,000 per full-time employee per year. The Act excludes the first 30 employees from the penalty.

For those employers offering coverage where the coverage is “unaffordable” or where the coverage has an “actuarial value” of less than 60% of the cost of benefits, a penalty will apply if at least one employee receives a premium tax credit or cost-sharing reduction. The penalty is the lesser of $3,000 for each employee receiving the credit or reduction or $2,000 multiplied times the total number of full-time employees. Employers with fewer than 50 full-time employees are exempt from the penalty assessment.

SHOP Exchanges. The Act creates state-based exchanges (known as Small Business Health Options Program, or “SHOP”, Exchanges) through which small businesses (up to 100 full-time employees) can buy health care insurance coverage for employees (and possibly save money by doing so).

Small Employer Tax Credit. The Act offers small employers (generally those with no more than 25 full time employees and paying average annual wages of no more than $50,000 per employee) that purchase health insurance coverage for employees a sliding-scale income-tax credit to help them pay for the plan.

Free Choice Vouchers. Employers that offer coverage to their employees will be required to provide a “Free Choice Voucher” to certain employees whose income is not more than 400% of the federal poverty level under specified circumstances. The voucher is generally equal to an amount the employer would have paid to cover the employee under the employer’s plan.

Grandfathered Coverage. The Act allows personal or employer-provided health benefit coverage existing at the time of enactment to stay in place under a “grandfather” provision. The Act considers the grandfathered coverage to meet the law’s individual coverage mandate, if certain requirements are met.

Medicare Tax Increases

The Act imposes Medicare tax increases on higher income taxpayers.

Additional Medicare Tax on Earnings. Individual taxpayers who earn more than $200,000 a year, married taxpayers filing jointly who earn more than $250,000, and married taxpayers filing separately who earn more than $125,000 will have to pay an additional Medicare tax equal to .9% of their wages over the relevant threshold amount for their filing status. Self-employed individuals will be liable for an additional tax of .9% on self-employment income over certain thresholds. The additional self-employment tax is not deductible.

Surtax on Investment Income. A 3.8% surtax will be imposed on the investment income of higher income individuals, estates, and trusts. For individuals, the tax is equal to 3.8% of the lesser of (1) net investment income for the year or (2) the amount by which modified adjusted gross income exceeds the annual threshold amounts specified above for the additional Medicare tax on earnings. The thresholds are not inflation-adjusted. The 3.8% surtax does not apply to qualified retirement plan and individual retirement account distributions.

For More Information

The new law contains many more provisions that may affect you and your business. The good news is that, while some provisions of the Act take effect in 2010, most of the employer provisions go into effect later this decade. We would be happy to consult with you on what the new law means to you — today and tomorrow. Please let us know if we can be of assistance.

At a time when your career is reaching a peak and you are looking ahead to your own retirement, you may find yourself in the position of having to help your children with college expenses while at the same time looking after the needs of your aging parents. Squeezed in the middle, you've joined the ranks of the "sandwich generation."

What challenges will you face?

Your parents faced some of the same challenges that you may be facing now: adjusting to a new life as empty nesters and getting reacquainted with each other as a couple. However, life has grown even more complicated in recent years. Here are some of the things you can expect to face as a member of the sandwich generation today:

• Your parents may need assistance as they become older. Higher living standards mean an increased life expectancy, and you may need to help your parents prepare adequately for the future.
• If your family is small and widely dispersed, you may end up as the primary caregiver for your parents.
• If you've delayed having children so that you could focus on your career first, your children may be starting college at the same time as your parents become dependent on you for support.
• You may be facing the challenges of "boomerang children" who have returned home after a divorce or a job loss.
• Like many individuals, you may be incurring debt at an unprecedented rate, facing pension shortfalls, and wondering about the future of Social Security.

What can you do to prepare for the future?

Holding down a job and raising a family in today's world is hard enough without having to worry about keeping the three-headed monster of college, retirement, and concerns about elderly parents at bay. But if you take some time now to determine your goals and work on a flexible plan, you'll save much stress--and expense--in years to come. Planning ahead gives you the chance to take the wishes of the entire family into account and to reduce future disagreements with your siblings over the care of your parents.

Here are some ways you can prepare now for the issues you may face in the future:

• Start saving for the soaring cost of college as soon as possible.
• Work hard to control your debt. Installment debts (car payments, credit cards, personal loans, college loans, etc.) should account for no more than 20 percent of your take-home pay.
• Review your financial goals regularly, and make any changes to your financial plan that are necessary to accommodate an unexpected event, such as a career change or the illness of a parent.
• Invest in your own future by putting as much as you can into a retirement plan, where your savings (which may be matched by your employer) grow tax deferred until you retire.
• Encourage realistic expectations among your children; their desire to attend an expensive college will add to your stress if you can't afford it.
• Talk to your parents about the provisions they've made for the future. Do they have long-term care insurance? Adequate retirement income? Learn the whereabouts of all their documents and get a list of the professionals and friends they rely on for advice and support.

Caring for your parents

Much depends on whether a parent is living with you or out of town. If your parent lives a distance away, you have the responsibility of monitoring his or her welfare from afar. Daily phone calls can be time consuming, and having to rely on your parent's support network may be frustrating. Travel to your parent's home may be expensive, and you may worry about being away from family. To reduce your stress, try to involve your siblings (if you have any) in looking after Mom or Dad, too. If your parent's needs are great enough, you may also want to consider hiring a professional geriatric care manager who can help oversee your parent's care and direct you to the community resources your parent needs.

Eventually, though, you may decide that your parent needs to move in with you. If this happens, keep the following points in mind:

• Share all your expectations in advance; a parent will want to feel part of your household and may be happy to take on some responsibilities.
• Bear in mind that your parent needs a separate room and phone for space and privacy.
• Contact local, civic, and religious organizations to find out about programs that will involve your parent in the community.
• Try to work with other family members and get them to help out, perhaps by providing temporary care for your parent if you must take a much-needed break.
• Be sympathetic and supportive of your children--they're trying to adjust, too. Tell them honestly about the pros and cons of having a grandparent in the house. Ask them to take responsibility for certain chores, but don't require them to be the caregivers.

Considering the needs of your children

Your children may be feeling the effects of your situation more than you think, especially if they are teenagers. At a time when they are most in need of your patience and attention, you may be preoccupied with your parents and how to look after them.

Here are some things to keep in mind as you try to balance your family's needs:

• Explain fully what changes may come about as you begin caring for your parent. Usually, children only need their questions and concerns to be addressed before making the adjustment.
• Discuss college plans with your children. They may have to settle for less than they wanted, or at least take a job to help meet costs.
• Avoid dipping into your retirement savings to pay for college. Your children can repay loans with their future salaries; your pension will be the only income you have.
• If you have boomerang children at home, make sure all your expectations have been shared with them, too. Don't be afraid to discuss a target date for their departure.
• Don't neglect your own family when taking care of a parent. Even though your parent may have more pressing needs, your first duty is to your children who depend on you for everything.

Most importantly, take care of yourself. Get enough rest and relaxation every evening, and stay involved with your friends and interests. Finally, keep lines of communication open with your spouse, parents, children, and siblings. This may be especially important for the smooth running of your multi-generation family, resulting in a workable and healthy home environment.

Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

2010 is touted by some as the year of the Roth IRA conversion, because the adjusted gross income limit is removed, allowing those with high income to convert. Although converting Roth IRA provides many tax benefits, it is not for everyone.

Follow this link to an article from the Journal of Accountancy that provides an in-depth analysis of the pros and cons of conversion. You may also find it helpful to use a Roth IRA Conversion Calculator to run comparisons. Here is the link to the calculator from Charles Schwab. Each person’s situation is unique. Please contact us if you have questions pertaining to your specific needs.

Now that the end of the traditional tax filing season is upon us, it may be tempting to purge certain tax documents from your files for the current and past tax years. However, you should be aware of the rules for retaining relevant tax records in the event that the IRS — or another taxing authority — requires that those records be produced as part of an audit.

Keep at Least Three Years
The following records are commonly used to substantiate a taxpayer’s income and expense items:

• Form(s)
• W-2 Form(s) 1099
• Form(s) K-1
• Bank and brokerage statements
• Canceled checks or other proof of payment of deductible expenses

At a minimum, the above tax records should be kept for a three-year period following the date that you filed your return, or its due date, if later.

However, the IRS’s time limit for initiating an audit on a return where income was grossly understated, yet no fraud was discovered, is six years. Therefore, it is ideal to retain the above documents for six years to better protect yourself in the event of an audit.

Some Records to Keep Longer
Be aware that the tax consequences of a transaction that occurs in one year may depend on what happened in earlier years. Therefore, the period for which you should retain records must be measured from the year in which the tax consequences actually occur. This is true, for instance, where you sell property that you bought years earlier.

Example: Maria bought her home in 1987 for $90,000 and made an additional $20,000 of capital improvements in 1995. If she sells her home in 2007, Maria will need to know her tax basis (i.e., the original cost plus later capital improvements) to determine the tax consequences of the sale. So, she may have to produce records relating to the purchase in 1987 and the capital improvements in 1995. Therefore, those records should be kept for at least six years after Maria’s 2007 return is filed instead of just six years after the transactions occurred.

Although as much as $250,000 of home-sale gain can escape tax — up to $500,000 for joint-return filers — you should still retain all records relating to home purchases and improvements. You cannot know now how much the home will be worth when it’s sold. Plus you cannot be certain that the home-sale exclusion will still be available when your future sale takes place.

Similar issues apply to other property that is likely to be bought and sold — for example, shares in a corporation or in a mutual fund, bonds (or other debt securities), etc. Keep in mind that if you reinvest dividends to buy additional shares of stock, each reinvestment is a separate purchase of stock, and the records of each reinvestment should be kept for at least six years after the return is filed for the year in which the stock is sold.

Another example: The calculation of the casualty and theft loss deduction is determined in part by your basis in the damaged or stolen property. Therefore, you’ll need to keep records to support your basis until six years after you file the return claiming the loss deduction.

What If You Lose Records?
Safeguard your records against loss from theft, fire, or other disaster. Consider keeping your most important records in a safe deposit box or other safe place outside your home. Moreover, consider keeping copies of the most important records in an easily accessible location so that you can quickly take them with you if you have to leave your home in an emergency.

If your records are lost or destroyed, don’t despair. It may be possible to reconstruct some of them. For instance, your stockbroker may be able to help determine the tax basis of securities you sold, and an attorney who represented you in the purchase of your home may retain records relating to the closing. Still, since you can never be sure whether those persons will actually have the records you need, the safest course of action is to retain them yourself, in as safe a place as possible.

Prior Years’ Tax Returns
It is a good idea to maintain one or more permanent files with important legal and personal documents, including those relating to taxes. Specifically, as a general rule, you should retain copies of your federal and state income-tax returns (and any tax payments) indefinitely. For instance, the IRS or another taxing authority could claim that you never filed a particular year’s return. If that occurs, the IRS (or other authority) could assess tax and penalties relating to the return in question. You will need a copy of your return to bolster your position that you actually filed the return.

Need More Information?
Filing your returns on a timely basis is just one aspect of properly handling your taxes. Be prepared to defend yourself in the event of an audit by retaining your records for the appropriate time period. Call us if you have any further questions.