• Leif Novie
• CPA, JD, Principal
• lnovie@mbafcpa.com
• (305) 373-5500

• Marjorie A. Horwin
• CPA, Principal
• mhorwin@mbafcpa.com
• (305) 373-5500

Last night Congress passed a bill that will reinstitute the estate tax at a 35 percent rate and an exemption of the first $5 million per estate, and will also extend the Bush-era tax cuts to 2011 and 2012 for all individual taxpayers. In addition, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 will retain the long-term capital gains tax rate at 15 percent for the years 2011 and 2012. In addition the bill will provide a two-year "patch" on the Alternative Minimum Tax (AMT).

President Obama has said that he plans to sign the bill (H.R. 4853) into law, possibly as soon as today.

With the passage of this widely anticipated bill, individuals and their families will be able to move forward with certainty on many important aspects of their estate and tax planning for 2011 and beyond.

Following are some of the bill's important provisions for high net worth individuals and their families:

Estate Tax and Gift Tax

The estate tax will be reinstituted for the years 2011 and for 2012 at a 35 percent tax rate and with an exemption of the first $5 million per estate and $10 million per married couple in 2011. The exemption amount will be indexed beginning in 2012.

Initially, there was no estate tax in 2010, following a nine-year phase-out. Prior to the new bill, the estate tax was scheduled to be at a 55 percent tax rate with a $1 million exemption per estate in 2011.

Under the new Tax Act, there is an estate tax for 2010. However, an election may be made to have it not apply. In the case of a descendent dying in 2010, the executor of the estate may elect to apply the pre-Tax Act rules if it is determined that these are more beneficial.

The bill provides for a top tax rate of 35 percent for the gift tax through 2012 with a one million dollar exemption.

The gift tax was reduced from 45 percent in 2009 to 35 percent in 2010. Prior to the new bill, it was scheduled to rise to 55 percent in 2011.

The changes on the estate tax and gift tax will be effective January 1, 2010. But personal representatives will be allowed to make an election to choose no estate tax and modified carryover basis for estates arising on or after December 31, 2009 and before January 1, 2011.

Effective for estates of decedents dying after December 31, 2010, the new bill will allow the executor of a deceased spouse's estate to transfer any unused exemption to the surviving spouse.

For gifts made after December 31, 2010 through 2012, estate tax and gift tax exemptions will be reunified.

Individual Tax Rates

In 2011, the tax rates for individuals and for married couples filing jointly will be at the rates they have been since 2001. Notably, the bill retains the rates of 33 percent and 35 percent for the two highest tax brackets.

Personal income taxes will remain at the following rates:

• 35 percent: individuals with income over $379,150; married couples with income over $379,150.
• 33 percent: individuals with income between $174,400 and $379,150; married couples with income between $212,300 and $379,150.
• 28 percent: individuals with income between $83,600 and $174,400; married filers with income between $139,350 and $212,300.
• 25 percent: individuals with income between $34,500 and $83,600; married filers with income between $69,000 and $139,350.
• 15 percent: individuals with income between $8,500 and $34,500; married filers with income between $17,000 and $69,000.
• 10 percent: individuals with income up to $8,500; married filers with income up to $17,000.

Qualified Dividends and Capital Gains Tax

Under the bill, the long-term capital gains tax will continue to be 15 percent through 2012. That tax is on the sale of stocks, bonds, mutual funds and other qualified assets that are held longer than one year.

The capital gains rate was scheduled to increase to 20 percent on sales of assets held longer than one year and to 18 percent on sales of assets held longer than five years.

Qualified dividends paid to individuals will be taxed at the same rates as long-term capital gains. Prior to the bill, dividends would have been taxed at the same rates that apply to ordinary income.

Alternative Minimum Tax

The AMT exemption amounts for 2010 will be $47,450 for individuals and $72,450 for married taxpayers filing jointly. For 2011, the exemption amount will be $48,450 for individuals and $74,450 for married taxpayers filing jointly.

The exemption amount for married taxpayers filing separately is half the amount for joint filers. Without this "AMT patch" the exemption would have dropped to pre-2001 levels and subjected a significant number of taxpayers to higher tax liabilities because of this alternative system of taxation.

If you would like additional information on the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, do not hesitate to contact us at (305) 373-5500 and (561) 909-4100.

• Leif Novie
• CPA, JD, Principal
• lnovie@mbafcpa.com
• (305) 373-5500

The final weeks of 2010 are a vital time for tax planning and estate planning due to expectations of increases in the estate tax, gift tax and Generation Skipping Tax (GST) that are scheduled to take effect in 2011 and for succeeding years.

One significant pending change is that the estate tax, which was repealed for 2010, is scheduled to return on January 1, 2011 at a 55 percent rate and $1 million exemption of estate size. Those were the levels in 2001, prior to the phase-out of that tax on assets that are transferred upon a death.

Congress is considering several bills that would restore the estate tax, but put it at lower rates and higher exemptions than those now scheduled for 2011. But there are widespread expectations that Congress will not pass those bills and expectations that it also will not act to prevent the changes scheduled on the gift tax and the GST, which is on transfers to grandchildren and other later generations. It also appears unlikely that there will be retroactive applications of the rates for those taxes that were in effect in 2010.

Estate Tax

There are several tax planning steps that can reduce the size of an estate and thus reduce the estate tax in 2011 and future years. One example is that during November 2010, loans can be made to family members at a rate as low as 0.35 percent for up to three years and as low as 1.59 percent for up to nine years.

Gift Tax

The gift tax was reduced from 45 percent in 2009 to 35 percent in 2010. It is scheduled to rise to 55 percent in 2011. In situations where gifts are being planned to children and other family members, the acceleration of those gifts into 2010 could result in significant tax savings.

Generation Skipping Tax

The GST was repealed for one year in 2010, after gradually being reduced from 55 percent in 2001 to 45 percent in 2009. It is scheduled to revert back to 55 percent for 2011 and succeeding years. Important considerations for the remainder of this year are that outright gifts to grandchildren in 2010 are free from the GST and that distributions from GST Trusts are free from the GST tax.

Grantor Retained Annuity Trusts

Congress is considering changes that would curtail some of the tax advantages for Grantor Retained Annuity Trusts (GRAT), in which assets are placed under the trust and an annuity is paid out every year. When the trust expires, the beneficiary receives the assets tax-free. So, it is may be important to establish a GRAT late this year, before any legislation is passed that would implement changes in 2011.

If you would like additional information on estate planning and tax planning steps that can be taken regarding the estate tax, gift tax and other taxes on which rates could rise in 2011, do not hesitate to contact us at (305) 373-5500

The account holder will have to pay income tax on the deferred earnings in their Traditional IRA (although conversions in 2010 allow the taxpayer to defer inclusion until 2011 and 2012), and that must be weighed in light of (i) whether the taxpayer will need the funds during their lifetime; (ii) whether there are other funds to pay the taxes; (iii) whether ordinary income tax rates will change; (iv) the age of the taxpayer; and (v) the taxpayer's overall estate and financial plan.

The tax code allows the taxpayer to re-characterize or revoke the conversion for a period of time, and creative structuring of a Roth IRA can optimize use of that provision. In addition, financial en- gineering or estate planning strategies can also be used to reduce or possibly eliminate the income generated by the conversion.

If a Roth conversion is right for you, proper planning can enhance its benefits. If you would like additional information on Roth IRA conversions, do not hesitate to contact us at (305) 373-5500.

• Marjorie Horwin
• CPA, Principal
• mhorwin@mbafcpa.com
• (561) 909-210

• Tony Argiz
• CPA / ABV / CFF, ASA, CVA, CFE, Chairman and CEO
• targiz@mbafcpa.com
• (305) 373-5500

On March 17th the Internal Revenue Service (“IRS”) issued guidance to clarify the deductibility of theft losses for taxpayers who were victims in investment Ponzi schemes such as the one operated by Bernard Madoff (“Madoff”).

IRS Revenue Procedure 2009-20 offers a uniform approach for determining the proper time and amount of the theft loss. Basically, under the new optional safe harbor, when certain conditions are met, the taxpayer can deduct in the year of discovery up to 95% of their net investment reduced by any actual or potential recovery from insurance (e.g., Securities Insurance Protection Corporation (SIPC)). If the qualified investor is seeking to recover any of their theft loss from third parties (e.g., accountants or investment advisers), these taxpayers may deduct 75% of their theft loss. There are a number of provisions, schedules and statements which must be completed to meet the requirements of the safe harbor.

IRS Revenue Ruling 2009-09 sets forth the legal position of the IRS as it applies to individuals and feeder funds. In summary,

• Qualified investors are entitled to a theft loss that is not a capital loss.
  
  
• Theft loss is not subject to the limitations of personal theft losses.
  
  
• Theft loss is deductible by the taxpayer in the year of discovery to the extent not reimbursed by a claim for recovery (e.g., SIPC or private insurance).
  
  
• The theft loss deduction includes the taxpayer’s total investment, including any income reported in prior years, and reduced by cash withdrawals.
  
  
• Theft loss is a business deduction and eligible taxpayers may elect to carry back a net operating loss generated by the theft loss up to five years if they meet the requirements under the American Recovery and Reinvestment Act of 2009.
  
  

The MBAF Special Task Force on Madoff is available to discuss these procedures and rulings in detail. Please contact Marjorie A. Horwin, CPA, at 561 909-2100 (Palm Beach and Broward), Miguel G. Farra, CPA, JD at 305 373-5500 (Miami).

• By Marjorie A. Horwin
• CPA, Principal
• marjorie.horwin@mbafcpa.com
• (305) 373-5500

The collapse of Bernard L. Madoff's investment company, Bernard L. Madoff Investment Securities, LLP (BMIS) has had some of its biggest impact in Florida, where individuals, private foundations, public charities, pension funds and other entities have re-portedly suffered combined losses of several billion dollars. In fact, of the 11,374 Madoff customers, nearly one in five – or 2,070 – are from Florida, making the Sunshine State the hardest hit outside of New York (Source: Miami Herald, 2/5/09).

Across the country, investors from different backgrounds, including many business owners, have found themselves to be victims of Madoff's alleged scheme. As auto dealers and other business leaders work to meet the difficult challenges of today's economy, understanding how to spot financial fraud is important. For those who have been struck by Madoff's apparent fraud, unraveling the financial situation and attempting a recovery of funds is essential.

With this in mind, MBAF has set up a Special Task Force to deal with the recovery of funds related to the Madoff Fraud Case. As the first public accounting firm in Florida to establish such an entity, MBAF is working to help determine if clients are eligible for IRS refunds in cases where reported earnings were the result of fraudulent or other incorrect tax reporting information supplied by Madoff.

MBAF's areas of focus include:

• Computing the amount of loss realized by the client. Assisting the client in gathering supporting documentation.
• Determining the ability to take an ordinary tax deduction as a theft loss for principal invested.
• Amending prior year tax returns appropriately.
• Potential carry back of net ordinary losses.
• Potential carry forward of remaining net operating losses.
• Working with counsel regarding SIPC filings that are typically due within 60 days of the notice of the published proceeding.
• Working with counsel regarding clients that were invested in outside entities managed by Madoff and his affiliates.

Investors affected by the Madoff case can contact MBAF at (305) 373-5500 for a consultation. To subscribe to the Special Task Force Advisory, please subscribe to the RSS feeds.

• Marjorie Horwin
• CPA, Principal
• mhorwin@mbafcpa.com
• (561) 909-210

• Tony Argiz
• CPA / ABV / CFF, ASA, CVA, CFE, Chairman and CEO
• targiz@mbafcpa.com
• (305) 373-5500

The MBAF Special Task Force continues to help investors who lost money in the collapse of Bernard L. Madoff Investment Securities (BMIS) to develop action plans to gain tax refunds and other recoveries.

Having full sets of records is essential in quantifying Madoff-related losses, and determining the amount of tax refunds that are available. Those losses can be carried forward or carried backward.

The MBAF Special Task Force is advising individuals who were Madoff clients on these steps in an action plan:

• Collecting federal tax returns for all years in which they placed and/or held investments in BMIS and any related entities that are part of the criminal, civil and bankruptcy proceedings.
  
  
• Obtaining all tax reporting statements including Form 1099 showing each year’s interest, dividend income and capital gains from Madoff entities.
  
  
• Collecting all similar IRS forms from all other financial firms on accounts and other investments on which they received taxable income.
  
  
• Obtaining all other annual and other periodic statements provided by Madoff entities on the entity’s overall performance, and on the returns for the individual client.
  
  
• Collecting all records and statements showing amounts they invested in BMIS and other Madoff entities, and records and statements showing amounts withdrawn.
  
  
• Considering the filing of a protective claim prior to April 15, 2009, when the statute of limitations expires for amending the 2005 tax year.
  
  

With those records and documents, and in consultation with each client, MBAF can assess each client’s specific situation concerning the Madoff entities and arrive at specific advice on filing amended tax returns and requests for refunds with the Internal Revenue Service.

If you would like to contact our firm to discuss your particular matter, please call Marjorie A. Horwin, CPA, 561 909-2100 (Palm Beach and Broward), Miguel G. Farra, CPA, JD, or Tony Argiz, Managing Partner, 305 373-5500 (Miami-Dade) or for more information on MBAF, please visit www.mbafcpa.com.

• Tony Argiz
• CPA / ABV / CFF, ASA, CVA, CFE, Chairman and CEO
• targiz@mbafcpa.com
• (305) 373-5500

Morrison, Brown, Argiz & Farra, LLP (MBAF), the largest independent CPA firm in Florida and 43rd largest in the country, has formed a Special Task Force to examine the income tax ramifications to clients, investors, and others who participated either directly or indirectly with entities controlled by Bernard L. Madoff.

Members of the Special Task Force, comprised of MBAF tax specialists, are working to assist clients and investors in the potential recovery of tax dollars. These refunds may be as a result of tax dollars expended for reporting of phantom income, or for principal losses in the current year that may affect prior and future filings.

On December 11, 2008, Bernard L. Madoff was arrested by the FBI and was criminally charged after admitting to securities fraud that was perpetrated on clients of Bernard L. Madoff Investment Securities LLC (BMIS). One day later the Securities and Exchange Commission appointed a receiver for BMIS and froze the assets of brokerage firm. The complaints filed allege that Madoff and BMIS committed fraud by operating an elaborate scheme that resulted in investors’ losses of up to $50 billion.

Members of the MBAF Special Task Force will work with attorneys, investment advisors and other representatives of clients and investors who suffered losses through investments in Madoff entities.

The areas of focus by the Special Task Force will include: timing and ability to take principal losses as an ordinary deduction; filing of protective elections to maintain open tax years so that amended returns may be filed; and addressing carry back and carry over of losses that affect prior and subsequent periods.

Our tax experts will also be working with legal counsel who represent former Madoff clients with Securities Investment Protection Corporation (SIPC) filings, assessment of damages, and defense of distributed proceeds received in prior years that regulatory agencies may attempt to reclaim.

Madoff investors should concentrate on gathering all documentation related to Madoff investments including monthly statements, trade slips and year end reporting information so that MBAF tax experts can assist in the analysis of potential tax losses and refunds. Areas of focus while providing this analysis will include:

• Ability to take ordinary tax deductions for loss of principal under I.R.C. Section 165 verses capital loss including timing of filing and documentation to be provided to IRS.
• Amending of prior year tax returns that include fraudulently reported investment earnings (protective or incomplete claims may be required in order to extend the statue of limitation for refund tax).
• Potential carry back of current year net operating losses including professional fees associated that have been incurred as a result of this theft loss.
• Potential carry forward of remaining net operating losses due to loss of principal that will be a tax benefit in future years.
• Working with counsel regarding SIPC filings typically due within 60 days of the notice of the published proceeding.
• Working with counsel regarding clients that were invested in outside entities investment or managed by Madoff and his affiliates.
• Working with counsel to document principal and income good faith distributions taken in prior years in order to preclude fraudulent conveyance assertions by the bankruptcy court.

If you would like more information on the MBAF Special Task Force on Madoff investments, please do not hesitate to contact us at (305) 373-5500 or at (561) 909-2100.