At this writing, the most recent, sweeping revision by Congress of the tax law was the 2009 revision which still has some dust kicking up. Here is a quick review of some of the 2009 changes, mostly aimed at the high-bracket taxpayer:
A top tax rate of 60% in 2011 and 50% in 2012 and later applied to salary and bonus income. In shaping his compensation demands, a high-paid executive may do better by stressing cash and putting less emphasis on fringe benefits - depending on his situation.
Also, consider the new minimum tax. "Preference" income above a specified level is taxed at 10%. Add £30,000 to your regular tax paid for the year; preference items above that total are hit with the 10%. These items include half of net long-term capital gains and the "bargain element" built into stock options. Among other things, this means that more care should be taken in exercising an option. The spread between option price and market value may be taxed at the rate - and at the time of exercise.
Note: For a top executive, tax-exempt bonds are now relatively more attractive. They're a "shelter" investment beyond the reach of the 10% tax bite. The currently confused state of common stocks makes this point all the more interesting.
Income-averaging is easier. To take advantage of this, your income must be at least 120% of your average for the past four years - down from 133%. And note: Long-term capital gains and gifts may be averaged.
A single executive faces a tax no more than 20% higher than that paid by a married man on a joint return.
Executive compensation needs a close review. For example: The lump-sum payout under a pension or profit-sharing plan - to the extent that it represents company contributions - is taxed as ordinary income instead of capital gain. Note especially: There's an averaging rule that can reduce the tax - but the advantage of the lump-sum payout is cut down for many individuals. An executive will want to seek the payout that works most to his advantage. An annuity may make good sense, even though it's taxed at the higher ordinary rate.
Investments also get a shaking out. A major point is that the maximum tax on capital gains stays at 25% - for gains up to £50,000. Above that, it's 35%.
There's a melange of investment provisions. Common stock dividends that are paid in stock instead of cash are now more often taxable, and all stock dividends on preferred shares are taxable.
Real estate investors will miss out on some tax breaks because of tighter rules on taking depreciation. Keep in mind that the new law makes residential real estate - especially slum property - a much better bet for investment than commercial property. A five-year write off covers rehabilitation of low-income housing, and the 200% method of depreciation is available. All of these points when applied need to be closely reviewed with a qualified tax adviser.
Weekend farmers won't do so well. The law curbs the use of heavy farm losses to offset nonfarm income. The big clampdown comes where the yearly loss is over £25,000 and nonfarm income is £50,000 or more.
First take a glance at the basics of the tax sheltering - what a shelter does for the man who can use it. In an oil deal, as much as 80% of the investment may be tied up in "intangible" drilling costs which are fully deductible from ordinary income. Thus, on every £1,000 invested, £800 is deductible. For an investor in the 50% tax bracket, this cuts taxes by £400 - and actual investment cost is £600. If the venture is a failure ("dry hole"), the taxpayer can then deduct the remaining cost in full against his other income. If it hits, percentage depletion rules take over - and 22% of gross income from the venture is tax-free (up to 50% of taxable income). Finally, if the taxpayer... see: The Tax Shelter: A Sometime Haven