Tax Tips S corporation owners often take modest salaries as a tax-saving strategy. By distributing most of the corporation’s profits in the form of dividends rather than wages, the company and its owners can avoid payroll taxes on these amounts. Although S corporations may be tempted to pay little or no salary to their shareholder-employees, this is a dangerous tactic. The IRS has targeted S corporations, assessing unpaid payroll taxes, penalties and interest against companies whose owners’ salaries are unreasonably low. To avoid an unexpected tax bill, S corporations should conduct an analysis — using compensation surveys, company financial data and other evidence — to establish and document reasonable salaries for each position. Now’s the time for giving The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 established a $5 million gift and estate tax exemption and a maximum tax rate of 35% for this year and next. Absent additional legislation, the exemption will drop to $1 million, and the top tax rate will increase to 55%, in 2013. It’s difficult to predict what Congress will do between now and then, so consider making large gifts now to take advantage of the high exemption amount. Even if Congress extends the current law, there are advantages to making gifts early, especially gifts of assets expected to appreciate. That’s because future appreciation is removed from your estate and sheltered from gift and estate taxes. A caveat: If the exemption does fall back to $1 million in 2013, the IRS might attempt to “claw back” previous gifts in excess of $1 million and subject them to estate tax, even though they were exempt from gift taxes when made. Most experts believe this outcome is unlikely, but if it happens, you’ll be no worse off for having made the gift, and you may be better off if the assets appreciate after the gift is made. Consider a charitable IRA rollover The Tax Relief act extended the charitable IRA rollover through the end of 2011. This strategy allows those 70½ or older to transfer up to $100,000 directly from an IRA to a qualified charity without triggering income taxes on the distribution. (The rollover can be used to satisfy minimum distribution requirements for the year.) Seniors who want to make charitable contributions often withdraw funds from their IRAs, donate the money to charity and offset the income with a corresponding charitable deduction. A direct rollover offers similar tax savings for those who don’t itemize or are constrained by income limits on charitable deductions. • |