Year End Newsletter 
and Tax law Changes For 2011

November 15, 2011

Dear Clients and Friends:

It is that time of year when you should be looking at your tax picture to determine if there is something you can do now to reduce your 2011 tax liability. This letter summarizes current law, changes that went into effect in 2011 and changes that are supposed to go into effect in later years. It also outlines year-end planning suggestions and the impact they may have on your current and future tax picture. Some of the changes that should have the biggest impact on you are:

• Repeal of expanded business information reporting requirements – Form 1099
• Repeal of expanded rental property expense payment reporting requirements – Form 1099
• Interim relief with respect to expanded Form W-2 reporting for employee medical insurance
• FUTA surtax expired June 30, 2011

Individual provisions scheduled to expire December 31, 2011

• Teacher’s classroom expense deduction
• Higher education tuition deduction
• State and local sales tax deduction
• Charitable contribution of IRA proceeds
• Residential energy property credit

Business provisions scheduled to expire December 31, 2011

• Additional first-year depreciation for 100 percent (reverts to 50%) of basis of qualified property
• Increase in expensing to $500,000/$2,000,000 (reverts to $125,000/$500,000) and expansion of definition of Section 179 property
• 15-year Recovery Period for Qualified Leasehold, Restaurant and Retail Improvements
• Research Tax Credit

You should look at how your life changed in 2011. Has your marital status changed, did you adopt or have a child, open a home business, change jobs, buy or sell a home, pay off or re-finance a mortgage, pay for college tuition? All of these items could affect your tax picture.

Also, remember that effective tax planning requires considering both this year and next (at least). Without a multi-year outlook, you cannot be sure that planning intended to save taxes on your 2011 return will not backfire and cost you additional money in the future.

Currently the higher pre-2001 tax rates will go back into effect starting in 2013 (maximum rate of 39.6% from 35%; qualifying dividends, 39.6% from 15%) and, beginning in 2013, higher-income taxpayers will pay an additional .9 percent tax on earned income and an additional 3.8 percent tax on unearned income. Because of this, you may want to accelerate income into 2011 and 2012 and defer deductions to 2013 or later years. See pages 4 through 7.

Lowering your taxes starts with tax planning. This newsletter is your guide to use year round. Feel free to contact us at any time to discuss any of these tax planning ideas and how they may affect your personal tax situation.

Following is an abbreviated table of contents.

- INDIVIDUALS -

Tax Credits

These credits are not allowed for married persons filing separately.

Since there are income limitations, it may be more advantageous for a parent to forgo the dependency exemption and not claim the student as a dependent on their Form 1040. If the student has a sufficient tax liability to absorb the credit, the student will file his or her own tax return and take the credit. Also, the student can take his/her own personal exemption if he/she provides more than one-half of his/her own support. This could reduce the overall tax liability of the family.

A $1,000 Child Tax Credit is available for each child under the age of 17. The credit is phased out for married taxpayers filing jointly with AGI's in excess of $110,000, $75,000 for single taxpayers and $55,000 for married taxpayers filing separately. Under certain circumstances, the credit may be refundable. The maximum credit of $1,000 is scheduled to be reduced to $500 in 2013.

3) Credit for Child or Dependent Care Expenses

If you and your spouse (or a single parent) work and have childcare expenses for children under age 13, a credit of up to $600 per child (maximum credit $1,200) is also available. The credit is equal to 20% of your eligible employment related child and dependent care expenses; the maximum expenses counted are $3,000 for one dependent or $6,000 for two or more dependents. The credit may also be available for the cost of taking care of an elderly parent you support or a spouse who can’t care for themselves.

4) Credit for Retirement Plan Contributions

Eligible lower-income taxpayers may claim a credit for elective deferrals to qualified retirement plans and IRAs (including ROTH IRAs). The credit rate (50%, 20%, or 10%) is for contributions of up to $2,000 per taxpayer and depends on your filing status and AGI. The credit is phased out for joint filers with an AGI of more than $56,500 and for single filers with an AGI of more than $28,250. To qualify, you must be at least 18 years old but cannot be a full-time student or be claimed as a dependent by another.

5) Energy Tax Incentives

For 2011, a credit is available for 10% of the cost of qualified energy efficient improvements placed in service in 2011 (up to $500 lifetime limit). It includes metal roofs coated with heat-reduction pigments, advanced main air circulating fans, natural gas, propane, oil furnace, hot water boiler, exterior windows and doors, insulation material, air conditioning and heating systems that meet certain energy efficiency standards. Not all Energy Star products meet the criteria for this credit. Only products with a Manufacturer Certification Statement meet the qualifications to obtain this credit. This credit will not offset AMT liabilities.

An unlimited credit equal to 30% of the cost of qualified property is available for installing solar photovoltaic property, solar water heating, fuel cell property, small wind energy equipment, and geothermal heat pumps. The credit for fuel cells is limited and is only available for your principal residence. None of these purchases can be used to heat hot tubs or swimming pools. This credit can offset AMT liabilities.

Self-Employed Health Insurance

Self-employed individuals with net business income at least equal to their health insurance premiums are able to take an above the line deduction for health insurance premiums paid.

A 2-percent shareholder-employee in an S corporation is eligible for the above the line deduction only if the premiums are paid or reimbursed by the S corporation and the premiums are included in the W-2 of the shareholder-employee as wages. This W-2 income is not taxable for social security or Medicare purposes. You must have Medicare wages at least equal to the health insurance premiums paid.

Consider establishing a HSA account if you have medical insurance with an eligible high deductible plan. You can take an above the line deduction for a HSA contribution (up to $7,150, but various limits apply) and then use the funds in the HSA to pay for medical expenses now or in future years. Starting in 2011, only doctor prescribed medicines will be covered by FSA’s and HSA’s. Without a HSA, medical expenses must be more than 7.5% of your AGI before an itemized deduction is allowed. Beginning in 2013, the threshold increases to 10 percent of your AGI.

Deductible IRA contributions of up to $5,000 can be made for 2011. For those individuals 50 and older, IRA catch-up provisions increase the contribution limitation to $6,000. If you and your spouse are active participants in employer sponsored retirement plans, you are eligible to make deductible IRA contributions if your AGI is below $90,000 if married filing jointly and below $56,000 for single individuals. The deduction is phased out between $90,000 and $110,000 (joint) and $56,000 and $66,000 (single). For joint filers where one spouse is not an active participant and the other is, a deduction is allowed for the non-active spouse when the AGI is below $169,000. A contribution can also be made for a non-working spouse under most circumstances.

Consider a Roth IRA Contribution or Rollover

Roth IRA distributions are tax-free (see below) but the contributions are not deductible. You can split a contribution of up to $5,000 per person, between a traditional and a Roth IRA (for example, $2,500 to each, subject to AGI limitations). In addition, a $1,000 "catch-up" contribution is allowed for taxpayers age 50 or older. Eligibility to contribute to a Roth IRA phases out for married couples filing joint returns with an AGI between $169,000 and $179,000 and for single individuals with an AGI between $107,000 and $122,000. Earnings grow tax-free in a Roth IRA and distributions are tax free if they are made after a five-year holding period and are after 1) age 59-1/2, 2) death, 3) disability, or 4) the purchase of a first-time home (lifetime maximum of $10,000). The Roth IRA does not require distributions after the age of 70-1/2 like a traditional IRA. Also, contributions can be made to a Roth IRA after 70-1/2.

Individuals may be able to contribute to a Roth 401(k) plan (if the plan is amended to accept such contributions). Roth 401(k) contributions do not reduce your taxable wage income; however, earnings grow tax-free and distributions are tax free. The annual contribution limit is higher than a Roth IRA. You can contribute $16,500 in 2011; $22,000 if you will be 50 by December 31, 2011. Beginning in 2011, eligible state and local government 457(b) plans may allow participants to contribute deferred amounts to designated Roth accounts.

The modified AGI and filing status requirements to convert a traditional IRA to a Roth IRA are eliminated. Individuals can arrange for direct rollover conversions from qualified retirement plans into Roth IRAs. The entire conversion is taxed. Converting at this time may seem especially smart if your IRA investments have declined significantly in value but only if you expect to be in a higher tax bracket in the future.

A conversion can be reversed up to October 15^th of the following year. So, if 1) the value of transferred securities dropped or 2) you changed your mind, you're not stuck with your decision.

If you cannot make a deductible or Roth IRA contribution because of limitations, consider making a non-deductible contribution. The earnings are tax-deferred until you take withdrawals.

Maximize your contributions to employer-sponsored retirement savings plans before year-end. Your contributions and any earnings on those contributions generally won’t be taxed until you begin receiving funds from the plan. You may be able to contribute up to $16,500 to a 401(k) or 403(b) plan. For those individuals 50 or older an additional $5,500 may be contributed (if the plan permits catch-up contributions to be made). Additionally, the maximum annual deferral limit in a SIMPLE plan is $11,500, and individuals age 50 or older can make extra, catch-up contributions of $2,500 (if the plan permits catch-up contributions to be made).

Workers who move from job to job have flexibility when it comes to investing their retirement funds. Tax-free rollovers are permitted between different types of plans. A surviving spouse may roll over a distribution from a qualified plan or IRA into an IRA or into a qualified plan, 403(b) annuity, or 457 plan in which the surviving spouse participates.

In addition, a tax-free rollover of direct trustee to trustee transfers from a deceased person’s IRA or retirement plan into a non-spousal beneficiary’s IRA will be permitted. The rolled-over amounts will be subject to the minimum required distributions rules that apply to inherited IRAs.

If you will be in a lower tax bracket in 2012 (versus 2011), it may pay to receive income in 2012 rather than in 2011. For example, ask your employer to defer your year-end bonus until January 2012 or if you change jobs, don’t take cash distributions from your company retirement plan. Leave the money in the plan or roll it over to an IRA or other qualified plan.

Also, you can invest excess cash in Treasury bills that don’t mature until next year or in certificates of deposit that won’t let you take out interest without penalty until 2012. In each case, all of the interest earned would be reported on your tax return for 2012 that will be filed in 2013.

If you will pay AMT for 2011 but not for 2012, accelerating income into 2011 may produce tax savings.

Capital gains on sales of investments are taxed at different rates, depending on how long you have owned the investment. For most investments owned more than one year, the maximum capital gain rate is 15% for individuals in the 25% and higher tax brackets effective through 2012. People in the 10% or 15% tax bracket will pay a 0% tax on their long-term capital gains for 2011 and 2012. However, in 2013 these rates are expected to increase to 20% for individuals in the higher tax brackets and 10% for individuals in the lower brackets. Long-term capital gains attributable to depreciation from real estate will be taxed at a maximum rate of 25%. The gains on collectibles (antiques, artwork, stamps, etc.) will be taxed at a maximum rate of 28%. Certain small business stock may be taxed at an effective rate of between 0% to 14% but may cause an AMT tax. The gain on an investment owned a year or less may be taxed at your ordinary income tax rate, which can be as high as 35% for 2011 and 39.6% plus surcharges for 2013.

Based on the various rates, you should consider the length of time you’ve held an investment before you sell. For example, postpone taking gains on appreciated investments until the more-than-one-year holding period has passed.

Qualified dividend income (i.e., certain dividends from mutual funds and stocks including any privately-held C corporation in which you were a shareholder) continues to be taxed at a top rate of 15% through 2012 and at 0% for taxpayers in the two lowest brackets for 2011 and 2012. However, in 2013 this income will be taxed at the taxpayer’s tax bracket which could be as high as 39.6% plus surcharges. There are certain restrictions with respect to the holding period of the security.

If you sell your home and 1) you owned and used the home as your main home for 2 years or more out of the last 5 years and 2) you have not sold another main home during the last 2 years, you may exclude up to $500,000 of gain if you are married or up to $250,000 of gain if you are single. The exclusion does not apply if you acquired the property through a like-kind exchange within the last 5 years.

Effective January 1, 2009, the gain exclusion is reduced for the period of time of nonqualified use. Generally, nonqualified use is any period (after January 1, 2009) during which the property was not used as your principal residence. For example, married taxpayers rented their home for 2010 and 2011 and lived in their home for 2007, 2008 and 2009. The home sold for $700,000 and cost $400,000 which resulted in a gain of $300,000. Under the old law, all of the $300,000 gain was excluded from income tax. Under the new law, 2/5 of the $300,000 gain or $120,000 would be included in income for the 2 years it was rental property which is nonqualified use. The remaining $180,000 (3/5 of the $300,000) would be excluded from income tax.

There is no tax on the income in a Coverdell education savings account and the distributions are also tax-free if used for qualified expenses which include a wide array of education expenses, such as elementary and secondary public, private, or religious school tuition and expenses, extended day programs, computer purchases, and connections to the internet. The non-deductible annual contribution limit to such an account is $2,000 but is reduced if your AGI exceeds $190,000 for married taxpayers filing jointly or $95,000 for single taxpayers. Contributions for 2011 may be made as late as April 15, 2012.

Qualified tuition programs (also called "Section 529 Plans") generally allow taxpayers to buy tuition credits or certificates for their children, grandchildren, nieces, nephews, etc. or to make contributions to an account set up to meet their qualified higher education expenses. Distributions are tax-free if used for qualified higher education expenses (e.g., college tuition, books). A special gift tax election applies to qualified tuition programs; it enables you, your parents, brothers, sisters, etc. to gift up to $65,000 in a single tax year to the program on behalf of a beneficiary and avoid all transfer taxes. However, the annual gift tax exclusion becomes $-0- (instead of $13,000) for five years so that any other gift to that beneficiary is subject to gift tax.

If your child has a UGMA or UTMA account set up in his/her name, you can transfer the funds into a 529 plan. However, because a 529 plan takes only cash, the UGMA/UTMA investments must be sold and any applicable tax paid. In addition, a UGMA/UTMA 529 plan will be subject to the rules for both types of accounts.

Investing for appreciation instead of current income usually makes sense at any tax bracket. It is better to pay taxes later rather than sooner (unless it pushes you into a higher tax bracket or because tax rates are going up); you will earn more because of compounding.

Since consumer interest expense (i.e. credit cards, auto loans) is not deductible, you should take steps to minimize it. A source of funds to pay off consumer debt is a home equity loan, especially with the current low interest rates. Interest on a loan of up to $100,000 that is secured by your home is fully deductible (but may cause an AMT tax). However, be careful, because if you default on the loan, you could lose your home.

You can claim an exemption for yourself, your spouse, your qualifying children and any other qualifying relative (if you provide over half of the relative's total support and his/her gross taxable income is less than $3,700).

In addition, if you are single, you can file as head of household (which is more favorable) if you claim a parent as a dependent (see above) and you pay for more than half of the cost of maintaining their residence...even if it is a rest home or old age home. Single parents may also qualify as head of household.

Premiums paid for private mortgage insurance contracts issued after 2006 continue to be deductible through 2011. This deduction is phased out for married and single taxpayers with AGI’s greater than $100,000.

For 2011, marriage penalty relief continues to be in effect, increasing the standard deduction to $11,600 for married couples filing joint returns. This amount is double the standard deduction for single individuals, which is $5,800 (for those over 65, the amount is higher).

Unreimbursed medical expenses are deductible only after they exceed 7.5% of your AGI. Consider long-term care insurance; certain policies are treated as medical expenses, but only after separate limitations are applied. Miscellaneous itemized deductions such as unreimbursed employee expenses are deductible only after they exceed 2% of AGI. Bunching deductions into a single tax year (2011 or 2012) can help beat these limitations. Also consider paying your January 2012 state estimated tax in December 2011. Be careful not to offset this planning technique by shifting income into the year in which you bunch deductions or by creating an AMT tax.

There is no deduction allowed for donations of used clothing and household goods that are not in good condition unless it is a single item worth more than $500 for which a qualified appraisal is attached to your return.

Cash donations are not deductible unless the donor has either a cancelled check or a written communication from the charity that adequately documents the donation. If you charge a contribution to a credit card, it is deductible in the year charged. For cash donations greater than $250, you must obtain a charity-provided statement which states 1) the amount of cash or the property donated and 2) whether the donee organization provided any goods or services in consideration for the cash or property donated.

If you plan to make a contribution to a public charity before year-end and you own appreciated stock, consider keeping your cash and donating the stock (or mutual fund shares). By doing this, you avoid paying tax on the donated stock’s appreciation but still receive a deduction for the stock’s full value (as long as you’ve owned it for more than one year prior to the donation). The charity also benefits because it can sell the property and not pay taxes on it. On the other hand, if you own depreciated stock, consider selling the stock and then donating the proceeds to charity; you may be able to deduct both your capital loss and your contribution. Consider a charitable trust if you want income from the property while still getting a partial contribution deduction.

If you deduct state and local taxes, miscellaneous deductions (such as employee business expenses), claim multiple dependents or recognize a large capital gain, you could be subject to the alternative minimum tax. It is a tax over and above your "regular" tax.

Taxpayers are allowed to exclude from income (tax free) up to $2 million of forgiven qualified principal residence mortgage debt through 2012, including debt that has been reduced through a restructuring, mortgage workout, short sale or foreclosure. If you exclude the canceled debt from income and you continue to own the residence, you must reduce the basis of the residence. This will increase any gain on sale (or could change a loss into a gain). The gain may be eliminated by the home sale exclusion of $500,000 for married taxpayers filing jointly or $250,000 for single taxpayers.

If you have foreign bank or financial accounts which had a total of $10,000 or more at any time during the year, you are required to file Form TD F 90-22.1.

Beginning after March 18, 2010, individuals with interests in specified foreign financial assets with an aggregate value that exceeds $50,000 will also be required to attach to their return certain information about those assets. In addition, transfers of property after March 18, 2010 by a U.S. taxpayer to a foreign trust is presumed to be a grantor trust owned by a U.S. beneficiary unless the taxpayer is able to show that no part of the trust income or corpus has accrued to the benefit of a U.S. person.

If your employer provides group disability insurance, you should check with your employer to determine what benefits you are entitled to if you were to become disabled. For example, how much are you covered for, is there a monthly maximum that you will receive, what determines if you are disabled and whether the payments you receive are taxable. Consider getting your own policy. Among other possible benefits, any payments you receive could be tax-free.

To avoid underpayment penalties, you must pay estimated tax in four equal installments (or as withholding taxes) equal to 90% of your 2011 income tax liability, or 100% of your total tax for 2010, whichever is lower. If your 2010 AGI was over $150,000 ($75,000 if married filing separately), you must pay in 110% of your total tax for 2010 or 90% of your 2011 tax, whichever is lower. You won’t owe an estimated tax if the tax shown on your 2011 return (after withholding) is less than $1,000. A tax projection can help you evaluate whether your withholding or estimated tax should be increased or decreased. Ask us about doing one for you.

- BUSINESSES -

A business can set up a retirement plan and take a 2011 tax deduction for contributions paid before the filing deadline of your 2011 tax return (as long as the plan was in existence no later than December 31, 2011 and no later than October 1, 2011 for a SIMPLE IRA). A different kind of plan (a SEP-IRA) can be set up and funded as late as the due date of your return (including extensions). Total contributions to all qualified retirement plans (including Keogh plans if you are self-employed) cannot exceed certain limits based on income levels. When you start a plan, you may be entitled to a credit of 50% of your administrative costs (up to $500 per year for 3 years).

Self-employed individuals who have no employees (other than their spouse) have a pension plan option (a "single-participant" 401(k)) that allows the owner to contribute up to $49,000 per year ($54,500 if over age 50) into the plan. Contributions can also be made for a spouse who is a paid employee. These contributions reduce your income tax but not your self-employment tax (or your spouse's social security and Medicare tax, if any). If you hire additional employees, the plan must be up-graded to a full blown 401(k) that covers the additional employees. Limitations may apply if you are a participant in another pension plan.

Some businesses are allowed an extra deduction just because they are in a domestic manufacturing or production activity in the U.S. The deduction equals 9% of the smaller of qualified activities income or taxable income. The deduction cannot exceed 50% of the W-2 wages allocable specifically to the activity.

Small employers who purchase health insurance for their employees may be eligible for a tax credit of up to 35 percent of their contributions toward the employee’s health insurance premiums from 2010 to 2013. This tax credit can offset both the regular and alternative minimum tax.

If you lease employees, speak with the leasing company to determine if you or they are entitled to the credit. If them, consider asking for a price reduction for the credit they receive.

If you expect to be in a lower tax bracket in 2012 (versus 2011), it may pay to defer income into 2012 from 2011. This only works if you use the cash method of accounting for your business. Make sure that this will not significantly increase the risk of not getting paid. If you use the accrual method of accounting, you must delay the shipment of goods in order to shift income.

If you are subject to self-employment tax (13.3% on up to $106,800 of earned income in 2011 plus 2.9% on income over $106,800), you may want to hire your child to work in your business - if it is a sole proprietorship. First, your child’s wages are fully deductible as a business expense. Second, children under age 18 who are employed in a parent's business are not subject to Social Security tax on their wages - and neither is their parent/employer. However, payroll tax returns and W-2’s would still have to be filed. A child with earned income receives a standard deduction of up to $5,800 for 2011 and qualifies for an IRA deduction of $5,000, totaling up to $10,800 of income free from federal income tax.

If you find yourself with excess inventory, you may consider contributing some to charity. Under certain conditions, you may deduct not only the cost of the goods, but half of the lost profit as well (not to exceed twice the cost) (subject to other limitations).

Employers will have to start reporting the value of health insurance coverage they provide to their employees on the employee’s annual Form W-2. For 2011, this requirement will be optional.

Section 179 expensing amounts were increased to $500,000 in 2010 and are now extended through 2011. Hence, if you own a business, have net business income and buy less than $2,000,000 of equipment, you can expense up to $500,000 of the cost instead of depreciating the equipment over several years. In addition, the definition of qualified Code Sec. 179 property is expanded to include qualified real property such as qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property through December 31, 2011. Qualified real properties are limited to a deduction up to $250,000 of the total cost. Trucks and vans do qualify for section 179 expensing if they have a gross vehicle weight of more than 6,000 pounds. For SUVs that have a gross vehicle weight of 6,000 to 14,000 pounds, the expense is capped at $25,000.

For self-employed taxpayers, a last-minute purchase may save self-employment tax and increase the amount of AGI related deductions (medical expenses and miscellaneous itemized deductions).

Qualified new property with a depreciation period of 20 years or less (which includes qualified leasehold improvement property) will be eligible for 100% bonus depreciation if purchased and placed in service before December 31, 2011. In addition, heavy SUVs with a GVW of more than 6,000 pounds are eligible to write off the entire purchase price if used 100% for business. For new vehicles purchased in 2011 less than 6,000 pounds, an additional first-year depreciation deduction of $8,000 will be allowed. Thus, the first-year limitation on depreciation for new "luxury" business automobiles for 2011 is $11,060 ($8,000 + $3,060) and $11,260 ($8,000 + $3,260) for "light" trucks and vans.

If your business owns real property, consider a cost segregation study to maximize your depreciation deduction. You can accelerate depreciation by properly identifying and pricing nonstructural items and land improvements separately from the building. This can be done on newly acquired property as well as on property acquired in previous years.

Extended through 2013, an immediate deduction (instead of depreciation) of up to $1.80 per square foot may be allowed for qualified energy-saving improvements such as interior lighting systems, HVAC, hot water systems and building envelopes. To qualify, the improvements must meet certain requirements which include meeting a 50% reduced energy consumption standard.

Proceeds from employer-owned life insurance may be taxable income if notice and consent requirements are not met. Employers who purchase life insurance policies on their employees in which their business is a beneficiary are subject to the new rules. The employee must be notified in writing and agree to be insured before the policy is issued. In addition, an annual return must be filed. Please consult with your insurance advisor.

Before the end of the year, consider accelerating any routine plant and equipment maintenance that is scheduled for early 2012. Take a look at your office and general supplies and consider restocking before year-end if they are running low. If you have business travel or meetings scheduled in early 2012, for which the dates are flexible, you might want to push one or more events to 2011 to accelerate the deduction. If you are on the cash method of accounting for your business, you must pay for (or charge to a credit card) the expenses in 2011 to get a deduction.

- OTHER PLANNING IDEAS AND CONSIDERATIONS -

If you are concerned about the federal estate tax or simply want to transfer money or securities to children or others, you should consider taking advantage of the $13,000 annual gift tax exclusion by making gifts before the end of 2011. Gifts have the added attraction of removing income from the donor's tax returns in future years. Married couples can make joint gifts of up to $26,000 per donee, per year without paying any gift tax. These gifts will not reduce the unified estate tax exemption. Make sure the check, or stock transfer, clears the bank, etc. in 2011 to avoid any questions. Note, in addition to the annual exclusion, you can make direct payments to schools (tuition only) and doctors and hospitals. These types of gifts do not count toward the annual exclusion. Additionally, the top estate and gift tax rate is 35% for 2011 and 2012 and scheduled to revert back to 55% for 2013.

For 2011 and 2012, the maximum estate tax rate is 35 percent with an applicable exclusion amount of $5 million. In addition portability would be available between spouses of the estate tax applicable exclusion amount. However, the utility of the portability is limited to situations where both spouses die during 2011-2012. With the continuous tax law changes, it may be advisable to have us look over your wills to assure that any necessary changes are made in order to avoid any unexpected outcomes. Estate planning is also more than having wills and reducing (or eliminating) your estate tax. It is about making sure that your heirs receive what you want them to ... at the lowest possible tax cost. Ask us about life insurance trusts, generation skipping trusts and how changing the beneficiaries of your retirement and IRA plans can increase what you leave to your loved ones.

Ask us about protecting your assets from creditors through spousal transfers, life insurance and annuities, family limited partnerships, retirement plans and IRA's.

· Installment sales. Defer the gain on sales of certain assets until you collect the installment payments. Remember that long-term capital gains tax rates are scheduled to increase January 1, 2013.

· Like-kind exchanges. Defer some or all of the gain on swaps (trades) of certain assets. Use this method instead of selling property and then replacing it.

· Cafeteria Plans. If available to you, take advantage of cafeteria plans as certain expenses can be paid on a pre-tax basis avoiding income taxes as well as Social Security and Medicare taxes.

· Home office expenses. The rules for qualifying for these deductions have been liberalized but are still quite strict.

- CONCLUSION -

Through careful planning, your 2011 tax liability can be reduced and your financial position improved. The ideas discussed in this letter are a good way to get you started with year-end planning. Please don’t hesitate to call us with questions or additional strategies on reducing your tax bill. We would be glad to set up a planning meeting or assist you in any other way that we can.

Just a reminder, our affiliate, Client Financial Services, Inc., can help you with all of your investment and insurance needs, such as health, disability, property and casualty as well as long-term care insurance. Client Financial Services, Inc. can help you with your 2011 IRA and pension contributions, as well as all of your investment planning needs. Please call for an appointment with us and our advisors - there is no charge to you.

This newsletter offers general tax, financial and business suggestions. Because of the complexities of the laws, the constant changes resulting from new developments and the necessity of determining whether the material discussed is appropriate to a particular individual or business, it is important that you call us before implementing any of the suggestions mentioned.

Unless otherwise specifically noted, any federal tax advice in this communication (including any attachments, enclosures, or other accompanying materials) was not intended or written to be used, and it cannot be used, for the purpose of avoiding penalties.

Thank you for being our clients and sending us your referrals.

Best regards,

ARTHUR T. TENENBAUM & COMPANY