2010 year end tax planning

2010 Year-End Tax Planning Guide

education / tax planning guide november 2010

summary in brief

There is enormous uncertainty about what the future holds for U.S. taxpayers in 2011 and beyond. Policymakers are debating whether to extend tax cuts initiated by President George W. Bush or to allow the cuts to expire on January 1, 2011. Reluctant to tackle the issue before the midterm elections, Congress will take up the question in late November.

At the time this guide was published, the outcome of these deliberations was unknown; however, there are still key steps you can take as 2010 draws to a close. In the following pages, you’ll find information, updates and ideas on many important tax topics to consider now.

Your Morgan Stanley Smith Barney Financial Advisor can work with you and your tax professional to help you decide on strategies that may be beneficial to you.

2 Timely Strategies for Uncertain Times

4 What Happens If the Tax Cuts Expire?

5 Managing Capital Gains with Capital Losses and Tax Swaps

6 Building and Managing Retirement Savings

7 Other Considerations for Business Owners

8 Preparing for Higher Estate and Gift Taxes

9 Tax-Efficient Gifting Strategies

10 Saving for Education

education / tax planning guide

2 morgan stanley smith barney | 2010

Timely Strategies for Uncertain Times

1.capitalgainsandlosses.ConsiderationWith nearly every area of individual taxes in limbo right now, the typical considerations—the ones that guide using your current and past gains and losses to help or assist in minimizing your current and future tax exposure—become magnified.

Strategy Your tax professional can run a prelimi-nary analysis of your 2010 tax situation. He or she can look at carryovers of tax losses and advise you as to whether any potential losses on depreciated securi-ties would be more valuable in 2010 or in future years.

2.portfolioallocation.Consideration The volatile financial markets may have thrown your portfolio allocation out of line. Year-end is a good time to check your asset allocation, and—just as im-portantly—to reassess your long- and short-term goals in light of any changes in your life and the financial markets.

Strategy Review your existing financial plan with your Financial Advisor—or create a plan for the first time. Once you have reviewed your goals, you can work together to access the investment expertise of the Morgan Stanley Smith Barney Global Investment Committee, which regularly

publishes recommended asset allocation strategies for many investment objectives.

3.retirement.Consideration High-income investors now have the opportunity to convert assets from a Traditional IRA or employer-sponsored retirement plan to a Roth IRA. With a Roth account, the retirement assets you are working hard to build now will one day become retirement income, free of tax.

Strategy To help you decide whether a Roth IRA makes sense for you, your Financial Ad-visor can prepare a Roth Conversion Analysis. This report will show you the after-tax potential future value of your IRA balance, comparing the outcome of your current Traditional IRA with that of a Roth IRA. You’ll also be able to see the wealth planning advantages of

“stretching” a Roth IRA over multiple generations and the benefits of including income from the conversion over the next two years.

With the current tax and legislative environment pointing toward a trend of higher personal income tax rates, consider the advantages of a Roth conversion in 2010. You’ll have the option of paying the conversion taxes now, at a poten-tially lower rate, or spreading the tax payment across two years by including half the income in 2011 and half in 2012 at rates in effect in those years.

1 Use current and past gains and losses to minimize current and future tax exposure.

2 Reassess portfolio allocations in light of your long-term goals.

3 Convert retirement assets to a Roth IRA.

4 Accelerate gifting plans.

5 Claim a tax credit for home improvements.

6 Request a retirement plan evaluation for your business.

SixTimelyStrategiesToConsider

morgan stanley smith barney | 2010 3


4.giftingtoindividualsandcharities.Consideration After 2010, unless there is legislation to the contrary, estate taxes are scheduled to return to rates that are higher than they have been for many years. If you plan to leave an estate to your heirs, you may want to strategically transfer assets this year, free of gift tax, rather than later, when they may be subject to the higher estate tax rates.

Strategies • In 2010, you can gift up to $13,000

($26,000 for a married couple) free of gift tax to an individual or nonchari-table entity. Read on to find out how you can accelerate your gifting in the current year; for instance, by contrib-uting to a 529 college savings plan you can remove up to $130,000 ( jointly) from your taxable estate.1

• If you want to use appreciated stock to make a charitable donation, do so before year-end to qualify for a potential income tax deduction this year and avoid paying any applicable capital gains taxes on the apprecia-tion. You can also arrange to contrib-ute long-term appreciated stock to a donor-advised fund, which is a rela-tively low-cost, flexible way to manage charitable giving.

5.taxcredits.Consideration If you made energy-saving improvements to your home this year or purchased a new home by April 30, 2010, you may be able to claim a tax credit that could reduce your tax liability dollar-for-dollar.

Strategy Review your receipts for home improve-ments with your tax professional to see if you qualify for these credits.

6.Businessowners.Consideration Like individuals, business owners need to prepare for possible tax increases. They may also be affected by the Small Business Jobs Act of 2010, which extends the depreciation bonus for a year, among other provisions.

Strategies • Business owners may want to revisit

certain strategies—including when to take capital gains and losses and whether or not to make installment sales—in light of possible tax increases. • The extension of the 50% deprecia-

tion bonus may allow some companies to preserve or increase cash flow by re-ducing their current tax liability.

• If your company has a 401(k), 403(b) or 457(b) plan, you may be able to offer employees the opportunity to convert their existing retirement account to a Roth account. Review your plan docu-ment or check with your attorney or your plan provider to see if this is an option under your plan.

1 No further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the same five-year period, and the transfer must be reported as a series of five equal annual transfers. If the donor dies within the five-year period, a portion of the transferred amount will be included in the donor’s estate for estate tax purposes.



What Happens If the Tax Cuts Expire?

Type of Tax 2010

2011 (Assuming Bush Tax Cuts

Expire after 12/31/10)

2011 (Assuming Tax Rates Proposed

by Obama Administration)*

Ordinary Income Tax 1st bracket 10% Eliminated 10%2nd bracket 15 15% 153rd bracket 25 28 254th bracket 28 31 285th bracket 33 36 366th bracket 35 39.6 39.6Short-Term Capital Gains (Holding Period of One Year or Less)

Ordinary Income Tax Ordinary Income Tax Ordinary Income TaxLong-Term Capital Gains (Holding Period of More Than One Year)1st and 2nd brackets 0 10 03rd and 4th brackets 15 20 155th and 6th brackets 15 20 20Qualified Dividends1st and 2nd brackets 0 Ordinary Income Tax 03rd and 4th brackets 15 Ordinary Income Tax 155th and 6th brackets 15 Ordinary Income Tax 20

ProposedTaxChangesfor2011

If the entire package of Bush tax cuts expires at the end of the year, you can

expect to see numerous changes:incometaxes. • Income tax rates for almost all

Americans will increase. • Taxpayers should consider accel-

erating income to 2010, before taxes increase, and delaying deductions to offset higher taxes in the coming years.

capitalgains. • Long-term capital gains will in-

crease across the board. • This year, the top long-term capi-

tal gains rate remains at a historically low 15%. Unless extended, this rate is scheduled to sunset in 2011—so you may want to consider taking gains now. • For investments in taxable broker-

age accounts, consider:

– selling appreciated securities this year instead of next year, when taxes may be higher.

– selling securities that have decreased in value to create a net capital loss that exceeds capital gains; the excess net capital loss can be carried for-ward to 2011 and beyond and used to shelter both short-term gains and gains recognized at the higher rates in those years.

dividends. • Dividends will be taxed as ordinary

income—up from a maximum rate of 15% currently. • This affects all investors and those

in the top tax brackets could see divi-dends taxed at as much as 39.6%—more than double the current rate. • Clients should review their invest-

ments and consider holding high-pay-ing dividend stocks in a tax-deferred account, such as an individual retire-ment account or a 401(k).

* This column reflects the Obama proposal, which may or may not be finally adopted as law.



Manage Capital Gains with Capital Losses and Tax Swaps

Year-end is an ideal time to sit down with your Financial Advisor to review

your portfolio and uncover opportunities to harvest capital losses, which can be used to offset capital gains and reduce your income tax liability. Evaluate your holdings for loss candidates, includ-ing equities, fixed income and mutual funds. If you sell securities for a profit during 2010, you can also offset gains by applying unused capital losses from previous years.

The Internal Revenue Service (IRS) allows taxpayers to use capital losses to offset capital gains on a dollar-for-dollar basis. For tax reporting purposes, you must first net short-term gains against short-term losses (securities held for one year or less) and long-term gains against long-term losses (securities held for more than a year). Any remaining gains and

losses can be netted against each other. If net capital losses still remain, up to $3,000 may be used to offset ordinary income. Any unused capital losses can be carried forward indefinitely.

considerataxswap.If you choose to sell a security to offset gains, under IRS rules, you cannot deduct losses from the sale of securities in a wash sale. A wash sale occurs when you sell securi-ties at a loss, and within 30 days before or after the sale, you: • Buy substantially identical securities • Acquire substantially identical secu-

rities in a fully taxable trade, or • Acquire a contract or option to buy

substantially identical securitiesIf you have a long-term conviction in

the security sold, you can repurchase it after 31 days.

You can also use a tax swap to maintain

your asset allocation and diversification objectives, which entails the sale and purchase of securities with similar—but not identical—characteristics. Stocks are not considered identical if they have dif-ferent issuers, and in the case of bonds, a different issuer or substantially different maturities or coupons.

amtrates.The alternative mini-mum tax (AMT) is a concurrent tax system that follows an alternative set of rules to calculate income tax. AMT disallows some of the exemptions, de-ductions and credits that are used to calculate standard income tax. If you are subject to AMT, you will owe which-ever tax is higher—the AMT or your

“normal” amount. For 2011, the AMT exemption amount

is scheduled to revert to the pre-Bush era ($45,000 married filing jointly and $33,750 separately). If this happens, mil-lions of taxpayers will be subject to AMT in 2010 and subsequent years.

There are a number of strategies that may help minimize your AMT exposure, including how you manage withholding on state income taxes, how you time your property tax payments, when you sell exercised stock options—even your investment choices. Speak to your tax professional about the role these strate-gies may play in your situation.

washsalerule:KeydatesTuesday,November30,2010:Last day to “double up” for 2010. Doubling up on a security allows you to recognize a loss without missing any potential ap-preciation during the wash sale period. However, doubling up would increase your risk exposure in that security.

Friday,December31,2010:Last day you can sell a security this year for a loss. (Note, however, that there may be oper-ational limitations in ensuring that your trans-actions occur on this date, so plan ahead.)

Monday,January31,2011:If you sold a security for a loss on December 31, 2010, you can avoid the wash sale rules if you wait until January 31, 2011 or later to repurchase the same or substantially similar security.

Short-Term Long-Term TotalRealized Gain 30,000 25,000 55,000Realized (Loss) (20,000) (60,000) (80,000)Net Taxable Gain (Loss) $10,000 $(35,000) $(25,000)

NettingGainsandLossesLet’s say you realize a short-term gain and loss of $30,000 and $20,000, and a long-term gain and loss of $25,000 and $60,000, respectively, this year.

After matching short-term gains and losses as well as long-term gains and losses, you could use $3,000 of the $25,000 net capital loss to offset ordinary income in the current year. The remaining $22,000 capital loss could be carried forward to offset future years’ capital gains and/or ordinary income.

Note: This hypothetical example is for illustrative purposes only.



Building and Managing Retirement SavingsStrategiesforIndividualsmaKeyour2010contriButionsnow.While contributions to an Individual Retirement Account (IRA) for 2010 may be made through April 15, 2011, waiting until April could deprive you of months of potential tax-deferred growth. The sooner the contribution is made, the sooner it can start working for your retirement account. If you have earned income, you can contribute up to $5,000 for 2010 or up to $6,000 if you are age 50 or older by year-end.

taKe your rmdfor2010.If you are age 70½ or older and have a Traditional, Simpli-fied Employee Pension (SEP) or Savings Incentive Match Plan for Employees (SIMPLE) IRA, or are the beneficiary of an Inherited IRA, be sure to take your 2010 Required Mini-mum Distribution (RMD) by December 31, 2010. If you turn age 70½ in 2010, you may delay taking your initial RMD until April 1, 2011.2 Be sure to take your RMDs on time to avoid any penalties.

2010rothiraconversionscarryaddedBenefits.This year, regula-tory changes make it easier than ever to

convert a Traditional IRA or employer-sponsored retirement plans to a Roth IRA—even if you didn’t qualify in the past because of your income level or marital status. The key benefits of a Roth

IRA are that, first, dis-tributions are tax-free3 and, second, there is no requirement that you must stop contributions or begin taking with-drawals at a given age.

Keep in mind that you will need to pay income tax on the amount converted to a Roth IRA, including pretax contributions and any investment earnings. However, 2010 conversions come with a one-time offer to help ease the tax bur-

den—you can spread your tax payment across two years. Instead of paying all the taxes when you file your taxes for

2010, you have the option to include half the income when you file your taxes for 2011 and half when you file your taxes for 2012 at rates in effect in those years. The conversion must be completed by December 31, 2010.

Finally, if you convert to a Roth IRA in 2010 and the value of the account decreases due to market activity, you have the option of recharacterizing the account back to a Traditional IRA; in essence, undoing the conversion.

StrategiesforBusinessOwnersreevaluateyourcompany’sretire-mentplan.If your company already offers a retirement plan, there have been significant changes over the years which may warrant a review, and potentially an update, to your plan. Along with your Financial Advisor, contact your ERISA attorney or retirement plan administra-tor to make sure you are in compliance in all areas. Also ask specifically about ways your plan can be enhanced through plan design changes such as automatic enrollment, or the addition of new in-vestment options.

Your Financial Advisor can prepare a complimentary retirement plan evaluation that will assess your current program and determine the ideal type of plan for your business, based on your personal and business goals.

Type of Plan Under Age 50 Age 50 or OlderTraditional/Roth IRA $5,000 $6,000401(k)/403(b)/457(b)/SAR-SEP* 16,500 22,000SIMPLE 11,500 14,000

2010RetirementPlanContributionLimits

* Only SAR-SEP plans established before 1997 may allow employees to make pretax contributions.

Thanks to the Small Business

Jobs Act of 2010, if you have a 401(k), 403(b) or 457(b)

plan that includes a designated Roth account, you may

now be able to complete a Roth

conversion within your employer-sponsored plan.



openaQualifiedretirementplanByyear-end.Establishing a qualified retirement plan for your employees can help attract and retain great employees. It can also offer important wealth building opportunities for you as the proprietor. If you don’t have a company retirement plan, call your Financial Advisor to get one started. If your business is operated on a calendar year basis, the plan has to be established by December 31, 2010 to qualify for a tax deduction for 2010.

exploreretirementtaxcredits.You may qualify for a number of credits and deductions that can help defray some of the costs in your plan. For instance, if your plan is new, you may be eligible to take a tax credit of up to 50% of the first $1,000 of qualified start-up costs of the plan. The credit is available for each of the first three years of the plan. You may also be able to deduct certain plan expenses, such as the expenses paid to begin or administer an eligible plan and/or educate employees about their plan. Your tax professional can offer more information on how this provision may affect your situation.

2 If you decide to delay your first RMD until April 1, 2011, you will be required to take two distributions in 2011—one for 2010 by April 1, 2011 and one for 2011 by December 31, 2011. This could result in the distributions being taxed at a higher marginal rate due to the increased income received during the year.3 Distributions of earnings are tax-free if made at least five years after the year of the taxpayer’s first Roth IRA contribution and after age 59½ or due to death, disability or for a first-time home purchase. Withdrawals of contributions are not taxed.

Other Considerations for Business Owners

With the Bush tax cuts set to expire, business owners may want to con-

sider taking capital gains and accelerating income in 2010 to avoid higher taxes in 2011. Conversely, losses may prove to be more beneficial if held until 2011.

Business owners who are in the process of selling their business via an installment sale method should con-sider electing out of that approach and accelerating income in 2010, ahead of potential tax increases.

With the Small Business Jobs Act signed by President Obama, business owners should consider enhancements that are now being offered as part of the approved bill:

Bonusdepreciation.For businesses of all sizes, the Act extends the tempo-rary 50% depreciation bonus for one additional year. It basically allows that 50% of the basis of qualified property may be deducted in the year the property is placed in service and the remaining 50% may be recovered under normal depreciation rules. Bonus depreciation may allow some taxpayers to preserve or increase cash flow by reducing cur-rent tax liability, and it may also enable some companies to increase a loss that can be carried back.

anew$30BillionsmallBusinesslendingfund.The bill will establish a new $30 billion Small Business Lending Fund which—by providing capital to small banks with incentives to increase small

business lending—could support several multiples of that amount in new credit.

rothretirementaccountop-portunities.Employers may be able to offer opportunities for employees and themselves to convert existing funds in company retirement accounts to a Roth account. One of the key ben-efits of a Roth is that distributions are tax-free. Review your plan document or check with your attorney or plan pro-vider to see if this is an option under your plan.



are transferred more than one genera-tion younger than the donor (such as

grandchildren). The GST tax exemption, the amount that transfers free of tax, will be approximately $1 million and the tax rate will be 55%. In addition, the modified carryover tax basis will come to an end on December 31, 2010 and the step-up regime will apply again beginning

January 1, 2011. This means that the income tax basis of property that passes from a decedent again will be stepped up to fair market value.

gifttaxes.The federal gift tax will change significantly, too. Although the gift tax exclusion, the amount that trans-fers free of tax, will remain at $1 million, the highest marginal rate will increase from 35% to 55%.

whattodoByyear-end. • Consider making gifts now at a max-

imum 35% rate, ahead of scheduled tax increases next year. • If you want to transfer wealth to

grandchildren, you can do so this year without incurring the generation-skip-ping transfer tax, unless there is legisla-tion to the contrary. Such transfers still will be subject to the gift tax. • If your estate is valued at over $3.5

million, or if you live in a state that im-poses taxes on estates of any value, ask

Preparing for Higher Estate and Gift Taxesestatetaxes.On January 1, 2011, two of the most significant wealth planning taxes—the federal estate tax and the generation-skipping transfer tax, both of which were repealed in 2010—are sched-uled to return to the pre-Bush levels, un-less there is legisla-tion to the contrary. That means that the maximum amount you can transfer free of federal estate tax will be only $1 million, and the highest tax rate will

jump to 55%. Recall that in 2009, the estate tax exclusion was $3.5 million

and the highest marginal rate was 45%.The generation-skipping transfer tax

(GST tax) typically applies when assets

Type of Tax 2010

2011 (Assuming Bush Tax Cuts

Expire after 12/31/10)

2011 (Assuming Tax Rates Proposed by Obama

Administration)*

Estate TaxEstate Tax Rate Repealed 55% 45%Exemption N/A $1mm $3.5mm

Basis Step Up $1.3mm + $3mm (spouse) Full Step Up Full Step Up

Generation Skipping TaxGeneration Skipping Tax Rate Repealed 55% 45%

Lifetime Exemption N/A $1mm $3.5mmGift TaxGift Tax Rate 35% 55% 45%Lifetime Exemption $1mm $1mm $1mm

ProposedTaxChangesfor2011

A beneficiary review ensures that your information is complete, up-to-date and reflects your current

desires. Your Financial Advisor can conduct a beneficiary review—not just for your estate plans

or trusts, but for your insurance contracts and retirement accounts, as well.

* This column reflects the Obama proposal, which may or may not be finally adopted as law.



Tax-Efficient Gifting StrategiesdonateappreciatedstocKforpo-tentialdouBletaxsavings.Instead of cash, consider donating appreciated stock to your favorite charity. If you have owned a stock for more than one year, you can avoid paying capital gains taxes, and you may also be able to deduct the full value of the stock from your taxable income. If you want to keep the stock in your portfolio, you can separately reinvest in the stock. If you wish to donate stock that has lost value, you should sell the shares and donate the proceeds—this way you realize a loss to offset income or gains in your portfolio.

considerthetimingofdeduc-tions.If tax rates increase, it may be more advantageous to hold deductions, such as charitable contributions, to offset higher taxes in the coming years. On the other hand, it may make sense to accelerate deductions this year. There is potential for a larger deduction of a taxpayer’s itemized deductions, because itemized deductions are not limited in 2010, but are expected to be in 2011.

completeanygifttransferstoindividualsByyear-end2010.Gift transfers support your beneficia-ries and help reduce the value of your estate and future estate taxes. You can transfer up to $13,000 per recipient in 2010 without incurring any federal gift tax. Spouses together may gift up to $26,000 per recipient. In addition, this might be a good year to consider larger

gifts, even taxable ones, since the gift tax rate is at an all-time low.

consideradonor-advisedfund.If you are looking to create a legacy of charitable giving but haven’t determined where to contribute, you might consider a donor-advised fund, which allows you to make a tax-deductible contribution this year, locking in the tax savings, and choose the recipients later.

your estate tax attorney what strategies may be beneficial to you. • Now is a good time to create a grant-

or retained annuity trust (GRAT). All else being equal, GRATs perform best when a particular discount rate that must be used in structuring the GRAT is low. The rate for GRATs created in October 2010 was 2.0%—the lowest the rate has ever been. • Consider the use of an Irrevocable

Life Insurance Trust (ILIT) to offset any future estate taxes. You can cre-ate and fund an ILIT with annual gifts to the trust, thereby maximizing the benefits of the annual gift tax exclu-sion. The ILIT purchases life insurance on your life and uses your gifts to pay the premiums. As long as the trust is properly drafted, the insurance pro-ceeds when paid as a death benefit will not be included in your taxable estate, are exempt from income tax, and can provide immediate cash to pay bills, expenses and taxes. • The low interest rate environment

makes it a great time for intra-family loans as well. This is a simple but often overlooked way to transfer wealth downstream without gift tax consequences.



Saving for Education

A variety of savings plans, tax credits and deductions are available to

help you defray some of the expenses of higher education, and many of them have year-end deadlines for participation.

529collegesavingsplans.A 529 college savings plan is a great way to gift to loved ones. By funding their higher education, you will be helping them to take an important first step toward preparing for the future while potentially reducing your taxable estate.

In addition to the flexibility and con-trol that 529 plans provide the account owner, they offer several tax benefits that may aid in your year-end planning. For example, you can utilize your an-nual federal gift tax exclusion of up to $13,000 ($26,000 jointly) to fund a 529 plan free of gift tax. Moreover, if it suits your estate planning needs, you can accelerate multiple years’ worth of gifts into the current year, removing up to $65,000 ($130,000 jointly) per recipient from your taxable estate.4 Your Morgan Stanley Smith Barney Financial Advisor can help you select the 529 col-lege savings plan that best suits your needs from some of the country’s most respected money management firms.5

If you are one of the millions of peo-ple funding a college savings plan, you know that market conditions may have negatively affected many investment portfolios, including education savings. Now is the time to review plan options

with your Financial Advisor and make any necessary adjustments in how your funds are allocated.6 If the beneficiary of the account is nearing or in college, your Financial Advisor can also recommend asset allocations to help minimize the impact of a negative market.

educationtaxcredits.If you pay for education expenses for yourself, your spouse or a dependent, document your expenses and discuss with your tax professional whether you qualify for a tax credit. Known by names such as the Hope Credit and the Lifetime Learning Credit, these credits may help reduce your tax obligation, dollar-for-dollar, based on your expenditures.

deductions.Take advantage of the tuition and fees deduction (included in the pending extenders bill), which may help reduce the amount of your income subject to tax by up to $4,000. Depending on your income, you may also be able to deduct interest on student loans used for higher education.

Many professionals invest significantly in ongoing work-related education. If you do so, you may be able to claim a deduction for these expenses, provided qualifying expenses plus other job and certain miscellaneous expenses add up to more than 2% of your adjusted gross income.

don’t“douBledip.”You cannot take both deductions and tax credits for the same expense. Ask your tax

professional to help you determine what you are qualified for, and to help you choose the one that will give you the lower tax.

4 No further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the same five-year period, and the transfer must be reported as a series of five equal annual transfers. If the donor dies within the five-year period, a portion of the transferred amount will be included in the donor’s estate for estate tax purposes.5 Before investing, clients should consult with their tax advisor to consider whether tax or other benefits are only available for investments in their home state.6 The account holder can reallocate the portfolio investments once every calendar year or whenever the designated beneficiary is changed.

Planning strategies to discuss with your Financial Advisor and tax professional before year-end.

2010 Year-End Tax Planning Checklist

generaltaxissues

Find out if you carryover any losses from the sale of investments. Use this information to determine if you want to use these losses to offset any investment gains from 2010 or in future years.

When selling securities, ask your Financial Advisor how to comply with wash sale rules that govern the purchase and sale of similar investments within a 30-day period.

Have your tax advisor estimate your adjusted gross income and tax rate now to determine if you have any Alternative Minimum Tax (“AMT”) liability for 2010. If so, you may consider deferring taxable income to 2011 or accelerat-ing or deferring deductions in 2010 to minimize AMT.1

Tell your tax advisor if you purchased any big-ticket items this year or are intending to by year-end. You may qualify for valuable tax credits or deduc-tions if you made energy-saving home improvements, purchased a home, or paid for a college education.2

Fully fund your IRA and company retirement accounts as soon as possible. You have until April 15, 2011, to fund your IRA for 2010. You should con-sult your tax advisor to determine the deadline for contributing to your company retirement plan.

If you are age 70½ or older and have a Traditional, SEP, SAR-SEP or SIMPLE IRA, remember to take your Required Minimum Distribution (“RMD”) for 2010.

Explore the benefits of a Roth IRA. Tax law changes in 2010 enable all investors to convert to a Roth IRA, which not only provides tax-deferred growth, but also tax-free income in retirement.

If you own a business which has a calendar tax year, you have until December 31, 2010, to adopt a qualified plan in order to deduct contributions for 2010. If you miss this deadline, a SEP plan can be established and funded by the due date for filing the plan sponsor’s 2010 tax return (with extensions)—which, if you are a sole proprietor, could be as late as October 15, 2011.

Check with your employer if your company’s retirement plan contains a designated Roth account. As a result of the Small Business Jobs Act of 2010, you may be able to complete a Roth conversion within your employer-spon-sored plan.

Diversifying your retirement portfolio with a variable annuity may help complement your existing investment strategy by providing a number of tax advantaged benefits—including opportunities to reduce your current tax liability, increase retirement savings, and possibly supplement social securi-ty and/or pension benefits.

retirementaccounts

giftingplans

Complete any gift transfers to individuals or use the annual exclusion to make gifts to an Irrevocable Life Insurance Trust by year-end. Not only will this make you feel good, but you will help reduce the value of your estate and future estate taxes. You can transfer up to $13,000 per recipient in 2010 without incurring any federal gift tax. Spouses together may gift up to $26,000 per recipient.

If you plan to gift shares of stock to charity, you must act by year-end. By gifting long-term appreciated stock, you can qualify for a potential income tax deduction—or by selling stock that has lost value and donating the proceeds, you can realize a loss to offset other gains.

Talk with your Financial Advisor about gifting through a 529 plan. Transfers to 529 plans can help reduce income or future estate taxes. By making an accelerated gift through a 529 plan, you can gift up to $65,000 ($130,000 for couples) per beneficiary.1

Ask your Financial Advisor about the charitable benefits of the Morgan Stanley Smith Barney Global Impact Funding Trust ("GIFT"), a suite of services designed to help you build your philanthropic legacy through a professionally-managed donor-advised fund and related grant making and reporting tools.2

Businessowners

In light of the expected expiration of the Bush tax cuts after 12/31/10, consider taking capital gains and accelerating income in 2010 to avoid potential higher taxes in 2011. Conversely, losses may prove to be more beneficial if held until 2011.

Consider how the new Small Business Jobs Act may benefit your business. The extension of the 50% depreciation bonus may allow your company to preserve or increase cash flow by reducing current tax liability.

If you are in the process of selling your business via an installment sale method, consider electing out of that approach and accelerating income in 2010, ahead of potential tax increases.

If your company has a 401(k), 403(b) or 457(b) plan, consider offering em-ployees the opportunity to convert their existing retirement account to a Roth account.

otherissues

Use any balance in your employer’s Flexible Spending Account (“FSA”) for qualified medical expenses by year-end 2010. When estimating your con-tributions for next year, consider the increasing costs of uncovered medi-cal expenses and changes in your company’s medical insurance plan.

Ask your Financial Advisor for help rebalancing your portfolio to remain in line with your goals, time horizon and risk tolerance. Discuss any new op-portunities for investing that might be appropriate for you.

Consider using a securities based loan to help you meet a tax obligation.

Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Smith Barney Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein.

Please consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. The offering statement contains this and other important information. To obtain an offering statement, please call your Financial Advisor. Read the offering statement carefully before investing.

1 No further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the same five-year period, and the transfer must be reported as a series of five equal annual transfers. If the donor dies within the five-year period, a portion of the transfer amount will be included in the donor's estate for estate tax purposes.

529 college savings plan funds not used for qualified educational expenses are subject to applicable taxes and penalties.

Before investing, investors should consider whether tax or other benefits are only available for investments in the investor’s home-state 529 college savings plan.

Variable annuities are sold by prospectus. Investors should carefully consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information and should be read carefully before investing.

Variable annuities are long-term investments designed for retirement purposes and may be subject to market fluctuations, investment risk, and possible loss of principal. All guarantees are based on the claims-paying ability of the issuing insurance company. Taxable distributions (and certain deemed distributions) are subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% federal income tax penalty.

For clients whose account is carried by Morgan Stanley Smith Barney, insurance products are offered in conjunction with Morgan Stanley Insurance Services Inc. For clients whose account is carried by Citigroup Global Markets Inc., Morgan Stanley Smith Barney offers insurance products in conjunction with SBHU Life Agency, Inc.

Since life insurance is medically underwritten, your client should not cancel their current policy until their new policy is in force. A change to their cur-rent policy may incur charges, fees and costs. A new policy will require a medical exam. Surrender charges may be imposed and the period of time for which surrender charges apply may increase with a new policy. Your clients should consult with their own tax advisors regarding any potential tax liability on surrenders.

Asset allocation does not assure a profit or protect against loss in declining financial markets.

Rebalancing does not protect against a loss in declining financial markets. There may be a potential tax implication with a rebalancing strategy. Please consult your tax advisor before implementing such a strategy.

2 Morgan Stanley Smith Barney GIFT, Inc. is an organization described in Section 501(c) (3), of the Internal Revenue Code of 1986, as amended, and Morgan Stanley Smith Barney Global Fund Trust is a donor-advised fund. Various divisions of Morgan Stanley Smith Barney LLC provide investment manage-ment and administrative services to Morgan Stanley Smith Barney GIFT.

© 2010 Morgan Stanley Smith Barney LLC. Member SIPC. GP10-02232P-Y10/10 CLF96000 JV6486374 11/10

Economy & Finance

2010 year end tax planning