Following is a great summary put together by DKB's Mike Tullio. Mike is a Senior Manager in DKB's personal tax and wealth planning practice. If you have questions contact Mike at mtullio@teamdkb.com.
On January 22, 2010 the US Government enacted a special provision allowing taxpayers making cash contributions to charitable organizations providing earthquake relief in Haiti to deduct those contributions on their 2009 tax returns as long as the contributions are made on or after January 12, 2010 and before March 1, 2010. Taxpayers should be aware that they have the option to deduct these contributions on their 2009 or 2010 tax returns, but not both. To qualify for this provision, taxpayers must
1. be able to itemize their deductions.
2. make the contribution specifically for the relief of victims in areas affected by the January 12 earthquake in Haiti, and
3. make sure their contributions go to qualified charities (contributions to foreign organizations generally are not deductible).
Additionally, federal law requires that taxpayers keep a record of any deductible donations made. For donations made by text message, a telephone bill providing the name of the donee organization, the date of the contribution and the amount will satisfy the recordkeeping requirement.
Finally, this recent provision is not reflected in the tax organizer that you recently received. Therefore, you may want to save this information with your 2009 tax organizer as a reminder when collecting your data for the preparation of your 2009 tax returns.
The IRS provides some additional helpful guidance on this new tax break at http://www.youtube.com/watch?v=ZLPzcJcKKEE
Tuesday, January 26, 2010
Tuesday, January 19, 2010
Roth IRA conversions in 2010
There are some significant tax planning opportunities for individual taxpayers in 2010 related to Roth IRA conversions. I "stole" this client communication (he gave me permission) on 2010 Roth planning opportunities from my partner, Dennis Stein. Dennis heads up TeamDKB's personal tax and wealth planning practice. If you are interested in exploring planning opportunties with Roth conversions, he is the "expert". You can contact him at 585-697-9305 or dstein@teamdkb.com.
Dear Client,
Beginning in 2010, taxpayers will be able to convert their traditional IRA (and funds that have been rolled over from a qualified plan) to a Roth IRA, regardless of their income level or filing status. This new conversion option presents both tax planning opportunities and challenges for 2009, 2010, and 2011.
Before 2010, only individuals with modified adjusted gross incomes (AGI) of $100,000 or less could convert amounts in their traditional IRA to a Roth IRA. However, beginning in 2010, the $100,000 AGI limit is eliminated completely. This special treatment gives everyone regardless of his or her income level the opportunity to convert a traditional IRA to a Roth IRA.
It is important to understand that an IRA conversion is treated as a taxable distribution, taxed as ordinary income at your marginal tax rate. This in effect accelerates the taxable income that you would eventually pay on distributions from a traditional IRA once you retire, but does so in exchange for never taxing any future appreciation in the value of your account from what it is at the time of the conversion. You should also note that unlike a withdrawal from an IRA, a conversion does not trigger a 10 percent early withdrawal penalty.
Although conversion to a Roth IRA does trigger immediate taxable income, congress provided a special incentive in 2010 to jump-start Roth conversions. In 2010 (and 2010 only), individuals will have the choice of recognizing their conversion in 2010 or averaging it over 2011 and 2012. The latter option, which must be elected, allows you to pay taxes on the converted amount ratably over two years, instead of recognizing it all as income in one year. You will be taxed at the rates in effect for 2011 and 2012.
For some taxpayers, their tax rate may rise after 2010 even if their income does not. President Obama has proposed, and Congress is expected to enact, legislation to restore the top two pre-2001 marginal income tax rates after 2010. This means that the top two brackets will be 36 percent and 39.6 percent after 2010. Consequently, if you do not want to take the chance that your income tax rate will be higher in 2011 and 2012 than in 2010, you may want to pay the full tax on the Roth conversion in your 2010 income tax return, at 2010 tax rates.
Roth IRAs have two major advantages over traditional IRAs. First, Roth IRA distributions are tax-free if they are qualified distributions. Second, Roth IRAs are not subject to the required minimum distribution (RMD) rules that apply to traditional IRAs.
An IRA to Roth IRA conversion should be considered by individuals who:
• Can afford the tax on the converted amounts;
• Anticipate being in a higher tax bracket in the future than they are currently in; and
• Have a significant amount of time before reaching retirement to allow assets to grow tax-free and recoup dollars that may have been lost due to the conversion tax.
If you anticipate being below the $100,000 AGI level this year, consider converting to a Roth IRA right away while your traditional IRA account balance is still low because of the stock market declines. If your situation is different from what you anticipate before you file your 2009 return, you have the option to recharacterize your 2009 Roth conversion back to a traditional IRA and then converting to a Roth IRA in 2010 instead.
There are a significant number of tax and financial considerations that come into play when determining whether to convert your traditional IRA to a Roth IRA. We would appreciate the opportunity to discuss this tax planning strategy with you in further detail. Please contact our office to arrange a meeting.
Dear Client,
Beginning in 2010, taxpayers will be able to convert their traditional IRA (and funds that have been rolled over from a qualified plan) to a Roth IRA, regardless of their income level or filing status. This new conversion option presents both tax planning opportunities and challenges for 2009, 2010, and 2011.
Before 2010, only individuals with modified adjusted gross incomes (AGI) of $100,000 or less could convert amounts in their traditional IRA to a Roth IRA. However, beginning in 2010, the $100,000 AGI limit is eliminated completely. This special treatment gives everyone regardless of his or her income level the opportunity to convert a traditional IRA to a Roth IRA.
It is important to understand that an IRA conversion is treated as a taxable distribution, taxed as ordinary income at your marginal tax rate. This in effect accelerates the taxable income that you would eventually pay on distributions from a traditional IRA once you retire, but does so in exchange for never taxing any future appreciation in the value of your account from what it is at the time of the conversion. You should also note that unlike a withdrawal from an IRA, a conversion does not trigger a 10 percent early withdrawal penalty.
Although conversion to a Roth IRA does trigger immediate taxable income, congress provided a special incentive in 2010 to jump-start Roth conversions. In 2010 (and 2010 only), individuals will have the choice of recognizing their conversion in 2010 or averaging it over 2011 and 2012. The latter option, which must be elected, allows you to pay taxes on the converted amount ratably over two years, instead of recognizing it all as income in one year. You will be taxed at the rates in effect for 2011 and 2012.
For some taxpayers, their tax rate may rise after 2010 even if their income does not. President Obama has proposed, and Congress is expected to enact, legislation to restore the top two pre-2001 marginal income tax rates after 2010. This means that the top two brackets will be 36 percent and 39.6 percent after 2010. Consequently, if you do not want to take the chance that your income tax rate will be higher in 2011 and 2012 than in 2010, you may want to pay the full tax on the Roth conversion in your 2010 income tax return, at 2010 tax rates.
Roth IRAs have two major advantages over traditional IRAs. First, Roth IRA distributions are tax-free if they are qualified distributions. Second, Roth IRAs are not subject to the required minimum distribution (RMD) rules that apply to traditional IRAs.
An IRA to Roth IRA conversion should be considered by individuals who:
• Can afford the tax on the converted amounts;
• Anticipate being in a higher tax bracket in the future than they are currently in; and
• Have a significant amount of time before reaching retirement to allow assets to grow tax-free and recoup dollars that may have been lost due to the conversion tax.
If you anticipate being below the $100,000 AGI level this year, consider converting to a Roth IRA right away while your traditional IRA account balance is still low because of the stock market declines. If your situation is different from what you anticipate before you file your 2009 return, you have the option to recharacterize your 2009 Roth conversion back to a traditional IRA and then converting to a Roth IRA in 2010 instead.
There are a significant number of tax and financial considerations that come into play when determining whether to convert your traditional IRA to a Roth IRA. We would appreciate the opportunity to discuss this tax planning strategy with you in further detail. Please contact our office to arrange a meeting.
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