Five Reasons to Visit IRS.gov this Summer
Day at the beach...vacation in the mountains...bike riding in the park...dinner with friends...or five reasons to visit IRS.gov this summer. Tough choice!
Thursday, August 19, 2010
Monday, August 16, 2010
Documentation, Logs and More
I learned in one of my very first college tax courses that tax deductions are granted as a matter of legislative grace. Better said...no expenditure is deductible unless the law says so.
The law stipulates in most cases that deductions are not allowed unless properly documented according to the Internal Revenue Code and related regulations. Strict documentation requirements are required for expenditures related to travel and entertainment and transportation (planes, trains and automobiles)
For travel, employees/taxpayers must submit a written statement of the time, place, destination and business purpose of the trip and the amount of expenses incurred by category (e.g., travel, meals, lodging). For meals or entertainment, the employee/taxpayer must submit a written statement showing time, place and cost of the event, who was entertained, and the business purpose of the meal or entertainment (if the event follows or precedes a business discussion, additional record keeping is required). Finally, the employee must keep and turn in to the employer documentary evidence such as receipts for all lodging expenses, and for other travel and entertainment expenses over $75.
Documentation related to the business use of automobiles and aircraft is also required in order to claim tax deductions. Taxpayers are required to maintain logs supporting the business use of their automobile or an employer provided vehicle. The value of personal use of an employer provided vehicle is required to be included in an employee's taxable compensation.
The IRS produced a publication that outlines documentation requirements for travel, entertainment and transportation expenses. http://www.irs.gov/pub/irs-pdf/p463.pdf. A handy table is included on page 26 that summarizes how to prove a variety of business expenses.
Our experience with IRS examinations is agents are expecting "substantial" compliance with documentation requirements summarized in this publication. Taxpayers' failures to provide documentation can and will result in disallowance of deductions. Do I need a log for my automobile expenses? Yes, you do.
Is it time for a tune up of your documentation process for travel, entertainment and transportation?
Any tax advice contained in the body of this blog was not intended or written to be used and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
The law stipulates in most cases that deductions are not allowed unless properly documented according to the Internal Revenue Code and related regulations. Strict documentation requirements are required for expenditures related to travel and entertainment and transportation (planes, trains and automobiles)
For travel, employees/taxpayers must submit a written statement of the time, place, destination and business purpose of the trip and the amount of expenses incurred by category (e.g., travel, meals, lodging). For meals or entertainment, the employee/taxpayer must submit a written statement showing time, place and cost of the event, who was entertained, and the business purpose of the meal or entertainment (if the event follows or precedes a business discussion, additional record keeping is required). Finally, the employee must keep and turn in to the employer documentary evidence such as receipts for all lodging expenses, and for other travel and entertainment expenses over $75.
Documentation related to the business use of automobiles and aircraft is also required in order to claim tax deductions. Taxpayers are required to maintain logs supporting the business use of their automobile or an employer provided vehicle. The value of personal use of an employer provided vehicle is required to be included in an employee's taxable compensation.
The IRS produced a publication that outlines documentation requirements for travel, entertainment and transportation expenses. http://www.irs.gov/pub/irs-pdf/p463.pdf. A handy table is included on page 26 that summarizes how to prove a variety of business expenses.
Our experience with IRS examinations is agents are expecting "substantial" compliance with documentation requirements summarized in this publication. Taxpayers' failures to provide documentation can and will result in disallowance of deductions. Do I need a log for my automobile expenses? Yes, you do.
Is it time for a tune up of your documentation process for travel, entertainment and transportation?
Any tax advice contained in the body of this blog was not intended or written to be used and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
Tuesday, August 10, 2010
The Road Map to Transparency??
First drafts of form UTP have been release by the IRS for the 2010 tax year.
IRS Commissioner Douglas Shulman announced in January 2010 the requirement to file this new form stating...
" The IRS is taking a major step towards transparency that I want to announce today related to changes we are proposing to reporting requirements regarding business taxpayers' uncertain tax positions."
Corporations with assets exceeding $10 million will be required to file this new form. Essentially this new form requires taxpayers to disclose uncertain tax positions on their tax return, describe the position taken and disclose the amount of tax involved in the reporting position. Essentially, the IRS is asking taxpayers to provide an annotated road map to the issues they should review upon examination. As you might imagine there has been a wide range of responses to this requirement from taxpayers and tax professionals...need I say more.
The new reporting requirement is currently confined to certain corporations with assets above the $10 million mark. Partnerships and S corporations should expect that similar requirements will be imposed upon them once the IRS has worked out the wrinkles with corporations.
Are you ready?
IRS Commissioner Douglas Shulman announced in January 2010 the requirement to file this new form stating...
" The IRS is taking a major step towards transparency that I want to announce today related to changes we are proposing to reporting requirements regarding business taxpayers' uncertain tax positions."
Corporations with assets exceeding $10 million will be required to file this new form. Essentially this new form requires taxpayers to disclose uncertain tax positions on their tax return, describe the position taken and disclose the amount of tax involved in the reporting position. Essentially, the IRS is asking taxpayers to provide an annotated road map to the issues they should review upon examination. As you might imagine there has been a wide range of responses to this requirement from taxpayers and tax professionals...need I say more.
The new reporting requirement is currently confined to certain corporations with assets above the $10 million mark. Partnerships and S corporations should expect that similar requirements will be imposed upon them once the IRS has worked out the wrinkles with corporations.
Are you ready?
Monday, August 09, 2010
Healthcare Reform Regulations
It has started and is not likely to end for some time...if ever. The issuance of tax regulations to implement provisions of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 has begun.
The IRS issued temporary regulations that require group health plans to provide health insurance coverage for dependent children until age 26. The regulations provide that plans cannot condition coverage on whether a child is a dependent for tax purposes, or whether the child is a student or resides with or receives financial support from the parent.
The regulations indicate that a plan or issuer may not define dependent for purposes of eligibility other than in terms of the relationship betwen the child and the participant. The plan or issuer may not deny or restrict coverage for a child who has not attained age 26 based on the presence or absence of the child's financial dependency on the participant, residency with the participant, student status, employment or any combination of these factors. In other words, the plan cannot require that the child be considered a dependent for income tax reporting purposes. In many instances, these requirements would encourage most children age 26 or under to remain on their parents health insurance coverage.
Employers will need to review health plans beginning with their first plan year beginning after September 23, 2010.
Any tax advice contained in the body of this blogwas not intended or written to be used and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
The IRS issued temporary regulations that require group health plans to provide health insurance coverage for dependent children until age 26. The regulations provide that plans cannot condition coverage on whether a child is a dependent for tax purposes, or whether the child is a student or resides with or receives financial support from the parent.
The regulations indicate that a plan or issuer may not define dependent for purposes of eligibility other than in terms of the relationship betwen the child and the participant. The plan or issuer may not deny or restrict coverage for a child who has not attained age 26 based on the presence or absence of the child's financial dependency on the participant, residency with the participant, student status, employment or any combination of these factors. In other words, the plan cannot require that the child be considered a dependent for income tax reporting purposes. In many instances, these requirements would encourage most children age 26 or under to remain on their parents health insurance coverage.
Employers will need to review health plans beginning with their first plan year beginning after September 23, 2010.
Any tax advice contained in the body of this blogwas not intended or written to be used and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
Friday, August 06, 2010
New York State Budget News for 2010
This is a great summary outline of tax and other provisions of the recently passed New York State Budget. This was developed by Laura Woodworth, CPA in our tax department.
The delay / deferral of business credits will have a significant impact on many taxpayers. It is unfortunate the NYS changed the rules in the middle of the game. Many investments in businesses were made with the cash flow from these credit in mind.
• Delay in $100 million in business tax credits
o The government imposed a three year delay on tax credits that have already been earned under 32 different programs
o Businesses with more than $2 million in aggregated business credits are required to defer the amounts above $2 million to 2013.
The deferred credits will be paid back to taxpayers over 2013-2015.
o Credits affected include:
Empire Zone Credits
Historic preservation benefits
Brownfield remediation credits
• Maximum biofuel production and QETC credits
o For members of an partnership or S corporation, the $2.5 million annual cap on the biofuel production credit will be applied at the entity level.
o The same rule would apply for the $250,000 annual cap on the Qualified Emerging Technology Company Facilities, Operations, & Training Credit.
o This means that the aggregate credit allowed to all the partners or shareholders in one of these entities would not be allowed to exceed the cap.
• Charitable Deductions
o The bill includes a limit on charitable deductions for taxpayers who earn more than $10 million per year.
Those taxpayers will have charitable contributions allowed cut in half; reducing allowable contributions from 50% to 25%.
• Hedge Fund Manager Commuter Tax
o The proposed tax on hedge fund managers who commute into the state was repealed.
This was in large part due to the governor of Connecticut offering relocation assistance to executives who moved to her state.
• Property Tax Cap
o Paterson proposed a cap on property taxes of 4%. This was not passed, but Paterson plans to reconvene lawmakers in October to revisit the issue.
o Fun Fact: Local taxes in New York are 78% above the national average.
• Medicaid Funding
o Lawmakers approved a plan to raise more than $1 billion if Congress fails to approve an increase in Medicaid financing this year.
o This will be done through across-the-board cuts to state programs.
• Other Notable Items
o $1.6 billion in STAR rebate checks won't be going out this year
o Increased taxes on tobacco
o Reinstatement of the 4% state tax on clothing under $110
o The 1 cent/oz tax on sugary drinks was dismissed by lawmakers
o Expanded hours on Quick Draw games and video slot machines at race tracks
o 5% cut in school aid (about $1.4 billion)
o Grocery stores are still not allowed to sell wine
o SUNY and CUNY schools are not allowed to set their own tuition rates
The delay / deferral of business credits will have a significant impact on many taxpayers. It is unfortunate the NYS changed the rules in the middle of the game. Many investments in businesses were made with the cash flow from these credit in mind.
• Delay in $100 million in business tax credits
o The government imposed a three year delay on tax credits that have already been earned under 32 different programs
o Businesses with more than $2 million in aggregated business credits are required to defer the amounts above $2 million to 2013.
The deferred credits will be paid back to taxpayers over 2013-2015.
o Credits affected include:
Empire Zone Credits
Historic preservation benefits
Brownfield remediation credits
• Maximum biofuel production and QETC credits
o For members of an partnership or S corporation, the $2.5 million annual cap on the biofuel production credit will be applied at the entity level.
o The same rule would apply for the $250,000 annual cap on the Qualified Emerging Technology Company Facilities, Operations, & Training Credit.
o This means that the aggregate credit allowed to all the partners or shareholders in one of these entities would not be allowed to exceed the cap.
• Charitable Deductions
o The bill includes a limit on charitable deductions for taxpayers who earn more than $10 million per year.
Those taxpayers will have charitable contributions allowed cut in half; reducing allowable contributions from 50% to 25%.
• Hedge Fund Manager Commuter Tax
o The proposed tax on hedge fund managers who commute into the state was repealed.
This was in large part due to the governor of Connecticut offering relocation assistance to executives who moved to her state.
• Property Tax Cap
o Paterson proposed a cap on property taxes of 4%. This was not passed, but Paterson plans to reconvene lawmakers in October to revisit the issue.
o Fun Fact: Local taxes in New York are 78% above the national average.
• Medicaid Funding
o Lawmakers approved a plan to raise more than $1 billion if Congress fails to approve an increase in Medicaid financing this year.
o This will be done through across-the-board cuts to state programs.
• Other Notable Items
o $1.6 billion in STAR rebate checks won't be going out this year
o Increased taxes on tobacco
o Reinstatement of the 4% state tax on clothing under $110
o The 1 cent/oz tax on sugary drinks was dismissed by lawmakers
o Expanded hours on Quick Draw games and video slot machines at race tracks
o 5% cut in school aid (about $1.4 billion)
o Grocery stores are still not allowed to sell wine
o SUNY and CUNY schools are not allowed to set their own tuition rates
Thursday, April 22, 2010
Tax Season Hangover?
April 15 has passed. Tax returns or extensions are filed. The accountants are getting a much deserved rest after sleep deprived days. I often tell people that post April 15 is like cleaning up after a big party.
Take your asprin...this is no time to have a hangover when it comes to tax compliance and planning. Congress has been very busy with law changes and new laws will impact your tax planning for 2010 and beyond.
Patient Protection and Affordable Care Act / Health Care and Education Reconciliation Act of 2010
Seems like old news already. This hotly debated law is now on the books. There are a number of tax law changes in the new law. Small business tax credits go into effect in 2010. Qualified small employers (no more than 25 employees and average annual wages of no more than $50,000) can qualify for a tax credit equal to 35% of their contribution toward the employee's health insurance premium.
In following years, individuals and businesses may be faced with:
In an effort to incentivize employers to hire, Congress passed new law that includes incentives for hiring and retaining workers. Included in this bill is an extension of the enhanced section 179 expensing...$250,000 expensing limit phased out based on total purchases in excess of $800,000.
The main thrust of the new law is payroll tax forgiveness. Wages paid to previously unemployed new hires for any 2010 period starting after March 18, 2010 through December 31, 2010 are not subject to the 6.2% OASDI Social Security tax. Qualified employees must start work after February 3, 2010 and before January 1, 2011. A qualified employee must have been unemployed for at least 60 days before his or her start date.
Employers that hire new workers who qualify for payroll tax forgiveness and keep them on the payroll for at least 52 consecutive weeks may be eligible for an additional tax credit. The employer can claim a credit equal to the lesser of $1,000 or 6.2% of the wages paid to the employee for the 52 week period.
More to come...
Most believe the Bush tax cuts will be allowed to expire at the end of 2010. This likely means long term capital gains and qualifying dividends will be subject to a 20% tax rate vs. the current 15%. This change in the law happens automatically on January 1, 2011 based on law already on the books.
No much talk lately about it, but Congress still seems intent on reinstating the Estate tax. The Estate tax expired on January 1, 2010. It will likely be back with a retroactive effective date of January 1, 2010.
Come back. There will be more...
Take your asprin...this is no time to have a hangover when it comes to tax compliance and planning. Congress has been very busy with law changes and new laws will impact your tax planning for 2010 and beyond.
Patient Protection and Affordable Care Act / Health Care and Education Reconciliation Act of 2010
Seems like old news already. This hotly debated law is now on the books. There are a number of tax law changes in the new law. Small business tax credits go into effect in 2010. Qualified small employers (no more than 25 employees and average annual wages of no more than $50,000) can qualify for a tax credit equal to 35% of their contribution toward the employee's health insurance premium.
In following years, individuals and businesses may be faced with:
- Monetary penalties for individuals who fail to maintain minimum essential health coverage.
- Coverage tax credits for individuals who cannot afford minimum essential health coverage.
- Non-deductible penalties assessed on large employers (generally more than 50 employees) who fail to offer full time employees with the opportunity to enroll in minimum essential coverage.
- An increased Medicare tax base for high-income taxpayers that imposes an additional Hospital Insurance tax rate of .9% on earned income in excess of $250,000 (married filing jointly) and a 3.8% unearned income Medicare contributions tax on high income taxpayers.
In an effort to incentivize employers to hire, Congress passed new law that includes incentives for hiring and retaining workers. Included in this bill is an extension of the enhanced section 179 expensing...$250,000 expensing limit phased out based on total purchases in excess of $800,000.
The main thrust of the new law is payroll tax forgiveness. Wages paid to previously unemployed new hires for any 2010 period starting after March 18, 2010 through December 31, 2010 are not subject to the 6.2% OASDI Social Security tax. Qualified employees must start work after February 3, 2010 and before January 1, 2011. A qualified employee must have been unemployed for at least 60 days before his or her start date.
Employers that hire new workers who qualify for payroll tax forgiveness and keep them on the payroll for at least 52 consecutive weeks may be eligible for an additional tax credit. The employer can claim a credit equal to the lesser of $1,000 or 6.2% of the wages paid to the employee for the 52 week period.
More to come...
Most believe the Bush tax cuts will be allowed to expire at the end of 2010. This likely means long term capital gains and qualifying dividends will be subject to a 20% tax rate vs. the current 15%. This change in the law happens automatically on January 1, 2011 based on law already on the books.
No much talk lately about it, but Congress still seems intent on reinstating the Estate tax. The Estate tax expired on January 1, 2010. It will likely be back with a retroactive effective date of January 1, 2010.
Come back. There will be more...
Tuesday, January 26, 2010
Contributions to Haiti Earthquake Relief
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
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 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.
Friday, November 13, 2009
More taxes with Healthcare Reform
While the House has passed its healthcare bill, the Senate bill continues to sit on the shelf. Apparently, the Senate is waiting for the scoring of the proposed bill by the Congressional Budget Office. Essentially, scoring is the CBO's estimate of how much all of the will cost over the next 10 years. I would really like to see that excel spreadsheet.
New reports are coming out that Senate Majority Leader Reid is considering an increase in the Medicare tax from its current 1.45% as part of the bill. He is also considering the application of a new Medicare tax on capital gains.
In its current form the Medicare tax is applied to earned income (wages, etc.). Most wage earners pay the Medicare tax by withholdings on their wages. Self employed individuals pay it through the Self Employment Tax on their self employment income with their individual tax return. It is suggested that potential increases in the Medicare tax rate on earned income might only be applied to income in excess of $250,000. A Medicare tax on capital gains does not currently exist in the tax law. I guess wealth redistribution in the United States begins at $250,000.
A strange twist in the Senate bill is a reduction in the amount that taxpayers can contribute to flexible spending accounts. Many employees take advantage of flexible spending accounts to pay for qualifying healthcare expenses with pre-tax funds. Generally the maximum contribution to a flexible spending account is $5,000 per year. The Senate bill would reduce this maximum to $2,500 per year. This provision is all about raising additional revenue and is in effect an additional tax. Lowering the maximum contribution simply results in more of an individuals earnings being subject to income tax. I thought we wanted to encourage people to spend wisely on healthcare.
New reports are coming out that Senate Majority Leader Reid is considering an increase in the Medicare tax from its current 1.45% as part of the bill. He is also considering the application of a new Medicare tax on capital gains.
In its current form the Medicare tax is applied to earned income (wages, etc.). Most wage earners pay the Medicare tax by withholdings on their wages. Self employed individuals pay it through the Self Employment Tax on their self employment income with their individual tax return. It is suggested that potential increases in the Medicare tax rate on earned income might only be applied to income in excess of $250,000. A Medicare tax on capital gains does not currently exist in the tax law. I guess wealth redistribution in the United States begins at $250,000.
A strange twist in the Senate bill is a reduction in the amount that taxpayers can contribute to flexible spending accounts. Many employees take advantage of flexible spending accounts to pay for qualifying healthcare expenses with pre-tax funds. Generally the maximum contribution to a flexible spending account is $5,000 per year. The Senate bill would reduce this maximum to $2,500 per year. This provision is all about raising additional revenue and is in effect an additional tax. Lowering the maximum contribution simply results in more of an individuals earnings being subject to income tax. I thought we wanted to encourage people to spend wisely on healthcare.
Thursday, November 05, 2009
Extension of First Time Homebuyer Tax Credit
Included in a bill to extend unemployment benefits to many Americans is an extension of the First Time Homebuyer Tax Credit. The credit is currently slated to expire on November 30, 2009.
As would be expected, Congress continues to tinker with tax law provisions like this credit. The proposed credit would not longer be limited to first time buyers who may be able to claim an $8,000 credit, but would be expanded to people who have owned a home for at least five of the last eight years. Those individuals could get up to a $6,500 credit on the purchase of a new residence. I suspect the name of the credit will need to be changed to the "First, Second, Third and possibly Fourth Time Homebuyer Tax Credit".
Annual income limits (before the credit begins to phase out) to claim the credit are proposed to increase to $125,000 for individuals and $225,000 for married couples.
To qualify purchase contracts would need to signed before April 30, 2010 and closing would need to occur before June 30, 2010. The proposal also limits the cost of the new home to $800,000. That's a lot of house...
Any tax advice contained in the body of this blog was not intended or written to be used and cannot be used, by the reader for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
As would be expected, Congress continues to tinker with tax law provisions like this credit. The proposed credit would not longer be limited to first time buyers who may be able to claim an $8,000 credit, but would be expanded to people who have owned a home for at least five of the last eight years. Those individuals could get up to a $6,500 credit on the purchase of a new residence. I suspect the name of the credit will need to be changed to the "First, Second, Third and possibly Fourth Time Homebuyer Tax Credit".
Annual income limits (before the credit begins to phase out) to claim the credit are proposed to increase to $125,000 for individuals and $225,000 for married couples.
To qualify purchase contracts would need to signed before April 30, 2010 and closing would need to occur before June 30, 2010. The proposal also limits the cost of the new home to $800,000. That's a lot of house...
Any tax advice contained in the body of this blog was not intended or written to be used and cannot be used, by the reader for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
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