Tag Archives: cash and debt management

planning to use cash flow to meet financial goals, with proper use of debt and ways to save, invest

Roth Conversions – decisions on 2010, recharacterize now or pay taxes over two years?

Posted on by

You can still decide as late as October 15th (if you extend filing of your tax returns) to either recharacterize or pay the taxes in 2011 and 2012 instead of on your 2010 taxes for your 2010 conversion to a Roth IRA.

Recharacterize – if you have the misfortune of losing value on the IRA after converting, you can “un-convert” by “recharacterizing” the Roth IRA as a traditional IRA using an IRA-to-IRA transfer (do not distribute funds to yourself, as that distribution voids the recharacterization). You can do this for all or a portion of the account. Once you do so, you cannot convert again until later of 30 days after the recharacterization or the year after the year of the original conversion.
This strategy is useful to address a decreased IRA value or to shift the conversion into future years with less income, so you are in a lower tax bracket.

Tax payments – 2010 is the only year where you can choose to have the income of the conversion split in half and carried onto your 2011 and 2012 tax returns. This (1) spreads the time to come up with funds to pay the taxes (you never want to use the funds in the IRA as that defeats the purpose) and (2) gives you earnings on funds already available to pay the taxes until the payment due date.

Note: if you are paying taxes on the conversion with your 2010 taxes, the amounts are due April 18, 2011, even if you extend to have the option of recharacterizing. If you do recharacterize, then you will have over paid and have a refund due …. until you convert again.

How long should you retain tax materials?

Posted on by

Clients often ask how long tax-related documents should be retained. There are two IRS rules:
 The general rule is 3 years from the date of filing the return.
 The second, in the case of fraud, is 7 years from the date of filing.
However, there is another reason to retain certain documents after 3 or even 7 years:
if ever you have to prove the basis of an asset that you sell, such as your house, then you need to keep all documentation of purchase price and capital improvements for as long as you own that asset, in case you are ever audited.
This applies to any other asset that is not traded on an exchange, such as a work of art, and other objects that appreciate over time.
In the case of mutual funds and stocks, the fund or broker usually has the cost basis on record these days.

Estate tax update

Posted on by

As anticipated, Congress lifted the estate tax credit for 2011 from $1 million to $5 million, lowering the rate from 55% to 35%. Also, the date-of-death value again serves as the basis for estate assets. Also, the exemption is portable, viz. the un-used portion can be carried cover gifts by or the estate of the surviving spouse. Finally, the exemption will be indexed for inflation. (Estates can elect to use the 2010 rules for $1.3 million carry over basis for heirs).

There are some special rules: up to $1,020,000 of real property used for farming or business can get a discounted valuation; and when a closely held business comprises more than 35% of an estate, then as much as $476,000 of estate taxes can be deferred at a cost of 2% (charged by theirs).

In 2013, the exemption again falls back to $1 million and the rate goes back up to 55%, unless Congress again takes action.

For any 2010 estates, the retroactive action provides requires estates with a date-of-death valuation in excess of $1.3 million to file informational returns to report the carry over basis to the IRS and to heirs (as well as the $3 million for assets passing to a surviving spouse).

See more at Estate Planning.

(or contact us with your questions at Contact Us.)

AMT rescue for 2010 and 2011

Posted on by

First, a quick reminder of what the Alternative Minimum Tax (AMT) is:

This is the tax that Congress imposed over four decades ago, when very rich people with clever advisors were able to pay $0 taxes. Unfortunately, it was never indexed for inflation and has, especially over the last decade, grabbed more and more taxpayers. This has led to several patches, including the law just passed by Congress.

Today, the tax has a 28% rate and removes many deductions, such state income taxes, most exemptions and then adds in other items, or “preferences”, like the spread on incentive stock options purchased but not yet sold.

For the new law, middle class taxpayers are rescued from the AMT – at least for 2010 and 2011.

That is, the compromise tax package from Congress boosts the exemption levels for the AMT to cover over 20 million middle-income taxpayers.

Someday, perhaps an inflation adjustment will be added…..

Tax planning and 2011 estate tax law

Posted on by

While we await more details, recent action by Congress has the Bush tax cuts continuing for two more years, making the 2010 to 2011 tax planning straight forward – much like past years.

The new law provides relief on the AMT, no reduction in deductions and other benefits, which we plan to review in greater detail.

Also, it appears that, rather than return to a $1 million unified credit for estate taxes, at least a $3.5 million, if not a $5 million, credit and perhaps as low as a 35% tax rate will be the law next year.

Until we have more, please consider this summary of Tax planning: 2010 tips and traps, and 2011 changes

For 2010, some old provisions return and some new changes require action now:

2010 conversion to a Roth IRA has no income limit and two years to pay the taxes (please see to convert or not to convert).

Certain advantages in 2009 are lost for 2010 (see tax planning 2009 tips and traps and 2010 changes):
• AMT patch falls back;
• Casualty and theft loss limits fall back;
• Educator and tuition and fees deductions against adjusted gross income are not available;
• Deduction of state and local sales taxes ends;
• Exclusion of $2,400 of unemployment income ends; and
• Exclusion of income from qualified distributions from IRAs to charities ends.

However, some still apply in 2010:
• New home buyer credit (through the extended date)
• Energy Credit for solar power, fuel cells and certain energy efficient improvements are Schedule A deductions. There are two types of credit depending on what improvements were made to your home and taking the deductions requires you to have documentation.
• A tax refund can be used to buy U.S. Series I bonds.
• Note that a dependent child’s income is taxed when it exceeds $1,900.
• Educator’s Expense

Note that not all states accept the IRS changes, so the information and outcome could be different.

As we said before, tax planning involves a multi-year view to optimize what you end up paying.

You should also review your mortgage when you review tax information.