Traditional IRA conversions rules under the current tax law allow taxpayers with adjusted gross income of $100,000 to convert their IRA's into Roth, pay the income tax and enjoy the benefits of Roth IRA's.
Deductible Traditional IRA contribution is similar to your contribution to your employer 401(K) plan on a pre-tax basis. These IRA's provide for a current income tax deduction. However, upon distributions you will pay the tax at your ordinary income rate at that time on your IRA contributions and earnings. Income limitation applies as well as coverage by other retirement plans (through employers, or self employed plans).
Whereas, the contribution to Non-Deductible Traditional IRA is similar to after tax contributions you make to your employer 401(K) plan. As a result, upon distributions you will be taxed on the earnings only and not the dollars contributed to the IRA. (Remember, you already paid the tax on these dollars once already, you won't be double taxed). There are no income limitations on individuals prohibiting contributions to non deductible IRA's regardless of coverage by other employer plans.
Roth IRA contribution is on an after tax basis. You ask me, is it different than the non deductible IRA? Oh Yes, since the earnings are income tax free. Yes absolutely income tax free. Similar to non deductible IRA's, you already paid the tax once on these dollars once; earnings are also income tax free. Moreover, you are not subject to dreaded required minimum distributions after age 70 1/2 as required with the traditional IRA's. This means Uncle Sam can't make you take distributions from your IRA if you don't need to or want to for that matter.
Under the current law, not everyone can setup a Roth IRA by contributing new dollars or converting an existing retirement plan, but income limitations apply. You can contribute $5,000 (or $6,000 if you are at least 50 years old) per person to a Roth IRA if your income is $105,000 for single individuals or $166,000 if you are married filing jointly.
You can convert to a Roth IRA in 2009 if your modified adjusted gross income is $100,000 and you are not filing separate from your spouse. However, in 2010 these income limitations disappear. So IRA conversions into Roth IRA's won't be subject to income limitations. The kicker is, if you convert in 2010, you are not paying the income tax on the conversion until April 2011 and 2012. Yes, the IRS allows the income tax bill to be split between the 2 tax years for conversions completed only in 2010. The benefits of ROTH IRA's weigh the initial cost of tax payments for most people, but if you are considering this, please consult with your tax advisor first and keep on reading our future posts addressing this topic. Now that we covered the different IRAs basics, my next post will address the benefits and strategies for conversions.
Stay tuned.......
Saturday, August 29, 2009
Sunday, August 23, 2009
Married couples without children and wills- to have or not to have:
Most Americans (including couples without children) should have basic legal documents such as wills as discussed in prior posts. Most of us including educated, professionals and celebrities die without one or intestate. These individuals can’t face their own mortality or just aren’t aware of the implications of this decision.
My friend JT is a married young professional, with no children. When asking him if he had a will or an estate plan, his reply was, do I need one? I do not have any kids yet. My answer to JT and all young couples without children yet: is YES. Here is why and how.
First- employees and self-employed individuals generally opt for life insurance policies offered through work to provide liquidity to survivors on the cheap. They also contribute to their retirement plans offered to benefit of the income tax deductions provided in our tax system. These steps are great ways to start building your nest egg as well as provide some protection to your survivors in case of death, however, beware of some of the following traps.
Both life insurance policies and retirement plans such as 401(K)’s and IRA’s require beneficiary designation forms to be completed when you start the program. MAKE SURE, to check this form on a regular basis since the beneficiary designation forms do not follow your will and last testament. The beneficiary named on these forms will inherit this asset regardless of what you will documents say. For example, if you completed a 401(K) beneficiary designation form naming a sibling when you first started working. Years later, you were married, and named your spouse, as your beneficiary in your simple will document. Guess who will inherit this 401(K)? You guessed right, your sibling will. If you have multiple life insurance policies or switched jobs and have several retirement plans, CHECK THESE FORMS ON A REGULAR BASIS.
Second- The Probate court in your state depending on the intestacy laws in the state will provide one third to one half of your assets to your surviving spouse, providing the remainder to your surviving parents and siblings. So, if your goal is to provide your surviving spouse with all your assets, then drafting a will indicating such a wish is necessary. This is especially important if as a couple you both are jointly liable for your home mortgage as well as other personal debt.
My friend JT is a married young professional, with no children. When asking him if he had a will or an estate plan, his reply was, do I need one? I do not have any kids yet. My answer to JT and all young couples without children yet: is YES. Here is why and how.
First- employees and self-employed individuals generally opt for life insurance policies offered through work to provide liquidity to survivors on the cheap. They also contribute to their retirement plans offered to benefit of the income tax deductions provided in our tax system. These steps are great ways to start building your nest egg as well as provide some protection to your survivors in case of death, however, beware of some of the following traps.
Both life insurance policies and retirement plans such as 401(K)’s and IRA’s require beneficiary designation forms to be completed when you start the program. MAKE SURE, to check this form on a regular basis since the beneficiary designation forms do not follow your will and last testament. The beneficiary named on these forms will inherit this asset regardless of what you will documents say. For example, if you completed a 401(K) beneficiary designation form naming a sibling when you first started working. Years later, you were married, and named your spouse, as your beneficiary in your simple will document. Guess who will inherit this 401(K)? You guessed right, your sibling will. If you have multiple life insurance policies or switched jobs and have several retirement plans, CHECK THESE FORMS ON A REGULAR BASIS.
Second- The Probate court in your state depending on the intestacy laws in the state will provide one third to one half of your assets to your surviving spouse, providing the remainder to your surviving parents and siblings. So, if your goal is to provide your surviving spouse with all your assets, then drafting a will indicating such a wish is necessary. This is especially important if as a couple you both are jointly liable for your home mortgage as well as other personal debt.
Thursday, August 20, 2009
Wednesday, August 19, 2009
New Jersey 2009 Income Tax Rate Increase....
The state of New Jersey is another state enacting increase in their gross income tax rate for the year of 2009, reducing and limiting their already limited income tax deductions as well as eliminating the state of New Jersey property tax rebates among other provisions. These provisions are efforts taken by Gov. Jon Corzine, who signed the state budget on June 29, 2009 to close the state of New Jersey's budget gap.
· Personal income tax rate increase: The personal income tax rate has been increased from for all New Jersey taxpayers with taxable income in excess of $400,000.
The rates are as follow:
1) 8% for taxable income above $400,000 but not over $500,000;
2) 10.25% for taxable income above $500,000 but not over $1 million;
3) 10.75% for all tax filers who earn more than $1 million.
The temporary New Jersey income tax rate increase is in effect for tax years beginning after 2008 and before 2010. The current maximum tax rate is 8.97% for taxable income above $500,000 which is a 20% income tax rate increase.
No additional taxes or penalties will be imposed by the state of New Jersey for deficiencies on estimates tax payments due on salaries, wages received before October 1, 2009, at which point the new tax rates would take effect. Employers will not be subject to interest, penalties, or other costs that would otherwise be imposed as a result of the insufficient withholding according to the new tax rates.
· Property Tax Deduction limitations: The state of New Jersey provides for limited deductions on the tax individual tax returns including a property tax deduction of up to $10,000 for property tax paid. Starting Higher-income taxpayers will see their deductions limited to a maximum of $5,000 for taxpayers with gross income in excess of $150,000, but not over $250,000. For taxpayers with gross income in excess of $250,000, no property tax deduction will be allowed unless the taxpayer is 65 years old or older, blind or disabled.
· Property Tax Rebates: As if limiting the Property Tax Deduction was not sufficient, the legislation eliminates property tax rebates for non-senior non-disabled homeowners with income over $75,000. Senior and disabled homeowners with income up to $150,000 will still qualify. Homeowners with earnings up to $50,000 will receive last year's Property Tax Rebate, whereas homeowners with earnings above $50,000 but not over $75,000 will receive two thirds of last year's property tax rebate.
The measure eliminates non-senior tenants from the homestead rebate program for 2010 fiscal year, but maintains the Senior and Disabled Citizens Property Tax Freeze Program.
· Lottery Winnings Taxation: Currently, winnings from the New Jersey Lottery are exempt from New Jersey income taxes. Beginning tax years after 2008, New Jersey Lottery winnings in excess of $10,000 will be included in gross income and withholding will be required.
Below is the State of New Jersey Department of Taxation public notice regarding the income tax legislation changes and its impact.
http://www.state.nj.us/treasury/taxation/pdf/webnoticetaxrateincrease.pdf
· Personal income tax rate increase: The personal income tax rate has been increased from for all New Jersey taxpayers with taxable income in excess of $400,000.
The rates are as follow:
1) 8% for taxable income above $400,000 but not over $500,000;
2) 10.25% for taxable income above $500,000 but not over $1 million;
3) 10.75% for all tax filers who earn more than $1 million.
The temporary New Jersey income tax rate increase is in effect for tax years beginning after 2008 and before 2010. The current maximum tax rate is 8.97% for taxable income above $500,000 which is a 20% income tax rate increase.
No additional taxes or penalties will be imposed by the state of New Jersey for deficiencies on estimates tax payments due on salaries, wages received before October 1, 2009, at which point the new tax rates would take effect. Employers will not be subject to interest, penalties, or other costs that would otherwise be imposed as a result of the insufficient withholding according to the new tax rates.
· Property Tax Deduction limitations: The state of New Jersey provides for limited deductions on the tax individual tax returns including a property tax deduction of up to $10,000 for property tax paid. Starting Higher-income taxpayers will see their deductions limited to a maximum of $5,000 for taxpayers with gross income in excess of $150,000, but not over $250,000. For taxpayers with gross income in excess of $250,000, no property tax deduction will be allowed unless the taxpayer is 65 years old or older, blind or disabled.
· Property Tax Rebates: As if limiting the Property Tax Deduction was not sufficient, the legislation eliminates property tax rebates for non-senior non-disabled homeowners with income over $75,000. Senior and disabled homeowners with income up to $150,000 will still qualify. Homeowners with earnings up to $50,000 will receive last year's Property Tax Rebate, whereas homeowners with earnings above $50,000 but not over $75,000 will receive two thirds of last year's property tax rebate.
The measure eliminates non-senior tenants from the homestead rebate program for 2010 fiscal year, but maintains the Senior and Disabled Citizens Property Tax Freeze Program.
· Lottery Winnings Taxation: Currently, winnings from the New Jersey Lottery are exempt from New Jersey income taxes. Beginning tax years after 2008, New Jersey Lottery winnings in excess of $10,000 will be included in gross income and withholding will be required.
Below is the State of New Jersey Department of Taxation public notice regarding the income tax legislation changes and its impact.
http://www.state.nj.us/treasury/taxation/pdf/webnoticetaxrateincrease.pdf
Thursday, August 13, 2009
First time homebuyers- Uncle Sam’s limited time offer of up to $8,000:
First time homebuyers or anyone not owning a main residence in the past 3 years might be in luck this summer. The American Recovery and Reinvestment Act of 2009 included a provision providing for an $8,000 tax credit for home purchases between January 1, 2009 and December 1, 2009. The income tax credit is 10% of the home purchase price with a maximum $8,000. Income limitation applies as the situation with any tax credit. In this case, for single individuals, the tax credit is phased-out (reduced) for individuals with income of $75,000 for single filers and $150,000 for married couples. The first-time homebuyers’ tax credit is completely phased out to Zero for single filers with income of $95,000 and $170,000 for married couples.
The 2009 first time homebuyers’ tax credit is different than the one enacted in 2008. The 2008 credit of up to $7,500 on home purchases between April 9, 2008 and before July 1, 2009 was to be recaptured over 15 years ratably with no interest unless the home is sold earlier than 15 years. As a result, the 2008 first time homebuyers credit was considered an interest free loan by Uncle Sam as opposed to a true tax credit as the current tax credit.
Planning point: For home purchases by first time homebuyers between January 1 and July 1 of 2009, if you filed your 2008 income tax return claiming the tax credit under the 2008 tax law, consult your tax advisor and preparer, and consider amending your tax return to claim the 2009 tax credit.
This tax credit significance lies in the value of a tax credit vs. tax deduction. A tax deduction is merely lowering your income providing you with a proportionate percentage equal to your top tax rate. Whereas with the tax credit your tax liability is reduced dollar for dollar. For example, if you are in the 25% tax bracket, your deduction will reduce your taxes by 25 cents on the dollar vs. your tax credit providing you with $1 for $1 deduction.
Moreover, the first time homebuyer’s tax credit is a refundable tax credit. This means, if you owe low to no income tax liability to reduce, Uncle Sam will send you a check with the difference .…. Enjoy your new home.
For more information on this credit check out the following link: http://www.federalhousingtaxcredit.com/2009/faq.php
The 2009 first time homebuyers’ tax credit is different than the one enacted in 2008. The 2008 credit of up to $7,500 on home purchases between April 9, 2008 and before July 1, 2009 was to be recaptured over 15 years ratably with no interest unless the home is sold earlier than 15 years. As a result, the 2008 first time homebuyers credit was considered an interest free loan by Uncle Sam as opposed to a true tax credit as the current tax credit.
Planning point: For home purchases by first time homebuyers between January 1 and July 1 of 2009, if you filed your 2008 income tax return claiming the tax credit under the 2008 tax law, consult your tax advisor and preparer, and consider amending your tax return to claim the 2009 tax credit.
This tax credit significance lies in the value of a tax credit vs. tax deduction. A tax deduction is merely lowering your income providing you with a proportionate percentage equal to your top tax rate. Whereas with the tax credit your tax liability is reduced dollar for dollar. For example, if you are in the 25% tax bracket, your deduction will reduce your taxes by 25 cents on the dollar vs. your tax credit providing you with $1 for $1 deduction.
Moreover, the first time homebuyer’s tax credit is a refundable tax credit. This means, if you owe low to no income tax liability to reduce, Uncle Sam will send you a check with the difference .…. Enjoy your new home.
For more information on this credit check out the following link: http://www.federalhousingtaxcredit.com/2009/faq.php
Tuesday, August 11, 2009
9 Steps Joe The Plumber regarding his estate planning:
1) Take a complete inventory of all your assets and their values
2) Confirm the form of ownership of these assets since it will impact your estate plan
3) Verify the beneficiary designation forms on your life insurance policies and retirement plans
4) Consider your minor children and name guardians and successor guardians
5) Set up trusts for your minor children and name trustees and successor trustees to manage these trust assets
6) Provide your spouse with a durable power of attorney to take care of financial decisions when you are unable to
7) Repeat the above providing your spouse with a healthcare power of attorney to take care of healthcare decisions in case of your incapacitation
8) Select an experienced attorney to draft your estate plan and legal documents
9) Review your estate plan on a regular basis since changes do happen to you, your family and the law
Let me tell you about Mr. & Mrs. Joe Small. The Smalls are a couple in their mid thirties, so estate planning wasn't a concern (they are invincible after all). Joe is a hard working small business owner trying to provide for his family, while Jane is a stay at home mom taking care of their 3 minor boys. The Smalls, had none of the basic estate planning documents in place, no wills, or trusts, no financial or healthcare power of attorney, and no guardians named to care for their children.
One day, Jane got a call from Joe's office; Joe had a heart attack and was moved to the nearest hospital. Jane was numb; she depended on her husband completely as he managed their finances. What if anything happened to Joe? What would she do with the business? How about the mortgage and their other debt? Do they have enough life insurance to provide for her and her children?
Jane wakes up from her horrible nightmare, waking Joe up and insisting that they schedule a meeting with their estate-planning attorney to start working on their estate plan.
In addition to the 9 steps above, Joe should draft a letter of instructions, which as the name implies provides specific instructions to Jane (no pun intended) on who to contact (ie, which advisor to call first) to give her the piece of mind they both need to sleep at night.
Stay Tuned for more details about the next steps in the Small’s scenario… This should be fun.
2) Confirm the form of ownership of these assets since it will impact your estate plan
3) Verify the beneficiary designation forms on your life insurance policies and retirement plans
4) Consider your minor children and name guardians and successor guardians
5) Set up trusts for your minor children and name trustees and successor trustees to manage these trust assets
6) Provide your spouse with a durable power of attorney to take care of financial decisions when you are unable to
7) Repeat the above providing your spouse with a healthcare power of attorney to take care of healthcare decisions in case of your incapacitation
8) Select an experienced attorney to draft your estate plan and legal documents
9) Review your estate plan on a regular basis since changes do happen to you, your family and the law
Let me tell you about Mr. & Mrs. Joe Small. The Smalls are a couple in their mid thirties, so estate planning wasn't a concern (they are invincible after all). Joe is a hard working small business owner trying to provide for his family, while Jane is a stay at home mom taking care of their 3 minor boys. The Smalls, had none of the basic estate planning documents in place, no wills, or trusts, no financial or healthcare power of attorney, and no guardians named to care for their children.
One day, Jane got a call from Joe's office; Joe had a heart attack and was moved to the nearest hospital. Jane was numb; she depended on her husband completely as he managed their finances. What if anything happened to Joe? What would she do with the business? How about the mortgage and their other debt? Do they have enough life insurance to provide for her and her children?
Jane wakes up from her horrible nightmare, waking Joe up and insisting that they schedule a meeting with their estate-planning attorney to start working on their estate plan.
In addition to the 9 steps above, Joe should draft a letter of instructions, which as the name implies provides specific instructions to Jane (no pun intended) on who to contact (ie, which advisor to call first) to give her the piece of mind they both need to sleep at night.
Stay Tuned for more details about the next steps in the Small’s scenario… This should be fun.
Wednesday, August 5, 2009
Foreign Bank Accounts Reporting (FBAR) deadline extension update alert:
If you thought tax deadlines end on 4/15, you are in for quite a surprise. Another deadline is yet upon us. Taxpayers and professional prepares are sorting through new treasury guidance and the limited time amnesty program offered for offshore account holders.
The new administration is cracking down on individuals and entities with secret offshore and foreign bank accounts. In general, Residents and US citizens pay tax on their worldwide income and not just their US sourced income. For years, notorious Swiss Banks promoted their accounts as solutions to evade US taxes. These foreign banks resisted disclosing information about their investors to the IRS unless permitted in writing by their clients. This is changing fast with the US government efforts to track tax evaders using offshore investing. So if you are one of the individuals believing you can continue to hide your foreign bank accounts, think again.
The reporting is the FBAR (Foreign Bank Account Reporting) declaring all foreign bank accounts and financial accounts held by US citizens and residents when the total value exceeds $10,000 at any time during the year.
The deadline to file this form with the Treasury Department is June 30th extended to September 30th
The form used for the declaration is Treasury Department Form: TD F 90-22.1
The financial accounts include checking, and savings bank accounts, brokerage accounts mutual funds, credit and debit cards, retirement plans as well as other financial instruments.
The filing requirement of the FBAR also applies to individuals with signature authority over any financial accounts.
The penalties include civil and/or criminal penalties await individuals who fail to file the FBAR form by the due date. Monetary penalties are between $10,000 to no more than $500,000 and potential imprisonment of no more than five years for failure to file, supply information and report false information.
The information required on the form includes:
a- The filer information including name, address and tax identification number
b- The financial institutions information including name, address, account number and the maximum value of the account
c- The financial accounts where filer has signature authority without any financial interest
d- The financial accounts where corporate filers are filing a consolidated report
The amnesty program offered by the IRS runs through September 2009 for late filers to come forward voluntarily and disclose delinquent reporting without facing imprisonment and a paying the tax on the income in addition to a single 20% penalty plus interest.
The new administration is cracking down on individuals and entities with secret offshore and foreign bank accounts. In general, Residents and US citizens pay tax on their worldwide income and not just their US sourced income. For years, notorious Swiss Banks promoted their accounts as solutions to evade US taxes. These foreign banks resisted disclosing information about their investors to the IRS unless permitted in writing by their clients. This is changing fast with the US government efforts to track tax evaders using offshore investing. So if you are one of the individuals believing you can continue to hide your foreign bank accounts, think again.
The reporting is the FBAR (Foreign Bank Account Reporting) declaring all foreign bank accounts and financial accounts held by US citizens and residents when the total value exceeds $10,000 at any time during the year.
The deadline to file this form with the Treasury Department is June 30th extended to September 30th
The form used for the declaration is Treasury Department Form: TD F 90-22.1
The financial accounts include checking, and savings bank accounts, brokerage accounts mutual funds, credit and debit cards, retirement plans as well as other financial instruments.
The filing requirement of the FBAR also applies to individuals with signature authority over any financial accounts.
The penalties include civil and/or criminal penalties await individuals who fail to file the FBAR form by the due date. Monetary penalties are between $10,000 to no more than $500,000 and potential imprisonment of no more than five years for failure to file, supply information and report false information.
The information required on the form includes:
a- The filer information including name, address and tax identification number
b- The financial institutions information including name, address, account number and the maximum value of the account
c- The financial accounts where filer has signature authority without any financial interest
d- The financial accounts where corporate filers are filing a consolidated report
The amnesty program offered by the IRS runs through September 2009 for late filers to come forward voluntarily and disclose delinquent reporting without facing imprisonment and a paying the tax on the income in addition to a single 20% penalty plus interest.
Subscribe to:
Posts (Atom)