Posts Tagged ‘Income Tax’

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Thinking about converting your IRA?

Sunday, February 12th, 2012

Without Congressional action by December 31, 2012, over 35 Bush-era tax cuts will be eliminated, which means, among other things, that income tax rates will go up.  Many so-called tax experts seem to think that Congress won’t act until after the election.  Taking a position on tax law changes and thereafter having to compromise BEFORE your election could mean that you do not get re-elected.

If that is the case, how do you plan?  As a Florida estate planning attorney, I have found that my clients appreciate any advice that allows for flexibility.  That way, they will not need to come back in six or eight months to re-do everything!

Along those same lines, for the last few years, advisors have talked to their clients about converting their traditional IRAs to Roth IRAs.  The reasons are numerous:

  • You can have tax-free income in retirement – which means you don’t have to worry as much about future income tax rates.
  • There are no required minimum distributions (RMDs).
  • You have access to the dollars you converted penalty-free before age 59½ (subject to a five year holding period in certain instances).
  • Conversions are allowed after age 70½.
  • You can create a tax-free legacy for your heirs.

As with many things in life, downsides exist when you convert.  For example, when you convert, you pay income tax on the value of your traditional IRA at ordinary income tax rates.  To make matters a bit more difficult, you will need to come up with the tax liability from other funds.  For some of our clients, they do not have taxable assets (such as bank accounts or an investment account) from which they can make a withdrawal to pay this income tax liability.

In addition, earnings distributions from a Roth IRA may be subject to taxes and a 10% penalty if the account is less than five years old and the owner is under age 59½.

Presumably, if tax rates go up next year, then paying tax now may make sense so that your converted account can grow tax free.  What makes the Roth conversion unique is the ability to “reverse” your conversion.  For example,  if your account balance declines substantially after the conversion due to poor investment performance, you may want to undo the conversion.  The deadline to recharacterize your conversion is the filing deadline of the date your tax return is due (October 15 of the year following the year of conversion, if your return is extended).

Have more questions, give me a call.  I would love to help.

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Car Deductions

Sunday, January 8th, 2012

In recent year-end planning meetings, several of my business-owner clients asked their accountants if they could “find” more deductions.  Legitimate ones, of course.

Here’s one that is often goofed up by taxpayers, but could result in worthwhile tax savings.  If you drive your vehicle for business, you are entitled to take deductions using two different methods. Many advisers suggest considering both methods to figure out which will produce a bigger deduction.

The first method involves calculating the actual costs of using your vehicle, which include oil, gas, tolls, depreciation, licenses, lease payments, insurance and repairs.  If you want to use this method, you have to keep a detailed log of your expenses.   This log needs to include miles driven for business use versus for personal use. You can then multiply your total expenses by the percentage of time driving your car for business use (unless you can otherwise show through your record-keeping that certain expenses related exclusively to business use).  More information can be found in IRS publication 463.

The second option is to use the standard mileage rate issued by the IRS each year. For 2012, business use of vehicles will result in a deduction of 55.5 cents per mile, the same rate as the second half of this year.  For many of us, this standard mileage rate is easier to keep track of, because you simply have to keep a log of miles driven for business. if you are a business owner, this means that your company can reimburse you for this amount, which results in a tax deduction for the business.

In either case, it is important to think about what it means to drive your car for business. Your commute to and from your home to your office does not count. Instead, driving from one office to another or from one job site to another would count.

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Payroll tax increases for everyone!

Sunday, November 20th, 2011

Late last year in an effort to “stimulate” our economy, employees were given a 2% payroll tax reduction.  In years’ past, employees were taxed at 6.2% for Social Security (capped at a specific income amount, which is adjusted for inflation) and another 1.45% for Medicare (which is not capped).  Employers pay an identical amount on wages.

The tax reduction means that the Social Security tax is limited to 4.2% for the employee’s expense.  Some articles that I have read suggested that the average American wage earner can expect to receive an additional $1,000 in net income this year.   Unfortunately, unless Congress acts by the end of this year, this tax savings will be lost in 2012, as the old rules of taxing at 6.2% would return.  President Obama, though, wants this tax savings to be continued and perhaps expanded so that the rate is reduced to 3.1%.  Without an extension of payroll tax relief, all Americans, including those with lower incomes, would be facing a tax hike!

The idea behind passing a law that reduced payroll tax was that Americans would receive more money in each paycheck, which they would spend.  In theory, that additional spending would somehow stimulate our economy.

If the government wants to stimulate the economy, it should consider offering that savings (the 2% payroll tax reduction) to employers.  Using the “average” tax savings number of $1,000 per American worker, if an employer had 50 employees earning $50,000/year, this savings would allow that employer to hire one additional person without increasing its payroll expense.  The net out-of-pocket cost to the employer would payroll taxes and employee benefits, such as health insurance.   Could you imagine spending $8,000-10,000 for a $50,000/year worker?  Maybe that would stimulate our economy – especially when you realize how many employers have hundreds or thousands of employees!

Please contact your senator and house representative to ask them to support continued payroll tax savings, including a tax break for employers.

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