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Challenging Your Property Tax Bill

Monday, December 7th, 2009

Throughout the United States, property values have been declining.  Even though this is upsetting for many individuals, this can be beneficial to you.   The reason is you may be able to reduce your property tax bill by appealing their tax assessments.

Property tax is an ad valorem tax typically imposed on an annual basis or at the time of a transaction and is based on the specific value of property, in this case real property.   The taxes are levied in order to fund budgets for schools, fire stations, police departments, and other municipal utilities. 

The taxing authority, your local municipal or county government, is responsible for appraising the monetary value of the property and then levy a tax based on the assessed value of the property.   When assessing a residence, the appraiser investigates the selling prices of all other similar houses in the county, the replacement costs, and what the house should sell for.  The appraiser thenassigns a value based on theaforementioned calculation. . 

Throughout the country (especially in areas such as Florida, Arizona, Michigan and California, where areas have been severely affected by the housing bust) home owners have a valuable opportunity to get their tax payments reduced by pushing their governments for revaluations and appealing their current assessments.   With property values dropping, people ask this question, “Why am I paying the same taxes?”   Most of the time, you shouldn’t be.

Not only are individual home owners trying to get reductions, they are also coming from condominium associations, companies that own commercial real-estate, industrial parks, and even shopping malls.  

Home owners aren’t the only ones suffering however.  Municipalities across the country are losing out on revenue.  Towns are setting aside money to refund homeowners.  In other parts of the country, appeals have gone up as much as four times.  This means a large percentage of less revenue for the governments and then contributes to cuts or borrowing in the form of bonds.  Officials are conceding that there will be much less tax revenue and are planning accordingly. 

Can I win?  Do I need a lawyer?  And is it expensive?  These are some common questions asked when filing a grievance or asking for your taxes to be reassessed . First off, the laws in most places support the homeowner when fighting the assessment.  The chances of winning are very high, especially today with the real-estate markets the way they are.  You do not need a lawyer to fight on your behalf but you certainly can get one.  They usually will charge you the amount they save you, payable in two annual installments.  This is an excellent option if you do not have the time to fill out the forms and do it yourself.  Also a lawyer will know the deadlines for filing for your specific area which is important because after that deadline you will no longer be able to fight it for that year.  If you chose not to get a lawyer,  you still have the ability to win but you need to do your research ahead of time.  There are a lot of websites out there that gives you an idea of what homes in a given area are selling for.   Once you have an idea what the value is, you can go in and do it yourself.   It’s worth a try, will not cost you much, and you could save a lot of money!

The Tax Club is committed to educating the public to the best of its abilities. If you would like to speak with one of our associates for a free consultation, please contact us at 866-840-1829 x5438

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Starting a New Business: 9 Steps to Passing the Career vs. Hobby Test

Thursday, November 12th, 2009

A huge majority of Americans establish their own business to generate another income stream for themselves and to attain financial independence. However, starting a new venture can be an overwhelming process particularly if one has no experience operating a business. Training programs and business seminars can be helpful in building  and operating the business once it is established. However, these tutorials only focus on the operational details of the business and not the legal compliance aspects which are equally important. Having a knowledgeable accountant at your side to help you deal with the financial and reporting requirements is crucial to the success of your endeavors. 

You can claim your business expenses as deductions on the income tax returns as long as the business is operational. Business owners are faced with the burden of proving that the business has started its operations if the IRS conducts an examination of their tax returns. If they fail to provide sufficient proof, the IRS will classify the business as a hobby and disallow the deductions.

What do you need to do so the IRS will not disqualify your business deductions?  For one thing, you need to establish a profit motive. Under the Internal Revenue Code, a profit motive is presumed if you earned income in any three out of five business years. To show you have an actual and honest profit objective, the following steps should be undertaken:

Step 1 – Incorporate Your Business

Incorporating your business is necessary to separate your personal affairs from your business entity. The incorporation process will also get your business recognized on the state level. You can establish your business as a corporation or a limited liability company by completing the necessary documents required by the Secretary of State’s office in your state. Both entities are good structures for doing business in all 50 states.

Step 2 – Obtain Federal and State Tax ID Numbers

After incorporating your business, it is necessary to obtain a federal tax ID number from the IRS. This procedure is mandatory since the IRS requires every corporation to be identified by its unique number. This number can be obtained by logging onto the IRS website and applying for a Federal Employment Identification Number. After obtaining a federal tax ID number for the business, you must obtain a state tax ID number for the business as well. This is necessary so you can report and pay sales and franchise taxes the business might owe to the state. The proper way to obtain and complete this form varies from state to state. Some states require this document to be completed online while others expect the small business owner to obtain the form from the State’s Department of Revenue website. A small percentage of the states send the form to you once you become incorporated.  

Step 3 – Open a Business Bank Account

To further establish your profit motive, you need to open a bank account in the name of the business.  A large number of banks will generally allow business owners to open small business checking accounts for free. Other banks will charge maintenance and other fees for opening and maintaining the business bank account. Some banks have an overdraft protection attached to your checking account which will be helpful in jumpstarting your business.

Step 4 – Open a Merchant Account

Opening a merchant account with a credit card provider will help put your business on a higher level. The merchant account will enable the business to accept credit cards and provide you with more cash flow thru quick deposits into your checking account. This account will be linked to your checking account and money will be deposited into your checking account through ACH transfers.

Step 5 – Telephone Line and Listing

Obtain a telephone line in the name of the business and have the number listed on major phone directories such as 411 and Super Pages. This will make it easy for potential banks and lenders to find your business. Not only will it play a major role in increasing your business credibility, it also makes your business accessible to people who might be in need of your products and services.

Step 6 – Dun and Bradstreet Number (Duns Number)

Register the business with the major business credit bureau, Dun and Bradstreet. The bureau will provide your business with a unique ID number known as a Duns number.  To allow potential vendors, customers, banks and lenders to review your business, the bureau will provide your company with a credit rating which gives a big boost to your business image. The Duns number is a great way to improve the value of your business and it encourages customers, lenders and other companies to work with your company.

Step 7 – Company Website

The increasing role of the internet in our society today makes it important for your business to establish a strong presence on the Internet. Create a good website and link it to major search engines to allow the public to find your business at the touch of a button. Utilize various social media sites to increase the public’s awareness of your business and its products. This helps legitimize the existence of your company in the eyes of the IRS.

Step 8 – Maintain Good Corporate Records

It is important to maintain good records for your business. The following are some important records that should be updated at all times:

·         Bank Statements

·         Bookkeeping Statements

·         Source Documents

·         Corporate Records

·         Corporate Resolutions

 Make sure you have complete and accurate records of all the transactions of the business so you have the necessary tools needed to defend your profit motive and the deductibility of your business losses in an IRS examination. Maintaining these documents can be tedious but the necessity of these documents to the life of the business can prove to be vital during different cycles of production.

 Step 9: Start Making Money

The day your business opens its doors will also be the day your expenses become fully deductible. You will be able to claim all the expenses ordinary and necessary for the business as soon as it becomes operational. Until then, your expenses are treated as start up or organizational expenses amortized over a fifteen year period under the Internal Revenue Code.

The IRS looks at the manner in which you carry on the activities of the business, your expertise and that of your advisers, the time and effort you expend on the business, your success in carrying on similar or dissimilar activities and your financial status in determining if your intent is to earn a profit. If you are starting a business and you need more information on this, please schedule an appointment with your tax advisor as soon as possible.

Please feel free to contact The Tax Club if you would like to schedule a free consultation at 866-840-1829 x5438

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Family Limited Partnerships 101: The Basics

Thursday, November 5th, 2009

Limited Partnerships have become popular in the last decade due to the real estate bubble that started to grip most parts of the country in the 1970s.  An extension of this limited partnership is the Family Limited Partnership ( FLP).

What is a Family Limited Partnership or FLP?

A Family Limited Partnership is a type of limited partnership formed to hold the family business or investments with the idea that the parents will make gifts of their limited partnership interests to their children. The main characters in an FLP are: a family, a family property and a C-Corporation or other appropriate business entity.

The potential benefits that can be derived from the Family Limited Partnership have pushed this entity from obscurity into being one of the preeminent vehicles for asset protection and estate planning. One of the benefits of forming an FLP is it enables you to spread the tax and risk among your family members. It is also designed to allow you to maintain full control of your family’s investments and assets while reducing the value of your estate for estate tax purposes.

Setting up an FLP

An FLP is formed in the state you live in and also in the state where the property is located. It is a separate legal entity with its own tax identification number. Any income or loss flows through to the partners and is reported on their tax returns. The key provisions for accomplishing tax savings and asset protection are set forth in an FLP agreement based upon your particular circumstances and objectives. Family savings, investments and titles to businesses and real estate interests are transferred into the FLP. If properly structured, these assets are protected from potential claims and lawsuits. In the beginning, the parents own both general partner and limited partner shares. Over time, limited partner shares are gifted to the children by the parents using their respective annual $13,000 gift exclusion. How much of the shares will be issued to each child? That is a typical decision every family must make according to their specific circumstances.

Generally, the spouse with the highest risk should not act as a general partner. The spouse with a relatively low risk will be the general partner operating and managing the FLP. This spouse will have a relatively low share to protect from any potential frivolous liability. Members can also own some percentage as general partners and some percentage as limited partners.

Example: A family of four, with 2 children, and both spouses earning close to $100,000 with some family property holdings. The shares in FLP for this family might look like this – Husband ( assumed to be high risk ) 49 % limited partner, Wife (assumed to be low risk) 2% general partner, Wife’s limited partnership shares 47% , each child can own 1% each as limited partners.

Each year, the spouses can gift a specified percentage to each child (subject to gift tax limitation), thereby diluting their shares gradually in favor of the children. This effectively spreads the income among the family members. The greater the value, income generated by the property and number of family members, the higher the spread or distribution of risk and tax.

Please feel free to contact The Tax Club if you would like to schedule a free consultation on how a Family Limited Partnership may be effective for you. 866-840-1829 x5438

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First-Time Home Buyer Tax Credit Will Be Extended and Expanded Under Senate Plan

Tuesday, November 3rd, 2009

The $8,000 tax credit for first-time home buyers, due to expire Nov. 30, will be extended to April 30, 2010, with borrowers given another 60 days to close the sale under a proposal by Senate Democrats.   In addition, the proposal would let current homeowners who buy a new home qualify for a $6,500 credit if they have lived in their prior residence for five years.

Lawmakers expect to consider the measure as part of a bill to extend unemployment benefits. That measure has been held up by a disagreement with Republicans over other proposed amendments.

Lawmakers have said they want to keep home sales from slipping as the economy struggles to recover from the worst drop in home prices since the Great Depression. The credit would be available to individuals earning up to $125,000, or $250,000 for couples, up from $75,000 for individuals and $150,000 for couples under the current law.

House Democrats are waiting to see the final Senate agreement before deciding whether to support it.

More than 1.2 million borrowers through Oct. 9 have claimed almost $8.5 billion of the $13.6 billion set aside for first- time home buyer tax credits this year, according to U.S. Treasury data.  However, government investigators recently reported that audits suggest widespread abuse and errors in the program.  As of September 30, the IRS has identified 167 possible criminal schemes and opened nearly 107,000 examinations of potential civil violations. Government officials said many suspect claims could turn out to be simple errors but 60% of taxpayers who claimed the credit had incomes below $50,000, suggesting that some people could not afford to purchase a home.

Realtors and mortgage bankers said the credits, which are available for taxpayers who haven’t owned a home in the past three years, have helped stabilize housing sales this year.

“Already we’ve seen the impact of this credit in jump- starting the housing sector,” Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said on the Senate floor. He said it would be a “great mistake” to allow the break to lapse. Dodd estimated that more than 70 percent of current home buyers would be eligible for the break.

As with the “Cash for Clunkers” program, while the tax credit speeds demand for homes from next year to this year, it won’t necessarily increase overall sales, several analysts said. 

Critics contend that by expanding the credit, more people will get involved, but they feel that you are paying people tax dollars to do what they probably would have done anyway.  It is hoped that the credit will continue to fuel the sales of lower-priced homes but if the credit expires, home sales may slow down and have to wait for natural demand to build up again.

Senate Minority Leader Mitch McConnell, a Kentucky Republican, agreed that most lawmakers support the unemployment and home buyer measures. “We’re not that far away from an agreement,” he said.

The Tax Club is committed to educating the public on tax codes.  Please feel free to contact us if you would be interested in a one-on-one consultation at 866-840-1829 x5438

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Nine Facts about the New Car Sales and Excise Tax Deduction

Thursday, October 29th, 2009

Taxpayers who buy new motor vehicles this year may be entitled to a special tax deduction for the sales or excise taxes on those purchases when they file their 2009 federal tax returns next year. This tax break is part of the American Recovery and Reinvestment Act of 2009.

Taxpayers in states that do not have state sales taxes may be entitled to deduct other fees or taxes imposed by the state or local government.

Here are nine important facts that you should know about the new car sales and excise tax deduction:

  1. State and local sales and excise taxes paid on up to $49,500 of the purchase price of each qualifying vehicle are deductible.
  2. Qualified motor vehicles generally include new cars, light trucks, motor homes and motorcycles.
  3. To qualify for the deduction, the new cars, light trucks and motorcycles must weigh 8,500 pounds or less. Motor homes are not subject to the weight limit.
  4. Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.
  5. Taxpayers who purchase new motor vehicles in states that do not have state sales taxes may be entitled to deduct other fees or taxes assessed on the purchase of those vehicles. Fees or taxes that qualify must be based on the vehicles’ sales price or as a per unit fee. These states include Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon.
  6. Taxpayers who purchase qualified motor vehicles may claim the deduction when they file their 2009 tax return in 2010.
  7. The deduction may not be taken on 2008 tax returns.
  8. This deduction can be taken regardless of whether the buyers itemize their deductions or choose the standard deduction. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return.
  9. The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

Please schedule an appointment with your tax advisor for more information on the new car sales and excise tax deduction and other key tax provisions of the Recovery Act.

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Cancellation of Debt

Wednesday, October 7th, 2009

Is Cancellation of Debt Taxable?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances.

When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

 Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.  Certain debts though, such as taxes and student loans, may not be discharged in a bankruptcy proceeding.
  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.  You are insolvent when your total debts are more than the fair market value of your total assets.  The amount by which you are insolvent will be the maximum amount of cancelled debt that will not be considered taxable income.  Insolvency can be fairly complex to determine.
  • Certain farm debts: Taxpayers who are eligible for this relief must have all of the following three qualifications:

1)       Incurred the debt directly in operation of a farm

2)      More than half your income from the prior three years was from farming

3)      The loan was owed to a person or agency regularly engaged in lending,

If you do qualify, your cancelled debt is generally not considered taxable income. The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.

  • Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
  • Home Foreclosure:  The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The amount excluded reduces the taxpayer’s cost basis in the home.  Losses from the sale or foreclosure of personal property, such as a residence, are not tax deductible.

 The Tax Club is committed to helping the public understand tax law and the implications on the individual.  Feel free to contact us for a free tax consultation.  We are here to help.  866-840-1829 x5438

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Tax Deduction for Ponzi Scheme Victims

Monday, October 5th, 2009

Victims of Bernard L Madoff’s huge investment fraud will be able to claim a tax deduction related to the bulk of their losses. Under the plan, investors must claim the loss as having happened in 2008.  Investors who have already filed 2008 returns should file amended returns claiming the theft-loss deduction.  The plan will apply to victims of all Ponzi schemes. 

The I.R.S. plan eases rules governing theft losses, which are deductions claimed by investors who are cheated by their advisers and others in Ponzi schemes and similar frauds.

Current theft loss rules typically allow losses to be carried back three years and forward 20 years, but the I.R.S plan will allow carrybacks of as many as five years, generally if the loss is for a small business with gross annual receipts of less than $15 million.

Under the plan, the I.R.S. will allow investors, including those who are suing Mr. Madoff, to claim a theft loss equal to 95 percent of their investments, minus any withdrawals, reinvested gains and payouts from the Securities Investor Protection Corporation, the government-chartered fund formed to help protect investors in failed brokerage firms. A theft loss from a Ponzi scheme is an ordinary loss and not a capital loss

Investors who are suing third-parties involved in such a scheme, and who, as a result, may have some prospect of recovery, are permitted to claim a deduction equal to 75 percent of their investments.

For people who invested with Mr. Madoff through retirement plans, like 401(k)s and individual retirement plans, the picture is more complicated because such money was already invested on a tax-free basis. Generally, if the investment was deductible when it was made, such investors can’t take a loss.

When computing losses, investors are not permitted to include any taxes they paid on what turned out to be fictitious income. In other words, those taxes can not be added to your basis to increase any loss.  For example, before December 2008, you reported $10,000 of fictitious income and paid $2,000 of income tax on that income.  The $2,000 paid in tax can not be added back to compute your theft loss.

More information is provided in two Revenue Rulings released by the IRS at www.irs.gov; Revenue ruling 2009-9 and, Revenue Procedure 2009-20.

The Tax Club is committed to helping the public understand tax law and the implications on the individual.  Feel free to contact us for a free tax consultation.  We are here to help.

866-840-1829 x5438

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FIRST TIME HOMEBUYER TAX CREDIT:

Tuesday, September 29th, 2009

YOU STILL HAVE TIME TO PURCHASE A HOME and CLAIM YOUR TAX CREDIT!

We’ve all heard of The American Recovery and Reinvestment Act of 2009. But do you know what you could get out it? Specifically, you could be entitled to a refundable credit of up to $8,000! If you’re a first-time homebuyer that purchased a home in that you intend to live in as your principal residence. This credit is scheduled to expire this year, so it is very important you claim your credit! The required timeframe for a qualifying purchase is between January 1, 2009 and December 1, 2009.

If you haven’t purchased your first home yet, there is still time!

TWO MONTHS to be exact! Time is of the essence.

October

 

November

 1

 

December
      1 2 3 4   2 3 4 5 6 7 8     1 2 3 4 5 6
5 6 7 8 9 10 11   9 10 11 12 13 14 15   7 8 9 10 11 12 13
12 13 14 15 16 17 18   16 17 18 19 20 21 22   14 15 16 17 18 19 20
19 20 21 22 23 24 25   23 24 25 26 27 28 29   21 22 23 24 25 26 27
26 27 28 29 30 31     30               28 29 30 31      

 

Rules to Partake in the First Time Homebuyer Tax Credit:

  •      The “first time” homebuyer must not have owned a principle residence during the three year period prior to the purchase. For married couples, this rule applies to both spouses.
  •    Unfortunately, this credit is not designed for everyone. There is a phase-out for the credit for single taxpayers at $75,000 adjusted gross income and $150,000 for taxpayers married filing jointly.

The credit is phased out completely once the adjusted gross income is $20,000 over the limit- meaning the credit is completely phased out for a single taxpayer if his/her adjusted gross income is $95,000.

Calculate Your Tax Credit:

The credit is claimed on Form 5405 on the taxpayer’s 2009 tax return.

The credit is 10% of the purchase price of the property up to a maximum of $8,000.

Example:

  • A $50,000 home will only be entitled to a refundable $5,000 credit.
  • An $800,000 home will only be entitled to an $8,000 credit!

Good News!

For those that can’t wait until next year to get their money, the IRS has allowed taxpayers to amend their 2008 tax return to claim the credit! If this is the route you would like to take, please contact your accountant for more details in amending your return. The sooner you do this, the faster you can get your money!

Don’t Break This Rule!

It is also important to know that the credit is interest free and obligation free, except for one thing. The taxpayer must remain in the primary residence for at least three years before selling the property; otherwise the IRS will seek to have the credit paid back to them.

QUICK SUMMARY: First-time homebuyers may be able to take advantage of a tax credit for homes purchased in 2008 or 2009. The credit:

  • Applies to purchases that close after April 8, 2008, and before Dec. 1, 2009.
  • Applies only to homes used as a taxpayer’s principal residence.
  • Reduces a taxpayer’s tax bill or increases his or her refund, dollar for dollar.
  • Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.

LATEST BUSINESS NEWS:

Expiring Tax Credits for 2009! Claim Them While You Can!

  1. Energy Efficient Home Credit for Homebuilders
  2. Tax incentive to Small Business Employers based on Differential Pay
  3. Section 179 Deduction
  4. Businesses That Donate Food to Charitable Organizations

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Roth or Traditional IRA’s In Today’s Economy

Wednesday, September 23rd, 2009

When the Roth IRA was first introduced, it was expected that only the highest income individuals would contribute to it since their income tax bracket were not expected to decline during retirement.  Unlike a Traditional IRA, there was no current tax savings, but the earnings are tax-exempt, not tax-deferred, as with a Traditional IRA.

But now, with fewer tax brackets, many people find themselves already near the maximum rate and a Roth IRA may become a better deal than a Traditional IRA.  Even if you are currently in a low bracket, or have children in a low tax bracket, contributing to a Roth IRA is a good way to build up their retirement savings on a tax-exempt basis.

It is important to note that Roth IRA contributions are limited for higher incomes. If your income falls in a “phase-out” range you are allowed only a prorated Roth IRA contribution. If your income exceeds the phase-out range, you do not qualify for any Roth IRA contribution. The table below summarizes the income “phase-out” ranges for Roth IRAs.

 

Tax filing status

2009 Income Phase-Out Range

Married filing jointly or Head of household

$166,000 to $176,000

Single

$105,000 to $120,000

Married filing separately

$0 to $10,000

 

There are many calculators on the Internet that model the comparison between contributions to a Traditional and Roth IRAs.

Converting a Roth IRA

If you have a Traditional IRA already, you may want to consider converting that to a Roth IRA.  Why would you do that, since the conversion will be taxable? 

1)      If you are like many people, your IRA may have lost money in the last few years. Converting now may save you taxes in the long term if your account recovers..

2)      Withdrawals of your Roth IRA contributions are penalty and tax-free.  Withdrawal of earnings is also tax free, as long as you meet the rules for minimum holding periods.

3)      There are no required minimum distributions.  Distributions from a Traditional IRA must begin at age 70 ½ and will be taxable.  This will result in increasing the income counted in determining what portion of your Social Security may be taxable.

4)      Your heirs don’t owe income taxes on withdrawals.

5)      For planning your taxes on a yearly basis, having the ability to take tax-free distributions gives you the most flexibility to keep your taxes low.  

The big hurdle in converting to a Roth is your ability to pay the income tax on the conversion.  For the conversion to make financial sense, you will need the ability to pay any tax out of non-IRA assets.  If you have to dip into the IRA to pay the tax, you are reducing the tax-exempt aspect of the conversion.  In that case, you may want to consider converting a smaller amount.

Conversions are not for everyone because in 2009, if your adjusted gross income exceeds $100,000 ( married or single), you can not do a conversion.  But that is changing in 2010 when the income cap is being eliminated.  And, if you do the conversion in 2010, you can report the income in 2010 or you can spread the amount converted equally across your 2011 and 2012 tax return.

There are still a number of hoops you will need to jump through because you can not cherry pick which assets you want to convert.  You have to add all of your IRAs together and allocate any non-deductible contributions to come up with a percent for the total.

Suffice to say that if this is a possibility for you, consult your advisor before taking any steps. 

 

IRA Distributions

With a Traditional IRA, you may begin to receive distributions when you reach age 59 ½, without a penalty, or you can continue to defer distributions until age 70 ½ when you must begin a Required Minimum Distribution (RMD) program.  The amount of the RMD is based on an IRS Life Expectancy table.  Here are distribution percents for selected ages.

 

Age Distribution Percent
70 3.7%
80 5.3%
90 8.8%

 

The RMD for a year must be done by December 31 of that year, based on the account value as of December 31 of the prior year.  There is an exception for the year you reach age 70 ½.  In that year, the withdrawal date is extended to April 1 of the next year.  If you choose to use the April 1 date, you would also need to take a December 31 distribution for that same year, meaning that you would take two distributions in that year.  Depending on your tax situation, there may be some planning opportunities for you.

For 2009 only, the  RMD rules have been suspended. 

If an account owner:

1)      fails to withdraw a RMD,

2)      fails to withdraw the full amount of the RMD, or

3)      fails to withdraw the RMD by the applicable deadline,

the amount not withdrawn is taxed at 50%. The penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.

Please Note: You should contact your tax accountant to discuss your specific financial situation before making any decisions regarding Roth IRA/IRAs.

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How Much Are You Overpaying in Taxes?

Wednesday, September 2nd, 2009

There are many political issues in the news lately that seem to carry a hefty price tag. America is currently involved in two wars, while debating a more socialized healthcare system and pumping billions of dollars into an ailing car industry through the program “cash for clunkers”.  These topics have caused wide concern for the big question, “what’s the cost?”  The image of a wolf at the door resonates with people; how much do we need to feed it before it goes away, or will we run out of food before it does?  What will we have to give up to support these decisions?

This question ultimately comes down to the reader. Each of decision depends on what the government can take out of your paycheck. But ironically, most people intellectually and emotionally involved with these polical issues are very careless about how they manage their own tax returns.  92% of individuals do not know where their tax dollars are going.  For this reason, people needlessly spend more on their taxes than they have to.  Before an informed decision can be made by the taxpayer on  macroeconomic decisions, it is important to understand how taxes affect their own businesses and/or families.  Knowing how to better strategize his or her own taxes can enable the tax payer (and voter) to make decisions on the political candidates that support the real intersts of the voter.

There are 8 tips The Tax Club offers to its clients to better understand their tax situation. Although The Tax Club does not take a stance on the personal politics of its customers, it does its best to enable the client to make the best decisions possible to save money on the existing tax code.  Their motto’s question always makes one think, “How Much Are you Overpaying in Taxes?”

  1. Tax Reform – The current individual tax rates are expiring at the end of 2010 and there are talks that the government might increase the tax rate to as high as 49%. We can discuss the implications of elevated tax rates and how people can start preparing for this.
  2. Business Entities – People always want to know if they should incorporate or just stick to their entity’s disregarded status. We definitely can give a lot of information on this.
  3. Retirement Distributions – Because of the tough times, a lot of people are taking money out of their retirement accounts. We can give information on the tax implications on this.
  4. Ponzi Scams – Because of the recent Madoff scandal, we can give information on whether victims of these elaborate scams can deduct their losses.
  5. Offshore Tax Shelters – The IRS wants to narrow the tax gap and have trained their eyes on the foreign financial interests of the taxpayers. Everybody, including investment banks (UBS is very much in the news because of this) have to disclose information on any financial account in a foreign country if the aggregate value exceeds $10,000 at any time during the calendar year. The IRS has extended the filing deadline of the report from June 30 to Sept. 23. ( We don’t deal with this issue a lot so we may not be able to provide a lot of info on this one.
  6. Cancellation of Debt Issues – Because of the tough economic times, a lot of people want to know if they can exclude their discharged credit card debt or mortgage loans on their principal residence and investment properties.
  7. Homebuyer’s Credit – This expires on Dec. 1st but a lot of people may still be interested in this.
  8. Expiring Small Business Tax Credit and Refund Claims – The provision in ARRA that allows small business owners to carry back up to 5 years (instead of just two) their 2008 NOL will expire on Sept. 15th and the Sec. 179 inflated deduction threshold of $250,000 (instead of the regular $135,000) expires on December 31st.

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