Act now, pay later with a Roth conversion

April 27, 2010

Are you thinking of converting your traditional IRA, SEP IRA, SIMPLE IRA, or other qualifying retirement plan to a Roth IRA this year?

 Depending on your tax bracket and financial situation, acting in 2010 could be a good idea. One reason: For conversions made this year, a change in the law provides a one-time “act now, pay later” option.

 * How it works. You instruct the custodian of your retirement plan assets to convert all or part of your account to a Roth during 2010. Normally, the amount you convert is treated as ordinary income on your 2010 federal income tax return — and you can still choose to report it that way.

 However, for 2010 conversions only, you have another alternative: You can include the conversion income on your 2011 and 2012 returns instead. You will report no income from the conversion on your 2010 return, 50% on your 2011 return, and 50% on your 2012 return.

 * What’s the catch? As you begin your planning, you’ll want to take into account estimated future tax rates. Why? Because you’re deferring the income from the conversion, not the tax on that income. In other words, you’ll pay federal income tax on the conversion in future years at the rates applicable to those years.

 In addition to potential changes in tax law, you’ll need to consider your personal financial outlook. Expected – and unexpected – increases in income may put you in a higher tax bracket.

 The opportunity to defer income is only one of the many factors to keep in mind as you determine whether a Roth conversion makes sense for you. Please call for a review of your options.

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HIRE Act signed into law

April 20, 2010

The “Hiring Incentives to Restore Employment Act” (HIRE Act), signed into law on March 18, 2010, creates two new business-friendly tax breaks that can save you money on your 2010 federal income tax return. The HIRE Act also extends a 2009 break.

 Here’s an overview.

 * Payroll tax forgiveness. The Act provides an exemption for your share of the social security payroll tax when you hire certain qualified workers after February 3, 2010 and before January 1, 2011.

 The break means you can forego paying the 6.2% matching portion of social security taxes on qualifying wages.

 Your new employees must certify that they haven’t worked more than 40 hours during the 60-day period before starting work for you.

 * Retained worker credit. When workers who qualify for payroll tax forgiveness stay on the job 52 weeks, you may be able to claim a credit on your business’s federal income tax return. Credits are applied against the tax you owe. The maximum credit is $1,000 per retained worker.

 * Section 179 extension. The enhanced Section 179 expensing rules are extended through the end of 2010. You can expense up to $250,000 of machinery and equipment you purchase and use in your business, as long as the total cost of the assets you buy does not exceed $800,000.

 The HIRE Act contains other tax provisions that may affect your business. Please call for the latest update.

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Need more time to file your tax return?

April 13, 2010

If you need more time to file your 2009 income tax return, you can get an extension – and no explanation is necessary.

 You may have a very good reason for wanting more time to file your 2009 individual income tax return. For instance, you might want to hold off funding a retirement plan such as a Keogh or SEP until you can save more money. Perhaps you’re waiting for a tax form from a trust, a partnership, or an S Corporation. Or maybe you’ve just been busy.

 It doesn’t matter. Whatever the cause or motivation, you can usually put off filing for up to six months beyond April 15. That means you could have until October 15, 2010, to finalize your return – assuming you follow the rules.

 Here’s what you need to do:

 * Estimate your total tax liability for 2009, subtract what you’ve already paid in withholding or estimated payments, and remit most or all of the balance, and

 * File an extension request form (generally Form 4868 for an individual return) by April 15.

 You can file the extension request form electronically, by phone, or by mailing it to the IRS. If you owe taxes, you can pay with an electronic funds transfer, your credit card, or a check.

 If you live and work outside the United States, you may qualify for an automatic two-month extension of time to file without having to send in a form.

 If you have special circumstances such as military service, or think you might have difficulty paying the tax due with your extension, please contact us. We can help you work through the rules.

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Health care reform becomes law

April 6, 2010

The passage of two bills by Congress provides for massive reform of the country’s health care system. The first bill, the “Patient Protection and Affordable Care Act” (H.R. 3590), was signed by President Obama on March 21, 2010. The companion bill, the “Health Care and Education Reconciliation Act of 2010″ (H.R. 4872), makes several changes to the “Patient Protection Act.” It was signed into law on March 30. Taken together, these two pieces of legislation will have a major impact on the health care industry and on the taxes paid by businesses and individuals.

 Provisions in these laws will go into effect over the next several years, creating an estimated $438 billion in new taxes on employers and individuals. Among the key tax provisions in the health care reform laws:

 * Starting July 1, 2010, a 10% tax will be imposed on indoor tanning services.

 * The tax credit for adoption expenses is increased to $13,170 for 2010, and the credit is extended through 2011.

 * Starting in 2011, the penalty for using health saving account funds for nonqualified expenses increases from 10% to 20%.

 * Starting in 2013, contributions to flexible spending accounts for medical expenses are limited to $2,500. Beginning in 2011, over-the-counter medications generally cannot be purchased with these funds.

 * Starting in 2013, the 7.5% income threshold for deducting unreimbursed medical expenses increases to 10% for those under age 65.

 * Starting in 2013, the payroll Medicare tax, now 1.45% of wages, will increase to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by couples filing jointly.

 * Starting in 2013, a new 3.8% Medicare tax will be imposed on unearned income for single taxpayers with incomes over $200,000 and couples with incomes over $250,000. Unearned income includes interest, dividends, capital gains, rental income, and income from passive activities.

 * Beginning in 2018, insurance companies will be assessed a 40% excise tax on health insurance plans with annual premiums exceeding $10,200 for individuals and $27,500 for families.

 The health reform legislation contains over 2,500 pages. It is estimated to cost $940 billion over ten years, cut the federal deficit $143 billion over ten years, and reduce the number of uninsured individuals by 32 million.

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