Who should take advantage of the IRA charitable rollover?

October 28, 2011

Last year’s tax law extended the “charitable IRA rollover” rule through the end of 2011. Taxpayers who are 70½ or older may make tax-free distributions of up to $100,000 directly to a charity from their IRA. The rollover fulfills the required minimum distribution (RMD) rule, and the rollover amount is not included in taxable income.

 If you or someone in your family could qualify to make a charitable IRA rollover, should it be considered? Here are some of the situations in which this tax break could be beneficial.

 * You have to take the RMD, but you don’t need the money and you don’t want to pay tax on the distribution.

 * You want to give to charity, but you don’t itemize deductions so any contribution you make would not be tax-deductible.

 * You do itemize deductions, but your charitable contribution deduction would be affected by the 50% / 30% of AGI limit.

 * Having to include your RMD in income would result in the phasing out of other deductions and credits based on adjusted gross income.

 The charitable IRA rollover is a powerful tool for tax planning. But remember, as it now stands, this provision will expire December 31, 2011. Give us a call if you would like to analyze whether this option makes tax sense for you or a family member.

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File by October 17 to avoid penalties

October 25, 2011

Tick-tock. Time is almost up on that six-month extension you filed back in April to give yourself more time to complete your 2010 individual income tax return.

 What happens if you fail to file your return by the extended due date? One consequence: Unless a disaster-relief exception applies or you have a valid reason, you may be charged penalties and interest.

 For example, the penalty for filing your return after October 17, 2011, is 5% of the amount of your unpaid tax, per month, up to a maximum of 25%. After 60 days, a minimum penalty of the smaller of $135 or 100% of the tax due applies.

 In addition, a late payment penalty of ½ of 1% of the tax due may apply for each month or part of a month that you fail to pay the tax due until you reach the full 25%. The two penalties interact and can be combined.

 You’ll also have to pay interest on the tax due. During 2011, the rate on underpayment of tax was 3% in the first quarter, 4% in the second and third quarters, and back to 3% in the fourth quarter. The interest is compounded daily and can be charged on penalties.

 Since the penalty and interest are based on unpaid tax, neither applies when your return shows zero tax due. Filing a return is still a good idea, however. Why? The general rule limiting the IRS to a three-year period for assessing tax begins when you file. No return means no triggering of the statute of limitations.

Give us a call if you think you may miss a deadline. We can help keep penalties to a minimum.

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IRS issues guidance on bonus depreciation

October 21, 2011

Under the “Tax Relief Act of 2010,” you may be able to write off the entire cost of business property placed in service this year, thanks to 100% “bonus depreciation.”

 Prior to this law, a business was able to claim 50% bonus depreciation on qualified new (but not used) property placed in service in 2010. This included property with a cost recovery period of 20 years or less, most computer software, qualified leasehold improvement property, and certain water utility property. Bonus depreciation could be coordinated with Section 179 first-year expensing and regular depreciation deductions (subject to the annual limits).

 The “Tax Relief Act,” signed December 17, 2010, improved and extended the tax benefits. It allows a business to claim 100% bonus depreciation for qualified property placed in service from September 9, 2010, through December 31, 2011 (through 2012 for property with a cost recovery period of ten years or more and certain aircraft and transportation property). As the law currently stands, 50% bonus depreciation can be claimed for qualified property placed in service during 2012.

 The “Tax Relief Act of 2010″ did not change the definition of “qualified property”; it remains the same as it was before.

 Recently, the IRS issued new guidance on using bonus depreciation. It focuses on the following areas:

 * Depreciation step-down. You’re allowed to “step down” from 100% bonus depreciation to 50% bonus depreciation this year if it suits your needs. For example, it may not be advantageous for a business to front-load its depreciation deductions to receive the maximum amount. The IRS guidance spells out the procedure for cutting back to 50% bonus depreciation.

 * Company vehicles. The first-year depreciation deduction for “luxury cars” and other vehicles is enhanced by $8,000 due to the bonus depreciation rules.

 Be aware that certain heavy-duty SUVs and other vehicles weighing more than 6,000 pounds are exempt from the luxury car limits. If purchased after September 8, 2010, and before January 1, 2012, they may qualify for 100% bonus depreciation.

 * Qualified leasehold property. The IRS says that qualified restaurant and retail improvement properties may be eligible for 100% bonus depreciation under the definition of “qualified leasehold property.”

 * Component depreciation. A business may be able to deduct certain components of a business building over a faster cost recovery period than the usual 39-year period required for an entire building. The IRS ruling authorizes an election to use 100% bonus depreciation for qualified components of a self-constructed building.

 Even with the recent IRS guidance, the depreciation rules remain very complicated. For assistance in applying the rules for maximum tax benefit to your business, contact our office.

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Should you undo a Roth to save taxes?

October 18, 2011

Yes, 2010 was the year of the Roth, and you may have converted your traditional IRA to take advantage of the one-time option to postpone recognizing the income. As you know, half of the related tax bill will be due with your 2011 tax return.

 End of story? Not exactly. You can still take advantage of a planning window that may save you money. Under the rules, you have until October 17, 2011, to change your mind about the original conversion.

 The tax term for the “do-over” election is recharacterization. It works like this: Say the value of the assets you converted to a Roth during 2010 has declined. That means if you had waited until now to convert, you would have ended up paying less tax. Reversing your 2010 decision puts you back in the position you were in before the Roth conversion and wipes out your original tax liability.

 Even better, you can still do another traditional-to-Roth IRA conversion after recharacterizing. While the option of splitting the income over future years is no longer available, you can achieve the same effect by reconverting over a multi-year period. Just be aware that time restrictions may apply on this strategy. For details or assistance, give us a call.

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Check out these 2011 numbers

October 14, 2011

This year we had two unusual dates in January: 1/1/11 and 1/11/11. Coming up next month are two more unusual dates: 11/1/11, 11/11/11.

 Another interesting 2011 number: Take the last two digits of the year you were born plus the age you will be this year, and it will be equal to 111.

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IRS drops interest rates for fourth quarter

October 11, 2011

The IRS will pay 1% less on tax overpayments and charge 1% less on tax underpayments during the fourth quarter of 2011. For the calendar quarter beginning October 1, 2011, and ending December 31, 2011, IRS interest rates will be 3% on individual overpayments and 2% on corporate overpayments, 3% on individual and corporate underpayments, 5% on large corporate underpayments, and .5% (1/2 a percent) on corporate overpayments exceeding $10,000.

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Review your 2011 tax payments

October 7, 2011

Don’t let penalties for underpaid taxes increase your tax bill next April. Check the total you’ve paid in for 2011 through withholding and/or estimated taxes. If you’ve underpaid, consider adjusting your withholding for the final pay periods of 2011 or increasing your remaining quarterly estimate. If you employ household workers, be sure your calculations include the payroll taxes you’ll owe for them.

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IRS provides tax relief for disaster victims

October 4, 2011

If you used Form 4868 to request a six-month extension to file your 2010 income tax return, be aware that your return must be filed by October 17, 2011. Generally, the IRS does not provide filing extensions beyond that date; however, victims of recent natural disasters have been given more time to file returns and pay taxes. This tax relief is part of the federal response to recent hurricanes on the East coast, wildfires in Texas, and severe storms and flooding in other parts of the country.

For updates on relief and areas covered, go to “Tax Relief in Disaster Situations” on the IRS website (www.irs.gov).

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