March 2010 Newsletter
For the past few years, we have been warning that electronic processing of tax returns (e-filing) would eventually be the standard. That reality has finally come home to roost in the form of a Congressional mandate.
Congress has added an amendment to the Senate version of the Worker, Home-ownership, and Business Assistance Act
of 2009 requiring tax preparers to electronically file tax returns. This Act, which extended the First Time Homeowner Credit and unemployment benefits, now requires tax preparers to not only e-file individual tax returns, but estate and trust tax returns as well. The mandate takes affect next tax season, 2010.
Thanks to a large majority of our clients, we are well ahead of this mandate. If you are a client who has never elected to have us e-file your returns, this would be a good year to get your feet wet.
Although it is understood that tax preparers are mandated to e-file all returns next year, we will still require a signed authorization form allowing us to do so.
The Tax Season Extensions’ Drill
We put the same information relating to extensions in every March newsletter. It may seem monotonous to see this every year if you’ve never needed an extension, but there is a first time for everything, or so the saying goes.
If you suddenly find yourself in a bind with a need to file an extension, you’ll be glad for the following information:
We can file your federal and state extensions from our office without your signature. Before we can file an extension for you, we will need you to provide to us with the following:
l name, address, and social security number(s) if you are a new client,
or if you need to update our records;
l total federal tax liability;
l federal income tax withheld;
l total state liability;
l state income tax withheld;
l personal check or money order for any additional amounts you’re paying made payable to the U.S. Treasury and/or your state.
Once an extension is filed, you automatically have until October 15th to file your return. Remember, an extension only extends the time to file, not the time to pay additional taxes owed, and it does not increase your chances of being audited.
Payments made after April 15th are always subject to late payment penalties and interest even if a timely extension is filed. If you believe an extension is necessary, we need to hear from you well before the 8th of April.
In Closing
We hope everyone receives a very small refund this year. If you do, then you have been making sure you have kept as much money in your hands over the year as possible rather than waiting for the government to give it back to you. The IRS actually prefers it this way as well.
If you need help ensuring you receive small refunds each year, make an appointment to meet with us. We can make that happen.
Developments Involving Foreign Accounts and Investments
There are a number of new developments involving individuals’ foreign accounts and investments. For instance:
The Treasury Department placed new emphasis on foreign account reporting this year, Form TDF 90-22.1. The penalty for failure to file is significant.
In IRS Notice 2009-62, the IRS has extended the due date for filing Form TDF 90-22., Report of Foreign Bank and Financial Accounts (FBAR), in certain situations. Taxpayers with only signature authority over foreign accounts and taxpayers with foreign hedge funds or private equity accounts had until June 30, 2010 to report accounts maintained in 2008 and earlier years.
Also, in June, IRS officials indicated that investments in foreign hedge funds and private equity funds had to be reported, an announcement that caught many by surprise. The IRS’s latest action indicates that the agency recognizes there are additional issues involving the filing requirements. Future regulations could exempt foreign hedge fund and private equity accounts from the reporting requirement or could create some exceptions.
A U.S. person must report an overseas bank account to the IRS (even an account with no income) if:
The U.S. person has a financial interest in, or signature or other authority over, one or more accounts in a foreign country; and
The value of the account (or of multiple accounts collectively) exceeds $10,000 at any time during the calendar year.
Accounts must be reported every year. The most recent returns are due June 30, 2010, based on an account’s
status in 2009.
An account includes an account with a bank or financial institution. It also includes an account holding securities, derivatives, or other financial instruments. The account’s value is the value that appears on a statement issued quarterly or more often. If there are no periodic statements, the value is the largest amount at any time during the year.
Earlier this year, the IRS provided filing relief to two groups:
Taxpayers who had “recently learned” that they had FBAR filing obligations for years prior to 2009; and
Taxpayers who had “recently learned” that they had a current FBAR filing requirement for 2009 but did not have sufficient time to properly file by the June 30th due date.
For both groups, the IRS announced that taxpayers who had reported and paid tax on all their taxable income for the applicable year(s) could file delinquent FBARs with a statement explaining why the reports are late. The FBARs had to be filed by September 23, 2009. In both situations, the IRS stated that it would not impose a failure-to-file penalty regarding the FBAR.
New 2010 Rollover Opportunity
There is an interesting new rollover opportunity that takes effect on January 1, 2010. You are now able to roll over amounts in qualified employer sponsored retirement plan accounts such as 401(k)s
and profit sharing plans, and regular IRAs,
into Roth IRAs, regardless of your adjusted gross income (AGI). Currently, individuals with more than $100,000 of adjusted gross income as specially modified are barred from making such rollovers.
What’s so attractive about a Roth IRA? Here’s a summary:
Earnings within the account are tax-sheltered (as they are with a regular qualified employer plan or IRA).
Unlike a regular qualified employer plan or IRA, withdrawals from a Roth IRA aren’t taxed if some relatively liberal conditions are satisfied.
A Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) after he or she reaches age 70 ½ as is generally the case with regular qualified employer plans or IRAs. (For 2009, there’s a moratorium on RMDs.)
Beneficiaries of Roth IRAs also enjoy tax-sheltered earnings (as with a regular qualified employer plan or IRA) and tax-free withdrawals (unlike with a regular qualified employer plan or IRA). They do, however, have to commence regular withdrawals from a Roth IRA after the account owner dies.
The catch, and it’s a big one, is that the rollover will be fully taxed, assuming the rollover is being made with pre-tax dollars (money that was deductible when contributed to an IRA, or money that wasn’t taxed to an employee when contributed to the qualified employer sponsored retirement plan) and the earnings on those pre-tax dollars. For example, if you are in the 28% federal tax bracket and roll over $100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA, you’ll owe $28,000 of tax. So you’ll be paying tax now for the future privilege of tax-free withdrawals, and freedom from the RMD rules.
Should you consider making the rollover to a Roth IRA? The answer may be “yes” if:
You can pay the tax hit on the rollover with non-retirement-plan funds. Keep in mind that if you use retirement plan funds to pay the tax on the rollover, you’ll have less money building up tax-free within the account.
You anticipate paying taxes at a higher tax rate in the future than you are paying now. Many observers believe that tax rates for upper middle income and high income individuals will trend higher in future years.
You have a number of years to go before you might have to tap into the Roth IRA. This will give you a chance to recoup (via tax-deferred earnings and tax-deferred payouts) the tax hit you absorb on the rollover.
You are willing to pay a tax price now for the opportunity to pass on a source of tax-free income to your beneficiaries.
You also should know that Roth rollovers made in 2010 represent a novel tax deferral opportunity and a novel choice. If you make a rollover to a Roth IRA in 2010, the tax that you’ll owe as a result of the rollover will be payable half in 2011 and half in 2012, unless you elect to pay the entire tax bill in 2010.
Why on earth would you choose to pay a tax bill in 2010 instead of deferring it to 2011 and 2012? Keep in mind that absent Congressional action, after 2010 the tax brackets above the 15% bracket will revert to their higher pre-2001 levels. That means the top four brackets will be 39.6%, 36%, 31%, and 28%, instead of the current top four brackets of 35%, 33%, 28%, and 25%.
The Administration has proposed to increase taxes only for those making $250,000, but it is difficult to predict who will get hit by higher rates. So if you believe there’s a strong chance your tax rates will go up after 2010, you may want to consider paying the tax on the Roth rollover in 2010.
Here are three ways individuals can prepare now for this rollover opportunity.
(1) Non-high-income individuals who are able to make deductible IRA contributions this year should do so. They’ll reduce their 2009 tax bill and, if they make the conversion to Roth IRA next year, they won’t have to pay back the tax savings until 2011 and 2012.
(2) Individuals who have never opened a traditional IRA because they weren’t able to make deductible contributions (and who never rolled over pre-tax dollars to a regular IRA) should consider opening such an IRA this year and making the biggest allowable nondeductible contribution they can afford. If they convert the traditional IRA to a Roth IRA next year they will have to include in gross income only that part of the amount converted that is attributable to income earned after the IRA was opened, presumably a small amount. In 2010 and later years, they could continue to make nondeductible contributions to a traditional IRA and then roll the contributed amount over into a Roth IRA. However, if an individual previously made deductible IRA contributions, or rolled over qualified plan funds to an IRA, complex rules determine the taxable amount.
(3) Some high-income individuals may plan to make large conversions in 2010 but to opt out of the deferral of tax until 2011 and 2012 because they fear they will be in a higher tax bracket in those years than in 2010. These individuals should avoid the standard year-end-planning wisdom of accelerating deductions and deferring income but should, rather, do the reverse in an effort to avoid being pushed into the highest brackets by a large IRA-to-Roth-IRA conversion in 2010. These individuals should be considering ways to defer deductions to 2010, and accelerate income from next year into 2009.
Meet with us to discuss your and your family’s entire financial situation before you plan for a large rollover to a Roth IRA after 2009. There are many details to go over, such as whether the amounts you are thinking of switching to a Roth IRA are eligible for the rollover (technically, they are called “eligible rollover distributions”), whether you can make rollovers from your employer sponsored plan (for example, there are restrictions on rollovers from 401(k) plans), and the tax impact of rolling over amounts that represent nondeductible as well as deductible contributions.
We look forward to helping you protect and enhance your retirement funds.
Social Security Wage Base Unchanged for 2010
The Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) in 2010 remains unchanged at $106,800.
Observation: There was an increase in average wages. Normally, this would cause the wage base to increase. However, with consumer prices down over the past year, monthly Social Security and Supplemental Security Income benefits for more than fifty-seven million Americans will not automatically increase in 2010. This will be the first year without an automatic Cost-of-Living Adjustment (COLA) since they went into effect in 1975. Since there is no COLA, the statute prohibits an increase in the maximum amount of earnings subject to the Social Security tax as well as the retirement earnings test exempt amounts.
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).
The FICA tax rate for employees and employers is 7.65% each—6.2% for OASDI and 1.45% for HI. For self-employed workers, the FICA tax is 15.3%—12.4% for OASDI and 2.9% for HI. There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.
Illustration: On a salary of $106,800 (or more), an employee and his employer each will pay $6,621.60 in Social Security tax in 2010, the same as in 2009.
Illustration: A self-employed person with at least $106,800 in net self-employment earnings will pay $13,243.20 for the Social Security part of the self-employment tax in 2010, the same as in 2009.
Observation: Self-employed workers deduct half of their self-employment tax above-the-line in arriving at adjusted gross income.
Observation: The FICA tax rates have remained unchanged since 1990.
Retirement Plan Limits for 2010
IRS has announced the 2010 cost-of-living adjustments (COLAs) for retirement plans. The many limits related to pension, and other retirement plans, which are adjusted by reference to Code Sec. 415(d), are unchanged for 2010, since the cost-of-living index for the quarter ended September 30, 2009 is actually less than the cost-of-living index for the quarter ended September 30, 2008.
The following plan limits remain unchanged effective January 1, 2010:
Defined benefit plans. The limitation on the annual benefit under a defined benefit plan is $195,000.
Defined contribution plans. (401-k, Profit-sharing, etc.) The limit on the annual additions to a participant’s defined contribution account is $49,000.
Annual compensation limit. The maximum amount of annual compensation that can be taken into account for various qualified plan purposes is $245,000.
Elective deferrals. The exclusion for elective deferrals described in is $16,500.
Deferred compensation plans. The limit on deferrals concerning deferred compensation plans of state and local governments and tax-exempt organizations is $16,500.
SEPs. The compensation limit (amount of compensation above which an employee who meets other requirements must be able to participate in the employer’s SEP plan) is $550.
SIMPLE accounts. The maximum amount of compensation an employee may elect to defer under for a SIMPLE plan
is $11,500.
Catch-up contributions. (401-k)The dollar limit under for catch-up contributions for individuals aged fifty or over is $5,500. The dollar limit under Code Sec. 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Code Sec. 401(k)(11) or Code Sec. 408(p) for individuals aged fifty or over is $2,500.
March
10th: last day to schedule an appointment to meet with a staff member on or before March 19th;
15th: corporate tax returns due;
19th: last day of appointments until after April 20th;
20th: tax information and Client Organizers must be in our office by March 20th in order for us to guarantee your return will be completed and ready to mail by April 15th.
April
8th: last day to call us with your tax extension information;
15th: tax returns must be picked up by noon; last day to file your return and 1st quarter 2009 estimated tax payment, or to fund your IRA or other retirement plan.
16th: office is closed on Friday the 16th and will reopen for business as usual the following Monday.
Elvis’ Corner
The newest rollover opportunity Dave talks about on page 2 is good stuff. However, being halfway through tax season and looking for an end to this cold weather, the only rollovers I’m interested in are the ones I make while lying in a sunny location. They aren’t complicated and I don’t need help with them...yet.
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