Lehrmann & Jackson LLC

Perhaps a better title for this post would be the Cool, the Crummy, and the Questionable. I’ll do my best to be concise.

If you have money invested in a traditional IRA, 401(a) qualified retirement plan, 403(b) tax-sheltered annuity or 457 government plan, and you have wanted to convert that traditional IRA (or any of the abovementioned plans) to a Roth IRA, 2010 might be the best time to do it.

The Cool:

• If the reason you haven’t converted your current retirement arrangement into a Roth IRA is because you make too much money (meaning your AGI exceeds $100,000), Uncle Sam’s going to have mercy on you.  In 2010 the income limit on Roth IRA conversions is repealed, and taxpayers will be able to make Roth IRA conversions without regard to their AGI.    Note: the repeal of income limitations only applies to conversions to a Roth IRA, not new contributions to a Roth IRA.
• If you are contributing to your 401(k), 403(b), or 457 plan with after-tax dollars, in 2010, you can move the nondeductible contributions you’ve made  to a Roth IRA with no tax costs.

The Crummy:

• Conversion to a Roth IRA is still a taxable event.
• If you are wanting to convert a traditional IRA to a Roth IRA, the new rule on after-tax contributions isn’t as lenient on conversions of a traditional IRA to a Roth IRA as it is on 401(k), 403(b), and 457 plan conversions.  When it comes to converting an IRA, the IRS will look at all your non-Roth IRA’s as one, and only the percentage of after-tax contributions to the total of your IRA balances will convert without tax.  I’ll illustrate:
  • Traditional IRA consisting entirely of after-tax contributions has a total value of $100,000 with after-tax contributions of $60,000.
  • SIMPLE IRA consisting entirely of pre-tax contributions has a total value of $50,000 with pre-tax contributions of $40,000.
  • OK… here’s how the calculation works, assuming you want to convert $80,000 to a Roth IRA.

Total After-Tax Contributions / Total Non-Roth IRA Balance

1. 1. $60,000/$150,000 = 40%
   2. 40% x $80,000 = $32,000
   3. $80,000 – $32,000 = $48,000

• • $32,000 of the $80,000 is non-taxable
  • $48,000 of the $80,000 will be added to your taxable income – kind of “crummy”

The Questionable:

• I label this next change “Questionable” because depending on your future circumstances it could help you, or it could hurt you.
• If you are eligible to convert to a Roth IRA in 2010, you will have the option of spreading the “crummy” part of the conversion that gets added to you income, ratably over two taxable years (2011 and 2012).
  • If you stay in the same income tax bracket, or move into a lower bracket in the next two years, splitting this income tax between two years is helpful.
  • If you move into a higher tax bracket then splitting the income tax will hurt you because  you will end up paying more taxes.
  • You do have the option of paying all the income tax in 2010.

That’s all ladies and gents, boys and girls.  Hope you find this information useful, and if you have any questions please do not hesitate to contact me.

Best,
Brandon Lehrmann, CPA

Hello fellow taxpayers-

I wanted to provide some tax tips as we begin the new year. More tax tips can be found on our website in the Tax Center at www.lehrmannjackson.com.

Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

Five Ways to Prepare for Tax Filings

Now that the page has turned on another calendar year, the tax return season is fast approaching. Although you may benefit from having your family’s 2009 returns prepared by an experienced professional, you still must provide the records needed to complete these filings. Logical organization of your records is a critical aspect of this process.

Here are five steps that can simplify things come tax return time. Taking this approach may also help a professional tax return preparer pinpoint various tax-saving opportunities on your personal returns.

1. Keep records of expenses that may be claimed as itemized deductions. Use a spreadsheet or other ledger for this purpose. The list of expenses includes real estate and income taxes, charitable donations, medical and dental expenses, interest expenses, casualty and theft losses, and miscellaneous expenses. Note: If you use a vehicle for business driving, it is important to maintain records of your trips in a contemporaneous diary.

2. Separate “income” items from “expense” items. This can simplify matters significantly when you present your files to a tax return preparer. When possible, develop subcategories for certain expenses. For example, travel and entertainment (T&E) expenses should generally be handled separately due to their extensive substantiation requirements. Note: A business traveler must document the date, amount, business purpose and other details about the expense (depending on the nature of the expenditure). Also, receipts are required for T&E expenses of $75 or more.

3. Coordinate financial statements. For instance, you might use a color-coding system for circling check numbers and other transactions that appear on statements. Another possibility is to use the memo lines or other spaces provided on checks or charge slips. Doing this provides a backup in the event you cannot locate income and expense files or ledgers.

4. Observe any special tax law requirements. For instance, the IRS recently imposed strict substantiation requirements for cash and cash-equivalent donations to charity. In general, filers are required to obtain a written confirmation from the charity or to support deductions through bank statements or receipts. Similarly, you must have access to information about securities to establish your basis for claiming capital gains and losses.

5. Store tax return records in a safe place. The best recordkeeping system in the world will not do you any good if you cannot locate the records when they are needed. Consider keeping valuable documents in a fire-resistant strongbox. Also, you might deposit check registers, credit card statements and the like in a safe deposit box until you are ready to have your return prepared. No matter what kind of recordkeeping system you use, try to stay flexible. It may be necessary to adapt to changes in your personal circumstances, such as buying a home or getting a divorce. How long should you keep your records? The IRS can generally go back up to three years to make adjustments, but this period is extended to six years for a return omitting more than 25% of your income. No limit exists if fraud is involved. Some experts recommend holding on to tax records for at least ten years.

I hope that you found these tips helpful as you begin gathering and organizing you records for this year. Please let us know if there is anyway we can be of service to you.

Regards,

Scot Jackson, CPA

TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us

Albert Einstein said, “The hardest thing in the world to understand is the income tax.”

If Einstein had a difficult time understanding it, perhaps you should consider seeking some help.

Sincerely,

Brandon Lehrmann, CPA