Traditional IRAs

Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2010 is $5,000. For 2010, a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year, making the total limit $6,000 for these individuals. For 2010, the AGI phase-out range for deductibility of IRA contributions is between $56,000 and $66,000 of modified AGI for single persons (including heads of households), and between $89,000 and $109,000 of modified AGI for married filing jointly. Above these ranges, no deduction is allowed.

Spousal IRA

If an individual files a joint return and has less compensation than his or her spouse, the IRA contribution is limited to the lesser of $5,000 for 2010 plus age 50 catch-up contributions, or the total compensation of both spouses reduced by the other spouse’s IRA contributions (traditional and Roth).

Roth IRA

This type of IRA permits nondeductible contributions of up to $5,000 a year. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after the first contribution and the individual has reached age 59¹/₂. Distributions may be made earlier on account of the individual’s disability or death. The maximum contribution is phased out in 2010 for persons with an AGI above certain amounts–$167,000 to $177,000 for married filing jointly.

Roth IRA Conversion Rule

If you have funds in a traditional IRA (including SEPs and SIMPLE IRAs), §401(a) qualified retirement plan, §403(b) tax-sheltered annuity or §457 government plan, it may be advantageous to consider rolling a portion of such into a Roth IRA this year.  A rollover is treated as a taxable distribution, hence, you will pay tax on the amount converted.  However, depending on your current age and projected AGI for 2010, a Roth conversion may provide you significant tax savings.

Beginning in 2010, taxpayers are able to make Roth IRA conversions without regard to their AGI. If you convert to a Roth IRA in 2010, you have the option of spreading the income ratably over two taxable years (2011 and 2012). This opportunity is available only for conversions in 2010. For conversions in 2011, the tax will have to be paid in the year of conversion.

401(k) Contribution

The §401(k) elective deferral limit is $16,500 for 2010. If your §401(k) plan has been amended to allow for catch-up contributions for 2010 and you will be 50 years old by December 31, 2010, you may contribute an additional $5,500 to your §401(k) account, for a total maximum contribution of $22,000 ($16,500 in regular contributions plus $5,500 in catch-up contributions).

SIMPLE Plan Contribution

The SIMPLE plan deferral limit is $11,500 for 2010. If your SIMPLE plan has been amended to allow for catch-up contributions for 2010 and you will be 50 years old by December 31, 2010, you may contribute an additional $2,500.

Catch-Up Contributions for Other Plans

If you will be 50 years old by December 31, 2010, you may contribute an additional $5,500 to your §403(b) plan, SEP or eligible §457 government plan.

Maximize Retirement Savings

In many cases, you are required to set your 2011 retirement contribution levels before January 2011. You may want to increase your contribution to lower your AGI in order to take advantage of some of the tax breaks described above or to avoid future tax rate increases. Maximizing your contribution is generally a good investment move and can provide an array of tax saving opportunities.

Need Help?

If you have further questions or concerns as you make plans to maximize your retirement investment, give our office a call.  We are currently offering complimentary phone consultations for issues concerning retirement investments.

Cuba yesterday announced a new tax code that it claimed was friendlier for small business, as thegovernment struggles to build a larger private sector within the state-run economy.

Hmmm…maybe Castro is trying to capitalize on US’s uncertain tax future…

The issue: 2011 tax-withholding tables. Treasury officials usually release the tables, which determine the take-home pay of millions of wage-earners, by mid-November because it takes payroll processors weeks to adjust their systems before Jan. 1.

But congressional leaders recently postponed voting on taxes until after the election and lawmakers don’t reconvene until Nov. 15. The Senate is scheduled to take up several nontax issues when it returns and is expected to leave for Thanksgiving soon after, possibly pushing a vote on taxes into December.

Wall Street Journal, Delays to Tax Tables May Dent Paychecks, by Laura Saunders:

“Things get very dicey after the first of December” because of employers’ need to know the 2011 rates, said Michael Graetz of Columbia University Law School, a former Treasury official. …

Some Capitol Hill tax staffers have suggested that the Treasury could set 2011 withholding at current levels for joint filers earning less than $250,000 ($200,000 for single filers), on the assumption that Congress seems likely to enact this change. Others have suggested that if Congress doesn’t act in time, Treasury officials might consider a one- or two-month grace period in which it maintains current tables until Congress passes tax legislation.

Treasury officials declined to discuss what they will do if lawmakers don’t come to a quick decision. … Treasury officials’ most obvious option is the least attractive. If they publish tables based on expiration of the Bush tax cuts, which occurs Jan. 1, millions of low- and middle-income taxpayers who have paid little or no income taxes for a decade would likely see increases in January. Prof. Graetz estimates that higher withholding could take up to $10 billion a month out workers’ pockets due to higher tax rates alone.

This IRS screw-up could be costly for the unfortunate taxpayers affected.  When the First-Time Homebuyer’s Tax Credit appeared in 2008, it was structured as 15-year, no interest loan, with the 1st of the 15 installments due at the time of filing the taxpayer’s 2010 tax return.  The Credit in 2009 and 2010, however, does not require repayment unless either the home is sold within 36 months of the purchase date or the home ceases to be the taxpayer’s primary residence.

The problem arises if the IRS recorded a 2008 purchase date for a home purchased in 2009 or 2010.   Accordingly, the IRS will be trying to collect the first installment payment by April 15, 2011 from the 2008 first-time homebuyers–including those with an improper 2008 purchase date.

Finally, here’s a few pointers for those of you who took advantage of the Credit in 2009 or 2010 and receive a deficiency notice from the IRS:

1. Don’t freak out!
2. Contact the IRS immediately.
3. Find out where the tax assessment is coming from (i.e. your 2007 1040).
4. Be prepared to dig up your closing documents to correct the recording date.
5. If you cannot resolve the issue by following the above steps, you may need to contact a tax attorney.

However, I found the article below interesting not only because it challenges the typical arguments against the estate tax, but because it was written by someone whose inheritance was actually diminished by the estate tax.

Tax Mickey's Estate...but don't take away his Magic Kingdom!

USA Today op-ed, Mickey Mouse, the Estate Tax and Me, by Abigail Disney:

[T]he estate tax will automatically be reinstated after a year’s hiatus — in its 2001 form. … In a far stricter tax environment, my grandfather still managed to accumulate and pass on ample funds to make three subsequent generations very comfortable indeed. And as an inheritor I am here to tell you, the estate tax is not as much of a bogeyman as you’ve been led to believe. Let’s start with the facts:

• First, the estate tax is not a double tax. … People like me, who inherit assets such as Disney stock, can spend our lives watching those assets grow, and when we pass them along to our children, they have not been touched or diminished at all by the tax system. The only thing I have paid taxes on is the interest from these assets, not their increased value.
• Second, opponents of the estate tax claim family farms will have to be broken up to pay the tax, but good luck finding an example of this. …
• Third, the estate tax incentivizes people like me to do good with our wealth because there is no estate tax on donations to charity. My filmmaking and foundations rely on a tax code that supports a vigorous non-profit sector, a vital part of our society that is bigger and stronger because of the many millions of dollars that flow into it as a result of the estate tax and other tax provisions.

To those who believe the estate tax is unfair, I say that there is no tax more fair than this one. I recently signed the Call to Preserve the Estate Tax organized by United for a Fair Economy because the estate tax is an expression of our deepest American values: that we live in a meritocracy, not an aristocracy; that every generation is a fresh start; and that we choose to build a society in which wealth and opportunity do not accrue to people simply for being born wealthy. …

The estate tax is the cornerstone of a progressive system that leaves wealthy heirs with ample funds while providing the government with the resources it needs to build an environment for the common good. By preserving it, we not only restore billions in revenue to the national treasury — we also restore our most cherished collective ideals as a nation.

“Tax me” may be the least popular sentence in America, but it’s what I am asking, and I hope that our leaders are listening.

“have you or someone you know taken the drug Acutane… if so, you may be entitled to cash compensation… call 1800-bad-drug…”

So what are the tax consequences of receiving compensation for your damages?

Well, it depends… Some damages and settlement proceeds are tax exempt under IRC § 104(a)(2) while other damage awards or settlement proceeds are fully taxable.

For example, say you sued the brokerage firm that embezzled $200,000 from your account.  The brokerage firm ends up settling and agrees to compensate you $300,000.  Initially, It may appear that you have recovered your original loss of $200,000, plus an additional $100,000 for the hassle and headache of the whole ordeal.  As you can see from the illustration, your bottom line will not look so rosy.

Thus, if you receive compensation from another party by virtue of filing a lawsuit, qualifying as member of a class action, or become entitled to a payout from an existing settlement fund, ask your attorney about the tax consequences.

Here’s a further rundown of the basics, thanks to Law.com:

5 Things Every Plaintiffs Attorney Should Know About Tax Law

While tax law may seem dull and irrelevant to most attorneys’ day-to-day practice, in order to better serve their individual clients, plaintiffs attorneys should always keep the following five basic tax laws in mind, and advise their clients accordingly.

1. Attorney Fees Are Taxable
2. Awards for Personal Physical Injuries Are Exempt From Tax
3. Insurance Proceeds
4. Lump Sum or Structured Settlement Payments
5. Reporting of Awards

Give Momma one more year of jet-setting!

New York Times columnist Paul Krugman famously  dubbed the Bush 2001 tax cuts the “Throw Momma From The Train Act”, because the estate tax was eliminated for just one year—2010. But as 2010 grinds on without a federal estate levy, it’s becoming clear that Krugman got it wrong.  Any Momma who would ride the rails (even the pricey Acela) probably isn’t worth shoving to a grisly demise.  It’s the Mommas flying on their private jets who need to pack parachutes or watch their backs. Without a doubt, the one- year lapse in the federal estate is a boon to heirs of the superrich. (At  least four billionaires, including George Steinbrenner have died so far this year.)  But for ordinary families, it is creating all sorts of grief and unintended consequences and might even cost some of them extra federal tax, to say nothing of lawyers’ bills.

One set of problems relates to wills that were written assuming there would be a tax; provisions  in such documents could inadvertently disinherit children or a spouse, or could subject an estate to unnecessary state estate tax.  (For more on these issues, click here. For a map showing 2010 state estate taxes, click here.)

Another set of problems relates to a trade-off Congress made in the 2001 law: In return for eliminating the estate tax in 2010, it also did away with the full “step-up” in basis for capital assets for 2010. In other years,  the basis cost of a  decedent’s capital assets–stocks, bonds, jewelry, real estate, artwork and so on– gets adjusted to its market value at his death, or six months afterward.  (The executor gets a choice.) Conveniently, that allows heirs  to sell all the property immediately with no capital gains income taxes due. But for those dying in 2010, the step-up in assets going to non-spousal heirs is limited to $1.3 million, with another $3 million in step-up allowed for assets left to a spouse.   This means some heirs of estates worth several million could end up paying more in total federal tax than they would have had their benefactor died in 2009, when all assets got a step-up in basis and the first $3.5 million of an estate going to non-spousal heirs was exempt from estate tax. (Amounts left to a citizen-spouse aren’t subject to estate tax, since Uncle Sam figures to get his when the second spouse dies.)  These moderately well-to-do families get hit with extra capital gains taxes because their benefactor died in 2010 instead of 2009, but they don’t save much or any estate tax, compared to 2009

While an unknown number of families may pay more, a greater number of them are having to shoulder a big paperwork and administrative burden.  Assuming capital assets (including a home and stocks) total more than $1.3 million, family members and executors must locate old records showing what assets were purchased for (if such records even exist) and deal with all sorts of complicated and potentially divisive issues such as which assets, going to which heirs,  get allocated the limited basis step-ups…

Considering the complicated nuances, it might be wise to keep Momma – and her private jet – around for another year.

August 19th marked the “Cost of Government Day” for 2010.  This is the day the average American has earned enough gross income to pay off his or her share of the spending and regulatory burdens imposed by government at the federal, state, and local levels.

Sadly, working Americans toiled 231 days this year just to satisfy government imposed – 8 days later than 2009 and a full 32 days longer than 2008.

We are likely to see one of the following scenarios (or a combination thereof):

1. Congress does nothing and allows the Bush tax cuts to expire (the tax laws from 2001 will reactivate on Jan. 1, 2011);
2. Congress passes legislation to extend ALL of the Bush tax cuts (Congressional Republican’s Position);
3. Congress passes legislation extending SOME of Bush’s tax cuts (Obama’s Plan- extend some of the stimulus measures, place new limitations on itemized deductions and allow the tax cuts benefiting taxpayers making $250,000+ to expire); or
4. Congress passes the legislation recently proposed by Congressional Democrats (similar to Obama’s plan but without extending stimulus measures and with no additional limitations on itemized deductions).

Despite the legislative unpredictability, taxpayers can still stay a step ahead by putting together a game plan for each of the possible tax scenarios above.

So check www.MyTaxBurden.org to see where you stand…however Congress decides to act (or not act).

The NCAA seems to be making an example out of USC’s violations by hitting them with severe sanctions, including revocation of championships, player record statistics, scholarships and essentially removing them from the BCS for the next couple years. With a substantial number of USC’s violations stemming from actions relating to individual players, the IRS is now chasing down former College All-Stars to collect tax on the multitude of gifts they received – complete with penalties, interest.

According to NCAA’s USC Public Infraction Report, Reggie Bush received over $300,000 of “gifts” and “benefits” from various agents.  Which leads us to the question, how can the IRS tax Mr. Bush on these “gifts?”

Generally, a gratuitous transfer of property will not result in tax consequences upon the recipient.   However, the IRS will consider the gift to be income if the recipient provides “consideration” or something of value to the donor of the gift. The problem with Mr. Bush’s situation was that EVERYONE wanted something of value from him…he was the one of the hottest commodities the NFL had seen in a while.

From the IRS’s standpoint, all the luxury gifts, limos, designer clothing, travel accommodations, as well as the rent-free living arrangements provided to him (and his entire family), were taxable items of “Gross Income.” The Internal Revenue Code broadly defines Gross Income as “all income from whatever source derived.”   Considering the items of income arose from events taking place over five years ago, the IRS will likely receive a generous “gift” of penalties and interest in addition to Mr. Bush’s income tax.

Although the extent in which the IRS will benefit from USC’s Sanctions is uncertain, I have no doubt that without stricter institutional governance, we will see the IRS stepping up their game to cash in on the college football fever.