The Roth IRA has been around for more than a decade. For 2010 and later, Congress removed the income and filing status restrictions on conversions to Roth IRAs. This caused a flurry of interest in Roth IRAs and their tax advantages.
The current tax law prevents higher income people from depositing directly into a Roth account (for example, married taxpayers with AGI [Adjusted Gross Income] over $167,000 to $177,000 for 2010). However, with the income restriction on conversions lifted, taxpayers of all earned income levels, and regardless of what type of retirement plans they have at work, can deposit, or contribute, funds into a non-deductible IRA (contributions are not deducted from income). The funds can then be converted to a Roth IRA. This strategy has caused a lot of buzz about Roth IRAs, since they are now open to almost everyone.
Traditionally, tax advisors have told their clients that it is better to take the deduction today and recognize the income later. However, as the tax laws change, this advice may not apply to your situation. With concerns about the overall economy, sluggish investment returns, lower retirement account values and potential future increases in tax rates, the time could be right to recognize income today with the thought of having tax savings in the future.
Roth accounts can offer a great tax savings in the right circumstances. Withdrawals from Roth IRA accounts are tax free if you follow the rules to make it a penalty-free, or qualified, withdrawal. Unlike the other retirement accounts, interest, dividends and the appreciation in account value are never taxed. Withdrawals are considered to be qualified withdrawals if the account owner is over 59 ½, the five-year waiting period since the account was established has passed or the withdrawal is a result of death, disability or used in the qualified purchase of a new home. There are also special provisions that allow the owner to withdraw their contributions, but not the earnings, without meeting the requirements above. However, you should seek advice before withdrawing funds for other than qualified reasons to avoid the 10% early withdrawal penalty.
Roth accounts do not require distributions (required minimum distributions or RMD) when the account holder reaches 70 ½. This allows the account to grow tax free until the funds are needed. The account holder can also pass the account to his or her heirs. In fact, people over 70 1/2 that have earned income, and meet the other requirements, can contribute directly to a Roth IRA. This is not possible with a traditional IRA.
As new developments emerge it’s important that people look at all the options and seek professional advice before converting to a Roth IRA. For example, with the signing of the Small Business Job Act in September 2010, some employers will begin offering a Roth 401(k) option. This adds another layer of complexity to an already difficult decision.
In Part II of this series, I will review why you might want to convert from a traditional IRA to a Roth IRA.
Everyone's situation is different. Get help from a trained CPA when you have questions.
--- Donna Boyette, CPA, Senior Accountant
Sunday, February 27, 2011
Saturday, February 12, 2011
Why You Might Not Want To Rush To File For Your Refund
You have your W-2, your tax deductions are all identified and you are hoping that a big refund is in your future. You rush to your tax preparer or your computer. Not so fast! Depending on your situation, filing your return early this year might cost you money. Why? Late year tax law changes.
Congress was so late in enacting some new tax laws that the IRS and state governments are working hard to catch up. The Jobs Act of 2010 (signed into law 9/27/10) and the Tax Relief Act of 2010 (signed into law 12/17/10) have several changes effective for 2010 that could affect millions of taxpayers. This caused delays in the IRS finalizing their forms and caused software companies to make last minute changes to their software.
The good news is that most software companies have completed their program changes. Check your software to make sure it is up to date before filing your return. According to their website, the IRS will be able to start processing the returns affected by the new law on February 14.
The bad news is that the NC General Assembly, as of press time, had not accepted the Jobs Act of 2010 or the Tax Relief Act of 2010. Since North Carolina returns start with your Federal income, you may get the benefit of the new laws on your federal return, but not on your state return.
There is hope! As of February 7, the General Assembly was still in session. They may still vote to accept these new federal tax laws for North Carolina tax purpose. It may be worth waiting to file your return to find out. But don’t wait too late! You need to file your return, or file an extension, by April 18, 2011.
Everyone's situation is different. Get help from a CPA when you have questions.
--- Donna Boyette, CPA, Senior Accountant
Congress was so late in enacting some new tax laws that the IRS and state governments are working hard to catch up. The Jobs Act of 2010 (signed into law 9/27/10) and the Tax Relief Act of 2010 (signed into law 12/17/10) have several changes effective for 2010 that could affect millions of taxpayers. This caused delays in the IRS finalizing their forms and caused software companies to make last minute changes to their software.
The good news is that most software companies have completed their program changes. Check your software to make sure it is up to date before filing your return. According to their website, the IRS will be able to start processing the returns affected by the new law on February 14.
The bad news is that the NC General Assembly, as of press time, had not accepted the Jobs Act of 2010 or the Tax Relief Act of 2010. Since North Carolina returns start with your Federal income, you may get the benefit of the new laws on your federal return, but not on your state return.
There is hope! As of February 7, the General Assembly was still in session. They may still vote to accept these new federal tax laws for North Carolina tax purpose. It may be worth waiting to file your return to find out. But don’t wait too late! You need to file your return, or file an extension, by April 18, 2011.
Everyone's situation is different. Get help from a CPA when you have questions.
--- Donna Boyette, CPA, Senior Accountant
Labels:
NC Income Tax
NC Accepts the April 18 Deadline, but It's Not That Simple
It’s official. The IRS has given everyone an extra weekend to file your taxes this year. Returns normally due on April 15, 2011 will now be due on April 18, 2011. The reason? The District of Columbia’s Emancipation Day holiday will be observed on April 15 this year.
On their website, the NC Department of Revenue announced on February 1 that they will follow the federal due date for certain returns. Sounds simple? Not quite. The State has extended the deadline for some returns and payments, but not all. The following are listed on their website as due April 18, 2011:
• 2010 State individual income tax returns, whether filed electronically or on paper
• First quarter 2011 individual estimated income tax payments - this is a change from an earlier announcement in January
• Partnerships
• Estates and Trusts
• Applications for extension for any of the above tax forms
North Carolina returns for calendar year corporations and certain fiscal year corporations are still due April 15, 2011. There is no change in the filing date. Corporate first quarter estimates originally due April 15 are still due April 15 as well. Don’t let the extra weekend confuse you. Mail those corporate returns on or before April 15 to avoid penalties.
Everyone's situation is different. Get help from a CPA when you have questions.
--- Donna Boyette, CPA, Senior Accountant
On their website, the NC Department of Revenue announced on February 1 that they will follow the federal due date for certain returns. Sounds simple? Not quite. The State has extended the deadline for some returns and payments, but not all. The following are listed on their website as due April 18, 2011:
• 2010 State individual income tax returns, whether filed electronically or on paper
• First quarter 2011 individual estimated income tax payments - this is a change from an earlier announcement in January
• Partnerships
• Estates and Trusts
• Applications for extension for any of the above tax forms
North Carolina returns for calendar year corporations and certain fiscal year corporations are still due April 15, 2011. There is no change in the filing date. Corporate first quarter estimates originally due April 15 are still due April 15 as well. Don’t let the extra weekend confuse you. Mail those corporate returns on or before April 15 to avoid penalties.
Everyone's situation is different. Get help from a CPA when you have questions.
--- Donna Boyette, CPA, Senior Accountant
Labels:
NC Income Tax
A Tax Benefit for Those That Depend on You
In case it wasn't difficult enough to raise a child or care for an aging family member, you have to navigate a maze of exceptions in the US tax code to figure out if you can claim someone as a dependent. Terms like "qualifying child" and "qualifying relative" are enough to make anyone's head spin.
There are some general factors listed in the tax code to consider when determining if you can claim someone on your income taxes. The person may be a qualifying child if they meet all six of the following criteria:
• Citizenship - The person must be a citizen, national, or resident of the US, Canada or Mexico.
• Relationship - The person is a child, brother, sister or is their descendent (grandchild, niece, nephew, etc.).
• Age - The person must be under age 19 at the end of the year, under age 24 at the end of the year and a full-time student, or any age and "totally and permanently disabled".
• Principal Place of Abode - The person must live with you for more than half the year. There are special exemptions that apply for separated and divorced parents.
• Support - You must have provided more than 50% of their support for the year.
• The person cannot file a Joint Return with someone else, with few exceptions
Do you support someone that doesn't meet all of these criteria? That person may be your qualifying relative instead if they meet all five of these criteria:
• Citizenship – same as for qualifying child
• Relationship - The qualifying child rules are expanded to include parents, grandparents, uncles, aunts, in-laws and members of your household for the entire year.
• Income - The person's gross income (before deductions) must be less than $3,650 in 2010.
• Support – same as for qualifying child
• Not a Qualifying Child of you or anyone else
Most importantly, a person can only be a dependent on one person's tax return. If you and your ex-spouse both claim your child, you could get a letter from the IRS or your electronically filed return will be rejected. Same goes if your married child or college-age child claims himself.
Everyone's situation is different. Get help from a CPA when you have questions.
--- Donna Boyette, CPA, Senior Accountant
There are some general factors listed in the tax code to consider when determining if you can claim someone on your income taxes. The person may be a qualifying child if they meet all six of the following criteria:
• Citizenship - The person must be a citizen, national, or resident of the US, Canada or Mexico.
• Relationship - The person is a child, brother, sister or is their descendent (grandchild, niece, nephew, etc.).
• Age - The person must be under age 19 at the end of the year, under age 24 at the end of the year and a full-time student, or any age and "totally and permanently disabled".
• Principal Place of Abode - The person must live with you for more than half the year. There are special exemptions that apply for separated and divorced parents.
• Support - You must have provided more than 50% of their support for the year.
• The person cannot file a Joint Return with someone else, with few exceptions
Do you support someone that doesn't meet all of these criteria? That person may be your qualifying relative instead if they meet all five of these criteria:
• Citizenship – same as for qualifying child
• Relationship - The qualifying child rules are expanded to include parents, grandparents, uncles, aunts, in-laws and members of your household for the entire year.
• Income - The person's gross income (before deductions) must be less than $3,650 in 2010.
• Support – same as for qualifying child
• Not a Qualifying Child of you or anyone else
Most importantly, a person can only be a dependent on one person's tax return. If you and your ex-spouse both claim your child, you could get a letter from the IRS or your electronically filed return will be rejected. Same goes if your married child or college-age child claims himself.
Everyone's situation is different. Get help from a CPA when you have questions.
--- Donna Boyette, CPA, Senior Accountant
Labels:
Federal Income Taxes
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