IRA to Roth Conversion

Now that 2010 is upon us, a significant opportunity is available for individuals. Taxpayers can now to convert a traditional IRA to a Roth IRA, regardless of income level or filing status. This is an exceptional opportunity for many. Here is how it is going to work and what the implications are.

First, here are some basics on a Roth IRA. The Roth IRA contribution is not deductible for tax purposes, so assuming certain age and holding period requirements are met, it is not taxable upon withdrawal. Also, there are no required distributions at any age, so unlike a regular IRA you are not required to begin taking distributions when you turn 70½. At death, there really are no differences as both are still taxed in your estate and a beneficiary has the same distribution requirements from either the Roth or the regular IRA.

Now, let’s look at the conversion of the regular IRA to the Roth. Any part, or all, of your IRA can be converted to a Roth; it doesn’t have to be an all or none situation. However, the conversion does create taxable income which is taxed as ordinary income at your regular marginal rate. Effectively, this accelerates the taxable income that you would eventually have begun once you were 70½ and were required to take distributions from your IRA. However, it does cap the amount you will have to pay tax on. This is significant.

Congress did provide different options to pay the tax on the conversion. You can either pay all of the tax in 2010 or you can average it over 2011 and 2012. However, you will be subject to the applicable income tax rates in 2011 and 2012 so you must consider what effect the applicable tax rates will have on your conversion income. For planning purposes, it may make sense to wait until October of 2011 to file your 2010 tax return. By that time the tax rates for 2011 and 2012 should be published. Then you can decide which year to include the income.

Why would you want to convert to the Roth and pay the tax early? There are many reasons that make this a very important opportunity. Once you meet certain holding period requirements a Roth distribution is tax free, so all earnings and appreciation after the conversion are free from tax. For example, assume that you have a $100,000 IRA that you convert to a Roth. You pay the tax at conversion on the $100,000 (probably $28,000 to $35,000 in tax). If you keep the account for 20 years and let it continue to grow tax free it will be worth about $466,000, assuming an 8% growth rate. However, the tax paid up front would have been worth about $95,000 after 20 years. Effectively, you would have $370,000 net. The additional growth of $366,000 will not be subject to tax and the full balance will be free from tax. That is quite a bargain! Of course, the higher the growth rate on the retirement account, the more benefit there is in converting. Assuming a 15% return, the value of the account in 20 years would be $1,636,000, which means you would receive $1,536,000 tax free. The longer the time horizon, the greater the benefit would be to your family.

Because the Roth does not have the required minimum distribution requirements that a regular IRA does, you will not be required to begin taking distributions from the Roth when you turn 70½ . This will allow the account to continue to grow tax free. This is particularly important for those who do not need the retirement account to live on. You can let it continue to grow tax free and have a tremendous impact on the amount of money you are passing on to your family.

Converting from a traditional IRA to a Roth IRA should be strongly considered in 2010. Advance planning and strategizing should be on your agenda. Contact us and we will assist you in determining if an IRA conversion makes sense for your financial plan.

Coming to Work In The US? You May Need an ITIN

Do You Need an Individual Taxpayer Identification Number (ITIN)

The ITIN is a nine-digit number issued by the IRS to individuals who are required to have a U.S. taxpayer identification number for tax purposes but who do not have and are not eligible to obtain a social security number. The ITIN is for federal tax purposes only. It does not entitle the holder to social security benefits or change an immigration status or the right to work in the U.S. ITINs are issued regardless of immigration status because both resident and nonresident aliens may have U.S. tax filing responsibilities. An ITIN is needed when a nonresident alien wants to claim the benefit of a reduced withholding rate under an income tax treaty. An alien spouse or dependent eligible to be claimed as an exemption on a U.S. tax return but who is otherwise not eligible for a social security number needs an ITIN.

Before you apply for an ITIN, you must first make an application for a social security number, Form SS-5, and receive a rejection notice that you are not eligible for a social security number. Once you receive the rejection you must apply for an ITIN on Form W-7 and attach a copy of the rejection letter. Form W-7 also requires original, notarized or certified proof of identity documents. There are very specific requirements for completing Form W-7. An incorrect application may lead to a rejection. If you qualify for an ITIN and your application is complete then it can take anywhere from 6 – 10 weeks to receive an ITIN. Applications mailed from abroad may take longer. Let us know if we can assist you with your ITIN application

Changes to Electronic Filing Requirements

Are You Required to Pay and File Your Business Tax Returns Electronically? New requirements affect many more businesses

Since July 1, 2006, all businesses submitting sales tax returns or withholding returns where the tax amount exceeds $5,000 have been required to submit those returns electronically.  Effective January 1, 2010, the threshold drops to $1,000 and effective January 1, 2011, the threshold drops to $500. In addition, any taxpayer required to submit returns electronically who fails to do so and does not have written exemption from the Georgia Department of Revenue will be subject to a 5% penalty plus loss of the Vendor’s Compensation.

Stephan Strothenke Presents Doing Business in Germany

Stephan Strothenke, who is working at HLB Gross Collins, P.C. as part of an international exchange, presented “Doing Business in Germany” during a firm Lunch and Learn session. This is one of the many ways that we will benefit from participation in this exchange, as he shared insights and knowledge of the German tax system, business operations and regulations. Topics discussed included:

  • Immigration and Employment Regulations
  • Social Security mandatory contributions
  • Germany after the election
  • Tax agenda of the new Government
  • Types of business organizations
  • Taxation of business profits
  • Corporation and trade tax
  • Transfer pricing
  • VAT system in EU

Stephan joins us for 4 months from our HLB affiliate firm in Germany, Dr. Stuckman and Partner.  For additional information about German business operations, please contact HLB Gross Collins, P.C. You can find out more about Stephan and our participation in the international exchange by clicking here.

Accelerated Deduction Option for Haiti Relief Contributions

Haunting images of destruction and moving stories of rescue have encouraged Americans to give generously to help their neighbors in Haiti recover from the January 12, 2010 earthquake. To encourage donations to charitable organizations working in Haiti, Congress recently passed, and President Obama signed into law, a special measure making your monetary contributions tax deductible in 2009 even though they are made in early 2010. The new law gives you flexibility in deciding when to claim a deduction for your early contributions.

Accelerated deduction
Typically, if you file an itemized individual federal return and you want to deduct your charitable contributions, you can only deduct the contributions you made in that tax year. The earthquake hit Haiti on January 12, 2010. Under the normal rules, charitable contributions made to help Haiti would be deductible when taxpayers file their 2010 returns in 2011. The new law makes a special and temporary exception for Haiti relief.

Under the new law, you can treat a contribution made to help Haiti after January 11, 2010 and before March 1, 2010 as if made on December 31, 2009. You can decide whether to deduct your 2010 Haiti contribution on your 2009 return or on your 2010 return. However, you cannot deduct the same Haiti contribution on both your 2009 and 2010 returns. You can, however, allocate multiple donations to more than one year. Of course, to take a charitable deduction of any kind, you must opt to itemize your deductions rather than take the standard deduction.

Monetary donations
Your contribution must be monetary to qualify under the new law. You can donate cash or make a donation by check or credit card. Property that is convertible into cash, such as marketable securities, however, is not eligible for this special treatment. Similarly, food and other items of property do not qualify for the accelerated deduction.

Currently, most charities are requesting monetary donations to help the earthquake victims. They use the funds to purchase relief items, such as food, medical supplies and emergency housing. If you want to make a non-cash contribution, make sure the charity will accept it. You’ll also want to contact our office and we can explain the appropriate tax treatment. Non-cash contributions are subject to special rules. For example, donations of food must be used only for the care of the ill, needy, or infants.

Limitations on deductions
The tax law imposes a 50 percent limit on the total of all charitable contributions you make during the year. Your deduction cannot be more than 50 percent of your adjusted gross income (AGI) for the year. You can carry over any contributions you are not able to deduct for one year because of the limit. The new law does not raise or remove the 50 percent limit for 2009 or 2010. There are other special limits, for example limits on gifts of capital gain property and qualified conservation contributions. Please contact our office and we can discuss these limits in more detail.

Another provision in the tax law limits certain itemized deductions, including contributions to charity, for higher income individuals. For 2009, the limitation is reduced by two-thirds. For 2010, the limitation is reduced to zero but this treatment is only available for 2010. Depending on your income and tax strategy, you may find it more valuable to deduct your contributions to Haiti earthquake relief when you file your 2010 return in 2011 rather than taking the deduction on your 2009 return filed in 2010.

Qualified charities
Contributions to domestic, tax-exempt, charitable organizations that provide assistance to individuals in foreign lands generally qualify as tax-deductible contributions for federal income tax purposes, provided that the U.S. organization has full control and discretion over the uses of such funds. Contributions to foreign organizations generally are not deductible. Additionally, contributions to benefit specific individuals or families are also not deductible.

For purposes of the accelerated deduction, contributions must be made specifically for relief of victims in areas affected by the January 12 earthquake. You should ensure that your contribution goes to a qualified charity. If you have a specific charity in mind, our office can tell you if it is a qualified charity for federal income tax purposes.

The IRS has very strict rules about substantiating charitable contributions. To deduct any charitable donation of money, regardless of amount, you must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified charitable organization indicating the amount of the cash and a description of any property contributed and whether the organization provided any goods or services in exchange for the gift.

The new law allows one additional method of substantiation in the case of donations to Haiti relief. If you make a donation by texting a contribution to a charity, your telephone bill can provide the required documentation. Your telephone bill must show the name of the charitable organization, the date of the contribution and the amount of the contribution.

IRS disaster designation
Shortly after the earthquake, the IRS designated it as a “qualified disaster for federal tax purposes.” This means that recipients of qualified disaster relief payments may exclude those payments from income on their tax returns. Additionally the IRS is allowing employer-sponsored private foundations to assist victims in Haiti without affecting their tax-exempt status.

Tragedies not only bring out the best in people, they also sadly encourage fraud. The Haiti earthquake is no exception. First, be an educated donor. Before you make a donation, make sure the charity is legitimate. Many reputable and well known U.S. charities are working day and night to help Haiti.

Be wary about giving out your personal information, such as your Social Security number. Con artists can use your personal and financial information for identity theft. Be especially cautious of emails asking for donations. Some phony charities use names that sound or look like those of respected, legitimate organizations. If you are not sure that a charity is legitimate, call our office.

If you have any questions about the accelerated tax deduction or charitable contributions in general, please contact HLB Gross Collins, P.C.

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