Posts Tagged ‘IRA’

Tax Roundup, 4/10/14: Still plenty of time for an IRA! And Iowa Tax Freedom Day looms.

Thursday, April 10th, 2014 by Joe Kristan

IRAWhen the tax deadline is looming, taxpayers looking for the Tax Fairy to wish away their tax problems often overlook the old-fashioned IRA.  You can still make 2013 IRA contributions through April 15.  An Individual Retirement Account contribution may be able to score you a 2013 deduction (or even a tax credit) for 2013; even if you don’t qualify for current tax savings, they are a nice and cheap way to build-up tax-sheltered savings.

IRAs come in two flavors: “traditional” and “Roth.”  Traditional IRAs build up their income tax-free, but earnings on them are taxable when they come out.  If you meet certain conditions, your traditional IRAs come with sprinkles: – a tax deduction.  If you don’t get the deduction going in, your principal is tax-free going out.

Roth IRAs never offer a deduction, but they leave a sweeter aftertaste: if you hold them long enough, income on Roth IRA assets is never taxed.  And unlike traditional IRAs, you are never forced to start withdrawing funds from the IRA, so the tax-free build-up can go on indefinitely.

Both traditional and Roth IRAs require you to have wage or self-employment net income.  The limits for contributions are the lesser of your taxable compensation or $5,500 ($6,500 if you were 50 by December 31, 2013).  You can contribute to a traditional IRA at any income level, but deductions phase out at higher income levels if you (or your spouse) are covered by a retirement plan at work.  The availability of Roth IRA contributions phases out at higher income levels regardless of whether you participate in another retirement plan.

One very useful way to use Roth IRAs is for teenagers and young adults.  A parent can fund a Roth IRA for them based on part-time job income — no matter what parent income is.  This starts a tax-free retirement fund for the young earner at a very age, giving the power of compound interest lots of time to do its magic.  And from what I’ve seen, parental Roth funding is much appreciated by the recipients.

While time is short, you can still fund a 2013 IRA if you make your contribution no later than April 15.  You can set one up at your friendly community bank or online with a mutual fund company on you lunch hour.  No, it probably won’t make your 2013 taxes go away, but it can be a nice step towards financial security for you or your kids.

This is the latest of our 2014 Filing Season Tips — a new one every day thorugh April 15!

Russ Fox, Bozo Tax Tip #4: Honey, You Don’t Exist!: “Perhaps it’s something in the water, but this year Aaron and I have seen multiple cases of individuals who have ignored that marriage license and filed as single if married.”

 

Kyle Pomerleau, When is My State’s Tax Freedom Day?  (Tax Policy Bl0g) Iowa’s is this Sunday.

 20140410-1

 

Kristy Maitre, How to Report National Mortgage Settlement Payments

TaxGrrrl, Taxes From A To Z (2014): X Is For XD   

Paul Neiffer, Trusts Can Get You in Trouble

Jason Dinesen, Tax Court Case Involving Radio DJ Strikes Close to Home for Me, Part 2 

 

Hey, preparers: are you ready to trust the IRS to regulate your livelihood?  A Week Before Tax Day, IRS Misses Crucial Windows XP Deadline (Washington Post, via the TaxProf)

Kay Bell, Computer problems for IRS, Canadian tax agency

 

20140401-1Alan Cole, Mainstream Economics Support Low Taxes on Capital Income (Tax Policy Bl0g): “The overwhelming bulk of the evidence is that taxes have a negative effect on economic growth, and that the effect is particularly strong on tax bases that include capital income.”  But, the rich!  Inequality!

Donald Marron, Seven Tax Issues Facing Small Business (TaxVox): “America’s tax system is needlessly complex, economically harmful, and often unfair.”

Cara Griffith, Guidance Today, Gone Tomorrow (Tax Analysts Blog).  “A recent Arkansas court opinion points out what might be a troubling trend in state taxation: the inability of taxpayers to rely on administrative guidance because the state can retract or supersede it on a moment’s notice.”

TaxProf, The IRS Scandal, Day 336.  It was a big day, with evidence that Lois Lerner was working behind the scenes with the ranking Democrat on the Ways and Means Committee to harass the opposition.

Tax Justice Blog, Is the Obama Administration Blocking International Efforts to Address Corporate Tax Avoidance? 

William Perez, Tax Reform Act of 2014, Part 4, Tax Credits

 

Hank Stern, The ObamaTax Domino Effect.  “While we’ve all seen the horrendous rate increases caused by the ObamaTax (including on our 1040’s), thee are other victims.”

“Pro-business” isn’t “pro-market,” a distinction utterly lost on Iowa officials.

David Brunori: I’ll Raise a Glass to Lower Booze Taxes (Tax Analysts Blog) “Jack Daniels is not bourbon, by the way, but Tennessee whiskey. There is apparently a difference, but frankly, after the first glass, I can never tell.”

Next: legislators are terrible at legislating.  GAO Went Undercover to Discover Tax Preparers Are Terrible at Tax Preparing (Going Concern)

 

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Tax Court makes IRA ownership of your business even more dangerous

Friday, May 10th, 2013 by Joe Kristan

20120511-2Owning a closely-held business through your Individual Retirement Account has always been a high-wire act of tax compliance.  The Tax Court snipped one end of the wire for many IRA-owned corporations yesterday.

The biggest danger of owning your business in an IRA has been the risk of having a “prohibited transaction.”  The tax law has hair-trigger rules for pension funds and other exempt organizations to prevent abuse of the funds by related parties or trustees.

Prohibited transactions are foot-faults.   If you have one, the 15% tax applies to the “amount involved” for each year of the transaction, even if you didn’t mean to do any harm — even if you in fact did no harm.  There is no “good-faith” out.   Worse, prohibited transactions terminate your IRA, triggering any untaxed income within the account.

In yesterday’s case, a taxpayer acquired a C corporation through an IRA.  The taxpayer then guaranteed loans to the corporation.  The Tax Court said this constituted an “indirect extension of credit” to the IRA (my emphasis):

 As the Commissioner points out, if the statute prohibited only a loan or  loan guaranty between a disqualified person and the IRA itself, then the prohibition could be easily and abusively avoided simply by having the IRA create a shell subsidiary to whom the disqualified person could then make a loan. That, however, is an obvious evasion that Congress intended to prevent by using the word “indirect”. The language of section 4975(c)(1)(B), when given its obvious and intended meaning, prohibited Mr. Fleck and Mr. Peek from making loans or loan guaranties either directly to their IRAs or indirectly to their IRAs by way of the entity owned by the IRAs.

That triggered both a prohibited transaction and the termination of the IRA.  The corporation was sold in 2006.  The termination of the IRA status meant the gain was taxable on the IRA-owner 1040s, rather than sheltered in an IRA.  Worse, the court upheld “accuracy-related” penalties.

Have you ever tried to get a loan for a closely-held corporation without personal guarantees?  It can be difficult, especially when you have a new business.  Unfortunately, owners of startups are often sorely-tempted to use their IRAs as owners, as it may be their best source of equity capital.  This case shows how dangerous IRA ownership of your business can be.

I suspect there are a lot of similar taxpayers out there, with much riding on any appeal of this case.  The consequences to these folks will be catastrophic, in the same league as the ruin caused by Incentive Stock Options (ISOs) exercised just prior to the dot-com collapse.   The ISO disaster was bad enough to get Congress to enact legislative relief.  This could also get Congressional attention.

Cite: Peek, 140 T.C. No. 12.

 

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Tax Roundup, 1/31/2013: Happy IRA mulligan day! And on brief, the Tax Update!

Thursday, January 31st, 2013 by Joe Kristan

20111109-1Today is the last day to make a charitable IRA rollover for 2012.  Yes, 2012 is over, but taxpayers who are required to make IRA minimum annual distributions may still have one 2012 transaction left in them.

Taxpayers who are born before July 1, 1942 who took cash from an IRA in December 2012 can contribute up to $100,000 to a charity today and have it excluded from their 2012 income.

- Taxpayers who have failed to take their required minimum 2012 distribution can avoid the 50% penalty for failing to take their distribution by arranging for the IRA to transfer the minimum amount, up to $100,000, to a charity today.

These opportunities are part of the retroactive extension of the rule allowing up to $100,000 to be transferred from an IRA directly to a charity without including the amount in the IRA owner’s income.  This avoids the 50% of AGI charitable contribution limit.  It also avoids other potentially unpleasant consequences of having the IRA income above-the-line, like making your Social Security taxable.

 

On brief, the Tax Update Blog.  The Institute for Justice, the victorious legal team behind the shutdown of the preparer regulation program, has filed a brief opposing a stay in the injunction against the program.  Making their case airtight, they cite the Tax Update, along with tax bloggers Kelly Phillips Erb (TaxGrrrl), Robert D. Flach  and Jason Dinesen.  From Footnote 18 of the brief:

For an example of the disruption routinely caused by the IRS’s misadministration of the RTRP regulations, see Alban Decl., Ex. 3 (the comments from preparers are illustrative and reference previous examples of similar disruptions); see also Joe Kristan, IRS quietly delays CPE requirement under new preparer regulation scheme , Tax Update Blog (January 8, 2013), http://rothcpa.com/2013/01/irs-quietly-delays-cpe-requirement-under-new-preparer-regulationscheme/ (describing IRS message as “a quiet admission of failure”).

With the Tax Update Blog on their side, who can be against them?

 

What does a poor college student have that could be lucrative to a thief? A Social Security number.  From the Memphis Business Journal:

With tax season bearing down, the IRS has a warning about a new refund scam aimed at college students, seniors and church members.

The Internal Revenue Service said Tuesday the scam tries to get students to give their personal identification and file tax returns claiming fraudulent refunds. It has sent misleading and bogus refund claims using the American Opportunity Education Tax Credit on college campuses throughout the Southeast.

Be very cautious about giving anybody but your employer, your bank, a medical provider or the IRS your Social Security number.  And never give it to a scammer.

 

David Brunori, Stifling Lefty — Political Correctness in the Tax Debates (Tax.com):

So the pro tax people managed to shut Mickelson up. Rather than engaging  in a discussion about why it is okay to take his money, they stifled him.

Shut up, they explained.

 

Paul Neiffer points out that now that penalties are waived for farmers who file after March 1, they may not want to file by their usual deadline:  File Your Return After March 1 Not Before!

 

Have you mailed your 1099s and W-2s?  Today is the deadline for sending them to recipients.  Russ Fox has the scoop.

TaxGrrrl, Ask the taxgirl: Tax ID Numbers and 1099s

Kay Bell,  Tax e-filing and Free File is now available for most taxpayers

Trish McIntire,  Freebies.  Don’t ask for them.

Chris Sanchirico,  Camp’s Investment Tax Plan: Implications for Lower Rates on Capital Gains? (TaxVox)

Tax Foundation, New Report: Cell Phone Taxes Exceed 20% in Several States

Margaret Van Houten and Jodie Clark McDougal,  Iowa Trust Industry Breathes a Sigh of Relief after the Supreme Court’s Reversal in Trimble

Cara Griffith, Kentucky DOR’s Disregard of Transparency (Tax.com)

Jack Townsend,  Another UBS Depositor Pleads

Patrick Temple-West,  India sees end to Vodafone tax dispute, and more

 

News you can use. IRS: No One Is Too Old, Too Poor Or Too Sympathetic To Avoid Prosecution  (Brian Mahany)

How to catch a dinosaur.  Not Income Tax Evasion – Structuring – That’s How They Got Kent Hovind (Peter Reilly)

Robert D. Flach goes into blog hibernation for the remainder of tax season:  SO LONG, FAREWELL, AUF WIEDERSEHEN, GOOD NIGHT!

These are a few of my favorite things…  Guns and Tax Returns. (Christopher Bergin, Tax.com).

 

Today’s morale builder: Les Misérables-Inspired Video Reminds You That Busy Season Kills Your Dreams (Going Concern)

 

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Tax Roundup, 1/25/2013: Only a few days left for IRA distribution mulligan. And: A $750 check for each Iowa household?

Friday, January 25th, 2013 by Joe Kristan

A proposal to refund part of the state budget surplus.  The Des Moines Register reports:

Iowa House and Senate Republican leaders today proposed to give a flat $750 to every Iowa household in an effort to return to taxpayers the state’s $800 million budget surplus.

The money would be returned to taxpayers in the form of a tax credit, said Senate Republican Leader Bill Dix, R-Shell Rock, and House Speaker Kraig Paulsen, R-Hiawatha.

20120504-1That seems pretty straightforward.  Better still to give it back as part of simplifying the tax code, but better that than just spending it.  Yet just spending it has its advocates:

Senate Democrats who control their chamber said that since it’s early in  the session they are open to talking about the Republicans’ proposal, but they have other ideas.

Sen. Joe Bolkcom, D-Iowa City, who chairs the tax-writing Iowa Senate Ways and Means Committee, said Democrats are interested in providing earned income tax credits for lower-income Iowa families and raising the threshold for filing state income taxes. He added that Iowa needs to invest more tax money to clean up dirty rivers and streams, repair crumbling roads and bridges, upgrade the state’s education system and make other improvements.

The earned income credit is a welfare program run through tax returns, with a tremendous rate of fraud.  It’s also a poverty trap.  The phase-out of benefits with rising income serves as a stiff tax on improving your income.  And spending doesn’t become something else just because you call it “investing.”

Elaine Maag,  Earned Income Tax Awareness Day (TaxVox)

 

Kay Bell reminds us that taxpayers who failed to make a 2012 required minimum distribution from the IRA have a January 31 mulligan.   The tax law imposes a stiff penalty on taxpayers who have reached age 70 1/2 who fail to take a minimum amount out by year end.  Taxpayers who failed to take their 2012 withdrawal last year can roll the RMD amount to charity by January 31 and avoid the 50% penalty.

Taxpayers who took an IRA distribution in December can also roll that into a charity by January 31 and avoid having the distribution included in 2012 income.

These provisions were part of the Fiscal Cliff tax bill, which extended the tax-free status of IRA rollovers to charity along with a bunch of other expired provisions.

 

Just because your bank is a country bank doesn’t make the banker a bumpkin.  Four Nebraskans have been charged with “structuring” — breaking deposits into chunks under $10,000 to avoid federal cash reporting requirements.  Federal law requires banks to report cash transactions over $10,000.  Folks who don’t want the government to know about their cash sometimes attempt to use multiple smaller transactions to fly under the radar; that’s illegal.    Theindependent.com reports:

 Randy L. Evans, 59, of Grand Island is charged in a 15-count indictment.  In the first 14 counts, it is alleged that between March 29, 2010, and Dec. 27, 2011, Evans structured financial transactions to evade reporting requirements when he made deposits in the amount of $210,381 at Five Points Bank. Count 15 charges him with structuring financial
transactions to evade reporting requirements when he made 449 transactions between Jan. 4, 2010, and Feb. 28 at Five Points Bank in the amount of $2,030,322.

Bankers are required to report suspicious transactions, and if you make yourself a regular, they’ll notice — especially in a small-town bank.

 

Regrettably, yes.  Libertarian writer Sheldon Richman breaks the bad news: just because the income tax is a bad thing doesn’t make it unconstitutional:

Where does this leave liberty’s advocates? First, we have to face the facts. Like it or not, the U.S. Constitution empowers the Congress to levy any tax it wants. Anyone is free to come up with a contrary interpretation, but the constitutionally endowed courts have spoken. Reading one’s libertarian values into the Constitution is futile. For better or worse, the Constitution means what the occupants of the relevant constitutional offices say it means.

In other words, it doesn’t matter if you think the income tax is unconstitutional if the IRS, the federal judge, the Marshals Service and the Bureau of Prisons think otherwise.  Fighting the income tax by not filing ruins your finances without hurting the Leviathan one little bit.

 

Luring and subsidizing your competitors with your tax money.  Left-side advocacy group Good Jobs First has released a report slamming “incentive” tax breaks like those used for two fertilizer companies in Iowa last year.  The report doesn’t mention Iowa’s programs, but it provides a depressing list of corporate bribery in other states, including subsidies to lure employers from Kansas City, Kansas across the river to Kansas City, Missouri, and vice-versa.  Their press release gets it right:

Interstate job piracy is not a fruitful strategy for economic growth, [report author Greg] LeRoy noted: “The costs are high and the benefits are low, since a tiny number of companies get huge subsidies for moving what amounts to an insignificant number of jobs.” LeRoy added: “The flip side is job blackmail: the availability of relocation subsidies makes it possible for companies that have no intention of moving to extract payoffs from their home states to stay put.”

For all the abuse, the organization’s recommendations are modest.  I would eliminate all such subsidies and replace them with a simple low-rate tax system for everyone.  The Tax Update Quick and Dirty Iowa Tax Reform would be a great start here.

 

TaxProf,  House Ways & Means Chair Proposes Mark-to-Market Tax on Financial Derivatives

IRS Asks Judge To Suspend Injunction Barring It From Regulating Tax Preparers

Jim Maule,  A Tax Question: So What Do You Do With Your Time?. A good discussion of the “material participation” rules that take on extra importance under the new Obamacare Net Investment Income Tax.

Anthony Nitti,  The Tax Impact of Obamacare On The Passthrough Income of Small Business Owners

Patrick Temple-West,  Firms keep stockpiles of ‘foreign’ cash in U.S., and more (Tax Break)

Joseph Henchman,  Tax Foundation and CBPP Agree: States Need Strong Rainy Day Funds (Tax Policy Blog)

Jamaal Solomon, Tax Organizer for Entertainers.  Independent entertainers who cross state lines can find their taxes complicated, so good recordkeeping is essential.

Robert W. Wood, Shhh, Home Office and other IRS Audit Trigger Secrets

David Cay Johnston, Missing Half the Cash (Tax.com)

Start your weekend early with a Friday Buzz from Robert D. Flach!

News you can use:  Stuff Creepy Accountants Like (Going Concern).  Wisconsin!

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Sunday down-to-the-wire tip: Fund that IRA!

Sunday, April 15th, 2012 by Joe Kristan

Counting today, filing season has three more days.  One of the few tax moves you can make between now and then is to fund an IRA.  If it is a traditional, deductible IRA, you can get a current deduction and save taxes on the return due Tuesday.  If it is a non-deductible traditional IRA, you have no deduction, but earnings accumulate tax free.  If you fund a Roth IRA, you get no deduction now, but if you leave the money in long enough, the earnings will never be taxed.

You can only make IRA contributions to the lesser of $5,000 or your wage and self-employment income.  If you turned 50 by the end of 2011, add $1,000 to the $5,000 limits.  If you file a joint return, a non-earning spouse can use up to $5,000 (or $6,000 if 50 or older) of the other spouse’s income in excess of the earning spouse’s limit to support a “spousal IRA” contribution.

Income limits apply for deductible traditional IRAs if you are covered by a retirement or profit-sharing plan at work.  Different income limits apply to Roth IRAs. Check the limits at the links before you pull the trigger.  And remember, the April 17, 2012 deadline for funding 2011 IRAs is NOT extended if you extend your return.

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No, your Roth IRA can’t own an S corporation

Thursday, March 29th, 2012 by Joe Kristan

The Ninth Circuit upholds a Tax Court ruling that Roth IRAs aren’t eligible shareholders.  No big surprise there. More coverage from Roger McEowen, Kaye Thomas and Peter Reilly.

Prior Tax Update coverage: Tax Court: Roth IRA can’t own S corporation stock

Cite: Taproot Administrative Services, Inc., CA-9, No. 70-70892

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401(k) max set at $17,000 for 2012

Thursday, October 20th, 2011 by Joe Kristan

The IRS released the inflation adjustments for qualified plan limitations today. From IR-2011-103:
– 401(k), 403(b) limits: $17,000 (was $16,500)
– Catch-up contribution for those 50 and older: $5,500 (unchanged)
Some other highlights:

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple

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You can’t squeeze $1.3 million into a $2,000 Roth IRA contribution. Not even in Kansas City.

Thursday, July 7th, 2011 by Joe Kristan

A tax plan hatched by a Kansas City-area tax advisor met disaster in Tax Court this week. The plan was the braincraft of A. Blair Stover, a former Grant Thornton tax practitioner. Mr. Stover has since come under unpleasant government scrutiny for overly-imaginative tax planning.
If everything worked out, it would have moved about $1.3 million from a traditional IRA, where it would have been taxable when withdrawn, to a permanently tax-free Roth IRA.
The plan was simple, yet absurd. When the smoke cleared, it worked like this: the taxpayer set up a new Roth IRA with a $2,000 contribution. He then had the Roth IRA and his existing traditional IRA set up new corporations. The Roth IRA-owned corporation got the $2,000 Roth contribution, while the Traditional IRA corporation got the $1.3 million in Traditional IRA assets. The Traditional IRA corporation then merged into the Roth IRA corporation. Suddenly the Roth IRA magically owned $1.3 million in assets, rather than $2,000. What could go wrong?
Mr. Paschall, the taxpayer, paid accounting firm Grant Thornton $120,000 to set up this transaction. GT’s Mr. Stover took care of the paperwork details. The taxpayer probably took comfort in this from the GT engagement letter:

The engagement letter contemplated a fee of $120,000 and contained a clause providing that Grant Thornton would represent and defend Mr. Paschall or any related entity at no additional cost in case of audit by the Internal Revenue Service (IRS). The engagement letter also contained an indemnity clause providing that Grant Thornton would reimburse and indemnify the Paschalls and any related entity for any civil negligence or fraud penalty assessed against them by Federal or State authorities.

Unfortunately for the taxpayer, Mr. Stover’s tax planning came under IRS scrutiny. The Tax Court explains:

In either 2003 or 2004 Mr. Paschall received a letter stating that Grant Thornton was turning over the names of people who had engaged in Roth restructures to the IRS. Mr. Stover at this time advised Mr. Paschall that the Roth restructure was legal but that he “might want to disclose on [his] income tax returns the structure”. Mr. Paschall thereafter attached to Telesis’ and his personal tax returns Forms 8886, Reportable Transaction Disclosure Statement.

When the taxpayer set up his Roth IRA, the annual limit for contribuitons was $2,000. The tax law applies a 6% annual penalty for excess contributions until the excess contribution and earnings are eliminated. The IRS said the $1.3 million moved into the Roth IRA was an excess contribution; over five years, that added up to $425,513 in taxes, plus another $105,000 or so in penalties.
The taxpayer naturally objected. The taxpayer first argued that the statute of limitations had expired on the tax, because he had filed timely 1040s more than three years before the assessment. The court ruled that the three-year statute never started running because he had never filed Form 5329, the form for reporting excess IRA contributions.
As for the substance of the transaction, the Tax Court said:

The substance of what happened in the instant case is that approximately $1.3 million began the year in Mr. Paschall’s traditional IRA and was transferred to his Roth IRA by the end of the year with no taxes being paid. Mr. Paschall did not attempt to provide a nontax business, financial, or investment purpose for what he did, and this Court cannot ascertain one. Instead, Mr. Paschall, incited by and at the urging of Mr. Stover, used corporate formations, transfers, and mergers in an attempt to avoid taxes and disguise excess contributions to his Roth IRA.

In upholding penalties against the taxpayer, Judge Wherry said the taxpayer should have known better:

Mr. Paschall should have realized that the deal was too good to be true. See LaVerne v. Commissioner, supra at 652-653. Mr. Paschall is a highly educated and successful businessman. He explained to this Court that because he grew up in the Depression, he was conservative with his investments and worried “about having enough money” to last through retirement. Yet he paid $120,000 for a transaction that he “did not fully understand”.
Mr. Paschall had doubts, repeatedly asking whether the Roth restructure was legal. Despite these doubts, he never asked for an opinion letter or sought the advice of an independent adviser, including Mr. Jaeger, who was preparing his tax returns at the time he met Mr. Stover. This was even after he received a letter warning him that there might be problems with the Roth restructure and that his name was being turned over to the IRS.

The cost of this do-it-yourself Roth IRA conversion was a lot more than it would have been to wait until 2010 to do a legal taxable conversion of his traditional IRA. It would be interesting to know how Grant Thrornton’s indemnification will hold up.
The Moral? Just the obvious:
– If it sounds too good to be true, it probably is.
– If somebody wants to sell you a tax plan, run it by a tax advisor who isn’t getting a cut of the deal.
Cite: Paschall, 137 T.C. No 2.
Same result: Swanson, T.C. Memo 2011-156
Related:
Kansas City attorney gets unwanted review of his tax work
Fool’s gold and chicken shelter

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Two tax wrongs don’t make a right

Friday, June 17th, 2011 by Joe Kristan

Few things take the joy out of taking on a new client like finding that they have been taking improper deductions. Even worse is when they say “we’ve been audited and the IRS didn’t say anything.” The IRS isn’t bound by its old mistakes, as a Minnesota couple learned yesterday in Tax Court.
The couple took an IRA deduction on their 2007 return. Unfortunately for them, they had no wage or self-employment income. You can only take an IRA deduction if you have such “earned” income. Ah, but they had been audited!

Petitioners contend that respondent determined the same issue in petitioners’ favor as to 2006, thereby establishing precedent. However, each taxable year stands alone, and the Commissioner may challenge in a succeeding year what was condoned or agreed to in a previous year. Auto. Club of Mich. v. Commissioner, 353 U.S. 180 (1957); Rose v. Commissioner, 55 T.C. 28 (1970). Thus, respondent’s concession of or failure to challenge the IRA deduction in a prior year does not necessarily entitle petitioners to the deduction in subsequent years.

If the deduction is improper, you don’t get a permanent private exception for it just because the IRS missed it before.
Cite: Niesen, T.C. Summ. Op. 2011-71

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Oh, my taxes hurt… is there anything I can still do?

Sunday, April 17th, 2011 by Joe Kristan

20110417-2.jpgMillions of Americans are doing their taxes over this last weekend of tax-season. Many of them will be disappointed by the results. While the best tax planning opportunities for 2010 expired 107 days ago, there are a few things you may be able to do to help make for a better tomorrow — when your return is due.
SEP plans can help taxpayers with self-employment income. You can set up and fund a SEP as late as tomorrow — or as late as October 15, if you extend. You can deduct up to 25% of your self-employment income, perhaps as much as $49,000. But SEPs have strict non-discrimination rules, so they work best if you have no employees.
Traditional IRAs can sometimes create a last-minute deduction. All IRA contributions are deductible for taxpayers who have wage or self-employment income and who do not otherwise participate in a pension plan. You can contribute up to the lesser of $5,000 ($6,000 if you were 50 at the end of 2010) or your wage and self-employment income. If you have an at-home spouse, you may be able fund a spousal IRA.
If you participate in a pension, profit-sharing or 401(k) plan at work, your deduction is limited depending on your income, per this chart:
20110417-1.png
Click to enlarge
If you have a Health Savings Account (HSA) and you haven’t fully funded it, you can make a deductible contribution as late as tomorrow, April 18.
Is that all? Pretty much. After December 31, the game is mostly over, except for adding up the score. Go back and make sure:
-you caught all of your estimated tax payments;
-you’ve picked up any payments that you applied from last year’s refund to 2010 taxes;
-you’ve picked up all of your charitable contributions, property taxes, and state tax withholding and payments on your Schedule A
-you’ve filled out Schedule M for the Making Work Pay Credit.
-you’ve checked your math.
Good luck. And make sure you file on time. More on that tomorrow.
This is our penultimate 2011 filing season tip. Tomorrow is the ultimate — well, the last one, anyway.
Flickr image courtesy Sarah G under Creative Commons license.

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How about a Roth IRA for that hard-working kid of yours?

Friday, April 8th, 2011 by Joe Kristan

So your high-schooler or college student is slaving away serving lattes to the masses to help pay for school. What can you do to show you appreciate the effort? Nothing beats the gift of tax shelter!
You can provide the funding for a Roth IRA for your hard-working student to the lesser of $5,000 or the student’s wage and self-employment income. The student can take out all funds tax free after five years. If your student does well, the cash can be left to earn tax-free income until it’s time to fund retirement — again, with tax-free withdrawals.
You have until April 18 to fund a 2010 IRA. Your friendly community banker can help you out. If you are an online sort of person, Vanguard makes it easy to start an IRA online with an initial investment as low as $1,000. And it’s not just for college students; you can help fund an IRA for your young graduate starting out in the working world.

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2010: Year of the Roth conversion?

Thursday, January 7th, 2010 by Joe Kristan

You can make a (taxable) conversion of a regular IRA to a Roth IRA this year regardless of your income level. Robert D Flach talks about some of the ins and outs of a conversion.

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Should you start a qualified retirement plan before year-end?

Wednesday, December 16th, 2009 by Joe Kristan

The tax law has a menu of tax-favored retirement plans for entrepreneurs. The simplest ones, SEPs and IRAs, can be set up for 2009 as late as the tax return deadline — in the case of SEPs, the extended tax return deadline. But the most potentially lucrative plans — qualified pension or profit-sharing plans — have to be in place by year-end for contributions to be deducted on 2009 returns.
For a profitable entrepreneur with no employees, the “Solo-401(k)” may be the most lucrative retirement plan option. If you are profitable enough, you can make a deductible 2009 contribution to such a plan of the first $16,500 of your earnings, plus 20% of your earnings, if you are a Schedule C entrepreneur. The $16,500 piece makes for bigger contributions than would be available from SEPs or other plans for those with earnings under $245,000. That’s a nice deduction for just taking money from one pocket and putting it in your other pocket.
If the plan is fully executed in 2009, it can be funded as late as the extended due date of your 2009 return.
There are downsides to such plans. They are much more expensive to maintain than a SEP, and the benefits either have to be foregone or shared if you add employees. You don’t want to just jump into a qualified plan, but if you want to look into one for this year, you need to act quickly.
This is another installment in the 2009 Tax Update year-end tax tip series.

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401(k) v. IRA?

Monday, September 28th, 2009 by Joe Kristan

When there’s an employer match, easy answer: you go with the 401(k) and take the boss’s money. For all other situations, read Robert D Flach’s extended discusion of the IRA/401(k) dilemma.

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Administration floats new retirement savings options

Tuesday, September 8th, 2009 by Joe Kristan

The Obama administration announced some new retirement savings initiatives for the coming tax season. Tax Analysts reports ($link) that the administration made the following initiatives to promote savings:

* provide guidance to make it easier for employers to automatically enroll and increase the contributions of their employees in section 401(k) plans and SIMPLE individual retirement accounts;
* provide an easy way for taxpayers to save their tax refund by making available an option for filers to automatically purchase U.S. savings bonds with their refund;
* provide guidance for employees on how to cash out and contribute unused vacation and other leave amounts to their 401(k) or similar plan to increase savings; and
* use the IRS Web site to provide more information to promote savings, including a road map for rollovers.

The savings bond proposal is the strangest item on the list. It almost looks like the government is desperate to hang onto the cash. (Update:Obama to Let Taxpayers Convert Tax Refunds Into IOUs“)
The guidance includes:
Rev. Rul. 2009-30, providing guidance for employers to implement automatic enrollment in 401(k) plans.
Notice 2009-65, with pre-approved plan language for 401(k) automatic enrollment,
Notice 2009-66, making automatic enrollment available for employers using SIMPLE IRA plans.
Rev. Rul. 2009-31, providing guidance on rolling paid time off amounts into 401(k) plans.
Press release announcing these initiatives.
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Extensions: when procrastination is wise

Monday, April 13th, 2009 by Joe Kristan

It’s serious now. Your return is due the day after tomorrow, and you just haven’t had the time to get all your 1099s together. Or that pesky K-1 from that oil well investment still hasn’t come in. Or you just realized you need to go back to 1988 to figure out your basis in that mutual fund you sold last year.
It’s time to file your extension.
But that means I’ll be audited! Nonsense. The IRS does not just ignore the millions of returns that come in by April 15 and then grab the stragglers that come in later. It’s what’s on your return that determines whether you’ll be audited, not whether it’s extended.
But I want the statute of limitations to run!. If there’s something so bad on your return that you need to sneak it by rather than wait a few weeks to get it right, you may have a bigger problem than your extension. In any case, I’ve yet to see somebody pay extra tax on an exam because their statute was still open because of an extension, and I’ve been doing this since 1984. I’m sure it happens, but it’s rare.
If you make a mistake because you hurry a return through, you increase your risk of exam far more than any extension could.
Extensions also give you more time to deal with other important tax issues, including:
– Electing the five-year NOL carryback for 2008 for small business losses.
– Funding a 2008 qualified pension or profit-sharing plan contribution, including a Keogh plan.
– Establishing and funding a SEP, or Simplified Employee Pension.
– Recharacterizing a 2008 Roth IRA contribution as a regular IRA contribution.
– Withdrawing excess IRA contributions for 2008.
How to extend.
You can extend a 1040 with Form 4868, postmarked no later than April 15. Extensions can also be electronically filed.
You should make sure you have at least 90 percent of your expected tax paid in with your extension to avoid penalties. If you are an estimated tax filer, bump up your extension payment by enough to cover your first quarter estimate. That way you have a little cushion in case you owe more on the extended return than you anticipate, and you can apply the overpayment to your first quarter 2009 taxes.
Link: IRS Topic 304, Extensions of Time to File Your Tax Return.

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