Tax Strategies to Maximize Your Roth IRA Conversion

By: Chris Martin

Since 2010, many taxpayers opted to act on a new tax strategy available to them by converting traditional IRA funds to a Roth IRA. Previously, taxpayers with an adjusted gross income above $100,000 were not able to convert their traditional IRA accounts, but changes to the 2010 tax code made a conversion to a Roth IRA available to taxpayers with any income.

Since the market has taken a downturn in recent months, taxpayers who converted to a Roth IRA when the market was higher will wind up with an artificially high tax bill if there is no recovery.  To avoid this unfair tax bill, the code allows you to “undo” a previous conversion. The rules generally allow you to do this until the due date (plus extensions) of the tax return for the affected year, and to reflect it on that year’s return. This “undo” activity is known as re-characterization.

Determining When You Should Re-characterize Your Conversion

You might want to re-characterize your conversion if your investments in the Roth plan have gone down in value. If this is the case, you would be paying taxes on the value that you converted, making the tax cost of the conversion much higher than you thought. This re-characterization is a one-time option that allows you to put the money back in the traditional IRA where it started and avoid paying taxes on the converted amount.

For example, let’s say you converted $100,000 from your traditional IRA to a Roth this year. When you filed your 2011 tax return, the investments you made in your Roth IRA have declined in value to $75,000. Instead of paying taxes amounting to as much as $35,000 on this conversion, you can re-characterize and avoid paying taxes on the decline in value.

To determine if you need to re-characterize a conversion, you need to make sure you understand the net value of your converted amount. This means you consider the amount you’re converting, plus any capital gains, dividends and interest and subtract capital losses and fees. If your account is a net negative, or if any investment you’ve made in the account is negative, you probably want to re-characterize. It’s not an all-or-nothing proposition. You could re-characterize a portion of your investments if the circumstances warrant. Keep in mind however, that the IRS has imposed timing limits on when you can reconvert traditional IRA funds which have previously been re-characterized back to a Roth IRA.

If you think a re-characterization of your Roth IRA may be beneficial, start by talking to your tax and investment advisors. A re-characterization involves several complex tax and investment considerations, and should not be undertaken without careful consideration of the circumstances.

Contact a BCG&Co. tax advisor for more information.

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BCG Blogger, October 20th 2011 | Tags: , , , ,
Posted in IRA Deductions, Tax Minimization, Tax Strategy, Uncategorized

Tax-Free IRA Distributions to Charity Extended

By: Tim Stiller

A taxpayer who is at least age 70½ may make distributions up to $100,000 to charities from his or her IRA without including the amount in gross income. Even better, while the charity receives the distribution ( and not the IRA owner), a taxpayer who makes such a qualified charitable distribution equal to his required minimum distribution (RMD) is considered to have satisfied his RMD for that year. This rule was retroactively reinstated by the 2010 Tax Relief Act and applies to years beginning before January 1, 2012. Because this rule was reinstated so late in the 2010 tax year, a special rule allows distributions made before February 1, 2011 to be applied to the taxpayer’s 2010 tax year.

There are a few advantages to using this charity direct distribution method.  Adjusted gross income (AGI) is not artificially inflating by distributing the money to the taxpayer then taking a charitable contribution deduction.  Decreased AGI may increase itemized deductions (such as medical costs), reduces social security benefits subject to income tax, and minimizes state taxes that use AGI as a starting point (i.e. Ohio).  This distribution option also allows a diminished tax bill for lower income retirees that do not typically have enough deductions to itemize.

For more information please contact your BCG & Co. tax advisor at (330)864-6661.

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BCG Blogger, January 12th 2011 | Tags: , , ,
Posted in IRA Deductions

New Wealth Taxes – What to Expect

By: Amanda DeFrank, MT

You probably know by now the health care bill was passed this spring. Officially titled the “Patient Protection and Affordable Care Act”, the law is aimed to give everyone access to health care in the United States. The law includes several ways to raise additional revenue, including these new taxes and changes, which will take effect in 2013.

Additional Hospital Insurance Tax on High-Income Taxpayers

  • This imposes an extra 0.9% tax on wages in excess of $250,000 for a married couple ($200,000 for all other filing statuses).  Self-employment income is also subject to this additional tax.

Investment Income Tax

  • This is a new 3.8% tax on investment income for those with adjusted gross incomes above the same thresholds ($250,000 married couple; $200,000 all others).
  • Investment income includes interest, dividends, rents, royalties and capital gains. Municipal-bond interest is not subject to the new tax.
  • This tax can also affect trusts and estates, as a tax is levied if investment income of at least $12,000 is not paid out to beneficiaries. 

 Modification of Itemized Deduction for Medical Expenses

  • The current law allows an itemized deduction for medical expenses that exceed 7.5% of a taxpayer’s adjusted gross income.  Beginning in 2013, this is changed to only allow deductions in excess of 10% of the taxpayer’s adjusted gross income.
  • For those 65 years and older, the increase in threshold does not apply until 2016.

There are several ways to minimize your tax burden. You can utilize municipal bonds and consider selling assets via installment sales to avoid a large capital gain. Also, now may be the time to convert to a Roth IRA. While traditional IRA withdrawals are not investment income, they do raise your adjusted gross income. Roth IRA withdrawals won’t raise your adjusted gross income and therefore may provide a benefit by keeping your adjusted gross income under the limit, sparing your investment income from an additional 3.8% tax. 

Please contact your tax representative at BCG & Company to discuss how you can plan now to minimize your liability for these new taxes in 2013.

For more information, see this article from the Wall Street Journal or read the law.

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BCG Blogger, July 14th 2010 | Tags: , , , ,
Posted in IRA Deductions, Legislation, Tax Credits, Tax Minimization, Tax Updates

Give Your Kids A Job – And Keep a Little More in Your Pocket Too!

By: Tim Stiller, MT

As school is letting out, many students are looking for summer jobs. As we all know, the job market is still looking pretty bleak, even for part-timers. There is an upside for parents with a family business. Instead of just giving your kids money, there’s a way they can earn it, and save you some money in the process. Take a look at this example:

A business person in the 33% tax bracket for 2010 hires her 17-year-old son to help with office work full-time during the summer and part-time into the fall. He earns $5,700 during the year (and doesn’t have earnings from other sources). If that $5,700 otherwise would be paid to the business person, she saves $1,881 (33% of $5,700) in income taxes at no tax cost to her son, who can use his $5,700 standard deduction for 2010 to completely shelter his earnings.

Even if the child’s income exceeds $5,700, the overall family tax bill is still cut because the income will be taxed at rates beginning at 10% rather than the parent’s rate.

When used alone this technique is effective at saving money, but the savings can be increased even more by combining it with other tax incentives such as IRA deductions and education credits.

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BCG Blogger, June 14th 2010 | Tags: , , , ,
Posted in Family Business, IRA Deductions, Tax Credits