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“Taxing” is a word synonymous with “onerous” and “wearing.” Bond Beebe, Accountants & Advisors, have created a user friendly blog called “It’s Taxing” to inform and educate our clients and business associates on timely topics related to tax, estates, accounting and finance. We hope our blog answers your questions and alleviates the heavy burden and anxiety related to understanding complicated tax laws and related matters.
IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
The last three years have surely been some of the scariest times to be a homeowner. The well-documented sharp increase in home sale prices between the early 2000s and 2007 has been followed by a continuing 3 year correction, bringing house prices right back down to near the levels they were at when the run-up started. I would surmise that for most homeowners, the safest course is to stay in your home and wait this correction out.
The government has been acting in a limited fashion to try to buck this trend and spur some buying activity in the real estate market. Lawmakers initiated a tax credit for homebuyers that recently expired, but have also exerted their influence to keep mortgage rates as low as possible. Right now, the average rate in the DC area for a 30-year fixed rate mortgage is a little over 4.5%.
Much has been written in the general press concerning the fate of the “Bush Tax Cuts” from legislation expiring during the current calendar year; 2010 is the last year for reductions in income tax rates for all taxpayers.
There is very little legislative time remaining before the mid-term elections this coming November. While the Congress has indicated extensions of certain Bush-era tax rate cuts will continue for the majority of American taxpayers, there is much squabbling over continuing of rate reductions for those individuals earning $200,000 and up and those joint return filers earning over $250,000. Democrats are generally for repeal of tax rate reductions for those aforementioned upper income earners. Republicans are generally in favor of continuation of all Bush-era tax rate reductions. Recent defections by certain Senate Democrats suggest that all tax rates cuts may be extended for a one-year period.
The media today is full of discussion regarding the ever-increasing national debt. Between the cost of ongoing wars in Afghanistan and Iraq and stimulus spending to support and grow the US economy, it is clear that, at least for the present time, deficit spending is an unfortunate fact in our country. The cost of this deficit must be paid at some point, and as a result, increased income tax rates are a near certainty in the future of the US taxpayer.
What tax increases should be expected?
With the Bush era tax cuts set to expire at the end of 2010, increased rates will apply for 2011 unless Congress intervenes to extend the current marginal tax rates. Budget proposals promulgated by the Obama administration call for limiting tax increases to apply only to high-income households – beginning at $200,000 for individuals and $250,000 for joint filers. Under these proposals, tax rates on the top marginal brackets will increase from 33% and 35% to 36% and 39.6%, respectively. Furthermore, the tax rate for long-term capital gains will increase from 15% to 20%.
In January of this year, two articles appeared in The Washington Post within 2 days of each other that shine a light on the present status of tax collection in this country and help depict a not-so-certain future.
The first, appearing on the front page on January 5, 2010, discusses plans by the Internal Revenue Service (IRS) to regulate people who are paid to prepare tax returns, “stepping into a virtually unregulated business on which millions of American depend for crucial financial services.” The article describes the range of tax preparation choices, from “fly-by-night operators who can leave taxpayers on their own when the IRS finds fault with their returns” to the national brand-name tax preparation companies like H&R Block and Jackson Hewitt. The plans to regulate preparers would exempt certified public accountants (CPAs), attorneys and enrolled agents. CPAs are regulated by individual states, have passed the CPA exam and must fulfill continuing education requirements. Enrolled agents (EAs) are tax professionals recognized by the IRS as eligible to represent taxpayers before the IRS—they must pass an exam provided by the IRS and must also fulfill continuing education requirements.
Like most of us, something that only has to be done four times a year is often forgotten. And so it goes with quarterly estimates. These late or forgotten payments can cause you to incur underpayment penalty.
The US Treasury offers a payment mechanism that may help. It is the “Electronic Federal Tax Payment System,” or “EFTPS” for short.
EFTPS is a secure, free system where, after enrollment, you can schedule required quarterly federal payments up to one year in advance. These payments you set up ahead of time will automatically be made on the dates you select – no longer will you need to remember when a payment is due.
Using EFTPS will also eliminate the very real possibility that your check will be credited to someone else’s account or – worse yet – lost in transit. The system allows you to initiate payments via the Internet or by telephone.
For more information, and to begin making electronic payments, visit the EFTPS Web site at www.eftps.gov.
As my colleague mentioned last week, the income limitations on Roth IRA conversions (moving qualified retirement plan or traditional IRA assets into a Roth IRA) were removed beginning in 2010. That change opens the door for all taxpayers to take advantage of the Roth IRA – specifically the tax-free growth (as opposed to tax-deferred in a 401(k) or traditional IRA) and the lack of required minimum distributions (RMDs). You pay the tax once on conversion to move those pre-tax assets into post-tax assets, and then (after meeting the age and time requirement) any future distributions are 100% tax free, including all future earnings as long as you live.
Current Roth Contributions
Even though the income limitations on Roth conversions were lifted, the income limit on annual Roth contributions is still in place ($105,000-$120,000 for single taxpayers, $167,000-$177,000 for married taxpayers). That keeps annual Roth contributions out of reach for higher-income individuals.
There is another option, however: starting in 2006, employers were allowed the option of including a Roth component of their 401(k) plan – called a Roth 401(k). The contribution limits are the same as a regular 401(k) ($16,500 in 2010), but instead of getting a tax deferral on the amount (the contribution is excluded from your pay and taxed later during your retirement); the amounts are taxed currently and can be distributed tax-free in the future, just like a Roth IRA. This is a great option for a taxpayer who earns too much to be eligible for Roth IRA contributions, but wants to take advantage of the tax-free growth. One other note: employer contributions cannot be allocated to the Roth account – those are still taxable on withdrawal.
The catch is that the Roth 401(k) is not exactly like a Roth IRA. We already know the annual contribution limits are higher, which is an advantage. And the Roth 401(k) is not restricted by income limitations—another advantage.
The Roth IRA can be an extremely powerful vehicle for retirement savings. Although contributions to a Roth IRA do not provide a current tax deduction, future withdrawals (once you reach the age of 59 and a half) are totally tax-free. For high net worth taxpayers, whose income is not anticipated to decline substantially after retirement, the benefit of a current deduction can be far outweighed by the tax-free withdrawal of the presumably appreciated investments in the future.
More Benefits of the Roth IRA
Furthermore, the lack of an annual required minimum distribution from the Roth IRA can provide for additional tax-free growth. While traditional IRAs mandate that the account owner must make annual withdrawals beginning after they reach age 70 and a half, Roth IRA owners and inheriting spouses are not required to make any lifetime distributions. If assets and income outside of the IRA are sufficient to cover the expenses of the retiree, the Roth IRA can be left untouched allowing the assets to continue to appreciate tax-free.
A new law can provide you a payroll tax savings for hiring new workers, and may allow you to take advantage of them if you hire your spouse. The Hiring Incentives to Restore Employment Act, P.L. 111-147 provides two tax benefits for employers that hire workers this year: payroll tax forgiveness for hiring unemployed workers and a tax credit for as much as $1,000 for keeping them on the payroll for at least one year.
Under this law qualified employers get to skip paying the employer’s 6.2% share of Social Security taxes on wages paid in 2010 to a newly hired qualified individual. A “qualified individual” is one who:
Begins employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011;
Certifies by signed affidavit or Form W-11, under penalties of perjury, that they haven't been employed for more than 40 hours during the 60-day period ending on the date the employee begins employment with the qualified employer;
Was not hired to replace another employee of the employer unless that other employee left voluntarily or for cause (including downsizing); and
Is not related to the qualified employer in any of the following ways; an individual cannot be the taxpayer's children or their descendants, siblings or step-siblings, parents or an ancestor of their parents, step-parents, niece or nephew, uncles, or aunts, or in-laws. They also can’t be their dependent. The rules don't mention a spouse. They also can’t be a person who owns, directly or indirectly, more than 50% of the business.