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Federal Tax

Reverse Rollover: A Bridge over the Backdoor Roth Trapdoor

Much has been written about the benefits of Roth versus Traditional IRAs, and over the past several
 years a popular “backdoor Roth” conversion has made headlines as well. As a refresher, this method allows high-income taxpayers, who are excluded from making direct contributions to Roth IRAs, the ability to make non-deductible contributions to a Traditional IRA, and then immediately convert that amount to a Roth. The net effect, ideally, is minimal tax on any earnings between the date of contribution and the conversion, and years of tax-free growth in a Roth account moving forward. This is especially beneficial for young people who can benefit from growth over time, and can avoid theoretically higher tax rates in the future when distributions may be taken. Furthermore, required minimum distributions do not apply to Roth accounts.

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On the surface, there doesn’t appear to be much downside. However, many taxpayers found out the hard way that there can be significant tax implications if other IRAs exist at the time of conversion. This is true because the IRS considers the value of all IRA assets at the time of conversion. For instance, if you had a Traditional IRA account with pre-tax assets of $544,500, made a $5,500 non-deductible IRA contribution and then immediately converted that $5,500 to a Roth account, 99% (or $5,445) would be taxable. In addition to creating an unintended tax liability, it also creates an administrative burden to track the amount on which tax has already been paid.

Precise Record Keeping Required on all Charitable Contributions

There have recently been a series of cases decided by the Tax Courts disallowing charitable contributions due to a lack of proper documentation about them. The rules here (under Code Section 170(f)(8)) are precise and strict:

  • Contributions of $250 or more must be supported by a written acknowledgement from the recipient organization dated prior to your return filing that states the amount of cash contributed and/or a description of any property other than cash,
  • A statement of whether or not the recipient provided any goods or services in consideration of the donation and if so an estimate of their value.

The IRS Dirty Dozen: Unscrupulous Tax Preparers

Posting by John Merchant

The Internal Revenue Service (IRS) has released its annual “dirty dozen” for 2015. The annual dirty dozen are the top twelve tax related scams that IRS has found are being perpetrated on unsuspecting victims each year. Once again, Unscrupulous Tax Preparers are on the list. The IRS reports that approximately 60% of all taxpayers use a paid preparer. While IRS acknowledges that most preparers provide very good service, every year there are some that run scams to defraud the government or to cheat their clients. Either way, the results can be devastating as these scams can lead to financial loss or even criminal prosecution for the taxpayer.

The unscrupulous preparers take advantage of honest taxpayers in several ways. Some promise large refunds and then take unallowable deductions to achieve their goal. Others prepare tax returns through April 15th and then simply disappear, leaving no one to help the taxpayer if the IRS questions the return. A few advertise themselves as licensed tax preparers when, in fact, they have no license and no training or background in tax law or tax return preparation.

The IRS offers several tips to taxpayers. These include:

  • Avoid preparers that base their fee on the size of your refund.
  • Always have any refund sent to you, not to the preparer.
  • Review your return carefully and make sure that you agree with amounts reported.
  • Make sure that the preparer signs your return and includes their Preparer Tax identification Number (PTIN).

For a complete list of IRS tips to taxpayers, go to Remember, even if you use a paid preparer, you are still responsible for the accuracy of your tax return. Choose your preparer carefully.

New Applicable Federal Rates Released for April by IRS

Each month, the IRS provides various prescribed rates for federal income tax purposes. These rates, known as Applicable Federal Rates (AFRs), are regularly published as revenue rulings.

The AFRs for April 2015 are as follows:


Annual Semi-Annual Quarterly Monthly
Short-Term: 1-3 years 0.48% 0.48% 0.48% 0.48%
Mid-Term: >3 & up to 9 years 1.70% 1.69% 1.69% 1.68%
Long-Term: >9 years 2.47% 2.45% 2.44% 2.44%

Everyone wants it now! - A Summary of the 2015 Annual Gift Tax Exclusion & Other Non-Taxable Gifts

taxformThe Federal gift tax return (Form 709) is a function of the overall Federal transfer tax system. Excluding any discussion on the Generation-Skipping Transfer tax for now, the rules just to report gifts on a gift tax return are very complex. All gifts are not reportable on a Federal gift tax return, however it is important to understand what the IRS considers a gift:

A gift is the transfer of a beneficial interest in certain property in exchange for something less than full and adequate consideration. Common examples would include cash gifts for life events (i.e. - weddings, graduations), funding trusts with beneficiaries other than yourself, creating below-market loans, and countless other scenarios. The IRS does not even need to prove donative intent when considering a transaction a gift.

Gifts are typically classified as either a gift of a “present interest” or a gift of a “future interest.” On the surface these terms are self-explanatory. Present interest meaning the donee has a right to use the property now and future interest meaning the donee has a right to the property later. A gift of a present interest made to one person is eligible for an annual exclusion, which is currently at $14,000 in 2015. You can check our blog here for more information on annual exclusions. The annual exclusion amounts, which are adjusted for inflation every few years, provide extra incentive for a taxpayer to qualify gifts as a present interest. The present interest is often easier to identify especially when gifts are made of cash or securities directly to the donee without involving a trust.

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