Federal Tax

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.

Memorial Day weekend may still be a month away, but as you daydream about your sunny-day beach house getaway, there may be some dark tax clouds looming over the horizon.  The Housing and Economic Recovery Act of 2008 (signed into law on July 30, 2008) contained a rather onerous provision related to the sale of vacation homes.  You may no longer be able to use the $250,000 ($500,000 if married filing jointly) home sale exclusion to reduce the gain from a sale, even if you lived in the house for 2 of the last 5 years.

Tax Consequences of Selling Your Home

Normally, you can exclude from taxable income up to $250,000 ($500,000 if married filing jointly) of gain from the sale of property if, during any 2 of the last 5 years, you used that property as your principal residence.  For most people, this means that if you’ve lived in your home (as your principal residence) since you bought it, you simply have to stay 2 years and then some (if not all) of the gain is excluded from tax. 

Like most tax professionals, I am relieved that April 15th has now come and gone.  As a member of the tax department here at Bond Beebe, tax compliance has been the center of my universe for the past three and a half months.  With many returns completed and the rest safely extended, my thoughts now turn to other areas of tax practice, including representing various clients in audits before the IRS and other state and local taxing authorities.  This is a part of my practice that I have, unfortunately, seen expand considerably over my 15 years as a tax professional.

Noncompliance: Where the Money is and is NOT Coming From

In an environment of growing demands on limited government resources, every dollar counts.  According to the 2008 IRS data book, net tax revenue has decreased by approximately 3.3 %while government spending has continued to increase.  It is further estimated that close to 16% of taxpayers are either underreporting income, overstating deductions or otherwise not in full compliance.  This percentage of the taxpaying population is estimated to represent a tax gap of well over $300 billion per year.  In light of the difficulties presented to many by the current downturn in the economy, the IRS is rightly concerned that this gap may continue to grow.

Given that the largest component of the tax gap is the result of underreporting noncompliance among individual taxpayers, the natural response of taxing authorities is to crank up enforcement activity and specifically to direct that enforcement activity to the returns of business owners and other high net-worth taxpayers.  The current budget outlined by the Obama administration calls for an increase to the budget of the IRS of approximately 4%, most of which will be directed for greater funding of enforcement activities including audits, criminal investigations, collection activities and greater policing of offshore tax evasion.