January 2010
MEMO ON ROTH CONVERSIONS
by
Richard S Schwartz, CPA, CVA
Beginning in 2010, taxpayers with
incomes exceeding $100,000 finally have the opportunity to
convert their traditional IRAs and other qualified retirement
accounts into a Roth IRA. What makes the decision to convert so
appealing are some of the unique benefits available to Roth
IRA’s, including:
As part of
your decision to convert existing IRAs to a Roth IRA, you need to weigh the
pros and cons. Some reasons influencing a decision to convert to a Roth IRA
include the following:
-
You anticipate higher tax rates in the future.
-
You have a long investment time frame.
-
While your retirement investments have declined in value due to last year's
market correction, you anticipate them to rebound at some point before you
retire.
-
You prefer delaying retirement distributions as long as possible and would
like to avoid taking withdrawals upon reaching age 70.5.
-
You have money available to pay the taxes due on this conversion.
-
You hope to leave your beneficiaries a tax-free gift.
-
The majority of your IRA’s are comprised of post-tax contributions,
resulting in a minimal tax from your conversion.
Conversely,
the primary reasons influencing a decision not to convert to a Roth IRA include
the following:
-
You do not believe in prepaying income taxes given uncertainty about the tax code,
future tax rates and other tax legislation.
-
You have a large amount of money in a rollover IRA, SEP IRA or SIMPLE IRA which would result in a
sizeable
tax burden on each IRA dollar converted.
-
You are unsure that the IRS will continue to allow qualified distributions
from Roth IRAs to be tax-free
in the future.
-
You will need to withdraw money from your converted Roth account to pay
taxes due on the conversion.
There is
one additional item to consider for 2010 conversions only. Under the
current rules, you can elected to either report 100% of the taxable income on your 2010 tax
returns or claim 50% of the conversion amount as taxable in
2011 and then claim the remaining 50% in 2012. Don't forget that rates may be on the way
up in 2011, however, since the tax cuts enacted as part of the 2001 Tax Act are set to
sunset at the end of 2010.
If you have
existing IRAs (traditional IRAs, rollover IRAs, SEP-IRAs, SIMPLE IRAs)
and/or 401(k) or 403(b) accounts held with a former employer and are considering converting some
or all of those funds to a Roth IRA, please contact one of the
CPAs or EAs listed on FindAGoodCPA.com to help you work
through a detailed analysis prior to making your final decision. A small amount
of planning may result in a large amount of tax savings.
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IRS ANNOUNCES 9% DECREASE TO STANDARD MILEAGE RATE FOR 2010
by
Andrew D. Schwartz, CPA
The IRS announced that the standard mileage rate will
decrease to 50
cents per business mile driven in 2010. That is a hit of just over
9% from the 55 cents allowed in 2009. According to the
IRS, "The new rates for business, medical and moving purposes are
slightly lower than last year’s. The mileage rates for 2010 reflect
generally lower transportation costs compared to a year ago."
When you use your car for business, driving
between job sites is deductible. So is driving between your home and a
temporary job site, job interviews, and conferences. Commuting between your
home and a regular place of business generally isn't tax deductible.
There are two ways for you to calculate your
automobile expenses. You can either claim $.55 per business mile driven in
2009 (decreasing to $.50 for 2010), or you can base your deduction on the
percentage of miles your car was driven for business multiplied by the
actual costs incurred during the year. Allowable costs include gas,
insurance, repairs, parking at home, and either your lease payments, or if
you own your car, a factor for depreciation.
Generally, unless you drive your car relatively few miles each year, with
most of those miles being allowable business miles, you're better off basing
your deduction on the standard mileage rate.
For Example
Let's say you lease a car for $400 a month that you drive only 3,000
total miles during the year. And of those miles, 2,000 qualify as deductible
business miles. By calculating your deduction based on the standard
mileage rate, you'll end up with a deduction of just $1,000 (2,000 business
miles * $.50 per mile).
What would your deduction be based on the actual expenses incurred,
assuming you spend $1,200 on insurance, $.10 per mile driven for gas, and
$1,200 on parking at home? Based on $7,500 of total automobile
expenses (including the lease payments), multiplied by two-thirds (2,000
business miles divided by 3,000 total miles), your allowable deduction for
your automobile expenses jumps to $5,000 - or five times the $1,000
calculated using the standard mileage rate.
Now let's see what happens if you drive 20,000 total miles during the year.
Assuming your allowable business miles remain at 2,000, you can either
claim an automobile deduction of $1,000 based on the standard mileage rate, or
$920 based on one-tenth (2,000 business miles divided by 20,000 total
miles) of your actual automobile expenses incurred.
How to Claim The Deduction
Taxpayers who are compensated as employees
generally will claim their deductible automobile expenses as an unreimbursed
employee business expense. These type expenses are reported on a Form 2106
and are deducted as a miscellaneous itemized deduction on the Schedule A.
Keep in mind that miscellaneous itemized deductions are only allowable to
the extent they exceed 2% of your income, and are not allowable when
calculating the Alternative Minimum Tax (AMT).
Those taxpayers compensated as independent
contractors will generally claim their allowable automobile expenses
directly against their self-employment income. For these taxpayers,
automobile expenses should be reported the Schedule C.
Other Deductible Miles
The use of an automobile in connection with a
charitable activity is deductible at a rate of 14 cents per mile for
2009 and 2010 and
should be reported with other charitable contributions as an itemized
deduction of the Schedule A.
Any mileage driven in connection with a
qualified move is deductible at a rate of 16.5 cents per mile in 2010,
down from 24 cents per mile in 2010, and should be reported on a Form 3903, Moving
Expenses.
And don't forget that medical related mileage
is also deductible. Medical mileage is allowable at 24 cents per mile
in 2009, before falling to 16.5 cents per mile in 2010, and should be reported with all other medical expenses on the Schedule
A.
Why such a huge decrease for
medical and moving mileage rates? According to the IRS, "The standard
mileage rate for business is based on an annual study of the fixed and variable
costs of operating an automobile. The rate for medical and moving purposes is
based on the variable costs as determined by the same study. Independent
contractor Runzheimer International conducted the study."
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2008 & 2009 TAX FACTS
- For 2009, the standard deduction for a single individual is $5,700 and
for a married couple is $14,400. A person will benefit by itemizing once
allowable deductions exceed the applicable standard deduction. Itemized
deductions include state and local income taxes (or sales taxes), real estate
taxes, mortgage interest, charitable contributions, and unreimbursed employee
business expenses.
- For 2009, the personal exemption is $3,650.
Individuals will claim a personal deduction for themselves, their spouse, and
their dependents.
- The maximum earnings subject to social security taxes is $106,800
for 2009 and 2010.
- The standard mileage rate is $.50 per business mile as of
January 1, 2010, down from $.55 per mile for 2009.
- The maximum annual contribution into a 401(k) plan or a
403(b) plan is $16,500 in 2010. And if you'll be 50 or
older by December 31st, you can contribute an extra $5,500 into your 401(k) or
403(b) account this year.
- The maximum annual contribution to your IRA is $5,000 for 2009. And if you turn 50 by December 31st, you can contribute an extra
$1,000 that year. You have until April 15, 2010 to make your 2009 IRA
contributions.
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