You will owe income tax on a Roth IRA conversion.  If you convert in [...]]]>

Starting in 2010, anyone with a traditional IRA can convert all or part of it to a Roth IRA.  Once you have had a Roth IRA for at least five years and after you are age 59 1/2, all withdrawals are tax free.

You will owe income tax on a Roth IRA conversion.  If you convert in 2010 you can elect to defer the tax payments to 2011 and 2012.  Even with this deferral, you probably will pay income tax much sooner that you would have paid if you had kept the money in a traditional IRA.

REASONS TO CONVERT

ESTATE PLANNING

• You are not required to take any withdrawals from a Roth IRA, no matter how old you are.  With traditional IRAs, you generally must take at least required minimum distributions (RMDs) after age 701/2.  Therefore, a Roth IRA can be ideal if you have ample wealth from other sources and wish to pass a tax-free account to your heirs.
• Example1:
  • Barbara has $1 million in a traditional IRA.  She converts the account to a Roth IRA in 2010 and owes $350,000 in income tax, at a 35% rate.  Barbara pays that tax bill with non-IRA funds.
  • Assume that Barbara lives for 24 more years.  She earns 6% per year in her Roth IRA and takes no distributions.  Therefore, the account is worth around $4 million at Barbara’s death. If Barbara’s son Phil is the beneficiary of the Roth IRS, he will be subject to an RMD schedule, but all of his withdrawals will be tax free.

TAX TACTICS

• When you convert a traditional IRA to a Roth IRA, you will have to recognize income from the conversion.  That income may help you use up tax benefits that otherwise would be used later or not at all.  Tax benefits that may expire for lack of income include net operating losses, ordinary losses, and charitable contributions.
• Example 2:
  • Nick is a retiree with modest taxable income.  A few years ago, he made a large donation to his alma mater.  Under the tax code, Nick’s charitable deductions each year are limited to 50% of his income.  If Nick doesn’t use all of his deductions within five years after the year of the donation, he will never be able to use them.
  • There, Nick converts his traditional IRA to a Roth IRA.  This move increases his income, enabling him to use the balance of his charitable deduction.  Thus, Nick has converted his tax-deferred traditional IRA to a potentially tax-free Roth IRA while incurring a relatively low tax obligation.

MARKET TIMING

• If your traditional IRA loses value, you will owe less tax on a Roth IRA conversion.  Many taxpayers invest IRA money in stocks.  Because the broad U.S. stock market is currently below its peak, Roth IRA conversions are relatively inexpensive.
• Example 3:
  • Robin Bradley’s traditional IRA was worth $300,000 in late 2007.  In her 33% tax bracket, Robin would have paid $99,000 in federal income tax to convert this IRA to a Roth IRA.
  • Robin’s traditional IRA is now only worth $210,000.  She would owe $69,300 on a Roth IRA conversion, at a 33% tax rate: $29,700 less than a conversion would have cost in 2007.  If Robin’s Roth IRA grows back to $300,000, she eventually can withdraw that $90,000 without owing any income tax.  Without a Roth conversion, Robin would owe income tax on withdrawals from her traditional IRA, making that $90,000 gain taxable.

RETIREMENT PLANNING

• Some taxpayers believe they will be in a higher tax bracket in retirement than they are now.  They may have low taxable income this year, for example, or they may plan to relocate to a high income tax state.  In addition, many people fear that future income tax rates will be higher than today’s rates because the federal government will need more money to cover its obligations.
• In such circumstances, you might want to convert all or part of your traditional IRA to a Roth IRA now and pay tax at current rates.  Once you meet the five year and age 591/2 tests, you will have a source of tax-free cash no matter what happens to your personal tax rate.

WHY YOU SHOULD NOT CONVERT

• You cannot convert the 2010 RMD amount from the traditional IRA to a Roth.
• The tax liability is too large.  It is not advisable to use part of the IRA conversion money to pay the tax due. Does paying the tax deplete too much of your liquid cash assets?
• Is the conversion going to bump you into a higher tax bracket so all your income will be taxed at a higher rate? The amount of Roth transfer is treated as income.  If you receive Social Security benefits, their taxability will be affected and some deductions could be reduced that are affected by income limits.

I tried to keep this letter brief, but as you can see there are many things to consider if you are contemplating doing a conversion.  There are too many variables to cover in a general article, so it is best to consult your financial advisor or CPA to analysis your particular situation.

Should you have questions regarding this post or any other tax needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.

Using independent contractors in your business can save money.  Independent contractors do not receive typical company benefits such as vacation, sick pay or health insurance/retirement benefits.  Plus, employers don’t pay social security taxes (FICA), or provide unemployment benefits. However, it is easy to blur [...]]]> Misclassifying Workers as Independent Contractors Can Be A Costly Mistake

Using independent contractors in your business can save money.  Independent contractors do not receive typical company benefits such as vacation, sick pay or health insurance/retirement benefits.  Plus, employers don’t pay social security taxes (FICA), or provide unemployment benefits. However, it is easy to blur the line between a true independent contractor and employee and the IRS is cracking down.

In order to be considered an independent contractor, a worker should meet certain criteria.  Control is one of the primary determinators.  What is your level of control over the worker?  An independent contractor determines how and when work will be performed whereas an employee’s work parameters are established by the employer.  For example, if you require a worker to attend regular meetings, work set hours and use specific materials and equipment, then in most cases that worker is an employee because you are exercising significant control over his/her job performance.

Other factors include such things as:

• Working relationship. Does the worker have other clients with whom he works or does he work exclusively for you?  An independent contractor is in business for himself so he should have other clients or at least be in the market to acquire other business opportunities.
• Work hours. An independent contractor should, in most cases be able to set his own work schedule.  As long as the contractor meets the deadline established by the client, he can decide his own work schedule.
• Work location.  Generally, an independent contractor provides for his own work location, materials and equipment.  In other words, his primary office is not located at your company’s facility.
• Expenses. Employees typically submit their work-related expenses to their employer for reimbursement.  An independent contractor, however, generally absorbs expenses as part of the cost of doing business.
• Taxes. An independent contractor pays his own taxes by filing quarterly estimated tax returns.  Your company does not withhold taxes.

If the IRS determines you have misclassified a worker as an independent contractor rather than an employee, get out your checkbook.  You may be charged for back taxes, interest and penalties.  In fact, there is even the possibility of criminal charges.  And in some cases the misclassified worker has been able to sue the employer for lost benefits during the time in which he should have been considered an employee.

The IRS has a set of guidelines an employer can use to determine the proper status of a worker.  If you are still uncertain, give us a call us.

While in the short-term, using independent contractors in your business may save you money, it could cost you significantly more in the long-term.  Make sure you make the right choice.

(From business.gov article Misclassifying Workers as Independent Contractors Can Be Costly)

Should you have questions regarding this post or any other tax needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.

To qualify for at least a partial credit, [...]]]> The Healthcare reform legislation allows certain small employers and tax-exempt organizations that pay at least half of the cost of health insurance for their employees to claim a tax credit starting this year (2010).  The rules for determining eligibility for, and the computation of, the credit are quite complicated.

To qualify for at least a partial credit, an employer must have fewer than the equivalent of 25 full-time employees and pay them average annual wages under $50,000.  Because eligibility depends on the number of “full-time equivalent” (FTEs) employees rather than the number of employees, employers that employ a combination of full-time and part-time help may qualify for a credit.  Owners of the business and their family members are not counted in calculating the FTEs and the annual wages for qualifying for the credit.  For the years 2010-2013, the credit can be as high as 35% of premiums.

As mentioned, the rules are complicated and have many “ifs”, so it is difficult to give a general answer on the amount of credit available for a specific organization.  If you are paying health insurance for your employees and think this may affect you, please give Schutte & Hilgendorf a call or send an e-mail to loish@prescottaccountants.com and we will customize the calculations for your specific situation to see how you may benefit.

For tax years beginning after December 31, 2010 and beyond, an employer must disclose on each employee’s W-2 Form the value of the employee’s health insurance coverage sponsored by the employer.

Beginning in 2014 an employer who employs an average of at least 50 full-time employees during the preceding calendar year is required to offer and contribute to their workers’ health insurance or  pay a penalty.

The 50% bonus depreciation in effect in 2009 HAS NOT YET been [...]]]> The HIRE act  of 2010 also extends the $250,000 limit on first-year expensing for purchase of business equipment and machinery in 2010,  (Known as Section 179).  If the total cost of qualifying purchases in 2010 exceeds $800,000, the $250,000 Section 179 deduction is reduced.

The 50% bonus depreciation in effect in 2009 HAS NOT YET been extended to apply in 2010.  The latest news we have received is that it is included in a bill that the Senate is considering, but has not yet passed.  We are keeping an eye on the developments and will post new information to our website www.prescottaccountants.com as soon as it is available.

If you have any questions about how to apply this depreciation extension or any other aspect of the 2010 HIRE act, or just need tax planning assistance,  please call Schutte & Hilgendorf, CPAs at 928-778-0079.  We specialize in accounting, auditing, and tax planning and preparation for individuals and business in the great quad-city area.

Under the HIRE Act, employers who hire unemployed workers after February 3, 2010 and before January 1, 2011 are exempt from having to pay the employers share of Social Security taxes(6.2%) on the wages [...]]]> On March 18, 2010, The HIRE Act was signed into law and provides some incentives for hiring and retaining previously unemployed workers.

Under the HIRE Act, employers who hire unemployed workers after February 3, 2010 and before January 1, 2011 are exempt from having to pay the employers share of Social Security taxes(6.2%) on the wages paid to the qualified employees after the March 18th effective date.  The employer still withholds and pays the employee share of Social Security tax(6.2%) and both the employee and employer share of Medicare tax(1.45%).

Qualifying employees are those who certify to the employer on new Form W-11 that they did not work more than 40 hours in the 60 days prior to the hire date.  If the new hire is replacing another worker, the exemption applies only if the worker left voluntarily or was fired for cause.

The credit is obtained by filing the new Form 941 for the 2nd quarter payroll tax reporting.

One additional credit will be available if the qualifying employee is retained for at least 52 consecutive weeks. The retention credit is taken in 2011 and will be the lesser of $1,000 or 6.2% of the wages paid to the worker during a 52 consecutive-week period.

If you need further information please contact us.

Should you have questions regarding this post or any other tax needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.

Now that health care reform legislation with a true price tag of nearly $2 trillion is the law of the land, many small business owners are asking how they will be impacted. The answer is to expect higher costs and more mandates.

Mandates. [...]]]> Health Care Reform And Your Business

How the New Law Will Impact Your Bottom Line

Now that health care reform legislation with a true price tag of nearly $2 trillion is the law of the land, many small business owners are asking how they will be impacted. The answer is to expect higher costs and more mandates.

Mandates. The new law forces small businesses to provide health insurance whether or not they can afford it. Beginning in 2014, employers with more than 50 employees will be required to offer coverage or pay a $2,000 fine per employee if just one employee receives a subsidy to purchase insurance through newly created state health insurance exchanges. A firm’s first 30 employees will be subtracted from this penalty payment calculation.

Even businesses with more than 50 employees that do offer health benefits will face a $3,000 fine for each full-time employee who opts out and receives a subsidy to purchase coverage through an exchange. Part-time employees are taken into account as full-time equivalents, defined as working 30 hours per week. The total employer penalty is capped at the maximum penalty amount it would face if it did not offer any coverage at all. An employer plan must cover a specific set of services to be determined by the government and meet actuarial standards laid out in the law.

It is estimated that nearly 220,000 small businesses employing more than 26 million workers could be subject to the employer mandate. As premiums rise, some businesses will decide that it makes sense to drop coverage and pay the fine. The Joint Committee on Taxation estimates that employers will pay $52 billion over 10 years in penalties for noncompliance. The Congressional Budget Office (CBO) projects that 3 million fewer Americans will be covered through employer plans in 2019.

Exchanges and Tax Credits. By 2014, states are required to offer insurance exchanges where small businesses and individuals can purchase coverage. Through 2016, the exchanges are restricted to small businesses with no more than 100 employees, but states will have the option of limiting pools to companies with 50 or fewer employees. State benefit mandates will apply to plans sold through the exchange.

From 2010 to 2013, small businesses with fewer than 25 employees who on average earn less than $50,000 per year will be eligible for tax credits paying up to 35% of their insurance costs. This credit, however, will do little to blunt new costs for businesses that previously did not provide coverage. For example, a company that pays $40,000 a year to insure its employees will still be faced with $26,000 in unsubsidized costs. The tax credit grows to 50% of insurance costs in 2014, but it disappears completely two years later.

Taxes and Fees. The bill imposes $569 billion in new and higher taxes on businesses and individuals. New taxes on pharmaceutical companies (beginning in 2011), medical devices (beginning in 2013), and the health insurance sector (beginning in 2014) will be passed on to every American in the form of higher prices and premiums. Beginning in 2018, a 40% excise tax will be imposed on employer-sponsored health premiums that exceed $10,200 for single coverage and $27,500 for family coverage.

Upper income earners are targeted for additional tax hikes. Beginning in 2013, the Medicare payroll tax will increase 0.9% for individuals earning more than $200,000 ($250,000 for married couples filing jointly). That equals an extra $2,250 per year in taxes for a family earning $500,000. Further, income thresholds are not indexed annually, meaning that every year more taxpayers will be subject to the payroll tax increase.

Those same households will face a 3.8% Medicare tax applied to net investment income, which captures income from interest, dividends, capital gains, and some profits from investments in partnerships and S-corporations.

In addition, the law curtails several positive features of the health care system designed to promote individual initiative and private sector efficiency. For example, caps on tax-free Flexible Spending Accounts (FSAs), which are used to reimburse some medical bills not covered by insurance, have been cut in half to $2,500, and over-the-counter medications will no longer be considered a qualified medical expense.

Learn more at www.uschamber.com/healthcare.
Originally published May 2010. Reprinted by permission, uschamber.com, May 2010.
Copyright© 2010 U.S. Chamber of Commerce – All Rights Reserved.

Included in the health care reform legislation, the Patient Protection and Affordable Care Act, approved by Congress and signed by President Obama on March 23, the credit [...]]]> WASHINGTON ― Many small businesses and tax-exempt organizations that provide health insurance coverage to their employees now qualify for a special tax credit, according to the Internal Revenue Service.

Included in the health care reform legislation, the Patient Protection and Affordable Care Act, approved by Congress and signed by President Obama on March 23, the credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

“This credit provides a real boost to eligible small businesses by helping them afford health coverage for their employees,” said IRS Commissioner Doug Shulman. “We urge small businesses and tax-exempt employers to look closely at this important tax break — which is already effective — to see if they qualify.”

The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. In 2014, this maximum credit increases to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible employers that are tax-exempt organizations.

The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers.

The maximum credit goes to smaller employers — those with 10 or fewer FTEs — paying annual average wages of $25,000 or less.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit.

The IRS will use postcards to reach out to millions of small businesses that may qualify for the credit. The postcards will encourage small business owners to take advantage of the credit if they qualify.

(From IRS Issue Number IR-2010-38)

Should you have questions regarding this post or any other tax needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.