Although we often think of the IRA as simply another account, the tax law generally regards it as a quasi-entity that is separate from the individual who owns it. Both the individual and the IRA have their own separate tax rules that apply; intermingling money is not allowed (due to contribution limits), and even paying each others' costs can get a client into some hot water. Accordingly, clients must be very careful when they use their own "outside" dollars to pay any form of expenses that are associated with the IRA itself. Fortunately, in a recent private letter ruling, the IRS did (re-)affirm that an IRA's wrap fee expenses are an acceptable cost to pay on behalf of an IRA with outside dollars, while not running afoul of the IRA rules and limitations.
Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (or the "Tax Relief Act" for short!) signed into law by President Obama on December 17th, taxpayers over age 70 1/2 may once again make up to $100,000 per year of so-called "qualified charitable distributions" out of their IRAs and directly to a charity, for the 2010 and 2011 tax years. Doing so allows the entire amount of the distribution to be excluded from income, effectively ensuring that those IRA dollars are never taxed, while also satisfying charitable goals.
Unfortunately, the problem is that this is actually a remarkably INefficient way to make significant charitable gifts, compared to other alternatives available under the tax law!
The Small Business Jobs Act of 2010, passed earlier this year on September 27th, opened up the possibility of completing an in-plan Roth conversion rollover from a 401(k) or 403(b) to a Roth 401(k) or Roth 403(b). However, the rules are not quite as simple and flexible as typical Roth conversions, due to the fact that the account is still first and foremost a qualified employer retirement plan. Fortunately, the IRS has issued guidance to help individuals understand the details of the new rules - which is fortunate, because there are some significant differences that could otherwise catch clients (and their planners) unaware!
Read More...
Earlier this week, the National Commission on Fiscal Responsibility and Reform released a draft version of its proposals on how to take control of our nation's deficit challenges, including suggestions for comprehensive tax reform. The good news in the proposal is that it includes a repeal of the highly unpopular Alternative Minimum Tax (AMT). The "bad" news is that the proposal also includes a repeal of many popular tax credits and deductions as well. But the reality is that we can't really have one, without the other.
Read More...
Given the wild unpopularity of the Alternative Minimum Tax, and the implicit higher tax burden it carries, it's no great surprise that most people wish to avoid the AMT. However, the reality is that while the actual higher tax burden of the AMT may not be desirable, the tax impact - at the margin- of having more income subject to the AMT can actually be good news!
It's difficult to go far in the world of financial planning these days without hearing a discussion about the "inevitability" of higher taxes in the future, leading to a broad range of tax planning strategies to dodge the anticipated increase in the income tax brackets. But in practice, it seems that we might be confusing the idea that the government will need to collect more tax dollars in the aggregate from us - a higher tax burden - with the belief that today's income tax brackets are at a low point that must rise. One does not, necessarily, lead to the other.Read More...
Under the existing rules for 529 plans, account owners can only make investment selection adjustments once per year (or when there is a change in beneficiaries). Under the new relief just released from the IRS for 2009, 529 plan account owners will now be eligible to make changes... twice.Read More...
The average cost accounting method was first created to allow a taxpayer to simply report the gain on partial sales based on the average cost of all shares purchased (instead of the default FIFO treatment, or by using specific share identification), but was reserved exclusively for mutual funds and not for individual equity securities.
However, it appears now that the rules may be a little broader than anyone realized - because technically, an exchange-traded fund (ETF) may also be eligible, notwithstanding the fact that it trades more like a stock than a mutual fund.
Earlier today the Supreme Court issued its ruling in the case of Department of Revenue of Kentucky v. Davis, stating that Kentucky's tax rules which exempt the interest earned on Kentucky muncipal bonds while taxing the interest of other state's bonds is not a violation of the so-called dormant commerce clause of the Constitution. The ruling spared what may have been a tumultuous disruption to the municipal bond market, but the Supreme Court's decision still leaves the door open for several issues...
With the Economic Stimulus Act rebate checks set to start mailing out to taxpayers next month, based on their 2007 tax filings, many believe that no tax planning remains for the rebate checks. However, for the many individuals who will receive less than the full maximum of the rebate check (or possibly as little as nothing), tax planning opportunities do remain!
Read More...
