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Using a NOL to Offset a Roth Conversion | Tax Tip of the Week | No. 73 December 29, 2010

Posted by bradstreetblogger in : Tax Tip, Taxes, Uncategorized , add a comment

The economic conditions of 2010 have been particularly brutal for many small business owners.  When business expenses exceed business income it can create what is called a Net Operating Loss (NOL).  In very limited circumstances an individual taxpayer can also realize a NOL, but that discussion goes beyond the scope of this Tax Tip.

While losing money is never desired, it can turn into a very attractive tax planning opportunity.  If, for example, a business owner has IRA accounts this may be an ideal time to do a Roth conversion.  Typically, if a Traditional IRA is converted to a Roth, tax must be paid on the converted amount.  A NOL can potentially make this a tax-free conversion.

For example:

Husband owns a small business and is married to a wife that is employed outside of the family business.  Let’s assume the husband has an IRA worth $200,000 and his wife earns $70,000 annually.  They also have dividend and interest income totaling $10,000.  The husband’s business generated a $200,000 loss:

Wife’s Earnings                                              $70,000
Interest/Dividends                                         $10,000

Total Income                                                 $80,000

Business Loss                                             ($200,000)

NOL for the year                                         ($120,000)
Roth Conversion (taxable income)                  $120,000

Net Taxable Income                                                $0

In this example, it may be possible for the husband to convert as much as $120,000 of his Traditional IRA to a Roth IRA tax-free.

Caution: This is an extremely simplified example.  Many other factors must be considered when using a NOL to make a Traditional to Roth conversion.  Please consult with a competent tax advisor before attempting such a conversion.

By converting a Traditional IRA to a Roth IRA you can now enjoy all the benefits that a Roth offers:

– Tax Free Distributions (after five years and beyond age 59.5)
– No Required Minimum Distributions at age 70.5
– The ability to name a beneficiary (example a grandchild) that can keep your investment growing tax-free for many years

Give us a call to discuss the details.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week. The economic conditions of 2010 have been particularly brutal for many small business owners.  When business expenses exceed business income it can create what is called a Net Operating Loss (NOL).  In very limited circumstances an individual taxpayer can also realize a NOL, but that discussion goes beyond the scope of this Tax Tip.

While losing money is never desired, it can turn into a very attractive tax planning opportunity.  If, for example, a business owner has IRA accounts this may be an ideal time to do a Roth conversion.  Typically, if a Traditional IRA is converted to a Roth, tax must be paid on the converted amount.  A NOL can potentially make this a tax-free conversion.

For example:

Husband owns a small business and is married to a wife that is employed outside of the family business.  Let’s assume the husband has an IRA worth $200,000 and his wife earns $70,000 annually.  They also have dividend and interest income totaling $10,000.  The husband’s business generated a $200,000 loss:

Wife’s Earnings                                           $70,000
Interest/Dividends                                      $10,000

Total Income                                               $80,000

Business Loss                                          ($200,000)

NOL for the year                                      ($120,000)
Roth Conversion (taxable income)            $120,000

Net Taxable Income                                             $0

In this example, it may be possible for the husband to convert as much as $120,000 of his Traditional IRA to a Roth IRA tax-free.

Caution: This is an extremely simplified example.  Many other factors must be considered when using a NOL to make a Traditional to Roth conversion.  Please consult with a competent tax advisor before attempting such a conversion.

By converting a Traditional IRA to a Roth IRA you can now enjoy all the benefits that a Roth offers:

– Tax Free Distributions (after five years and beyond age 59.5)
– No Required Minimum Distributions at age 70.5
– The ability to name a beneficiary (example a grandchild) that can keep your investment growing tax-free for many years

Give us a call to discuss the details.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Special Tax Alert December 23, 2010

Posted by bradstreetblogger in : Tax Tip, Taxes, Uncategorized , add a comment

SPECIAL NOTICE: New Tax Law Passes 12/17/10

Highlights of Proposed Legislation – Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 – HR 4853

• Ordinary Rates – Continue All Current Ordinary Individual Income Tax Rates For 2011 and 2012.

• Capital Gains and Dividends – Continue Current 0%/15% Tax Rates For Long-Term Capital Gains and Dividends for 2011 and 2012.  Also, 100% Gain Exclusion For §1202 Stock For Purchases Through 2011.

• Estate Tax – For 2010, 2011, & 2012, Estate Tax Rate 35% and Exemption Amount Is $5M.  The $5M Will Be Indexed For Inflation Beginning In 2012.

• Estates of Individuals Dying In 2010 – May Choose 1) No Estate Tax With Modified Carryover Basis or 2)  $5M Exemption Amount, 35% Rate, And Basis Generally Equal to DOD FMV (§1014).

• Unused $5M – $5M Exemption Amount Not Used By Estate of First Spouse To Die May Be Used By Estate Of Second Spouse For Estates of Decedents Dying After 2010.

• Gift Tax – Gift Tax Rate 35%.  The $5M Estate Exclusion Amount Used to Reduce Taxable Gifts Made After 2010 And Any Unused Amount Reduces Taxable Estate.

• Charity – Generally, Items Expired After 2009 Routinely Extended In The Past, Extended Through 2011.  Allows Charitable Contributions Directly To Charity From IRAs Before February 1, 2011 To Be Treated As Made on 12/31/2010.

• AMT – Provides Indexed AMT Exemptions of $47,450 & $72,450 For 2010 and $48,450 & $74,450 For 2011.  Also, Allows Nonrefundable Personal Credits to Reduce AMT For 2010 and 2011.

• Personal Exemptions and Schedule A Deduction Phase-Outs – No Phase-Out of Personal Exemptions or Schedule A Deductions Through 2012.

• Child Credit – No Reduction or Other Changes To Child Credit Through 2012 – Remains at $1,000.

Marriage Penalty – No Reduction In Size of 15% Bracket On Joint Return or Joint Return Standard Deduction Through 2012.

• Coverdell Accounts – Continue Without Change (Including $2,000 Contribution Amount) Through 2012.

• Student Loan Interest – Rules Remain The Same (Including Phase-Out Levels) Through 2012.

• American Opportunity Credit – Extended (Including Refundable Credit Feature) Through 2012.

• Employer-Provided Educational Assistance – Extended Current $5,250 Exclusion, Etc. Through 2012.

• § 168(k) Up-Front Deduction – For Property Placed In Service After 9/08/10 and Before 1/01/12 – 100% §168(k) Deduction.  50% § 168(k) Deduction For Property Placed In Service In Calendar Year 2012.  C Corps May Accelerate AMT Credits In Lieu of § 168(k) Deduction.

• Generation-Skipping Tax – Generation-Skipping Exemption $5M With Zero Percent Tax Rate For 2010 Generation-Skipping Gifts.  35% Tax Rate For Generation-Skipping Gifts Made After 2010.

• 2% Reduction In OASDI – Employee’s OASDI Reduced From 6.2% To 4.2% For 2011 and Self-Employed’s OASDI Reduced From 12.4% to 10.4% (Max Savings $2,136).

As always, give us a call…..

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

A Week Off From Thinking About Taxes | Tax Tip of the Week | No. 72 December 22, 2010

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Happy Holidays and Good Luck in the New Year!

We are going to take a break from tax planning this week.  Instead, the family of Bradstreet & Company would like to wish you and your family the most joyous holiday season and best wishes for 2011.

We hope you have enjoyed the Tax Tip of The Week this year.  Please let us know what topics you would like us to cover as we enter the New Year.

Is The Tax Tip of the Week real?
While your kids are questioning if Santa is real, we continue to receive some interesting feedback that some of you don’t realize this is really Bradstreet CPAs reaching out each week (… some suspect this is a “packaged” communication to which we add our logo).  Well, rest assured it’s us and we’d love to hear from you.

Enjoy the week and, “Yes Virgina, there is a Santa Claus.”

As always, give us a call…..

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Here is a Year-end Tip Worth Repeating | Tax Tip of the Week | No. 71 December 15, 2010

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Before Santa comes to visit, here is a year-end tax savings tip to consider:

Go through your house and garage and see what items you have not used in the last two years and donate them to charity.  You can clean out space for all the new toys that are coming and receive a tax deduction for it!

The IRS requires that these non-cash donations must be in “good condition or better.”  Furthermore, you can only deduct the Fair Market Value (FMV) of the items donated.  The Salvation Army’s web site provides a guide that you can use to determine the FMV.  If the FMV exceeds $500 you will need to complete Form 8283 as part of your tax return.  On this form you will need to list: name and address of the donee organization, date of the contribution, description of the items donated, FMV and the original cost of the items donated.  A photo of the donated items is also a good idea to support their value.

If you donate a car, or have non-cash contributions exceeding $5,000 give us a call to discuss the details.

We hope Santa is good to you this year while you take as many tax deductions as you can.

As always, give us a call…

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

The IRS May be Looking For You…| Tax Tip of the Week | No. 70 December 8, 2010

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And they want to give you money!

According to a recent IRS news release, “the Service is seeking to return $164.6 million in undeliverable refund checks to taxpayers.”  “A total of 111,893 taxpayers are due one or more refund checks that could not be delivered because of mailing address errors.”

A taxpayer only needs to update his or her address once for the IRS to send out all refund checks due.

Taxpayers can generally update their addresses with the “Where’s my Refund” tool on the IRS web site.

The easiest way for taxpayers to avoid this problem in the future is to e-file their returns and have refunds directly deposited into their checking/savings accounts.

The IRS also reminds the public that they DO NOT contact taxpayers by e-mail to alert them of pending refunds.  There are many fraudulent enterprises on the internet that try to steal your identity or infect your computer with official looking e-mails.  Never provide personal information to any such e-mails you receive.  Better yet, don’t even open them.

If you or anyone you know has not received an anticipated (or forgotten) refund, this Tax Tip might make your holiday shopping a little easier.

As always, give us a call…

We’ll keep you posted.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

New IRS Ruling for Homeowners with Corrosive Drywall | Tax Tip of the Week | No. 69 December 1, 2010

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Casualty Loss Update

Drywall RepairsThe IRS issued guidance recently in a Rev. Proc. 2010-36 providing relief to homeowners who have suffered property loss due to the effects of certain imported drywall installed in homes between 2001 and 2008.

A bit of background first—

For years, the tax code has allowed for a potential casualty loss deduction.  In the past, however, losses were limited to “sudden or unexpected” damages due to fires, floods, car accidents, etc.  This is the first time we have ever seen a potential casualty loss deduction due to a “progressive deterioration.”

With this ruling, the IRS recognizes that many homeowners with certain imported drywall have reported blackening or corrosion of copper electrical wiring and copper components of household appliances.  There have also been reports of the presence of sulfur gas odors and mold.

If you, or anyone you know, have suffered damages from imported drywall then give us a call.  As usual, there is a lot of fine print to review to see if you qualify.  The first requirement is the damages must exceed a $100 or $500 deductible (depending on the year of the claim).  In addition, the loss must exceed the 10% of adjusted gross income (AGI) floor.

Give us a call if you think this may help you save a few tax dollars.

We’ll keep you posted.
You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.