Regretting your Roth IRA conversion? You have just a few days left to undo that move: The deadline to reverse — or to “recharacterize” in tax parlance — the conversion is Oct. 17.
Why consider a do-over? Thanks to the volatile stock market, investors may find their Roth IRA is now worth less than on the conversion date. That means they’d be stuck paying taxes on money that’s been lost. Investors may also consider reversing the conversion if they can’t afford that tax hit; the Internal Revenue Service requires that investors pay taxes on their savings when they convert to a Roth IRA from a traditional one, though they don’t have to pay them all at once.
More people may be considering a do-over this year because the number of people who could convert to a Roth IRA soared in 2010 thanks to new rules from the IRS that made more people eligible. Before 2010, people with adjusted gross income of more than $100,000 typically couldn’t convert a traditional IRA to a Roth IRA. High-income taxpayers still cannot contribute to a Roth, but they can do the conversions.
Weekend Investor’s recent feature, “Write Off Your Job Hunt!” offers a tax guide for the unemployed. It has drawn much reader interest and a few questions.
For answers we turned to Douglas Stives, a professor at Monmouth University in West Long Branch, N.J. Stives was a full-time CPA for 36 years and still practices part-time in addition to teaching at Monmouth’s business school. He prides himself on making optimum use of tax deductions allowed by Uncle Sam, and last spring he was featured in a WSJ article dubbing him “The Most Tax-Efficient Man.”
Stives agrees with experts cited in the story that often a job hunter’s best hope for maximizing deductions is to set up a Schedule C sole proprietorship and look for part-time as well as full-time work, so that the same deductions work for both.
Like them, he also stresses that taxpayers must have some income to offset the deductions. “The good news is, you don’t have to have income in the first year, just in three out of five years,” says Stives. “It also helps if you can show that some of the future income was generated by your earlier expenses.”
Thanks to countless deductions and credits, the federal income tax brackets are ruined.
Few people pay 10%, 15%, 25%, 28%, 33% or 35% of even their “marginal” dollar in income taxes. So, Monday’s proposal from President Barack Obama is really about average tax rates.
The plan picks up on one of Warren Buffett’s frequently cited notions — that the richest Americans pay a lower percent of their income in taxes than those earning far less. A progressive tax system, such as the one purportedly used in the United States, is designed to do the opposite.
If you owe estimated taxes, consider this your alarm clock.
You can hit the snooze button as long as you postmark or electronically submit your estimated tax payments to the IRS and your state(s) on September 15. For more details, read our primer on estimated taxes for what to do if you think you owe more or less than you expected. And, if you followed this summer’s federal debt and deficit debate, you can actually watch the taxes roll in at the daily Treasury statement, listed under Individual Income Taxes on Table IV.
You can find estimated tax forms at the IRS or your state’s tax or finance department web site.
The perks of municipal bond investing are on the chopping block — again.
President Obama has proposed limiting the amount of interest from municipal bonds that high earners can excludefrom their taxable income, a move that could make the bonds much less appealing for their biggest buyers.
Weekend Investor’s recent “IRS Whistleblower” feature story, about how to turn in a tax cheat to the Internal Revenue Service and collect part of the proceeds, drew a host of reader comments. Reaction ranged from enthusiastic support of the program—“White-collar crime detection deserves the help of citizens”—to outright condemnation of it, with detractors comparing the IRS’s efforts to police-state tactics.
Tax cheats have more to worry about than just whistleblowers. According to recent report from a governmental watchdog, the criminal division of the IRS is getting more efficient. The study was issued by the Treasury Inspector General for Tax Administration, known as TIGTA, which closely monitors the IRS and often issues assessments critical of it.
This TIGTA report was unusually positive. It praised IRS agents for taking an average of 365 days to complete a case vs. 401 days in 2009. The agency spent about $660 million on criminal tax cases during the 2010 fiscal year.
Overall, the IRS criminal division initiated some 4,700 investigations and completed 4,300 during the same period, exceeding preset goals in both categories.
Most important, say outside experts, is that the IRS continues to make progress on initiating “pure” criminal tax cases. These are cases in which the tax charges are central to the case, instead of simply an add-on to a long list of more important charges, such as drug running or money laundering. The agency calls these cases “legal-source investigations.”
The August 6 Tax Report on the controversial “carried interest” issue attracted many comments. Some readers defended the provision’s current generous tax treatment and said changing it could damage the U.S.’s ability to create jobs and compete internationally.
“Does America really want to drive away the private equity industry when international competitiveness and international demand for U.S. products is more threatened than ever?” said Bernard Peperstraete of NGN Capital in New York.
Mark Heesen, president of the National Venture Capital Association, agreed. In a statement to the Wall Street Journal, he said, “Continuing to apply a capital gains tax rate to carried interest earned by venture capitalists who invest long-term to build new companies and create jobs is not only appropriate by definition, but from a public policy perspective it is paramount to U.S. economic recovery as we desperately need to encourage - not discourage – this high growth activity.”
Others disagreed. An investment manager from Hilton Head, S.C. said, “The carried-interest rules benefit me personally as a manager of investment partnerships. But even I can’t argue that they are sound tax policy.”
A few readers had technical questions. “Do you think REITs and Master Limited Partnerships would be included in changes on carried interest?” asked one adviser.
Independent tax analyst Robert Willens said no, because the dividends from most REITs and MLPs are already taxed at ordinary income rates. “They aren’t part of the discussion on carried interest,” he said. Neither has there been talk of changing the capital gains tax rates for timber REITs.
While some believe all carried interest should be taxed as ordinary income, others suggested a less radical approach. It is to tax the original award of carried interest at ordinary income rates but then allow further appreciation to be taxed as a capital gain.
Here’s an example: Say that Ted, Joe and Jane form a partnership. Ted and Joe each put in cash in return for an 80% of the profits, while Jane contributes her expertise in return for a 20% share. Jane would be taxed at ordinary income rates on her 20% profit share when she receives it. After that, her future appreciation would be taxed as capital gain.
Lots of small companies are skipping their federal payroll taxes in this wobbly economy, and tax lawyers say the Internal Revenue Service has gotten more aggressive about penalizing executives, accountants or other individuals for the lapses.
Among the IRS’s tough tactics: freezing a company’s accounts receivable, seizing assets and garnishing wages of responsible employees. It can assess substantial penalties and apply tax liens.
Payroll tax debt can “bring a company to its knees,” says Caroline D. Ciraolo, a partner at Rosenberg Martin Greenberg LLP in Baltimore, Md. She sees cases more frequently now, citing the example of a tool company that suffered a fire and, struggling in the rocky economy, used money it should have spent on payroll tax as an emergency slush fund.
Other clients with payroll tax problems included a medical services company and a group of charter schools for at-risk children. Closely-held businesses like these may have revenue of several millions of dollars and may be owned by four or five people.
A government watchdog in July estimated that some $54 billion in employment taxes go underreported every year. The report by Treasury Inspector General for Tax Administration described a study the IRS has under way, in which it plans to audit payroll-tax compliance by some 6,600 randomly picked employers for recent years.
Chicago tax lawyer Robert E. McKenzie, a partner at Arnstein & Lehr LLP, describes the IRS’s tactics as “harsh.” In singling out people to penalize, it seems “more likely to shoot at the person on the sidelines” instead of those genuinely responsible for the arrears.
The tax code gives leeway to hold the company itself liable for employment tax errors, or to lay responsibility with a range of individuals or entities, from officers, owners, bookkeepers and treasurers to lenders that prevent companies from paying employment tax by seizing control of company accounts and dictating what debts can be paid.
Once the IRS adds its penalties, the debt can snowball. Companies can be fined for outright failure to pay or to report on the tax, and also for paying late — that is, if it misses by more than two-and-a-half days the deadline for depositing the funds with a bank or other authorized institution, which then forwards them to the IRS. Fines for late payment can go as high as 25% of the tax due. Sometimes employers hesitate to file a tax report when they have fallen behind on payments, and that just compounds their problems and triggers more penalties.
Typically, tax attorneys like Ciraolo and McKenzie get involved after a business has run into trouble. Often their help is sought by an individual whom the IRS has held personally liable.
Tom Nichols, a tax attorney in Milwaukee, Wis., advises new businesses on how to avoid trouble in the first place. The best plan: Meet the deadlines, he says. Short of that, pay taxes the IRS could make a personal liability for the person it targets.
Rapper and actor Ja Rule was sentenced Monday to 28-months in federal prison and was ordered to pay $1.1 million in unpaid taxes for not filing income tax returns.
The multi-platinum-selling artist, whose real name is Jeffrey Atkins, admitted in March that he hadn’t paid taxes on more than $3 million he earned between 2004 and 2006 while living in Saddle River, N.J.
According to the Associated Press, before his sentencing at a New Jersey federal court, he blamed “youthful inexperience, bad advice and the inability to manage fame” for his mistakes.
Last month, he was sentenced in New York to up to two years in prison after he pleaded guilty to attempted criminal weapon possession. That case stems from an incident in 2007 when authorities found a semi-automatic gun in his luxury sports car.
Recently, the Internal Revenue Service announced an increase in standard mileage rates taxpayers can claim for the final six months of 2011. Beginning July 1, the rate for business miles increases to 55.5 cents from 51 cents and to 23.5 cents from 19 cents per mile for medical and moving expenses. The per-mile deduction for charitable expenses remains unchanged, at 14 cents.
“This year’s increased gas prices are having a major impact on individual Americans,” said IRS Commissioner Douglas Shulman, so “the IRS is adjusting the standard mileage rates to better reflect [them].”
The business standard mileage rate is used by many taxpayers to compute deductible costs of a using a car in a business in lieu of tracking actual costs. The rate is also used as a benchmark by the federal government and many businesses to reimburse employees for mileage.
The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at firstname.lastname@example.org.