Monday, April 22, 2013

Certain Roth conversions are final


Under the new tax law, it is now easier to convert your employer-sponsored retirement plan such as a 401(k), 403(b), or 457 into a Roth IRA account. This is similar to converting your traditional IRA into a Roth IRA, but with one very significant difference.

When you convert a traditional IRA into a Roth IRA, you can change your mind and undo this conversion (also known as a recharacterization) by October 15 of the following year. This may make sense when the value of the account has dropped since you did the conversion, because you do not want to pay tax on a higher value than the account currently has.

When you convert an employer-sponsored retirement plan, you do not have the option of undoing the conversion by October 15. Once you convert your employer-sponsored retirement plan into a Roth IRA, it cannot be undone.

If you decide to convert your entire 401(k) into a Roth IRA, the entire balance will be taxable in the year of the conversion.

If you want to take advantage of this new provision, please contact our office first because there are some very important tax planning consequences to consider. If done without proper tax counsel, you may be paying more taxes than you should. In light of the new tax law, there are now more variables that need to be considered in your tax planning.

Friday, April 12, 2013

Simplify your tax recordkeeping


Did you spend hours pulling together your tax records in preparation for filing your 2012 tax return? It doesn't have to be that way. Avoid the problem next year by taking a few simple steps now.

* First, decide what records you need to keep for the current year. Generally speaking, you'll need records of income items and deductible expenses. Use your 2012 tax return as a guide.

* You'll also need to keep some items for longer periods. For example, you may need purchase records for your house and other investments years later to calculate your capital gains.

* Set up a filing place for each category. Use folders or plastic pouches for paper records, such as charitable receipts, property tax payments, and mortgage reports.

* If you manage your banking and finances online, open up a series of folders on your hard drive. Save copies of electronic statements or transaction receipts in the relevant folder. Remember to make regular data backups.

* Then stay current with your records as you go through the year. It's easier to spend a few minutes each month than to have to spend hours reconstructing everything at the end of twelve months.

* At the end of each month, highlight income and deduction items in your check register. Use one color for charitable contributions, another for work expenses, and so on. You can do this whether you keep your register on paper or on a computer. Make sure any associated receipts are filed away correctly.

* At year-end, you should know exactly what falls into each category and where the records are.

Remember, the better your recordkeeping, the better your chances of maximizing tax breaks.

Friday, April 5, 2013

What if you can't file your 2012 tax return on time?


If you need more time to file your 2012 income tax return, you can get an extension -- and no explanation is necessary.

You may have a very good reason for wanting more time to file your 2012 individual income tax return. For instance, you might want to hold off funding a retirement plan such as a Keogh or SEP until you can save more money. Perhaps you're waiting for a tax form from a trust, a partnership, or an S Corporation. Or maybe you've just been busy.

It doesn't matter. Whatever the cause or motivation, you can usually put off filing for up to six months beyond April 15. That means you could have until October 15, 2013, to finalize your return -- assuming you follow the rules.

Here's what you need to do:

* Estimate your total tax liability for 2012, subtract what you've already paid in withholding or estimated payments and remit most or all of the balance, and

* File an extension request form (generally Form 4868 for an individual return) by April 15.

You can file the extension request form electronically, by phone, or by mailing it to the IRS. If you owe taxes, you can pay with an electronic funds transfer, your credit card, or a check.

Requesting an extension for your personal return also gives you additional time to file a gift tax return for 2012. The gift tax return extension is automatically included. You don't even have to check a box. But if you owe gift tax (or generation skipping transfer tax), or are requesting an extension only for a gift tax return, you'll need to use Form 8892.

One more quirk: If you live and work outside the United States, you may qualify for an automatic two-month extension of time to file without having to send in a form.

If you have special circumstances such as military service, or think you might have difficulty paying the tax due with your extension, please contact us. We can help you work through the rules.