MORE ON IRAs

Larry, my mom and I have a joint IRA. She is 73 years old and I am 45 years old. How do we figure out how much of it is taxable to each of us?

Helen

Helen, there is a problem here. There is no such thing as a joint IRA. You need to call up your financial advisor and find out more about the account. It is possible that you’re the beneficiary of your mom’s IRA – that’s a whole other matter. If that is the case, it’s taxable to your mom during her lifetime and then it passes to you at her death. But you can’t own an IRA together during her lifetime.

Larry Kopsa CPA

JUST FOR FUN

See what happened the year you were born by clicking on the following site:

http://www.angelfire.com/ak2/intelligencerreport/click_year.html

IRA WITHDRAWALS

I filed an extension and am working on my 2009 tax return. Last year, I cashed in my IRA to pay off some doctor bills. I lost my job and couldn’t pay but I did have my IRA so I used that to pay. I used the whole thing. Now going through my papers I found that I got a 1099 that says that it is all taxable. Please help because I thought it was not taxed if you use it to pay the hospital. Thank you.

Al

Bad news Al. Amounts you withdraw from a traditional IRA are generally taxable in the year you withdraw them, no matter what the reason for the withdrawal.

There is more bad news. If you’re under age 59 1/2, you may be subject to a 10% additional tax plus possibly a state surtax. There are a few exceptions to the additional tax rule. This is what may have confused you. You can avoid the 10% additional tax (not the regular tax) if your IRA withdrawals are equal to or less than your deductible medical expenses. This means if you had medical expenses greater than 7.5% of your adjusted gross income (the number at the bottom of page one of your return).

But there’s no exception for medical expenses that would allow you to escape taxation of your entire IRA. Sorry.

Larry Kopsa CPA

HEALTH CARE BILL PROVIDES A MORAL DILEMMA

Remember that our elected officials were told to pass the bill and then they could find out what is in it. Crazy way to create such a huge government program. We now know that in a couple of years you will be required to have health insurance. If you don’t there will be a fine that you will have to pay when you file your income tax return. The problem is that apparently there is no penalty for failing to pay this fine. Here is the wording according to Congress’s Joint Committee on Taxation:

The penalty applies to any period the individual does not maintain minimum essential coverage and is determined monthly. The penalty is assessed through the Code and accounted for as an additional amount of Federal tax owed. However, it is not subject to the enforcement provisions of subtitle F of the Code. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner.

Think about it. Without effective enforcement of the individual mandate, and with proscriptions against denying coverage on preexisting conditions, you've got yourself the potential for a pretty big moral hazard. A young person might just say, “I don’t want to pay the fine since there is no penalty and if I get sick they can’t deny coverage.” And remember… it is the IRS that has to make the determination.

Pass the bill to find out what is in it. Or what ain't.

Watch for our upcoming FREE WEBINAR on health care after we have had a chance to digest the new law.

Larry Kopsa CPA

QUOTE OF THE WEEK

"Even the early Chinese understood the value of mentoring.
A single conversation across the table with a wise man is worth a month's study of books."
--Chinese proverb

TAX CREDITS

Over the years the government has put so many tax credits in the tax law that it is hard to keep track of all of them. Here is a cool tool that you can use to make sure that you have not missed any credits. http://www.whitehouse.gov/recovery/tax-saving-tool

SENATOR JOHANNS EXPLAINS HEALTH CARE LEGISLATION

Senator Johanns has a good video explaining in 4 minutes how the health care bill will pass through Congress. I thought you might be interested. Clients seem to be asking what next.

Click here to view: Status of Health Care Legislation

HEALTH CARE REFORM ACT - A FEW KEY TAX CHANGES

The following is a letter we sent to our clients regarding the recently passed Health Care Reform Act:

RE: Health Care Reform is Also Tax Reform

As I am sure you are aware, Congress just passed the massive Health Care Reform Act. You may not know that the bill includes many tax law changes that the Congressional Budget Office says the IRS will need $10 billion and 17,000 new employees to enforce its share of the new rules? It's true! Here are just a few key tax changes:

• Starting this year, certain small businesses with fewer than 10 employees will get a 35% credit for the cost of providing employee health benefits.
• Starting in 2011, employers will have to report the value of health benefits on Form W-2.
• The penalty tax for Health Savings Account distributions not used for health care expenses doubles, to 20%. This will discourage using HSAs for supplemental retirement savings.
• Starting in 2013, the 7.5% floor for deducting medical and dental expenses climbs to 10% (unless you or your spouse are 65 or older, in which case it remains at 7.5% until 2016).
• Healthcare flexible spending account contributions are capped at $2,500 per year.
• Starting in 2014, businesses with more than 50 employees will have to offer health benefits or pay a penalty of $2,000 per employee.

The reconciliation bill that accompanied the act includes one more unwelcome change. Currently, the Medicare tax is limited to 2.9% of earned income. The reconciliation bill raises that tax by 0.9% of earned income above $200,000 (individuals) or $250,000 (families). It also adds a 3.8% "Unearned Income Medicare Contribution" on investment income (interest, dividends, annuities, royalties, capital gains, and rents) for taxpayers with Adjusted Gross Incomes above those same thresholds. Those new taxes would take effect in 2013.

The complete bill is 1,018 pages long! So it's going to take some time to analyze. But we'll pay close attention and keep you informed as details become available. Watch our website for our upcoming FREE Health Care Reform Webinar. You may also check out our Small Business Health Care Tax Credit Savings Worksheet on our webite. In the meantime, if you have any questions, be sure to call us at 1.800.975.4829.

It is a pleasure serving you.

Larry Kopsa CPA

START PLANNING NOW FOR THE NEW MEDICARE SURTAX

I have been getting queries on the Medicare surtax, which is the the key revenue raiser in the new health reform law. First, the new tax does not take effect until 2013 but now is the time to start planning. Here is how the surtax works and how it will affect your tax planning strategies.

There are actually two surtaxes in the law:

• The first is a 0.9% levy on earned income, covering wages and income from self-employment. Singles owe the 0.9% surtax once total earnings are more than $200,000 - couples…over $250,000. That makes the effective Medicare tax on earnings over the thresholds 3.8%...the usual 2.9% rate plus the 0.9% surtax. In addition, self-employed taxpayers will not be able to deduct the surtax as part of their deduction for half their SECA tax.

• The second surtax is a special 3.8% Medicare surtax on unearned income of single filers with modified adjusted gross income (AGI) over $200,000 and joint filers above $250,000. Modified AGI is AGI less any excluded foreign earned income. The surtax is levied on the smaller of the filer’s net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income, but not tax free interest or payouts from retirement plans such as regular IRAs, Roths, profit sharing plans and defined benefit plans.

For example: A couple with $50,000 of investment income and AGI of $270,000 will pay $760 (3.8% on the $20,000 excess over $250,000.) A single taxpayer with AGI of $300,000 and $50,000 of investment income will pay an additional $1,900 (3.8% of $50,000.)

Note the effect on capital gains and dividends. The maximum rate on both is currently 15%. If Congress adopts Obama’s budget plan to let the top rate rise to 20% for taxpayers, the surtax would effectively bump it to 23.8%. However, if Congress lets dividends be taxed as ordinary income again and sets the top rate at 39.6%, the surtax makes the maximum rate 43.4%, nearly triple the current levy. Add to that state taxes and you are well over a 50% tax rate.

Larry Kopsa CPA

NEW HIRING TAX INCENTIVE

As you probably know, the HIRE Act provided a new tax incentive if you hired a person that had been unemployed for 60 days. Now the IRS has issued a new form 941 to allow for the new law. Below is their announcement.

http://www.irs.gov/newsroom/article/0,,id=221036,00.html

QUOTE OF THE WEEK

"Nearly all men can stand adversity,

but if you want to test a man’s character,

give him power."

Abraham Lincoln

APRIL 15TH IS FAST APPROACHING – HERE IS THE SCOOP ON THE IRS PENALTIES

The tax filing deadline is approaching. If you don’t file your return and pay your tax by the due date you may have to pay a penalty. Here are nine things the IRS wants you to know about the two different penalties you may face if you do not pay or file on time.

1. If you do not file by the deadline, you might face a failure-to-file penalty.

2. If you do not pay by the due date, you could face a failure-to-pay penalty.

3. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return and explore other payment options in the meantime.

4. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.

5. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

6. You will have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.

7. If you filed an extension and you paid at least 90 percent of your actual tax liability by the due date, you will not be faced with a failure-to-pay penalty if the remaining balance is paid by the extended due date.

8. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

9. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

ARE GIFTS TAXABLE?

I Hope You Can Help Me Out-

I had a person help me prepare my tax return this year and they told me that the $3,000 gift that I received from my Aunt is taxable. Usually I get a refund and because of this $3,000 I owe taxes. Is this right?

Heather

Heather, I suggest that you run from that tax preparer. True gifts that you receive from individuals are not taxable events. There might be some circumstances that I don’t understand. For example, if the person gave you something that you sold, there might be some tax ramifications but a true gift is not taxable. Can you imagine the havoc that Santa Clause would cause when he made Christmas gifts? Run from that preparer and find someone competent to prepare your tax return.

Larry Kopsa CPA

UNEMPLOYMENT MAP - REVISITED

Larry,

You recently sent out an unemployment calendar showing how unemployment has increased over the last year or so. I can’t seem to find it. Could you reprint. Thanks - August

August, here it is. Be careful, it is pretty depressing.

Unemployment Map

WASHINGTON REFORMS HEALTH CARE AND TAXES

Sunday's night's health care bill will go down as one of those once-in-a-generation accomplishments. I'm not here to debate the merits of the bill - historians will still be doing that decades from now. But it's important to point out some important tax changes included in the bill and the companion "reconciliation" bill now before the Senate. (Just how important are they? Well, the Congressional Budget Office says the IRS will need $10 billion and 17,000 new employees to enforce its share of the new rules!)

Here are some of the key tax provisions:

• Starting immediately, certain small businesses with less than 10 employees will get a 35% credit for the cost of providing employee health benefits.
• Starting in 2011, employers will have to report the value of health benefits on Form W2.
• The penalty tax for Health Savings Account distributions not used for health care expenses doubles from 10% to 20%. This will discourage using HSAs for supplemental retirement savings.
• Starting in 2013, the 7.5% floor for deducting medical and dental expenses climbs to 10% (unless you or your spouse are 65 or older, in which case it remains at 7.5% until 2016).
• Healthcare flexible spending account contributions are capped at $2,500 per year.
• Starting in 2014, businesses with more than 50 employees will have to offer health benefits or pay a penalty of $750/employee.

The reconciliation bill includes one more unwelcome surprise.

• Currently, the Medicare tax is limited to 2.9% of earned income (earned income is income from wages and self employment like business, partnership and LLC income). The reconciliation bill imposes an additional Medicare tax of 0.9% on earned income above $200,000 (individuals) or $250,000 (families).
• It also adds a 3.8% "Unearned Income Medicare Contribution" on investment income - specifically, interest, dividends, annuities, royalties, capital gains, and rents - for taxpayers with Adjusted Gross Income above those same thresholds. Those new levies would take effect in 2013.

The complete bill is 1,018 pages, so it's going to take some time to analyze. But we'll be paying close attention as details become available. In the meantime, email us with any questions.

Larry Kopsa CPA

I DON’T HAVE THE MONEY TO PAY MY TAXES

Help!!!! I just found out that I owe over $4,000 to the IRS. I don’t have that kind of money. Should I just not file till I can get the money together or should I just leave the country?

Owen

Owen, I have some fairly good news for you. First of all, you should file your return. There is a severe penalty for failure to file your return by the due date. As a matter of fact, if you don’t pay you will get hit with a double penalty. Along with the failure to file you will get a failure to pay penalty. You could extend your return to October 15th but this is just an extension of time to file, not to pay so there still would be some penalties.

The fairly good news is that you can apply for an installment agreement. Since you owe less than $25,000 it is automatically accepted by the IRS. Pay what you can and then the installment agreement will allow you to pay any remaining balance in monthly installments. Since you owe less than $25,000 you may apply for a payment plan using the Online Payment Agreement application or just attach Form 9465, Installment Agreement Request, to the front of your return. You’ll need to list the amount of your proposed monthly payment and the date you wish to make your payment each month. The IRS charges $105 for setting up the agreement, or $52 if the payments are deducted directly from your bank account.

You will be required to pay interest plus a late payment penalty on the unpaid taxes for each month or part of a month after the due date that the tax is not paid, but at least you will not have to leave the country.

Remember that you also need to start planning for 2010 taxes.

Larry Kopsa CPA

NEW TAX REFUND

The following is an important message regarding tax refunds from the Internal Revenue Service.

NEW TAX REFUND