Posts Tagged ‘income’

With the lure of tax-free distributions, Roth IRAs have become popular retirement savings vehicles since their introduction in 1998. But if you’re a high-income taxpayer, chances are you haven’t been able to participate in the Roth revolution. Well, new rules apply in 2010 that may change all that.
What are the general rules for funding Roth IRAs?
There are three ways to fund a Roth IRA–you can contribute directly, you can convert all or part of a traditional IRA to a Roth IRA, or you can roll funds over from an eligible employer retirement plan (more on this third method later).

In general, you can contribute up to $5,000 to an IRA (traditional, Roth, or a combination of both) in 2010. If you’re age 50 or older, you can contribute up to $6,000 in 2010. (Note, though, that your contributions can’t exceed your earned income for the year.)
But your ability to contribute directly to a Roth IRA depends on your income level (”modified adjusted gross income,” or MAGI), as shown in the chart below:
What’s changed?
Prior to 2010, you couldn’t convert a traditional IRA to a Roth IRA (or roll over non-Roth funds from an employer plan to a Roth IRA) if your MAGI exceeded $100,000 or you were married and filed separate federal income tax returns.
In 2006, however, President Bush signed the Tax Increase  revention and Reconciliation Act (TIPRA) into law. TIPRA repealed the $100,000 income limit and marital status restriction, beginning in 2010. What this means is that, regardless of your filing status or how much you earn, you can now convert a traditional IRA to a Roth IRA. (There’s one exception–you
generally can’t convert an inherited IRA to a Roth. Special rules apply to spouse beneficiaries.)
And don’t forget your SEP IRAs and SIMPLE IRAs. They can also be converted to Roth IRAs (for SIMPLE IRAs, you’ll need to participate in the plan for two years before you convert). You’ll need to set up a new SEP/SIMPLE IRA to receive any additional plan contributions after you convert.
What hasn’t changed?
TIPRA did not repeal the income limits that may prevent you from making annual Roth contributions. But if your income exceeds these limits, and you want to make annual Roth contributions, there’s an easy workaround. You can make nondeductible contributions to a traditional IRA as long as you have earned income at least equal to the contribution, and you haven’t yet
reached age 70½. You can simply make your annual contribution first to a traditional IRA, and then take advantage of the new liberal conversion rules and convert that traditional IRA to a Roth. There are no limits to the number of Roth conversions you can make. (You’ll need to aggregate all of your traditional IRAs when you calculate the taxable portion of the conversion–more on that below.)
Calculating the conversion tax

When you convert a traditional IRA to a Roth IRA, you’re taxed as if you received a distribution with one important difference– the 10% early distribution tax doesn’t apply, even if you’re under age 59½. (The IRS may recapture this penalty tax, however, if you make a nonqualified withdrawal from your Roth IRA within 5 years of your conversion.) If you’ve made only nondeductible (after-tax) contributions to your traditional IRA, then only the earnings, and not your own contributions, will be subject to tax at the time you convert the IRA to a Roth. But if you’ve made both deductible and nondeductible IRA contributions to your traditional IRA, and you don’t
plan on converting the entire amount, things can get complicated. That’s because under IRS rules, you can’t just convert the nondeductible contributions to a Roth and avoid paying tax at conversion. Instead, the amount you convert is deemed to consist Roth IRA Conversions–New Opportunities for 2010

If your federal filing status is:
Your 2010 Roth IRA contribution is reduced if your MAGI is:
You can’t contribute to a Roth IRA for 2010 if your MAGI is:
Single or head of household More than $105,000 but less than $120,000
$120,000 or more

Married filing- jointly or qualifying widow(er)
More than $167,000 but less than $177,000
$177,000 or more Married filing, separately
More than $0 but less than $10,000 – $10,000 or more
Ameriprise Financial
Jeffrey D. Carlson, CFP®
CERTIFIED FINANCIAL PLANNER practitioner
10025 Governor Warfield Pkwy
Suite 209 A
Columbia, MD 21044
(410) 740-8000
jeffrey.d.carlson@ampf.com
April 07, 2010

Making every gift dollar count ~ Jeffrey D. Carlson, CFP®

www.ameripriseadvisors.com/jeffrey.d.carlson.

In challenging economic times, charitable organizations often suffer. More than ever, this is a time when every dollar you can spare for your favorite causes can make a significant difference.

As you study your budget to determine what you can afford to give, it is equally important to be aware of the rules surrounding charitable giving as it affects your tax return. You may find you can afford to give more if you take steps to maximize your own tax benefits. For most types of gifts, the laws are not complex, but in order to legitimately deduct all of your charitable donations, you want to make sure to follow them. In simple terms, there are two basic rules:

• Make sure the gift is made to a qualified organization. This typically includes religious, charitable, scientific, literary or educational organizations like United Way or the Red Cross. A list of charitable organizations recognized by the IRS (IRS publication 78) can be found at www.irs.gov.

• Make sure the donation is properly documented. The IRS requires that all cash donations claimed as deductions be backed by bank records (you’ll need to keep your pay stubs from the charity showing the gift) or written receipt provided by the recipient organization.

Different ways to give cash

It is possible to make charitable contributions part of your regular budget by having payroll deductions made (this is common for gifts to large organizations like United Way) or through an automatic withdrawal from your bank account. This allows you to maintain consistent giving regardless of other financial challenges or spending temptations you may encounter.

You can also make direct cash donations to specific organizations on a one-time basis. As long as the gift can be fully documented (with bank or credit card records or a receipt from the organization), it may qualify for a deduction. There can be limitations related to your adjusted gross income.

There are a variety of other ways to effectively donate cash as well. The key is to claim the actual cash value to the recipient organization. For example, if you buy a ticket for a charitable fundraising dinner, there is an underlying value you obtain by attending the event. That value cannot be deducted. The organization should identify what portion of the ticket price is deductible for charitable purposes.

Non-cash contributions

You can also donate stock or mutual fund shares. If you hold for more than one year and shares have appreciated in value, you can deduct fair market value in the shares. You avoid the taxable capital gain and the organization can receive a gift of greater value (the appreciated share price) and can sell the investment with no tax consequences. If, as is the case from the recent bear market, shares are worth less than you paid for them, you can only deduct the fair market value of the investment when you donated it.

The IRS is more demanding of truthful reporting for gifts of property. Any low-value clothing or household items you donate must be in “good used condition” or better in order for it to qualify as a deductible gift. In other words, you can’t simply drop off a box of worn-out household appliances at the Goodwill store and claim a deduction or loss for it. Therefore, it may be better to sell the depreciated stock and donate the proceeds in order to get the capital loss and the charitable deduction.

The IRS has strict rules about valuing and substantiating donated vehicles. For example, if a car is valued at more than $500, you generally will be required to deduct only the gross proceeds the charity obtained by selling the car, and more than blue-book value of the car. There are some exceptions, for example, if the organization makes significant use of the vehicle or it gives the car to a needy person, you then can deduct the fair market value.

IRA contributions

Individuals age 70-1/2 or older can have money sent directly from their IRA account to a charitable organization. From a tax standpoint, this is particularly beneficial to those with a traditional IRA, where distributions are subject to income tax. Money that goes directly from the IRA to the charity will not be taxable. It is one way for those with a traditional IRA to manage required minimum distributions if they wish to limit their own taxable income. Keep in mind that for 2009 only, required minimum distribution rules for IRAs have been waived.

Travel write-offs

Charities also have a big need for human resources. If you are able to donate time to a charity, you can claim a deduction for the miles you drove to perform your volunteer services (for a qualified organization). For 2008 and 2009 taxes, the allowable rate is $0.14/mile.

Consult your tax planner and financial advisor. Tax laws are constantly changing, so it’s wise to consult a tax expert before you make any large charitable contributions. A tax expert can identify if there are advantages to making a contribution in certain years and may advise you to accelerate or postpone your gift at year- end based on your tax situation. Your financial advisor can help you establish a financial plan that takes into account your charitable giving goals.

Jeffrey D. Carlson is a CERTIFIED FINANCIAL PLANNER practitioner™ who can be reached at (410) 740-8000, 10025 Governor Warfield Parkway, Suite 209, Columbia, MD 21044. Or visit www.ameripriseadvisors.com/jeffrey.d.carlson.

This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.

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