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. 

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. If you have questions about the records you need to keep, give us a call.

Don't treat the IRS as your banker

When cash flow is tight, you may be tempted to pay your suppliers first and your payroll taxes last. The IRS will take steps to minimize the liability as quickly as possible. They also have a powerful weapon available to collect such taxes. Whether or not you own the company, you could be determined to be a "responsible person" held personally liable for 100% of any payroll tax deficiency.

Take time to review your estate plan

The "Taxpayer Relief Act" signed on January 2, 2013, permanently sets the estate and gift tax exemption at $5,000,000 and the top tax rate at 40%. The exemption amount is adjusted annually for inflation, which puts the 2012 exemption at $5,120,000 and the 2013 exemption at $5,250,000. The annual gift tax exclusion for 2013 is set at $14,000 per recipient.

Now that the rules have been made "permanent," take the time to review your estate plan to make sure it still accomplishes your wishes.

With the higher exemption amount, fewer estates will be subject to tax, and perhaps yours falls short of the tax threshold. But regardless of the size of one's estate, everyone needs the following basic documents - updated for the current rules and your particular circumstances:

* A will that specifies who is to inherit your assets and who is to be the guardian of any minor children you have.

* A power of attorney naming someone to handle your financial affairs if you become disabled or seriously ill.

* A health care directive (living will) stating your wishes should you become terminally ill or permanently unconscious.

* A financial inventory listing such things as bank accounts, income sources, insurance policies, and other assets.

Your estate plan review should include checking your exposure to state inheritance taxes and an update, if needed, to beneficiary designations on such things as IRAs and insurance policies.

For help in getting your estate plan in order, please contact us and your attorney.

New withholding obligation for employers

The Medicare tax on earned income increases this year for individuals earning more than $200,000 and married couples earning more than $250,000. The tax on earnings above these thresholds will increase from 1.45% to 2.35%. This tax increase will also apply to self-employment income exceeding the threshold amounts.

Employers are required to withhold the additional tax from wages exceeding $200,000, regardless of the individual's filing status. They are not required to inform employees when they begin the additional withholding, nor are they required to match the additional withholding.

Employers who don't withhold the additional Medicare tax required this year may be subject to penalties in addition to the tax, according to an IRS official. If employees pay the additional Medicare tax at the end of the year, the employer may only be required to pay the penalties.

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.

Filing reminder for nonprofit organizations.

Nonprofit organizations are required to file annual reports with the IRS. Those with gross receipts below $50,000 can file an E-postcard rather than a longer version of Form 990. The deadline for nonprofit filings is the 15th day of the fifth month after their year-end. For calendar-year organizations, the filing deadline for 2012 reports is May 15, 2013.

Many tax deadlines fall on April 15

April 15, 2013, is a major tax day, with the following IRS deadlines falling on that date:

* Individual income tax returns for 2012 are due.

* 2012 partnership returns are due.

* 2012 annual gift tax returns are due.

* Deadline for making 2012 IRA contributions.

* First installment of 2013 individual estimated tax is due.

* Deadline for amending 2009 individual tax returns.

* Deadline for original filing of a 2009 individual income tax return to claim a tax refund for that year.

Contact our office if you need details or assistance with any tax filing.

If you need more time to file, just ask

If you can't file your 2012 tax return by the April 15 deadline, file for an extension to get until October 15, 2013, to file. You can request the extension on paper, by phone, or online. You don't need to explain why you want more time. Be aware that an extension just gives you more time to file; it does not give you more time to pay taxes due for 2012.

IRS announces second quarter interest rates

Interest rates charged by the IRS on underpaid taxes and paid by the IRS on tax overpayments will remain the same for the second quarter of 2013 (April 1 through June 30). Therefore, for the first six months of 2013, the rates will be the following for individuals and corporations:

For individuals:
* 3% charged on underpayments; 3% paid on overpayments.

For corporations:
* 3% charged on underpayments; 2% paid on overpayments.
* 5% charged on large corporate underpayments.
* ½% paid on the portion of a corporate overpayment exceeding $10,000.