Roth IRA Conversion Planning in 2011 & 2012

The online edition of the Wealth Strategies Journal provides a complete overview Roth IRA conversion opportunities:

Opportunistic Conversions

The key objective behind this type of Roth IRA conversion is to take advantage of short-term economic conditions that are expected to reverse over time. For example, a taxpayer whose traditional IRA contains stock that is expected to incur significant growth within the near future may benefit from converting to a Roth IRA. As opposed to holding the stock in a traditional IRA, holding the quickly-appreciating stock in a Roth IRA would allow the stock's growth to occur completely tax-free. The concept of converting by asset class to multiple Roth IRAs with the tactic of recharacterizing the underperforming asset classes is another example of an "opportunistic conversion".

Strategic Conversions

The key objective behind this type of IRA conversion is generally motivated by wealth transfer. Considering that Roth IRAs are not subject to "required minimum distributions" ("RMDs") when the IRA owner reaches age 70½, converting a traditional IRA to a Roth IRA will allow the IRA assets to continue to grow tax-free for a longer period of time, thus allowing greater wealth to accumulate for future generations. An ideal candidate for strategic conversion is one who (1) possesses "outside funds" (for example, nonqualified investment accounts) from which to pay the tax on the conversion, (2) anticipates being in the same or higher marginal income tax bracket in the future, (3) does not need to make withdrawals from the Roth IRA to meet his/her annual living needs, and (4) desires to leave a tax-free asset to his/her children or grandchildren.

Tactical Conversions

This type of Roth IRA conversion is executed to take advantage of unused, short-term, special tax attributes that the taxpayer may otherwise not be able to utilize. A non-exhaustive list of these types of tax attributes includes NOL carryovers, current year ordinary losses, unused charitable contribution carryovers, nonrefundable tax credits, as well as alternative minimum tax credit carryovers. By converting to a Roth IRA, the taxpayer generates enough taxable income to fully utilize these tax attributes. If done correctly, the taxpayer could pay little to no income tax on the conversion.

Hedging Conversions

This type of Roth IRA conversion is done as a "hedge" against a future tax increase. Hedging conversions can be further subdivided into two types of conversions: (a) income tax hedging conversions and (b) estate tax hedging conversions. Both types of hedging conversions are generally executed during the current time period so as to lower overall taxes in the future, taking into consideration the potential for higher income tax rates and/or estate tax rates that could be enacted by Congress.

Please feel free to contact us for more information.

PMA - Tax Planning and Advisory

Using S corporations to reduce self-employment income

As most business owners are aware, income that you generate in your business that you are conducting as a sole proprietor (or through a wholly-owned limited liability company (LLC)) is subject to both income tax and self-employment tax.  The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for social security up to the social security maximum ($106,800 for 2010) and a 2.9% rate for medicare, without any maximum.  Similarly, if you conduct your business as a partnership in which you are a general partner, in addition to income tax you would be subject to the self-employment tax on your distributive share of the partnership's income.  However, if you conduct your business as an S corporation you will be subject to income tax, but not self-employment tax, on your share of the S corporation's income.

An S corporation is not subject to tax at the corporate level. Instead, the corporation's items of income, gain, loss, and deduction are passed through to the shareholders.  However, the income passed through to the shareholder is not treated as self-employment income. Thus, by using an S corporation, you can avoid self-employment income tax.

There is a problem, however, in that IRS requires that the S corporation pay you reasonable compensation for your services to the S corporation.  The compensation is wages which is subject to employment tax (split evenly between the corporation and the employee) which is equivalent to the self-employment tax.  If the S corporation does not pay you reasonable compensation for your services, IRS may treat a portion of the S corporation's distributions to you as wages and will impose social security taxes on the deemed wages.  There is no simple formula regarding what is reasonable compensation.  Presumably, reasonable compensation would be the amount that unrelated employers would pay for comparable services under like circumstances.  There are many factors that would be taken into account in making this determination.

Please feel free to contact us if you would like to discuss the practical aspects of conducting your business through an S corporation and how much the S corporation would have to pay you as compensation. I look forward to hearing from you.

PMA - Tax Planning and Advisory

Classification of Gas Stations for Depreciation Purposes

Gas Stations, oil change businesses, repair shops, car washes, and automobile dealerships owning such facilities, may benefit from a recent IRS clarification of the definition of real property eligible to be depreciated as a 15-year motor vehicle service station.

The Service recently issued informal guidance, in the form of a Chief Counsel Advice, to the effect that an industrial building containing office space, restrooms, work rooms, a mechanical room, truck service center, and a truck wash was depreciable over 15 years for federal income tax purposes.  The site also consisted of a fuel island, paved lot with parking spaces, and billboards.  At issue was whether the building was depreciable as 15-year property, pursuant to Rev. Proc. 87-56, Activity Class 57.1: Distributive Trades and Services - Billboards, Service Station Buildings and Petroleum Marketing Land Improvements.  In reaching this conclusion, the Service stated that the primary use of the building, consisting of approximately 84% of its square footage, was as a service station building.  Accordingly, the entire building was classified under Activity Class 57.1.

Further enhancing the tax benefit for this group of assets is the eligibility of 15-year property for bonus depreciation.  For property acquired after September 8, 2010, and before January 1, 2012, and placed into service before January 1, 2012, the entire cost of the property or improvements may be deducted as an expense through the 100% bonus depreciation provisions in its first year of use as long as the property's original use also begins with the taxpayer.  Additionally, for property or improvements for this group of assets placed in service after December 31, 2007, and prior to September 9, 2010, as well as all of 2012, 50% bonus depreciation may be available.

Nonresidential real property, typically depreciated over 39 years, is eligible to be depreciated over 15 years, allowing taxpayers to recover their costs more quickly.  When that property is eligible for 100% bonus depreciation, its entire cost may be deducted in the year it is placed in service.

Even if service stations or car washes were originally depreciated over 39 years, steps may be taken to correct taken to correct the error.  For more information, please contact us or visit our website dedicated to gas stations: www.gasstationaccounting.com

The New Rules of Estate Planning

Smart Money, The New Rules of Estate Planning:

Best moves for getting your estate in order, after the Tax Relief Act of 2010:

Now that the hoopla has quieted somewhat, we're starting to get a clearer picture of who might benefit from [the 2010 Act]. When considering whether to fiddle with existing estate plans, there are two things to keep in mind: First, estate planning is sales-oriented. ... Second, the changes made in the 2010 legislation expire after the close of 2012, which means the window in which to act, if you choose to, is fairly limited. Given all that, here are several issues and strategies to consider, whatever the size of your holdings.

• Asset Protection and Wealth Sharing
• Formula Clauses
• Trusts
• State Taxes

If the Tax Relief Act motivates you to review your estate plan and consider any of these strategies, great. Have a chat with your attorney. Ideally, though, he or she will tell you that estate planning, at its heart, isn't about taxes; rather, it's about providing for your family, safeguarding their futures, anticipating your own financial needs -- and offering peace of mind.

PMA Estate and Gift Planning

WSJ: The 25 Documents You Need Before You Die

Wall Street Journal, The 25 Documents You Need Before You Die:

Design your death dossier soon -- or you could be setting up your heirs for frustration and financial pain.

1. Marriage license
2. Divorce papers
3. Personal and family medical history
4. Durable health care power of attorney
5. Authorization to release health care information
6. Living will
7. Do-not-resuscitate order
8. Housing, land, and cemetery deeds
9. Escrow mortgage amounts
10. Proof of loans made and debts owed
11. Vehicle titles
12. Stock certificates, savings bonds, and brokerage accounts
13. Partnership and corporate operating agreements
14. Tax returns
15. Life insurance policies
16. IRAs
17. 401(k) accounts
18. Pension documents
19. Annuity contracts
20. List of bank accounts
21. List of user names and passwords
22. List of safe deposit boxes
23. Will
24. Letter of instruction
25. Trust documents

For more information, please contact us:  http://www.pmaadvisors.com/contact_us.php