Comments for Fairmark.com http://fairmark.com Taxes and investing in plain language Wed, 16 Feb 2011 14:40:28 +0000 hourly 1 http://wordpress.org/?v=3.1.3 Comment on Relief for Estates with Basis Problem? by Kaye Thomas http://fairmark.com/2010/09/14/relief-for-estates-with-basis-problem/comment-page-1/#comment-99 Kaye Thomas Wed, 16 Feb 2011 14:40:28 +0000 http://fairmark.com/?p=1063#comment-99 The proposal was adopted as part of the Tax Relief Act of 2010, enacted at the end of the year -- the same law that extended the Bush tax cuts. The proposal was adopted as part of the Tax Relief Act of 2010, enacted at the end of the year — the same law that extended the Bush tax cuts.

]]> Comment on Relief for Estates with Basis Problem? by Barbara K http://fairmark.com/2010/09/14/relief-for-estates-with-basis-problem/comment-page-1/#comment-98 Barbara K Wed, 16 Feb 2011 04:25:22 +0000 http://fairmark.com/?p=1063#comment-98 Any more word on this? Has the proposal been adopted? Any more word on this? Has the proposal been adopted?

]]> Comment on Managing Income from a Roth Conversion by Kaye Thomas http://fairmark.com/2011/01/10/managing-income-from-a-roth-conversion/comment-page-1/#comment-97 Kaye Thomas Thu, 03 Feb 2011 23:27:21 +0000 http://fairmark.com/?p=1354#comment-97 Yes, any additional conversion in 2011 would simply add to the $25,000 of conversion income you'll already be reporting for 2011. And yes, you can apply the overpayment for 2010 to your estimated tax for 2011, eliminating the paperwork of making these payments in 2011 (but forgoing any interest you might earn on amounts you leave with the IRS during periods you aren't required to do so). Before adopting this plan, consider the AMT implications if you're subject to state income tax and made state estimated payments in 2010. Yes, any additional conversion in 2011 would simply add to the $25,000 of conversion income you’ll already be reporting for 2011. And yes, you can apply the overpayment for 2010 to your estimated tax for 2011, eliminating the paperwork of making these payments in 2011 (but forgoing any interest you might earn on amounts you leave with the IRS during periods you aren’t required to do so). Before adopting this plan, consider the AMT implications if you’re subject to state income tax and made state estimated payments in 2010.

]]> Comment on Managing Income from a Roth Conversion by MikeO http://fairmark.com/2011/01/10/managing-income-from-a-roth-conversion/comment-page-1/#comment-96 MikeO Wed, 02 Feb 2011 18:08:28 +0000 http://fairmark.com/?p=1354#comment-96 I converted $50K to Roth in 2010 (keeping my wife and me within the 25% bracket) and planned to pay the tax in the same year -- because I thought the Bush tax cuts would be allowed to expire -- so I paid estimated taxes each quarter. Now, it makes more sense to defer the tax to 2011 and 2012. If I convert an additional $25K to Roth in 2011, will the additional "conversion tax" just add to the 50%-of-$50K-tax due for 2011? Then could I just leave the overpayment and use it to prepay my estimated taxes for 2011? It that works, then I would probably convert another $25K in 2012 and pay estimated taxes for the $50K conversion then. I converted $50K to Roth in 2010 (keeping my wife and me within the 25% bracket) and planned to pay the tax in the same year — because I thought the Bush tax cuts would be allowed to expire — so I paid estimated taxes each quarter. Now, it makes more sense to defer the tax to 2011 and 2012. If I convert an additional $25K to Roth in 2011, will the additional “conversion tax” just add to the 50%-of-$50K-tax due for 2011? Then could I just leave the overpayment and use it to prepay my estimated taxes for 2011? It that works, then I would probably convert another $25K in 2012 and pay estimated taxes for the $50K conversion then.

]]> Comment on Mom Pays, Daughter Deducts by blevine http://fairmark.com/2011/01/04/mom-pays-daughter-deducts/comment-page-1/#comment-95 blevine Thu, 20 Jan 2011 18:55:32 +0000 http://fairmark.com/?p=1314#comment-95 Just shows you the IRS is just as intent to cheat tax payers as tax payers cheat the IRS. No logical reason to deny this deduction and waste the courts time. Common sense should rule. Just shows you the IRS is just as intent to cheat tax payers as tax payers
cheat the IRS. No logical reason to deny this deduction and waste the courts time.
Common sense should rule.

]]> Comment on Managing Income from a Roth Conversion by Kaye Thomas http://fairmark.com/2011/01/10/managing-income-from-a-roth-conversion/comment-page-1/#comment-94 Kaye Thomas Thu, 13 Jan 2011 21:20:29 +0000 http://fairmark.com/?p=1354#comment-94 There are no special rules here, so the general rules dealing with estimated tax payments apply to those who did Roth conversions. If you qualify for the safe harbor for 2011 you can use it, even though the event that gives rise to the income occurred in 2010 and the added income is a known quantity as of the beginning of 2011. And yes, barring some other significant change in your income or deductions, you should anticipate having to pay quarterly estimates in 2012. This means you may in effect be required to pay 5/8 of the tax in April 2012 (half on your 2011 tax return and 1/8 on your first quarter 2012 estimate) and 1/8 per quarter for the rest of 2012. There are no special rules here, so the general rules dealing with estimated tax payments apply to those who did Roth conversions. If you qualify for the safe harbor for 2011 you can use it, even though the event that gives rise to the income occurred in 2010 and the added income is a known quantity as of the beginning of 2011. And yes, barring some other significant change in your income or deductions, you should anticipate having to pay quarterly estimates in 2012. This means you may in effect be required to pay 5/8 of the tax in April 2012 (half on your 2011 tax return and 1/8 on your first quarter 2012 estimate) and 1/8 per quarter for the rest of 2012.

]]> Comment on Managing Income from a Roth Conversion by Alan http://fairmark.com/2011/01/10/managing-income-from-a-roth-conversion/comment-page-1/#comment-93 Alan Wed, 12 Jan 2011 20:10:09 +0000 http://fairmark.com/?p=1354#comment-93 I've chosen to defer the income to 2011 and 2012. Since it will be a large increase in my income for 2011, can I use the "safe harbor" exclusion for 2011 (withhold the same or more than my 2010 tax) and put off paying the taxes until April 15, 2012, or must I make estimated tax payments in 2011. If so, will I definitely have to make estimated tax payments or increase my paycheck withholding in 2012? I’ve chosen to defer the income to 2011 and 2012. Since it will be a large increase in my income for 2011, can I use the “safe harbor” exclusion for 2011 (withhold the same or more than my 2010 tax) and put off paying the taxes until April 15, 2012, or must I make estimated tax payments in 2011. If so, will I definitely have to make estimated tax payments or increase my paycheck withholding in 2012?

]]> Comment on Managing Income from a Roth Conversion by Kaye Thomas http://fairmark.com/2011/01/10/managing-income-from-a-roth-conversion/comment-page-1/#comment-92 Kaye Thomas Mon, 10 Jan 2011 23:03:12 +0000 http://fairmark.com/?p=1354#comment-92 It's likely that some people did conversions who shouldn't have -- but they're okay if they can figure that out by October 15 and recharacterize. A much larger number, I believe, failed to convert despite being in a position where doing so would be beneficial. They may not have understood the benefit, or perhaps just couldn't accept the idea of writing a big check to the IRS when they didn't have to do so, even if the long-term effect would be an increase in their wealth. They haven't irretrievably lost their opportunity, of course, but 2010 was the only year with the special rule for deferring the tax. We've discussed many different aspects of the advantages and disadvantages here. To lay it out in broad strokes, you're likely a poor candidate for conversion if (a) you would have to use money from your retirement account to pay tax on the conversion, or (b) your conversion income would be taxed at 25% or higher and you anticipate a tax rate of 15% on retirement account withdrawals if you don't convert. With a reasonably long time frame before pulling the money out of the account, you can come out ahead with a conversion even when you anticipate a lower tax rate in retirement, provided the retirement rate is at least 25%. Conversion produces the greatest benefits for the ultra wealthy, who can expect to be in the maximum bracket throughout their lifetimes -- Charlie Munger of Berkshire Hathaway mentioned he was planning to do a Roth conversion -- though I saw some articles indicating many of them balked at the idea. I've also encountered some advisors who refused to recommend the strategy under any circumstances, which is a sad comment on their analytical skills or objectivity or both. It’s likely that some people did conversions who shouldn’t have — but they’re okay if they can figure that out by October 15 and recharacterize. A much larger number, I believe, failed to convert despite being in a position where doing so would be beneficial. They may not have understood the benefit, or perhaps just couldn’t accept the idea of writing a big check to the IRS when they didn’t have to do so, even if the long-term effect would be an increase in their wealth. They haven’t irretrievably lost their opportunity, of course, but 2010 was the only year with the special rule for deferring the tax.

We’ve discussed many different aspects of the advantages and disadvantages here. To lay it out in broad strokes, you’re likely a poor candidate for conversion if (a) you would have to use money from your retirement account to pay tax on the conversion, or (b) your conversion income would be taxed at 25% or higher and you anticipate a tax rate of 15% on retirement account withdrawals if you don’t convert. With a reasonably long time frame before pulling the money out of the account, you can come out ahead with a conversion even when you anticipate a lower tax rate in retirement, provided the retirement rate is at least 25%.

Conversion produces the greatest benefits for the ultra wealthy, who can expect to be in the maximum bracket throughout their lifetimes — Charlie Munger of Berkshire Hathaway mentioned he was planning to do a Roth conversion — though I saw some articles indicating many of them balked at the idea. I’ve also encountered some advisors who refused to recommend the strategy under any circumstances, which is a sad comment on their analytical skills or objectivity or both.

]]> Comment on The Tax Deal: Rethink Roth Conversions? by Kaye Thomas http://fairmark.com/2010/12/09/the-tax-deal-rethink-roth-conversions/comment-page-1/#comment-91 Kaye Thomas Mon, 10 Jan 2011 22:28:36 +0000 http://fairmark.com/?p=1219#comment-91 The comment from twittles inspired me to write a separate blog entry that should answer these questions: http://fairmark.com/2011/01/10/managing-income-from-a-roth-conversion/. The comment from twittles inspired me to write a separate blog entry that should answer these questions: http://fairmark.com/2011/01/10/managing-income-from-a-roth-conversion/.

]]> Comment on Managing Income from a Roth Conversion by Bruce http://fairmark.com/2011/01/10/managing-income-from-a-roth-conversion/comment-page-1/#comment-90 Bruce Mon, 10 Jan 2011 21:31:47 +0000 http://fairmark.com/?p=1354#comment-90 Good ideas on how to manage the taxes due with the conversion. I am curious to learn more about how many people actually did convert and the reasons that lead them to do it. There was extensive coverage of this strategy in the financial planning industry and general personal finance press/media/websites. It was one of the special planning issues for 2010. Whenever I did the analysis and ran the numbers, if I assume a lower tax bracket at retirement, and that I would invest the money that I would have to pay in taxes now, it seem like not converting was the better result. With a shift in assumptions (e.g., same tax bracket and rates of return), converting was slightly better. However, it was so small that I would rather have access to the money that I would have had to pay in federal and state taxes and instead just kept it in a liquid investment (e.g., mutual fund or ETF). Estate planning issues were not part of my analysis, as that conversion reason is hopefully very far off. What did others decide to do in the end? Did I make a mistake in my analysis or over think it? I apologize if this is better to post on the Message Board. Good ideas on how to manage the taxes due with the conversion.

I am curious to learn more about how many people actually did convert and the reasons that lead them to do it. There was extensive coverage of this strategy in the financial planning industry and general personal finance press/media/websites. It was one of the special planning issues for 2010.

Whenever I did the analysis and ran the numbers, if I assume a lower tax bracket at retirement, and that I would invest the money that I would have to pay in taxes now, it seem like not converting was the better result. With a shift in assumptions (e.g., same tax bracket and rates of return), converting was slightly better. However, it was so small that I would rather have access to the money that I would have had to pay in federal and state taxes and instead just kept it in a liquid investment (e.g., mutual fund or ETF). Estate planning issues were not part of my analysis, as that conversion reason is hopefully very far off.

What did others decide to do in the end? Did I make a mistake in my analysis or over think it? I apologize if this is better to post on the Message Board.

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