by NFS | Nov 16, 2012 | Archives
Q: I am 26 and I have been contributing to my Roth IRA since I was 18. Now, I am looking to purchase my first home and was considering taking funds from my Roth IRA. The 5-year rule is confusing to me and I am not sure how this applies to me, given the circumstances. Are the funds in my Roth IRA penalty free, and tax free when withdrawn for the purpose of buying a first home?
A: You can always withdraw your contributions to a Roth IRA tax and penalty free. In your case, the 5-year rule for withdrawing up to $10,000 of earnings tax and penalty free has been satisfied. Because you will use the funds for a first-time home purchase ($10,000 lifetime limit) and you started a Roth IRA more than 5 years ago, the withdrawal of earnings will be tax and penalty free (known as a qualified distribution).
by NFS | Nov 15, 2012 | Archives
The Social Security Administration announced an upward cost-of-living adjustment for the Social Security taxable wage limit. For year 2013,the amount of earnings taxable for Social Security (Old Age, Survivors and Disability Insurance, or “OASDI”) will increase from $110,100 to $113,700. The temporary decrease in the employee tax rate from 6.2% to 4.2%, last extended under the Middle Class Tax Relief and Job Creation Act of 2012, expires on December 31, 2012.
Therefore, the 2013 tax rate for employees will increase to 6.2% from the 2012 rate of 4.2%. The employer rate will remain unchanged at 6.2%. With this increase in taxable wages, the maximum Social Security tax payable by an employee will be $7,049.40, an increase of $2,425.20 from the current maximum tax of $4,624.20.
Employers will match the employee’s 2013 contribution of $7,049.40, an increase of $223.20 from their 2012 maximum of $6,826.20.
Regarding Medicare tax, in 1993 the Omnibus Budget Reconciliation Act removed the taxable wage limit for the Medicare tax for 1994 and years thereafter. Thus, for year 2013 again there will be no maximum employee or employer contribution amount for Medicare tax. For employees, all covered wages will be subject to Medicare tax at a rate of 1.45%. For high-income earners who have wages in excess of certain filing status thresholds ($250,000 if married filing jointly, $125,000 if married filing separately, and $200,000 if filing single), an Additional Medicare Tax of 0.9% will be imposed. However, for withholding tax purposes, covered wages in excess of $200,000 will be taxed at a tax rate of 2.35% (1.45% + 0.9%), regardless of filing status. (See the September 2012 Tax Researcher for more details.)
Employers are not subject to the Additional Medicare Tax. They will continue to be subject to the Medicare tax at the rate of 1.45% on all taxable wages.
Depending on the amount of taxable wages, the combined Social Security and Medicare employee tax rate will range from 7.65% (6.20% + 1.45%) to a combination of 6.2%, 1.45% and 0.9% if the employee is a high-income earner. The combined employer rate will remain 7.65%.
by NFS | Nov 14, 2012 | Archives
(Bloomberg) The race is on for wealthy Americans to save on taxes before January 1.
President Barack Obama’s re-election means his administration will push to let tax cuts enacted during the George W. Bush era expire for high earners, as scheduled, at year-end. Obama wants to increase the top federal income tax rate to 39.6 percent from 35 percent, boost rates on long-term capital gains to as much as 23.8 percent, and shrink exemptions from estate-and-gift taxes.
“If you have to put a movie title on what’s going to happen from now until the end of the year it would be: ‘The Fast and the Furious,’” said Jeff Saccacio, a personal financial services partner at New York-based PricewaterhouseCoopers LLP. “The wise, smart people are preparing themselves for a sunset of the Bush tax cuts.”
Wealthy investors have about a month and a half to examine their investment gains and losses left over from previous years, as well as to consider ways to move income into 2012 and transfer assets to heirs, Saccacio said. Now is the time to start running the calculations, he said.
“Acceleration of investment income is clear,” said Elda Di Re, partner and personal financial services area leader for Ernst & Young LLP in New York. “If anyone was planning on realizing a gain in the next two to three years on either securities or real estate, there’s a considerable amount of money to be saved.”
The Standard & Poor’s 500 Index, which is up 64 percent since Obama took office in 2009, lost 2.4 percent yesterday to 1,394.53, its lowest level since August.
Capital Gains
An investor who sells $100 of stock with a cost basis of $20 in 2012 would see proceeds—after capital gains taxes—of $88, according to an analysis by J.P. Morgan Private Bank. Next year, if Congress doesn’t act, earnings from the sale would drop to $80.96 if rates rise to 23.8 percent. That means the stock price would need to rise by at least 9 percent for an investor to be better off selling in 2013.
Investors shouldn’t accelerate sales of securities just to avoid a higher tax rate, said Saccacio, who is based in Los Angeles. They should consider how long they planned to hold stocks and whether they need to rebalance. Those who decide to sell at current capital gains rates can re-invest in the securities if they remain attractive without violating so-called wash-sale rules under the Internal Revenue Service code that apply to stocks sold at a loss, he said.
Bonuses, Dividends
Closely held businesses that have a choice to pay bonuses or dividends in 2012 or 2013 should do so before year-end, said Joanne E. Johnson, wealth adviser and managing director at New York-based JPMorgan Chase & Co.’s private bank unit. The tax rate on dividends may jump to as much as 43.4 percent next year from 15 percent now with the expiration of Bush-era tax cuts and levies set to take effect from the health-care law.
Employees who have a choice to receive their bonus this year should do so and consider exercising stock options that are set to expire, she said.
While the election provided some clarity, wealthy taxpayers still must be prepared for the unexpected before Dec. 31, Johnson said. “We don’t know what the compromises are going to be,” she said.
Fiscal Cliff
Democrats maintained control of the U.S. Senate in the election results last week as Republicans kept their majority in the House of Representatives. That ensures continued resistance to Obama’s determination to raise taxes for the wealthiest Americans in the effort to reduce the U.S. budget deficit.
Lawmakers may have to address the so-called fiscal cliff of tax increases and spending cuts that would start in January if Congress doesn’t act in a lame-duck session set to begin this month.
House Speaker John Boehner told reporters last week that Republicans are “willing to accept new revenue under the right conditions.” He cited ideas Democrats already have rejected: restructuring entitlement programs and relying on revenue generated by economic growth from a tax-code overhaul.
Some tax-rate increases scheduled to take effect next year don’t depend on fiscal-cliff negotiations, said Di Re of Ernst & Young. The 2010 health-care law, which Republican presidential candidate Mitt Romney had vowed to repeal, applies a 3.8 percent surtax on unearned income such as realized capital gains, dividends and interest in 2013 for married couples making more than $250,000 and individuals earning at least $200,000.
Payroll Tax
The law also increases the Medicare payroll tax levied on wages by 0.9 percentage points for high earners.
Wealthy taxpayers with large carryover losses remaining from 2008 and 2009 may not want to rush to sell securities before year-end, Saccacio said. They may have enough losses to offset future gains even with higher tax rates, he said.
When capital losses exceed gains, the extra generally can be deducted on individuals’ tax returns and used to reduce other income, such as wages, up to an annual limit of $3,000, according to the IRS. If the total loss is more than the cap, the unused portion may be carried over to following years.
The Obama victory also may lead some millionaires who were hesitating to take advantage of current rules on gifts to fund trusts they’ve set up, said Linda Beerman, manager of the wealth strategies group at Atlantic Trust. The firm is the private wealth-management unit of Atlanta-based Invesco Ltd.
Estate Tax
Legislation enacted in 2010 raised the lifetime estate-and- gift-tax exclusion for 2011 and 2012. This year individuals can transfer up to $5.12 million—or $10.24 million for married couples—free of estate and gift taxes. Those levels are scheduled to expire at the end of 2012 and Obama wants to set the estate tax threshold at $3.5 million while dropping the gift-tax exemption to $1 million as it was in 2009.
“People are really rushing here at the end to take advantage of it,” Beerman said.
Wealthy families should consider setting up trusts under current rules that can benefit grandchildren or future generations and set them up in states such as Delaware, which let the entities exist in perpetuity, said Johnson of JPMorgan. The Obama administration has proposed curtailing the benefits of such trusts as well as limiting discounts taken when transferring illiquid assets in its most recent budget proposal.
Decisions about making charitable contributions this year are more complicated, Beerman said. While deductions for donations probably will be more valuable next year if rates are higher, limits on itemized deductions for those with higher incomes are scheduled to be reinstated next year, she said.
“They need to start crunching some numbers,” PwC’s Saccacio said of wealthy taxpayers. “This year, year-end tax planning takes on a heightened significance given the fact that we’re going to have this jump in rates next year unless we have an 11th-hour adjustment.”
-Margaret Collins, Bloomberg
by NFS | Nov 7, 2012 | Archives
President Barack Obama delivered his acceptance speech early Wednesday morning after winning re-election in a hard-fought campaign against Republican rival Mitt Romney as the U.S. faces the risk of another plunge into recession with the expiration of the current tax rates coupled with deep automatic spending cuts.
In his acceptance speech at McCormick Place in his native Chicago, Obama promised to work with both parties to solve the country’s lingering economic problems. “You elected us to focus on your jobs, not ours,” he said. “And in the coming weeks and months, I am looking forward to reaching out and working with leaders of both parties to meet the challenges we can only solve together: reducing our deficit, reforming our Tax Code, fixing our immigration system, freeing ourselves from foreign oil. We’ve got more work to do.”
Obama indicated he might even call on Romney to help after the election.
“I just spoke with Governor Romney and I congratulated him and Paul Ryan on a hard-fought campaign,” said Obama. “We may have battled fiercely, but it’s only because we love this country deeply and we care so strongly about its future. From George to Lenore to their son Mitt, the Romney family has chosen to give back to America through public service and that is the legacy that we honor and applaud tonight. In the weeks ahead, I also look forward to sitting down with Governor Romney to talk about where we can work together to move this country forward.”
After winning his 2008 election by defeating Sen. John McCain, R-Ariz., Obama had also sought to involve his rival, consulting with McCain before the inauguration about potential nominees to national security jobs in his administration. But McCain remained a leading critic of Obama’s policies after the President took office.
Like Obama, Romney emphasized in his concession speech the need to put aside politics to solve the country’s problems. “The nation, as you know, is at a critical point,” Romney told a crowd of supporters in Boston. “At a time like this, we can’t risk partisan bickering and political posturing. Our leaders have to reach across the aisle to do the people’s work.”
Obama will need to work with congressional leaders on both sides of the aisle during the lame-duck session of Congress, which starts next week. They hope to keep the economy from going off the so-called “fiscal cliff.” The combination of across-the-board automatic tax increases and deep cuts in defense spending and discretionary spending threatens to lead to another recession. Throughout his campaign, Obama has pledged to avert tax hikes for the middle class, but has called for raising taxes on incomes above $250,000, while Republicans in Congress have steadfastly resisted any tax increases.
The so-called Bush tax curs are due to expire at the end of the year after Democrats and Republicans had extended them for two years at the end of 2010. In addition, the alternative minimum tax has not yet been patched, threatening to ensnare millions more taxpayers. The current tax rates for estate taxes and dividends are also slated to return to pre-Bush levels. The payroll tax cut on Social Security and Medicare withholding taxes is due to expire at the end of the year, along with dozens of other tax breaks.
Speaker of the House John Boehner, R-Ohio, was also re-elected Tuesday night and will retain his leadership in a Republican-dominated House. He reiterated his opposition to tax increases after learning that Republicans would continue to control the House. “With this vote, the American people have also made clear that there is no mandate for raising tax rates,” he said.
Democrats, meanwhile, have retained their majority in the Senate. Leaders of both parties in Congress are expected to meet with the administration in the days ahead to try to avert some of the automatic tax hikes and spending cuts while trying to stay within the parameters of the deficit reduction deal they negotiated during their last battle over raising the debt ceiling, which is again approaching its limit around the end of the year. Republican vice presidential nominee Rep. Paul Ryan, R-Wis., who chairs the House Budget Committee, is expected to play a role in those negotiations.
Michael Cohn, Accounting Today
by NFS | Nov 6, 2012 | Archives
Today is election day in America – it doesn’t matter who you decide to vote for, just get out there and do it! Not voting, is a wasted vote.
Voting in Wrentham is at the Delaney School, Gibbons Gym, 120 Taunton St. Polls open Tuesday, November 6 at 7 a.m. and will close at 8 p.m.
