Mar 11

The budget is out. No, I’m not coming out with my personal budget. It’s a strange mix of stuff on both ends of the spectrum. And I think other people’s budgets are boring, do you really care that my daughter’s dance classes are a priority? I didn’t think so. I’m talking about the budget we should all be interested in, the U.S. Budget. It has something for everyone, and by that, I mean everyone will find something they don’t care for.

Budget2015In case you can’t sleep at night, Fiscal Year 2015 Budget of the U.S. Government can be downloaded right from the White House web site. If that’s not enough, the Treasury offers an even longer (297 pages vs 218) General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals. I’m still sifting through both documents, and hoping for a Cliff Notes version that will just list the potential changes to the tax code.

Over the next few articles, I plan to highlight what I’ve found, along with comments on the proposed changes. The first -

Harmonize MRD requirements for tax-favored retirement accounts. – this proposal add an RMD to the Roth IRA account. You might know that the Traditional IRA has a provision in which Required Minimum Distributions must be taken the year after one turns 70-1/2. I found it curious that when the Roth IRA was introduced in 1998, it offered a remarkable feature, no RMDs. This created an amazing opportunity for those wishing to leave a significant sum of money to their heirs, with no income tax bill. Note – the Roth inheritance can still trigger the estate tax, but as the funds are post tax, the beneficiary can withdraw money with no income tax due. This opportunity is scaled back by this proposal, as now the Roth IRA will have a post 70-1/2 RMD for those attaining age 70-1/2 after Dec 31, 2014.

My assessment of the impact of this proposal? Minimal effect. The RMD triggers no tax, nor does it pull in other money, such as Social Security benefits to be taxed (yet). If at 71, I take my withdrawals and invest in a stock fund, I need to deal with the dividends, but the capital gain can remain deferred until I pass. On my passing, my beneficiaries get a stepped up basis, so even if we are talking say, a million dollars, a 2% dividend is $20K, and the tax on it, $4000 maximum. Not a million per year, a cumulative million dollars no longer in the Roth, but taken out over more than a decade. The average taxpayer wont lose sleep over this one.

written by Joe \\ tags:

Nov 07

As exciting as the new tax table was for me, the retirement limit announcement produced a hollow thud.

You see, for 2014, the 401(k), 403(b), 457, and Government TSP are all unchanged at $17,500 limit, with a $5,500 catch-up provision for those 50 and older.

The IRA limit is also unchanged at $5,500 with a $1,000 catch-up for 50 and older. The phaseout for IRA deductibility for a single filer covered by a workplace retirement plan is between $60,000 and $70,000, and for married filing joint, between $181,000 and $191,000. The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly.

For those in that phaseout range, these numbers are important. Above or below them, and you’re not impacted at all.

This lack of an increase comes thanks to a low CPI inflation rate, which is either good, or if you are a conspiracy theorist, is purposely understated to keep Government programs COLAs from increasing too much. Either way, the numbers are out.

written by Joe \\ tags: ,

Nov 06

For Tax Geeks like me, it’s an exciting time when the new tax tables are announced by my friends at the IRS. If you’ve been reading this blog for a while, you know how taxes work, more or less. The tables aren’t the actual tax you pay on gross income, but on taxable income which is gross less a number of items, including the personal exemption which rises to $3,950 in ’14 and the standard deduction for single $6,200 or joint $12,400. 

I’ll be referring back to this article over the next year whenever the tax table is part of the conversation. Check out the new rate table and start planning for 2014.


Taxable income is over But not over The tax is Plus Of the amount over
$0 9,075 $0.00 10% $0
9,075 36,900 907.50 15% 9,075
36.900 89,350 5,081.25 25% 36,900
89,350 186,350 18,193.75 28% 89,350
186,350 405,100 45,353.75 33% 186,350
405,100 406,750 117,541.25 35% 405,100
406,750 118,118.75 39.6% 406,750

Married Filing Jointly
Qualifying Widow(er)

Taxable income is over But not over The tax is Plus Of the amount over
$0 18,150 $0.00 10% $0
18,150 73,800 1,815.00 15% 18,150
73,800 148,850 10,162.50 25% 73,800
148,850 226,850 28,925.00 28% 148,850
226,850 405,100 50,765.00 33% 226,850
405,100 457,600 109,587.50 35% 405,100
457,600 127,962.50 39.6% 457,600

written by Joe \\ tags: , ,

Jul 02

A Guest Post from Ryan -

Being in college, the whole money-management and doing your own taxes thing can feel cumbersome. You may get the “final exam” feel while doing it, but the difference here is that this test involves money. However, with a bit of research and preparation from your end can make things easy and help you make the most out of this “test”. So how do you go about making this tax exam easier? Let’s find out:

#1: File

Don’t make much money? It still makes sense to file even if you don’t have to. Not having a lot money shouldn’t stop you from filing because if you have had cash withheld from past paychecks then you will see a refund coming your way. This might seem like a simple tip but it will work in your favor in the long run.

#2: Begin Early

Don’t worry if you haven’t got your W-2s yet. You’ll find the needed tax information (how much you earned and how much was withheld) with your final pay stub. If you feel like you need a helping hand then you may want to check with your college’s account department. There you should find students offering to help with taxes for free to gain practice in “real life” returns. Don’t wait too long for seeking on-campus help because the closer April 15th gets, the more difficult it is to find help.

#3: Take Your Time

It’s a good idea to give yourself a weekend to fill out your forms. Will it take that long? No, of course not. But the ample amount of time you have on weekend will give you the space to take breaks when and if needed and double or triple check everything before you mail your return. If you want to take a safer route, do your returns on a leisurely weekend, then seek outside help/ask any questions the following week and then finally send it the next weekend after checking your numbers one last time.

#4: Practice on Paper

If you choose to file taxes online, it is better to go through the paper forms, fill them out and get rid of any bugs before taking the final step. Your aim here is to ensure that the whole filing process goes smooth without any obvious mistakes that can be avoided with some practice. Remember, clarity is the key to getting things right the first time.

#5: Know About Your Family’s Financial Picture

Talking to your parents about money and finances is not easy for any college student. But then it’s important that you learn about their financial situation in order to plan who should be claiming as their dependent and using your education deduction or credit. Keep in mind that if your parents are taking care of fifty percent of your expenses, then you can be listed as a dependent on their taxes.

Every college student knows the importance of money, and so should you. But what’s more important than that is understanding how to manage your finances and get them in order so that you can study with peace of mind.

written by Joe

May 07

After I wrote The Step Transaction Doctrine at my companion site, RothMania, I received a number of emails asking about situations where this might apply. Here’s an example of another disallowed series of transactions:

A) A son and wife are in a high tax bracket. Enough so the AMT effect causes there long term capital gain to be taxed at 22.5% (really 15% plus extra due to AMT). They gift the son’s parents $50,000 in appreciated stock.
B) The parents, who are in a low bracket, sell the shares and have no tax due as there’s no cap gain tax if you are in the 10 or 15% bracket.
C) Parents then gift their son and his wife $50,000, the proceeds of the sale.


In a Q&A a few years back my favorite IRA author Ed Slott offered a definition of the Step Transaction Doctrine:

The step transaction doctrine can be a bit complicated, but essentially, when applied it treats what are actually several independent steps as if they were a single transaction for tax purposes. 

There are three different tests which have been used to determine if the step transaction doctrine should apply. One test, commonly referred to as the “binding commitment test” applies when there is a commitment to complete a later step in an overall transaction at the time the first step is made. Since an IRA contribution (deductible or not) does not require that one convert the contribution to a Roth IRA, this test is a non-factor here.  

Another test that is used to determine if the step transaction doctrine should be applied is the “mutual interdependence test.” This test looks at each step in an overall series of steps and determines if a specific step is meaningless unless the later step(s) actually occurs. Since a non-deductible IRA contribution is clearly beneficial (read “not meaningless”) on its own, this test is also a non-factor.  

The third and final test, known as the “end result test,” is the most applicable for this discussion. Under the end result test, the steps in a transaction are looked at to see whether the series of steps were really just predetermined steps of a single, overall transaction, aimed at achieving a specific outcome. Do clients make IRA contributions with the idea that they will later convert them? Sure. So is it possible for IRS to raise issues with this strategy in the future? Yes, but it’s not a likely scenario.

You can see that each of these events, taken alone, is perfectly legitimate. It’s only when they are combined in this way that the IRS combines the transactions and would go back to our Yuppie couple along with a tax bill.
The key thing to ask yourself is whether each event was legitimate, and in this case, there’s really no bona fide gift to anyone, the transactions are simply tax avoidance. Will you get caught? That’s the wrong question. You see, once you start asking what your chances are, it’s a slippery slope. Best to avoid deals that look like this regardless of what your ‘advisor’ tells you. At RothMania, a reader’s brother has a tax attorney who was encouraging him to skirt this rule, either that or the lawyer was completely ignorant of it. In either case, I’d stay clear of any advisor who makes such proposals.  If it sounds too good to be true, it might just be tax evasion.

written by Joe \\ tags: , ,