12/17/2010 – with the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, the rate changes formerly discussed in this article have been superseded.
September, 2009:
Gift Tax Changes in 2010 and 2011
12/17/2010 – with the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Gift Tax law is updated as follows: 35% maximum tax rate, and $5,000,000 lifetime exclusion. This is simply an extension of the 2010 rate into the future, with the exemption being unified with the Estate Tax exemption and indexed to inflation.
Estate Tax Changes for 2010 and 2011
12/17/2010 – with the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Estate Tax law is updated with a retroactive rate for 2010 (although estates that came into being in 2010 can make choices) of 35% and a $5,000,000 exemption. The rate will continue into the future through 2012, and the exemption is to be indexed beginning in 2013. In addition, couples can jointly use the full $10,000,000 available between the two on either estate, split however they choose.
Roth IRA Conversion Strategy – Fill Out the Bracket
One strategy to consider as you think about making Roth IRA conversions is the idea of “filling out the bracket”. With this strategy, you consider your income level and what bracket you’re in, and if it makes sense, convert enough of your IRA or QRP to effectively use up the remainder of the tax rate bracket that you’re in.
Of course, this mostly makes sense in the lowest brackets, but for some folks with potentially high incomes it may be appropriate at higher brackets. Your feeling on this also depends on what you think will happen with tax rates as you get to the point where you’re ready to retire – and if you’re like me, you’ve got to believe that tax rates are on the rise.
The following table illustrates the highest income you could have within each tax bracket, using the rates for a Single taxpayer and a Married Taxpayer, using only the Standard Deduction for 2009, with only one exemption for the Single taxpayer and two for the Married Taxpayer. Add $3,650 to the figure for each additional exemption claimed, and add the difference of your itemized deductions above the standard.
Also, if you happen to claim the standard deduction and have real estate taxes paid in the tax year, you can deduct up to $500 for those (in addition to the standard). Plus if you’ve bought a car in the tax year, the sales tax on that purchase can be deducted above and beyond the standard deduction as well.
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Maximum Income in Each Bracket w/Standard Deduction Only – 2009 |
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|
Tax Bracket |
Single, 1 Exemption |
Married, 2 Exemptions |
|
0% |
$9,350 |
$18,700 |
|
10% |
$17,700 |
$35,400 |
|
15% |
$43,300 |
$86,600 |
|
25% |
$91,600 |
MAGI Less than $100,000 |
To use the above table, calculate your income – from wages, salaries, tips, dividends, interest, short-term capital gains, rental income, etc.. Figure out which bracket you fit into, based on the table. Subtract your income amount from the amount for your applicable bracket: the remainder is how much you could convert to a Roth IRA while remaining in that tax bracket.
As an example, let’s say you’re single, with no dependents. Your total income for the year will be $30,000. When we go to the table we see that you’re in the 15% bracket, and that you could convert up to $13,300 to a Roth IRA without bumping yourself up above the 15% bracket. The tax on that conversion would be $1,995.
For another example, let’s say you’re married, and your household income is also $30,000. According to the table, you’re in the 10% bracket, and you could convert as much as $5,400 without going above the 10% bracket. Plus if you have two kids who are dependents, the additional exemptions would increase that number by an additional $7,300 ($3,650 per dependent exemption) to a total of $12,700.
Now, you might be saying to yourself, that’s all well and good, but how many families of four have the wherewithall to undertake a Roth conversion in those circumstances? After all, that would be an additional tax of $1,270! You’re right, it’s not terribly practical for folks in those particular circumstances – but consider someone who is semi-retired, who has very little earned income beyond some interest and dividends. How about a married individual, with part-time work earnings of $10,000? This individual could convert as much as $8,700 to a Roth IRA – and owe no income tax at all!
As I’ve mentioned before, unless you’re very, very competent with income taxes, please, do yourself a favor and run any plans of this nature past a tax professional. It’s well worth the cost – you don’t want to make mistakes on this sort of thing! And if you rely on a box as your tax advisor, don’t expect the box to represent your interests before the IRS.
4 Ways You Can Make IRA Contributions – Without a Job!
If you’re astute, you already know that one of the main requirements for making contributions to an IRA is that you must have earned income. For most folks, that means you have a job… but it doesn’t have to. Here are four ways that you can have “earned income” without a job – plus a few ways to make contributions without having paid ordinary income tax on the wages. These exceptions are for either kind of IRA: traditional or Roth.
Four Ways to Contribute to an IRA Without a Job
- If your income is solely from exercising non-qualified stock options. When you exercise a non-qualified stock option, the taxable component of the option exercise is considered taxable income, and therefore is eligible for contribution to an IRA.
- Alimony. If you receive alimony, it is taxable as ordinary income, which is eligible for IRA contribution.
- Scholarships and Fellowships – if these are taxable, reported in box 1 of a W2 form, they’re eligible for contribution to an IRA.
- Spousal contribution. If your spouse has earned income (and you have none or not enough to make a maximum contribution), you are eligible to make an IRA contribution based on your spouse’s income. The limit is that the total of all IRA contributions (yours and your spouse’s) cannot exceed the earned income of the working spouse.
A Few Ways to Make Contributions Without Paying Tax on the Income
- Non-taxable combat pay, reported in box 12 of your W2 form, is also eligible for contribution to an IRA.
- Exempt students, with a part-time job at the school (for example) can make IRA contributions.
- If your income is less than your exemption and deductions, effectively you are not paying tax on the earnings – but the IRA contribution is based upon MAGI, so you can still make an IRA contribution with the non-taxed funds.
Although these factors can be considered fairly trivial – the fact remains that they are exceptions to the general rule, so I thought it was important to note them for anyone who might be interested.
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