Recharacterize: Should you do it?

Congress has expanded conversion and rollover options for IRAs. Beginning January 1, 2010, taxpayers with adjusted gross income in excess of $100,000 can convert a traditional IRA to a Roth IRA. A Roth Ira has substantial benefits: Income from a Roth IRA is tax exempt and there are no minimum distributions at age 70 1/2. The conversion can be accomplished through a trustee-to-trustee transfer, a rollover or account redesignation.

The converted amount less any after-tax contributions must be included in gross income. If the rollover is accomplished in 2010, the income is reported on the individual’s tax return in equal installments over 2011 and 2012. Taxpayers can elect to include the entire amount in income in 2010. Given the projected increase in tax rates, taxpayers may want to consider including the entire amount in income in 2010.

Taxpayers have until October 17, 2011 to recharacterize a 2010 rollover or conversion to a Roth IRA. Recharacterizing an IRA contribution involves transferring amounts previously converted to a Roth or traditional IRA to an IRA of the opposite type. Therefore, a taxpayer is not committed to a decision to reconvert to a Roth IRA. A taxpayer may recharacterize conversions that decrease in value.

With questions or for more information, please contact a Simons Bitzer Tax Specialist at (317) 782-3070. Visit www.SimonsBitzer.com.

2010 Year End Tax Planning for Individuals

Year-end tax planning for 2010 presents new challenges for individual taxpayers like you to reduce or defer your federal income tax liability. Although it is generally beneficial to defer income and accelerate expenses, with tax reform on the horizon, the focus shifts to balancing overall tax rates in 2010 and beyond. As you know, the Obama administration has proposed an increase in the income and capital gains tax rates for 2011. Additionally, over $1 trillion in tax cuts enacted in 2001 (EGTRRA) and 2003 (JGTRRA) are scheduled to sunset after December 31, 2010. Unless Congress acts to extend or modify these provisions, the impacted rates, deductions, and credits will revert to pre-2001 levels in 2011.

The rate increases proposed by the current administration would affect single individuals with income exceeding $200,000, and married couples with incomes greater than $250,000. If you fall within these parameters, the traditional year-end planning strategy of deferring income into next year may not be effective in 2010. Higher income taxpayers are more likely to benefit by accelerating 2011 income into 2010 and deferring losses to 2011 and later years to escape higher rates. If you think you will be in a higher tax bracket in 2011, you may want to:


• Accelerate income, including bonuses if possible, into 2010
• Defer selling capital assets at a loss until 2011 and later years
• Move some assets into tax-free instruments, like municipal bonds, that are not subject to federal tax
• Take capital gains in 2010 while the top rate is still 15 percent
• Accelerate billings and/or provide incentives for clients or customers to make payments in 2010 (for self-employed cash-basis taxpayers)
• Take taxable retirement plan distributions before 2011 (for taxpayers over age 59-1/2)
• Bunch itemized or business deductions into the 2011 tax year
• Consider paying all of the tax owed on a Roth IRA conversion in the 2010 tax year


However, if you anticipate being in a lower tax bracket in 2011 as compared to 2010, you may want to take advantage of the complete elimination of phase-outs for personal exemptions and itemized deductions that is available for the 2010 tax year only. If you have been affected by these limitations in the past, you may be able to take advantage of this opportunity, but you should carefully review all of your options beforehand.

For more information regarding year end tax planning, please contact Simons Bitzer & Associates at (317) 782-3070.