Sunday, April 1, 2012

Back Door Roth IRA contribution

If you want to contribute to a Roth IRA, but your income is above the phase-out, there is a workaround.

Due to too much income  Roth contributions are phased out. But you may  qualify (earned income, etc.) to make traditional contributions. With no more phase-outs for CONVERSIONS, you can  first contribute to a traditional IRA, then  convert to a Roth immediately. If  there are no other traditional contributions over the years, you won't have to worry about earnings, ratios of with-vs-without basis, etc. 
Back door Roth.

Friday, March 2, 2012

Taxes on K-1 Forms

Taxes for Investments in Partnerships, LLCs, LPs
Even if you invest in these kinds of entities in an IRA there could be unexpected tax implications.
You will receive a K-1 form for tax purposes—not a 1099-DIV since income from non-corporate entities are not considered dividends.
ROYALTY INCOME (Code T):                                                                                                                                                     Your K-1 will have a multitude of codes.  Some of the income may be from royalties.  If so, there will be a CODE T for depletion.  You will probably be able to take a 15% depletion allowance, but it will not be shown on the K-1.  Line 17 of the Partnership or LLC return is for depletion BUT it specifically states NOT for Oil and Gas depletion.  When I prepare a return for a Partnership or LLC, I provide an attachments for the company to give K-1 recipients with the following message:
“If an LLC member uses percentage depletion, he must apply the 65%-of-taxable-income limit using ALL of his taxable income.”
In the event the investor has a very low taxable income, this would be relevant.
UNRELATED BUSINESS TAXABLE INCOME (Code V):                                                                                                 If you have over $ 1000 in UBTI, you must file a Form 990 and pay tax on it, even if it is an IRA investment.  After I invested in several  Master Limited Partnerships, I became concerned with the possibility of over $ 1000 such income, and transferred one of them out of my IRA to limit the income to less than $ 1000.  However, when I got my K-1s the amounts in Code V, in every case, were small negative amounts.  Nevertheless, the possibility of UBTI could arise with some such MLPs.  Your broker may prepare the Form 990 for you or you may have to prepare it yourself.  I have no experience since I’ve never had this come up, so anyone having this situation would need to investigate further.

Monday, February 27, 2012

Retain and back up tax records

Records supporting your tax return should be retained for four years after the end of the tax year (i.e. three years after the due date which is normally April 15 of the following year).  If you file later with or without obtaining an extension, you need to keep them for three years after you file.
One way is to store all of your receipts and other data in a box or file cabinet.  I used to do that, but it takes up too much space, so now I scan all documents into a document file I set up for each year.  I bought a Fujitsu ScanSnap S-510 Scanner.  It can scan several pages which is a lot more convenient than scanning one page at a time on a flat bed scanner.  There are better, more expensive scanners, but the one I bought does the job for me.
In addition to tax documents, I also use it to scan and keep a lot of other documents unrelated to my tax return or tax returns of my clients. 
There is still a risk involved.  What if your computer crashes.  For years I had no crashes, but one day I read about Carbonite and other off-site backup services and decided to install Carbonite  just in case.  A year or so later, my computer DID crash.  The backup took a long time, but it worked with one problem:  I had several sets of accounting records and all were restored.  However, for one company, I was unable to establish a new vendor code.  I waited until the end of the year and re-established the company with a new name in order to be able to create new vendor codes
In order to avoid such a situation again, I bought an external hard disk which is connected to my computer with a UBS cord.  Every so often I COPY (not backup) the company files to the external hard disk.  Although it is not backed up daily, like the Carbonite backup, it would be helpful if the Carbonite restoration was corrupted.  I also periodically copy other important files and programs to the external hard disk.
I would recommend that anyone who has important records on a computer, at a minimum, use an external hard disk which is a very low-cost item.  Carbonite costs a little more, but if you pay three years in advance, the cost-per-year is not too high and is well worth it.