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Death and taxes have long been
certainties - Mr. Franklin certainly
got that right. The uncertainty
concerning federal taxes is usually
limited to the forever changing
rules and rates. However, 2010 has
brought some unexpected tax
uncertainty as the federal death tax
expired on December 31, 2009.
Congressional leaders have stated
that the death tax will be reenacted
retroactively to January 1, 2010.
The United States Supreme Court
upheld retroactive death tax law
changes in United States v Carlton
(1994) where the period of
retroactivity was fourteen months.
Most of us expect death taxes to be
reinstated - probably retroactive to
January 1, 2010 and probably at the
2009 levels. As you might recall, in
2009, each decedent was entitled to
an estate tax exemption of $3.5
million and was subject to a tax of
up to 45 percent on fair market
value above $3.5 million.
The gift tax has remained in
place for 2010 with an
annual exclusion amount
of $13,000 per donee, per |
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donor. Gift amounts in excess of the
annual exclusion first reduce
the donor’s lifetime $1 million
exemption, and amounts above that
lifetime exemption are taxed at 35
percent.
If Congress fails
to act, the Bush tax cuts of 2001
expire, and the estate and gift tax
exemptions and rules return at the
2001 level on January 1, 2011. Under
the 2001 rules, the maximum gift and
estate tax rate would be 55 percent
with an exemption of $1 million per
person. A compromise frequently
mentioned amid speculation on the
future of the estate tax is a
proposal to reduce the estate tax
rate to 45 percent retroactive to
January 1, 2010 with an exemption
ranging from $1.5 million to $5
million. Obviously, the details and
burden of the estate tax in the
future are very uncertain. Most
agree, however, that taxpayers with
potential taxable estates in excess
of the exemption can significantly
reduce their death taxes with
transfer planning.
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As you might recall, we have
previously written about the now
universally available conversion of
traditional IRAs to Roth IRAs.
Before January 1, 2010, both Roth
IRA conversions and contributions
were limited to taxpayers with
modified adjusted gross incomes of
$100,000 or less. For 2010 and later
years, Roth conversions are now
available to all taxpayers, but
direct contributions to Roth IRAs
are still limited to taxpayers with
modified adjusted gross incomes of
$167,000 or less. There is, however,
a way to “Roth IRAs for all.”
An indirect annual contribution (or “back
door contribution”) to a Roth IRA is
available to those with incomes
above $100,000. Taxpayers eligible
for an IRA contribution may make a
nondeductible contribution to a
traditional IRA. Assuming that they
have no other traditional IRA
balances, they can then convert the
contents of that traditional IRA to
a Roth IRA and pay tax only on the
income accumulated in the
traditional IRA between the
contribution and conversion. A
contribution followed immediately by
a conversion should avoid all but
possibly miniscule tax. Taxpayers
less than 70˝ years of age with (or
with a spouse with) earned income
and no other traditional IRA
balances might want to make a
nondeductible 2010 contribution to a
traditional IRA followed by a Roth
conversion now. A couple under age
50 can place $10,000 ($5,000 each)
and a couple over age 50 can place
$12,000 ($6,000 each) under the
umbrella of tax-free compounding
without any incremental income tax
cost. Those over age 70˝ are not
allowed an IRA contribution.
Our website, www.cepcpa.com,
contains a paper,
To Roth or Not,
discussing conversion of traditional
IRAs to Roth IRAs. Roth IRAs are
generally superior for:
● Those
who expect higher tax rates in the
future.
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● Those
who will not need to consume all of
their IRA funds during their
retirement. Roth IRAs do not require
annual minimum distributions during
the lifetime of the owner or of the
spouse of the owner. The entire
balance with the continued benefit
of tax-free compounding of a Roth
IRA can be left to children (or
grandchildren or their trusts) with
required distributions beginning
only after the death of the second
of the couple to die and occurring
over the life expectancy of the
child/ grandchild/beneficiary.
● Those
whose successions will pay death
taxes. They will thin their taxable
estates by the amount of income tax
paid on the Roth conversion or
contribution. They will also leave
an asset with the very valuable
characteristic of long-term,
tax-free compounding that is valued
for death tax purposes identically
to assets without that
characteristic.
● Those
expecting above average asset
appreciation in the IRA.
● Young
people since they will enjoy a
longer period of tax-free
compounding.
Roth conversions are probably not
advisable for:
● Those
who expect that future distributions
will be taxed at a rate
significantly lower than their tax
rate on conversion.
● Those
who would have to use IRA or other
tax-deferred funds to pay the tax
(especially if an early withdrawal
penalty would apply).
We
would be pleased to discuss IRA
choices and conversions or answer
your questions about them.
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The Louisiana Secretary of State has
begun mailing post cards to
corporations and limited liability
companies with instructions on how
to file the annual report and submit
the payment on-line. The Secretary
of State's office is apparently not
going to mail paper forms as in the
past. The annual report and payment
require the completion of the form
on-line and payment by credit card.
If you are skeptical about
furnishing your credit card
information on-line to the
government, you may still file a
paper form and pay with a
check. To do so, you will need
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to access the
Secretary of State's website at
www.sos.louisiana.gov, go to the
site’s Commercial database, and,
from there, to the Corporations
Database (search by company name,
officer or agent name, or charter
number). When you have located your
entity, the site allows you to print
a form to use for the annual report
and payment of the fee.
The post card information also
furnishes a telephone number to call
if you do not have internet access.
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