Iowa once again rates very poorly in the annual Tax Climate Index released by the Tax Foundation. Iowa ranks 46th (5th-worst) in business tax climate, and 42nd (9th-worst) in individual income tax climate.
Iowa has the highest top corporate tax rate in the nation (at 12%) and a complex system of corporate taxation overall. On the individual side, Iowa ranks low because of high rates and complexity.
This should come as no surprise to anyone who has dealt with filing an Iowa tax return. You can read the full report here.
Saturday, October 30, 2010
Friday, October 29, 2010
IRS Releases Various Cost-of-Living Adjustments for 2011
The IRS has released the cost-of-living adjustments for items such as the adoption credit, eligible long-term care premiums, medical savings accounts and the gift tax.
The maximum adoption credit in 2011 will be $13,360. For medical savings accounts, a "high-deductible health plan" will mean a plan that has an annual deducible between $2,050-$3,050 for self-only, and $4,100-$6,150 for a family plan.
The limitation on eligible long-term care premiums starst at $340 for people under the age of 40; $640 for people between the ages of 40 and 50; $1,270 for ages 50-60; $3,390 for ages 60-70; and $4,240 for age 70 and older.
And, the gift tax exclusion remains the same in 2011 as it was in 2010. The first $13,000 of gifts to any one person are not taxable.
You can find more cost-of-living adjustments, including such oddball items as "tax on arrow shafts" and a number of other items, here.
The maximum adoption credit in 2011 will be $13,360. For medical savings accounts, a "high-deductible health plan" will mean a plan that has an annual deducible between $2,050-$3,050 for self-only, and $4,100-$6,150 for a family plan.
The limitation on eligible long-term care premiums starst at $340 for people under the age of 40; $640 for people between the ages of 40 and 50; $1,270 for ages 50-60; $3,390 for ages 60-70; and $4,240 for age 70 and older.
And, the gift tax exclusion remains the same in 2011 as it was in 2010. The first $13,000 of gifts to any one person are not taxable.
You can find more cost-of-living adjustments, including such oddball items as "tax on arrow shafts" and a number of other items, here.
IRS Releases Retirement Plan Limits for 2011
The contribution limits to IRAs and other retirement plans will stay the same in 2011 as they were in 2010. The contribution limit to an IRA will remain at $5,000 for people under the age of 50, and $6,000 for people age 50 and older. The contribution limit to a 401(k) plan will remain at $16,500 for those under the age of 50, and $22,000 for those age 50 and older.
Wednesday, October 27, 2010
Roth Conversions
The rules on converting a traditional IRA to a Roth IRA have been relaxed for 2010, opening the door to more taxpayers to make this conversion.
Contributions to a traditional IRA are generally tax deductible. Distributions from a traditional IRA are generally considered to be taxable income.
Contributions to a Roth IRA are post-tax, meaning you get no tax deduction when you make a contribution. However, distributions from a Roth IRA are generally tax-free.
Taxpayers have always been able to convert a traditional IRA to a Roth IRA, but only if their income was less than $100,000. For 2010, the income limitation has been removed. Meaning, anyone can now convert a traditional IRA to a Roth IRA. And, a bill was recently signed into law that allows Roth conversions within 401(k) plans as well.
When you make a conversion, the money in your traditional IRA/401(k) is treated as being distributed to you, so you’ll have to claim it as income and pay tax on it. For 2010 conversions only, you will have the option of claiming half of the amount as income in 2011 and the other half as income in 2012.
Example:
John has $40,000 in a traditional IRA account that he wants to convert into a Roth IRA in 2010. John will have to claim the $40,000 as income on his tax return. He can elect to claim all $40,000 on his 2010 return, or claim $0 in 2010, $20,000 in 2011 and $20,000 in 2012.
The upside to a Roth conversion is that a Roth account will provide you with tax-free income at retirement. That being said, the decision on whether to convert a traditional IRA/401(k) to a Roth account is complex and involves many variables. In general, a Roth conversion is advisable if think you will be in the same or higher tax bracket at retirement, you have a long time to go before retirement, and if you can afford to take the current tax hit. You should consult with both a tax advisor such as me, and your investment advisor, before making a final decision on whether to convert.
Contributions to a traditional IRA are generally tax deductible. Distributions from a traditional IRA are generally considered to be taxable income.
Contributions to a Roth IRA are post-tax, meaning you get no tax deduction when you make a contribution. However, distributions from a Roth IRA are generally tax-free.
Taxpayers have always been able to convert a traditional IRA to a Roth IRA, but only if their income was less than $100,000. For 2010, the income limitation has been removed. Meaning, anyone can now convert a traditional IRA to a Roth IRA. And, a bill was recently signed into law that allows Roth conversions within 401(k) plans as well.
When you make a conversion, the money in your traditional IRA/401(k) is treated as being distributed to you, so you’ll have to claim it as income and pay tax on it. For 2010 conversions only, you will have the option of claiming half of the amount as income in 2011 and the other half as income in 2012.
Example:
John has $40,000 in a traditional IRA account that he wants to convert into a Roth IRA in 2010. John will have to claim the $40,000 as income on his tax return. He can elect to claim all $40,000 on his 2010 return, or claim $0 in 2010, $20,000 in 2011 and $20,000 in 2012.
The upside to a Roth conversion is that a Roth account will provide you with tax-free income at retirement. That being said, the decision on whether to convert a traditional IRA/401(k) to a Roth account is complex and involves many variables. In general, a Roth conversion is advisable if think you will be in the same or higher tax bracket at retirement, you have a long time to go before retirement, and if you can afford to take the current tax hit. You should consult with both a tax advisor such as me, and your investment advisor, before making a final decision on whether to convert.
Monday, October 25, 2010
Recycled and UPDATED - Will My Health Insurance Be Taxable?
I have published this article twice already, but the rumor is still out there, plus the IRS recently issued more information for employers.
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(Originally posted June 27, 2010, and re-posted on July 21, 2010)
I saw one of my clients yesterday, and he asked me whether the rumor is true that the government is going to start taxing people on health insurance provided by their employers. The answer to that question is, NO.
My client is right that there is a rumor going around about this, including one of those wonderful "chain" e-mails that breathlessly states that starting in 2011, you'll be taxed on employer-provided health insurance and that you need to forward the e-mail on to all your friends.
As with most rumors like this, there is a small grain of truth here. The health care bill passed in the spring does indeed impose an excise tax on employer-provided health insurance (this is the so-called "Cadillac Tax" that you may have heard of). Here are the facts about this excise tax:
•The tax starts in 2018, not 2011
•The tax applies only to employer-provided health insurance that exceeds $27,500/year, and the tax is imposed on the insurance company, not on you
•It is true that the value of your employer-provided health insurance will be reported on your W-2 starting in 2011, but that's all -- it will be reported on your W-2 but it's not a taxable item to you; it will be shown for reporting purposes only.
UPDATE ON OCTOBER 25, 2010: The IRS says that employer reporting of health insurance on the W-2 will be optional for 2011. So, your 2011 W-2 may or may not show the value of employer provided health insurance. At any rate: you will not be taxed on this! It will be shown on the W-2 for informational and reporting purposes only.
Snopes.com provides more information about the original rumor:
http://www.snopes.com/politics/taxes/hr3590.asp
-----------------
(Originally posted June 27, 2010, and re-posted on July 21, 2010)
I saw one of my clients yesterday, and he asked me whether the rumor is true that the government is going to start taxing people on health insurance provided by their employers. The answer to that question is, NO.
My client is right that there is a rumor going around about this, including one of those wonderful "chain" e-mails that breathlessly states that starting in 2011, you'll be taxed on employer-provided health insurance and that you need to forward the e-mail on to all your friends.
As with most rumors like this, there is a small grain of truth here. The health care bill passed in the spring does indeed impose an excise tax on employer-provided health insurance (this is the so-called "Cadillac Tax" that you may have heard of). Here are the facts about this excise tax:
•The tax starts in 2018, not 2011
•The tax applies only to employer-provided health insurance that exceeds $27,500/year, and the tax is imposed on the insurance company, not on you
•It is true that the value of your employer-provided health insurance will be reported on your W-2 starting in 2011, but that's all -- it will be reported on your W-2 but it's not a taxable item to you; it will be shown for reporting purposes only.
UPDATE ON OCTOBER 25, 2010: The IRS says that employer reporting of health insurance on the W-2 will be optional for 2011. So, your 2011 W-2 may or may not show the value of employer provided health insurance. At any rate: you will not be taxed on this! It will be shown on the W-2 for informational and reporting purposes only.
Snopes.com provides more information about the original rumor:
http://www.snopes.com/politics/taxes/hr3590.asp
Residential Energy Credits Expire Soon
If you've been planning to make home improvements, time is running out -- not just on the weather but also on your chance to qualify for tax credits related to certain improvements.
The "Residential Energy Credit" expires December 31. The credit is available for qualifying purchases of energy efficient doors, windows, insulation, furnaces, air conditioning systems, certain types of water heaters, and even certain types of roofs. The credit is 30% of the purchase price.
Example:
If you spend $500 on energy efficient doors for your house, you can claim a credit of $150 on your tax return ($500 purchase price x 30%).
The purchases must be for an existing home that you live in as your principal residence. Purchases for new construction are not eligible for this credit, nor are purchases made for rental properties that you own.
The credit was available in 2009 as well, and the maximum total credit that you can take is limited to $1,500 combined in 2009 and 2010.
Please note that not all Energy Star rated purchases are eligible for the credit. You can find a listing of eligible products and more information in general about this credit at this website: http://www.energystar.gov/index.cfm?c=tax_credits.tx_index.
The "Residential Energy Credit" expires December 31. The credit is available for qualifying purchases of energy efficient doors, windows, insulation, furnaces, air conditioning systems, certain types of water heaters, and even certain types of roofs. The credit is 30% of the purchase price.
Example:
If you spend $500 on energy efficient doors for your house, you can claim a credit of $150 on your tax return ($500 purchase price x 30%).
The purchases must be for an existing home that you live in as your principal residence. Purchases for new construction are not eligible for this credit, nor are purchases made for rental properties that you own.
The credit was available in 2009 as well, and the maximum total credit that you can take is limited to $1,500 combined in 2009 and 2010.
Please note that not all Energy Star rated purchases are eligible for the credit. You can find a listing of eligible products and more information in general about this credit at this website: http://www.energystar.gov/index.cfm?c=tax_credits.tx_index.
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