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My Accountant Told Me I Have Until April 17th to Make a Contribution to an IRA, What is an IRA?

March 30, 2012

An Individual Retirement Account (known as the IRA) is a way to start saving for retirement that comes with some tax advantages.  You have until April 17,2012 to contribute to a 2011 IRA and still have the ability to deduct the contributions on your 2011 tax return if you qualify.

The Traditional IRA and Roth IRA are two different types of individual retirement accounts with different qualifications and benefits.  With a Traditional IRA contributions can be tax-deductible and you pay tax at the back end, which means when you withdraw the money in retirement.  With a Roth IRA you pay taxes on your contributions and then distributions are tax-free.

For a Roth IRA for 2011, the amount you can contribute can be limited or reduced to zero if you are single and have a modified adjusted gross income between $107,000 and $122,000 or are married filing jointly and household income is between $169,000 and $179,000.  If you are under age 50 and under the gross income limits, you can contribute $5,000 to your Roth IRA in 2011.  You can withdraw your contributions to a Roth IRA at any time but any withdrawal of the earnings before you reach age 59 1/2 will result in tax and may result in a 10% early-withdrawal penalty.

For a Traditional IRA for 2011, the amount you can deduct as contributions may be limited if you are covered by a retirement plan at work and are single with a modified adjusted gross income between $56,000 and $66,000 or are married filing jointly with a household income between $90,000 and $110,000 (However, if you are covered by a company plan but your spouse is not, then the deduction is phased out between $173,000 and $183,000).  If you are under age 50, you can contribute $5,000 to your Traditional IRA in 2011.  Withdrawals can be taken after age 59 1/2 without penalty and must be taken by age 70 1/2 in order to avoid penalties.

If you qualify for both types of IRAs, you will need to make a determination of which one is better for you.  This type of analysis would include estimating the amount of earnings you expect to make in the IRA and what tax rates you will be subject to when you make withdrawals to determine which would result in the payment of less tax.

I Just Started a New Business, How Do I Avoid Tax Trouble?

March 14, 2012

So you’ve started a new business and hired an attorney to make sure that your business is properly formed in order to give you some liability protection.  What is the next step?

Another important step in the process is making sure that you follow all the proper federal and state tax laws as the failure to do so could result not only in liability for your new company but also for you personally.  Besides just filing annual returns, there are also a number of other requirements.  Below is a list of some of the major items to consider when starting your business:

  • Sales and Use Tax.  Are the goods or services you are selling subject to Iowa sales or use tax?  The Iowa Department of Revenue has posted an Iowa Sales and Use Tax Guide to help business owners determine if they need to pay for these taxes and how to go about getting a permit to collect such taxes or an exemption certificate to give to suppliers to purchase items without paying the sales tax.
  •  Employee v. Independent Contractor.  Will your workers be classified as Employees or Independent Contractors?  There is a big tax difference between those two classifications.  Generally for employees you must withhold income taxes and pay Social Security and Medicare taxes and unemployment tax on wages but you do not have to pay these items on payments to independent contractors.  The problem with misclassifying individuals who do perform work for you is that the company may ultimately be liable to pay the employment taxes for the misclassified worker.
  •  Employee Withholdings.  Will your business have employees?  If so, each employee will need to fill out a Form W-4 at both the federal and state level to determine how much to withhold from each employee’s paycheck for state and federal income taxes.  In addition to just withholding amounts for federal and state taxes, employees and employers are required to withhold amounts for Social Security and Medicare taxes and remit payments in a timely manner. Your new business will then need to make sure to comply with all filing and deposit requirements of such withholdings to the IRS and Iowa Department of Revenue.
  •  Estimated Tax Payments.  Are you required to make estimated tax payments?  If you receive income from your business that is not subject to withholding, you may be required to pay estimated income tax at both the federal and state level.  Typically this applies to self-employed individuals or individuals that receive large amounts of interest, dividends, capital gains, rents, royalties, business income, or farm income.

In addition to these items, Iowa also has unemployment tax and employer’s can set up an account through Iowa Workforce Development.  The IRS also has some additional guidance for new start-ups on their website.

It is much easier and less costly for new businesses to make sure they are complying with all tax laws in the formation stage rather than waiting until they receive a notice from the IRS or Iowa Department of Revenue for failure to comply with such rules and regulations.  Penalties and interest can be very steep and tax debts may not be dischargeable in bankruptcy.

New Online Tool for Individuals that Received the First Time Homebuyer Credit

February 2, 2012

The First Time Homebuyer Credit is a credit which reduced a taxpayer’s tax bill (or increased his or her refund) if he or she purchased a new home between certain time periods.  This credit was one of the incentives used by Congress to try to help the real estate market by giving an incentive to certain individuals to purchase a home.

Were you aware that you may have a repayment obligation for receiving the First Time Homebuyer Credit?  If you claimed the credit for a house you purchased in 2008 (applicable for homes purchased after April 8, 2008 and before January 1, 2009), the credit was really a 0% loan and was to be repaid in 15 equal annual installments beginning in 2010 as an additional “tax” on the tax return (shown on line 59b of the 1040).  The credit was extended for a few additional years and if you took the credit during 2009 or 2010 (and even for part of 2011 for military personnel) you do not have a repayment obligation unless the home you purchased is no longer considered your home (meaning that you sold it, it was destroyed or it was converted into a business or rental property) within three years from the date of purchase.

The IRS has a new tool on its website that allows individuals who received the First Time Homebuyer Credit to determine his or her repayment obligation.  In order to access the information you will need your Social Security Number, date of birth and complete address.  The website will show the original amount of the credit, the annual repayment amounts, total amount paid and the total balance left to be paid.  The IRS will no longer be mailing reminder letters to individuals that have to repay the credit and this will be the only way to access the information.

Certain Management Contracts Can Cause Trouble for Tax-Exempt Bonds

January 10, 2012

The Internal Revenue Service has recently become more proactive regarding its efforts to conduct audits on tax-exempt bond financings and has indicated that issuers and borrowers should maintain and follow post-compliance policies and procedures in order to make sure that the interest on the bonds continues to remain tax-exempt.

One such example where bonds can lose their tax-exempt status is when a 501(c)(3) borrower or a governmental issuer enters into an arrangement with a private party which is a management or incentive payment contract on property that is financed with proceeds of tax-exempt bonds because this may result in private business use.  If the contract is considered a management contract under Regulation § 1.141-3 and does not pass the tests under Rev. Proc. 97-13 which make it a qualified management contract, then the contract may cause the bonds to lose their tax-exempt status.

One of the warning signs that a contract may not be a qualified management contract is when a contract provides compensation based in whole or in part on a share of either net profits, gross revenues or gross expenses.  Management contracts where compensation is based in whole or in part on a share of net profits are not allowed and there are limitations on the amount of compensation that can be based on a percentage of gross revenues or expenses and on the term of the contract.

If your organization has either entered into or is planning on entering into management or incentive payment contracts on property that is financed with proceeds of tax-exempt bonds, it would be a good idea to review the contract against the Internal Revenue Service rules for qualified management contracts to make sure that such contracts don’t trigger the loss of tax exemption on your bonds.

Welcome to Davis Brown’s Tax Law Blog

January 10, 2012

Do you have trouble understanding the tax laws or keeping up to date on the ever-changing tax rules and regulations?  Our tax laws are very complex and it can be an onerous task to try to keep up with all of the new rules and regulations.  Davis Brown Law Firm has one of the largest and most experienced tax departments in the State of Iowa and can be a great resource and guide in navigating these laws and helping to find answers to difficult questions.  

My name is Courtney A. Strutt Todd and I serve as  a chair of the Tax Department at Davis Brown.  I have a B.A. from the University of Northern Iowa and have passed the Certified Public Accountant’s examination.  I also have a J.D. and an M.B.A. from Drake University.  I practice primarily in public finance and have worked as bond counsel, underwriter’s counsel and issuer’s counsel in all kinds of tax-exempt financings.  Learn more about my practice.

 In addition to posts from myself, this blog may include posts from William Boatwright, Bruce Campbell, Frank Carroll, Thomas Houser, Christopher James, Thomas Stanberry, Jason Stone, Margaret Van Houten, David VanSickel, and Jana Lutteneger.


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