Saturday, September 25, 2010

Where’s My Refund?

Right about now I get a lot of calls from clients who have not received their federal refunds. There is an easy way to find out where it is.

First, go to this link

https://sa2.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp

You will need to enter the following information

* Your Social Security Number (or Individual Taxpayer Identification Number)
* Your Filing Status
* The exact whole dollar amount of your refund

And VOILA you will get information on what is happening with your refund.

Just remember, if the IRS says they mailed the check last Friday, it probably means that it actually got to the post office next Friday. This is a great argument for having the IRS do a direct deposit your refund.

Tuesday, September 21, 2010

Take Your Business Electronic

For years the Commonwealth of Massachusetts has required businesses to pay their taxes electronically. The Department of Revenue has a web site designed to accomplish this. And the web site is actually fairly easy to use. Here is the website:

https://wfb.dor.state.ma.us/webfile/business/Public/Webforms/Login/Login.aspx

You take a few minutes to register and then it goes live a couple of days later. Then you can use its full capabilities.

You would use this to pay essentially any tax that you owe to the Commonwealth. The most common ones would be state tax withholdings, sales and meals taxes collected, and corporate excise taxes. You are required to pay even the more obscure taxes electronically.

The Massachusetts unemployment office has set up the QUEST system for employers to file and pay returns and process unemployment claims. It is located at

https://wfb.dor.state.ma.us/webfile/business/Public/Webforms/Login/Login.aspx

Again you need to register with them and this can be a difficult process. You need a user name and password and can call 617-626-5075 for assistance. Expect a wait.

The QUEST system is not as user friendly as other government sites.

The IRS is getting into the game of requiring direct payments rather than using paper checks. The system is relatively easy to use and it is required for all but the smallest business starting in 2011.

Here is the registration site
https://www.eftps.gov/eftps/

Good luck.

Why Have a Mortgage?

Most people have a mortgage because that is the only way they can afford to own a home. Although the real estate market is having a very tough time right now, over the long run your house is often your biggest asset and will help fund your retirement. Plus you get a tax benefit from paying the interest on the mortgage.

Some people are fortunate to have significant financial assets. One of the more important questions for these lucky people is “Why do you have a mortgage?” The answer often is “Its my only tax deduction.”

That’s nice but is it worth it? If you have a $200,000 mortgage at 4% you are paying the bank interest of $8,000. The IRS will give you back about $2,000 in reduced taxes so $6,000 is coming out of your pocket. That is not a very good result for your pocket.

Investment advisors argue that you can invest the money and earn more than 4% but they are hesitant to guarantee that you will earn more than the interest rate on your mortgage. My suggestion is to pay off your mortgage and then invest the monthly payment with your investment advisor. You will be amazed how quickly that money will pile up.

You can’t pay it off? Add a little extra to the principle you pay every month so that you will pay your mortgage off in a shorter time period. This will save you a lot of money.

Convertin Your IRA to a Roth

A lot of clients have asked about converting regular IRAs to Roth IRAs. This is a complicated question.

Let’s start with the basics. You usually get to deduct the money you contribute to your regular IRA while there is no deduction for contributions to a Roth IRA. You pay taxes on the money you take out of your regular IRA. There may be some adjustments but the distributions are a taxable event. If you meet the requirements for a Roth IRA you do not pay tax on money you take out of it. So Roth distributions generally are tax-free.

You are allowed to convert a regular IRA to a Roth IRA. Here is the problem: you pay taxes on the amount you move from your regular IRA to a Roth IRA. You need to pay these taxes out of money that is not in the IRA. So if you have a $10,000 tax liability for making one of these conversions, it must come out of other investments or savings account. If you use the IRA money to pay the taxes you might end up paying some penalties and taxes.

Why do a conversion? You do not have to pay taxes on future earnings in the Roth IRA assuming you meet the requirements of having it in the account for five years and being over 59-1/2. There are some exceptions to these rules.

You are paying current taxes to save future taxes. If you left the money in the regular IRA you would eventually pay taxes on all the earnings when you withdrew it from the account. You do not pay these taxes on the Roth.

Here is the big problem. You can pay as much as 40% in taxes on the value of the IRA that you convert to a Roth. This happens if you are in a high tax bracket. Even if your income were about $100,000 you would pay about 33% in taxes on the conversion. That’s a lot of money.

I have analyzed this conversion for several clients. The results have consistently come in that doing the conversion does not result in significant savings for the client. After taxes were considered the clients would end up with the same amount of money whether or not they did the conversion.

The one kicker that investment advisors keep throwing on the table is that tax rates are probably going up so pay the taxes now. I have a problem with paying a lot of taxes now based on what Congress might do in the future.

A conversion like this could benefit a low-income taxpayer, perhaps someone who lost a job and had very low income this year but expects to re-enter the workforce soon. This could result in some future benefit. Analyze your situation carefully if you are thinking about doing this type of transaction.