A friend recently asked me a question about non-deductible IRAs. She had been putting money into non-deductible IRAs for years and realized she had not reported the deposits to the IRS. Her question “What should I do?”
First, what are non-deductible IRAs?
If you have a job, you can put aside up to $5,000 into an IRA ($6,000 if you are over 50) or the amount of your compensation, whichever is lower. In other words, if you work part time and earn $2,000 then you can put up to $2000 into your IRA. (I’m sure Bill Gates earns more than $5,000 a year so he can put aside ONLY $5,000. Does anyone know if he is over 50?)
If you decide to put money into an IRA, you have to figure out if you can deduct it on your federal income tax return. The first question you need to answer is: “Do you participate in a retirement plan of some sort?” If so, there are income limits that determine whether or not you can deduct the IRA contribution. A married couple filing a joint return can deduct an IRA if their total income is less than $89,000. It cannot be deducted if their income exceeds $109,000. There is a phase-out of how much you can deduct between those two numbers. If your total income is $99,000, you can deduct up to $2,500.
The income-limits for single individuals are $55,000 and $65,000.
You have a non-deductible IRA if you contribute to an IRA, you are in a pension plan, and your total income exceeds $109,000 (if married) or $65,000 (if single).
So you put the money aside, but did not get any tax benefit.
Why would you do this? The investment earnings on the IRA are not taxed in the year they are earned. So you get to accumulate the earnings until you decide to withdraw money from your IRA, possibly when you are not working and in a lower tax bracket.
Eventually, you will withdraw money from the non-deductible IRA. You should pay tax only on the earnings, but not on the money you contributed because you did not get a tax benefit when you made the contribution.
There is a horrendous calculation you need to make when you withdraw money from the IRA. You must calculate the portion of the withdrawal that came from investment earnings and pay tax on it. You do not want to pay tax on the contributions you made. The various tax packages do a good job of making this calculation. Don’t try doing it on the back of an envelope.
This is where my friend’s question comes in. You are supposed to tell the IRS when you put money into a non-deductible IRA. You do this every year on Form 8606. Then each year you add the current year’s contribution to the total of the prior contributions and have all the information at your finger tips. She did not do this.
What she needs to do is go back and total up all the non-deductible contributions that she made. She should not include any income earned in the calculation and she should not include any contributions to ROTH IRAs. It is possible that she can get the information from her mutual fund company. Form 8606 should be completed when she does her 2009 tax return. Line 1 is for her 2009 non-deductible contributions. She should put the total of the non- deductible IRA contributions from all the prior years on Line 2 of that form. A total goes on line 3. Then, going forward, each year Form 8606 should be filed with her tax return.
The IRS will probably not question the change but be prepared to provide the calculation should they become interested. There is a potential annual $50 penalty for not filing Form 8606.
Friday, July 3, 2009
Monday, June 29, 2009
Say What?
I’m a numbers guy. They talk to me. Sometimes words just fail me. Luckily I have a good editor for this blog. But sometimes words speak to me. I administer a group on Yahoo and got the following message:
“Sir am interested in joining ur group found in search seems intrestingfor me so plz accept my membership thanking u.”
Wow. In this case words screamed at me. I know that texting is popular and requires a lot of abbreviations. But this is not texting. This is an email requesting participation in a business networking group. My immediate impression was that this was an ignorant lazy person who was not willing to take the time to form a literate sentence.
Here is my suggestion. Think before you hit the send button.
Now let’s hope my editor reviews this carefully. It would be bad form to have a grammar or spelling mistake.
(Editor’s note: I found two spelling errors.)
“Sir am interested in joining ur group found in search seems intrestingfor me so plz accept my membership thanking u.”
Wow. In this case words screamed at me. I know that texting is popular and requires a lot of abbreviations. But this is not texting. This is an email requesting participation in a business networking group. My immediate impression was that this was an ignorant lazy person who was not willing to take the time to form a literate sentence.
Here is my suggestion. Think before you hit the send button.
Now let’s hope my editor reviews this carefully. It would be bad form to have a grammar or spelling mistake.
(Editor’s note: I found two spelling errors.)
Sunday, June 21, 2009
How To Improve Your Business
Employees can provide a plethora of ideas to improve their company. Sometimes, bosses are too self-important to realize this and they squelch any sort of effort on the part of the employee’s to make constructive suggestions. The boss then complains of having unmotivated, uncooperative employees.
Every year, after tax season, we take our team from Arrison & Olden out to a restaurant for a morning of conversation. Because it minimizes any extraneous interruptions, we do it offsite where we are in a better environment to be able to relax and give better feedback.
We discuss three basic topics; what went right, what went wrong, what can we do better. The team has the right to send the two partners (Andy and Thom) out of the room if they wish. This has never happened. So we spend the morning drinking coffee, eating pastry and breaking down the business. It is one of the most valuable times we spend together all year.
What are the benefits? First, we get great ideas for making next year better. Sometimes it means small changes, but changes that can have a big impact. We have had suggestions like getting electric staplers, or getting our tax return extension process ready earlier. Most importantly, team members get to feel that they are listened to and valued (which they are all year round). An added advantage is the chance to socialize, which we don’t get to do during the tax season. It has proved to be, year after year, a very positive experience.
We hire an outside executive coaching firm to run the meeting and keep it focused. For several years we have used Jan Stewart from Emerge in Littleton, Mass. She has done a great job of guiding the meeting, keeping good notes and providing valuable feedback. If you are thinking of doing something like this, I highly recommend Jan and her team to help you. For more information, Emerge’s website is: http://www.emergewithcoaching.com
Every year, after tax season, we take our team from Arrison & Olden out to a restaurant for a morning of conversation. Because it minimizes any extraneous interruptions, we do it offsite where we are in a better environment to be able to relax and give better feedback.
We discuss three basic topics; what went right, what went wrong, what can we do better. The team has the right to send the two partners (Andy and Thom) out of the room if they wish. This has never happened. So we spend the morning drinking coffee, eating pastry and breaking down the business. It is one of the most valuable times we spend together all year.
What are the benefits? First, we get great ideas for making next year better. Sometimes it means small changes, but changes that can have a big impact. We have had suggestions like getting electric staplers, or getting our tax return extension process ready earlier. Most importantly, team members get to feel that they are listened to and valued (which they are all year round). An added advantage is the chance to socialize, which we don’t get to do during the tax season. It has proved to be, year after year, a very positive experience.
We hire an outside executive coaching firm to run the meeting and keep it focused. For several years we have used Jan Stewart from Emerge in Littleton, Mass. She has done a great job of guiding the meeting, keeping good notes and providing valuable feedback. If you are thinking of doing something like this, I highly recommend Jan and her team to help you. For more information, Emerge’s website is: http://www.emergewithcoaching.com
How To Improve Your Business
Employees can provide a plethora of ideas to improve their company. Sometimes, bosses are too self-important to realize this and they squelch any sort of effort on the part of the employee’s to make constructive suggestions. The boss then complains of having unmotivated, uncooperative employees.
Every year, after tax season, we take our team from Arrison & Olden out to a restaurant for a morning of conversation. Because it minimizes any extraneous interruptions, we do it offsite where we are in a better environment to be able to relax and give better feedback.
We discuss three basic topics; what went right, what went wrong, what can we do better. The team has the right to send the two partners (Andy and Thom) out of the room if they wish. This has never happened. So we spend the morning drinking coffee, eating pastry and breaking down the business. It is one of the most valuable times we spend together all year.
What are the benefits? First, we get great ideas for making next year better. Sometimes it means small changes, but changes that can have a big impact. We have had suggestions like getting electric staplers, or getting our tax return extension process ready earlier. Most importantly, team members get to feel that they are listened to and valued (which they are all year round). An added advantage is the chance to socialize, which we don’t get to do during the tax season. It has proved to be, year after year, a very positive experience.
We hire an outside executive coaching firm to run the meeting and keep it focused. For several years we have used Jan Stewart from Emerge in Littleton, Mass. She has done a great job of guiding the meeting, keeping good notes and providing valuable feedback. If you are thinking of doing something like this, I highly recommend Jan and her team to help you. For more information, Emerge’s website is: http://www.emergewithcoaching.com
Every year, after tax season, we take our team from Arrison & Olden out to a restaurant for a morning of conversation. Because it minimizes any extraneous interruptions, we do it offsite where we are in a better environment to be able to relax and give better feedback.
We discuss three basic topics; what went right, what went wrong, what can we do better. The team has the right to send the two partners (Andy and Thom) out of the room if they wish. This has never happened. So we spend the morning drinking coffee, eating pastry and breaking down the business. It is one of the most valuable times we spend together all year.
What are the benefits? First, we get great ideas for making next year better. Sometimes it means small changes, but changes that can have a big impact. We have had suggestions like getting electric staplers, or getting our tax return extension process ready earlier. Most importantly, team members get to feel that they are listened to and valued (which they are all year round). An added advantage is the chance to socialize, which we don’t get to do during the tax season. It has proved to be, year after year, a very positive experience.
We hire an outside executive coaching firm to run the meeting and keep it focused. For several years we have used Jan Stewart from Emerge in Littleton, Mass. She has done a great job of guiding the meeting, keeping good notes and providing valuable feedback. If you are thinking of doing something like this, I highly recommend Jan and her team to help you. For more information, Emerge’s website is: http://www.emergewithcoaching.com
Worker's Compensation
Recently, one of our clients got a nasty surprise from the Commonwealth of Massachusetts. A representative from the Worker’s Compensation Board walked into our client’s one-person company and demanded to see his Worker’s Compensation policy. He did not have one. He was shut down until he paid a fine and took care of the Workers Compensation situation.
Usually, this would not be unusual. Companies are supposed to have Worker’s Compensation Insurance and the punishment for not having it is harsh. There is an important exception. The owner of a business can elect out of the insurance.
Our client was the only employee of his incorporated business and he was aware that he did not need to have Workers Comp for himself. He didn’t realize that, legally, he had to make a positive election to not have the insurance. This is where he got in trouble.
My advice is to call your insurance agent to make sure you avoid this situation, and to verify that you have done everything right.
Usually, this would not be unusual. Companies are supposed to have Worker’s Compensation Insurance and the punishment for not having it is harsh. There is an important exception. The owner of a business can elect out of the insurance.
Our client was the only employee of his incorporated business and he was aware that he did not need to have Workers Comp for himself. He didn’t realize that, legally, he had to make a positive election to not have the insurance. This is where he got in trouble.
My advice is to call your insurance agent to make sure you avoid this situation, and to verify that you have done everything right.
Sunday, June 14, 2009
Electric Cars
Electric Cars
This is what the IRS says about Plug-In Electric Vehicles
“Plug-in Electric Drive Vehicle Credit (Section 1141): The new law modifies the credit for qualified plug-in electric drive vehicles purchased after Dec. 31, 2009. To qualify, vehicles must be newly purchased, have four or more wheels, have a gross vehicle weight rating of less than 14,000 pounds, and draw propulsion using a battery with at least four kilowatt hours that can be recharged from an external source of electricity. The minimum amount of the credit for qualified plug-in electric drive vehicles is $2,500 and the credit tops out at $7,500, depending on the battery capacity. The full amount of the credit will be reduced with respect to a manufacturer's vehicles after the manufacturer has sold at least 200,000 vehicles.”
“Plug-In Electric Vehicle Credit (Section 1142): The new law also creates a special tax credit for two types of plug-in vehicles — certain low-speed electric vehicles and two- or three-wheeled vehicles. The amount of the credit is 10 percent of the cost of the vehicle, up to a maximum credit of $2,500 for purchases made after Feb. 17, 2009, and before Jan. 1, 2012. To qualify, a vehicle must be either a low speed vehicle propelled by an electric motor that draws electricity from a battery with a capacity of 4 kilowatt hours or more or be a two- or three-wheeled vehicle propelled by an electric motor that draws electricity from a battery with the capacity of 2.5 kilowatt hours. A taxpayer may not claim this credit if the plug-in electric drive vehicle credit is allowable.”
Plug in vehicles have been around for over 15 years and new ones are coming to market soon. The Chevy Volt is one and both Mitsubishi and Chrysler have electric vehicles on the drawing board. You need to make sure any electric vehicle you purchase qualifies for the credit. You also need to determine if the driving range of the car suits your needs. They generally travel less than 50 miles on a single charge although one claims to go 150 to 200 miles.
The new law sets a limit that once the manufacturer sells 200,000 vehicles, they will quickly lose the tax credit. Something a few people noticed is that when the Toyota Prius came out it cost $24,000 and you got a $3,000 tax credit. There was a waiting list and people jockeyed to move up on the list. Toyota quickly sold a lot of hybrid cars and eventually the cars no longer qualified for the credit. Magically the cost of the car dropped to $21,000 and they were available to drive off the lot. Last year they were even offering special deals on the Prius. So expect the same thing to happen with the new plug in cars.
By the way, there is nothing wrong with this. The goal of the credit was to give the financial viability of the hybrids a push. That goal was met and now they are a fixture on the highway.
The IRS has not provided guidance on how the plug in credits will work. Expect the information to be out in the fall.
Here is a link to an IRS article that talks about all the new credits.
http://www.irs.gov/newsroom/article/0,,id=206871,00.html
This is what the IRS says about Plug-In Electric Vehicles
“Plug-in Electric Drive Vehicle Credit (Section 1141): The new law modifies the credit for qualified plug-in electric drive vehicles purchased after Dec. 31, 2009. To qualify, vehicles must be newly purchased, have four or more wheels, have a gross vehicle weight rating of less than 14,000 pounds, and draw propulsion using a battery with at least four kilowatt hours that can be recharged from an external source of electricity. The minimum amount of the credit for qualified plug-in electric drive vehicles is $2,500 and the credit tops out at $7,500, depending on the battery capacity. The full amount of the credit will be reduced with respect to a manufacturer's vehicles after the manufacturer has sold at least 200,000 vehicles.”
“Plug-In Electric Vehicle Credit (Section 1142): The new law also creates a special tax credit for two types of plug-in vehicles — certain low-speed electric vehicles and two- or three-wheeled vehicles. The amount of the credit is 10 percent of the cost of the vehicle, up to a maximum credit of $2,500 for purchases made after Feb. 17, 2009, and before Jan. 1, 2012. To qualify, a vehicle must be either a low speed vehicle propelled by an electric motor that draws electricity from a battery with a capacity of 4 kilowatt hours or more or be a two- or three-wheeled vehicle propelled by an electric motor that draws electricity from a battery with the capacity of 2.5 kilowatt hours. A taxpayer may not claim this credit if the plug-in electric drive vehicle credit is allowable.”
Plug in vehicles have been around for over 15 years and new ones are coming to market soon. The Chevy Volt is one and both Mitsubishi and Chrysler have electric vehicles on the drawing board. You need to make sure any electric vehicle you purchase qualifies for the credit. You also need to determine if the driving range of the car suits your needs. They generally travel less than 50 miles on a single charge although one claims to go 150 to 200 miles.
The new law sets a limit that once the manufacturer sells 200,000 vehicles, they will quickly lose the tax credit. Something a few people noticed is that when the Toyota Prius came out it cost $24,000 and you got a $3,000 tax credit. There was a waiting list and people jockeyed to move up on the list. Toyota quickly sold a lot of hybrid cars and eventually the cars no longer qualified for the credit. Magically the cost of the car dropped to $21,000 and they were available to drive off the lot. Last year they were even offering special deals on the Prius. So expect the same thing to happen with the new plug in cars.
By the way, there is nothing wrong with this. The goal of the credit was to give the financial viability of the hybrids a push. That goal was met and now they are a fixture on the highway.
The IRS has not provided guidance on how the plug in credits will work. Expect the information to be out in the fall.
Here is a link to an IRS article that talks about all the new credits.
http://www.irs.gov/newsroom/article/0,,id=206871,00.html
Friday, June 12, 2009
Wind Energy Credits
Energy Credits - Continued
Wind Energy Credits
Energy from the wind has been around for centuries. Ships used to sail the ocean using the wind. It has been used to pump water in Holland where it helped keep the cities dry behind the dikes. Recently the wind has been captured to generate electricity.
You might be familiar with the Cape Wind project in Nantucket Sound and the battle that has been raging for years over whether or not it should be built. From a purely economic and energy perspective, it will help the Massachusetts economy and move us toward energy independence.
A few years ago I was traveling in the west and was awed by a wind farm that just appeared in the desert. There had to be a hundred or more windmills that did not desecrate the desert as far as I am concerned.
A tax credit is now available for small wind turbines that are used for a residence. Thus, you can install a wind turbine and get a credit for 30% of the cost of the unit. It can provide electricity for your house and could generate electricity that you might be able to sell to the electric company. The most common problem with wind turbines is having a site that gets enough consistent wind to justify the unit. A 30% credit is useless if you are limited in how much you can use the turbine.
Like the other energy credits, you use Form 5695 to claim this one. This is not a refundable credit so you need to have a substantial tax liability to take advantage of the credit.
Here are some links for you:
This link could help you understand wind energy for your home. Remember this is an industry group so all the downsides to wind energy may not be presented.
http://www.awea.org/faq/rsdntqa.html
Here is a site that could help you understand purchasing a wind system as well as other energy alternatives.
http://www.homepower.com/home/
Here is a link to a government website where you can search for grants.
http://www.grants.gov/
Wind Energy Credits
Energy from the wind has been around for centuries. Ships used to sail the ocean using the wind. It has been used to pump water in Holland where it helped keep the cities dry behind the dikes. Recently the wind has been captured to generate electricity.
You might be familiar with the Cape Wind project in Nantucket Sound and the battle that has been raging for years over whether or not it should be built. From a purely economic and energy perspective, it will help the Massachusetts economy and move us toward energy independence.
A few years ago I was traveling in the west and was awed by a wind farm that just appeared in the desert. There had to be a hundred or more windmills that did not desecrate the desert as far as I am concerned.
A tax credit is now available for small wind turbines that are used for a residence. Thus, you can install a wind turbine and get a credit for 30% of the cost of the unit. It can provide electricity for your house and could generate electricity that you might be able to sell to the electric company. The most common problem with wind turbines is having a site that gets enough consistent wind to justify the unit. A 30% credit is useless if you are limited in how much you can use the turbine.
Like the other energy credits, you use Form 5695 to claim this one. This is not a refundable credit so you need to have a substantial tax liability to take advantage of the credit.
Here are some links for you:
This link could help you understand wind energy for your home. Remember this is an industry group so all the downsides to wind energy may not be presented.
http://www.awea.org/faq/rsdntqa.html
Here is a site that could help you understand purchasing a wind system as well as other energy alternatives.
http://www.homepower.com/home/
Here is a link to a government website where you can search for grants.
http://www.grants.gov/
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