Possible Tax Refund Delays this Season

Last week, National Taxpayer Advocate Erin Collins gave her annual tax filing season report to Congress on the 2021 tax year.

With 77% of individual taxpayers receiving tax refunds last year alone, tens of millions of taxpayers saw delays in processing their tax returns. According to both the IRS and the Treasury Department, similar or even worse delays are expected to happen this year as well due to staffing shortages stemming from the COVID-19 pandemic and budget cuts, along with new tax relief measures.

Since last tax season, the IRS is still dealing with millions of unprocessed tax returns, particularly the ones that arrived on paper. Collins said before Congress, “Paper is the IRS’s Kryptonite, and the agency is still buried in it.”

With many taxpayers still waiting for their refunds from nine months ago, Collins’ report indicates that the IRS still has backlogs of 6 million unprocessed original individual returns (Forms 1040), 2.3 million unprocessed amended individual returns (Forms 1040-X), more than 2 million unprocessed employer’s quarterly tax returns (Forms 941 and 941-X), and about 5 million pieces of taxpayer correspondence.

While electronically filed returns are considered far better than paper returns, there have been millions of them suspended during processing due to discrepancies between the amounts reflected on IRS records and amounts claimed on the returns. Also, when a taxpayer disagreed with an error notice, their response went into the IRS’s paper processing backlog, further delaying the refund.

Collins’ report also stated that the two types of IRS help, “Where’s My Refund?” app and telephone service haven’t provided all the answers. The app doesn’t give information on unprocessed returns, and it doesn’t explain any status delays, the reasons for the delays, where returns stand in the processing pipeline, or what actions taxpayers should take, if any. For their telephone service, only about 11% of the 282 million calls were answered, having an average wait time of at least 23 minutes. From this, most callers could not obtain answers to their tax law questions, get help with account problems, or speak with a customer service representative about a compliance notice.

 

If you have any questions, please feel free to contact your trusted Scheffel Boyle team member. We will continue to monitor this as the 2021 filing season progresses. We are always here to help!

Two Important IRS Letters to be Sent this Month

If you were eligible for the third stimulus check or the advanced child tax credit payments in 2021, you need to be on the lookout for two letters from the IRS. They will be arriving by the end of January 2022.

 

2021 Economic Impact Payment (Third Stimulus Check)

People who received the third stimulus check will receive Letter 6475 from the IRS.

This will help them determine what the taxpayer received and if they qualify for the Recovery Rebate Credit on their 2021 tax returns.

“Letter 6475 only applies to the third round of Economic Impact Payments that was issued starting in March 2021 and continued through December 2021,” the IRS said on its website.

 

Advance Child Tax Credit Payment

Families who received advance child tax credit payments in 2021 will receive Letter 6419 from the IRS.

This letter will tell eligible families how much of the credit they have received so far and the number of qualifying children that was used to calculate that amount. From this, the taxpayer will be able to determine out how much of a tax credit to claim on their tax returns this year.

Monthly payments that were sent to millions of families with eligible children from July to December only accounted for half of the credit. Now, those who got the money need to show what they received to make sure they get any remaining credit on their 2021 tax return if applicable.

If taxpayers don’t receive the letter, they can also go to the IRS CTC Update Portal to see how much they’ve received.

As of right now, the monthly advance child tax credit payments are not set to continue in 2022.

If you receive these letters, please hold on to them and provide them to your tax preparer with your other 2021 tax documents.

 

 

If you have any questions, please feel free to contact your trusted Scheffel Boyle team member. We are always here to help!

Tax Deadline Extension & IL Pass-Through Entity Tax to Avoid SALT Limit

Tax Deadline Extension

On December 20, 2021, the IRS announced an extension of the tax deadline to May 16, 2022, for taxpayers in certain counties. This includes the filing of individual and business tax returns along with their estimated tax payments. This relief is being granted to taxpayers affected by the devastating storms that took place on December 10 in many parts of Illinois. This relief is currently available for the following counties: Bond, Cass, Coles, Effingham, Fayette, Jersey, Macoupin, Madison, Menard, Montgomery, Morgan, Moultrie, Pike, and Shelby. The original filing deadline for 2021 individual tax returns was April 18, 2022. The original due date for business tax returns was March 15, 2022, and April 18, 2022. The due date is now May 16, 2022, for both individual and business returns to be filed by taxpayers with an IRS address of record in the above counties. This also means taxpayers in the affected counties will have until May 16, 2022, to make 2021 IRA contributions. The quarterly income tax payments originally due on January 18, 2022, and April 18, 2022, are now also due on May 16, 2022. Also, farmers who choose to forgo making estimated tax payments and normally file their returns by March 1, 2022, will now have until May 16, 2022, to file their 2021 tax return and pay any tax due.

The IRS automatically provides this filing and penalty relief to anyone with an IRS address of record located in the counties listed above. There is no need to contact anyone to get this relief.

 

Illinois Pass-Through Entity Tax to Avoid SALT Limit

In 2017, the Tax Cuts and Job Act limited state and local income taxes paid by individuals, whether from pass-through entity income or other income to a SALT (State and Local Tax) cap of $10,000. Several states, including Illinois, enacted a pass-through tax to be paid at the entity level and credited at the individual level as a workaround to the federal SALT limit. The IRS recently released guidance approving these state workarounds.

An election is made by the partnership or S corporation for the Illinois pass-through entity (PTE) tax and estimated payments are required. An election may be made each year and is irrevocable for the year made. If you decide to elect the PTE tax, the partnership or S corporation is not required to withhold income tax on the partners that do not reside in the state of the partnership or S corporation. This allows a partner or shareholder to deduct Illinois tax on the business income in full on the federal return. This will benefit taxpayers who itemize and are subject to the $10,000 SALT limit and those who do not itemize.

Until further guidance is issued, we are recommending that the IL pass-through entity tax be paid on or before 12/31/21 in order to claim a deduction on the partner’s or shareholder’s tax return.  This payment may be made using a payment voucher or through MyTax Illinois.

Shareholders of the S corporation and partners of the Partnership are allowed a refundable credit for the PTE tax paid by the pass-through entity. Those partners and shareholders must add their distributive share of the PTE tax back to their Illinois income. The tax liability at the partner level will then equal the PTE tax paid at the entity level.

 

Our team will continue to monitor the status of these and any other tax laws that change. Please contact your trusted Scheffel Boyle team member with questions. We are always here to help!

Biden Administration’s Tax Blueprint

TREASURY’S GREEN BOOK PROVIDES DETAILS ON ADMINISTRATION’S TAX BLUEPRINT

 

The Treasury Department on May 28 released its general explanation of tax proposals included in the Biden administration’s fiscal year 2022 budget submission to Congress. Commonly known as the “Green Book,” the 114-page document provides more details regarding the administration’s tax proposals that had been previewed in the American Jobs Plan and the American Families Plan.

The Green Book lays out the administration’s priorities in paying for proposed spending plans. We want to emphasize that this is not tax law. These are simply proposals for how the administration would like to pay for certain items.

A look at some of the administration’s tax proposals follows.

Individual Income Tax Rate
The top marginal individual income tax rate would increase from 37% to 39.6%. For taxable year 2022, the rate would apply to taxable income over $509,300 for married individuals filing jointly ($254,650 for married individuals filing separately), $481,000 for head of household filers, and $452,700 for single filers.  The proposed increase would be effective for taxable years beginning after December 31, 2021.

Capital Gain and Qualified Dividend Income

Long-term capital gains and qualified dividend income of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates to the extent that the taxpayer’s income exceeds $1 million ($500,000 for married individuals filing separately). If the proposal for raising the ordinary income tax rate to 39.6 % becomes law, then the maximum tax rate of capital gains would be 43.4% (39.6% plus net investment income tax rate of 3.8%). The proposed effective date would be for gains required to be recognized after the date of announcement, which is understood to be April 28, 2021, the date of President Biden’s first address to a joint session of Congress during which he introduced the American Families Plan.

Transfers of Appreciated Property

Taxpayers transferring appreciated property during certain events would realize a capital gain based on the property’s fair market value at the time of the transfer. The proposal generally would be effective January 1, 2022. Recognition events include:

  • Gifts
  • Death
  • Transfers of in-kind property to trusts (other than wholly revocable trusts)
  • Distributions of in-kind property from a trust (other than to the grantor owner of a revocable trust or to a spouse of the grantor, as long as the distribution is not in discharge of an obligation of the deemed grantor owner)
  • Terminations of revocable grantor trusts – at death or during life
  • Transfers of in-kind property to partnerships or other non-corporate entities
  • Distributions of in-kind property from partnerships or other non-corporate entities
  • Holdings of trusts, partnerships or other non-corporate entities, when the property has not had a recognition event within the prior 90 years, measured as of January 1, 1940. The first recognition event under this 90-year rule would occur December 31, 2030.

The “deemed” gain would be taxable income to the donor or to the decedent. The amount of gain would be measured by the amount that the fair market value of the appreciated property exceeds the basis on the date of the gift or upon the date of death, whichever is applicable. The use of capital losses and carry-forwards from transfers at death would be permitted on the decedent’s final income tax return.

The proposal allows for some exclusions. Transfers by a decedent to a U.S. spouse would not be a taxable event, and the surviving spouse would receive the decedent’s carryover basis. The surviving spouse would recognize the gain upon disposition or death. Transfers to charity would not generate a taxable capital gain. Transfers to a split interest trust, such as a charitable remainder trust, would generate a gain with an exclusion allowed for the charity’s share of the gain. Transfers of tangible personal property, such as household furnishings and personal effects (excluding collectibles), are excluded. The exclusion for small business stock would still apply.

The proposal would allow a $1 million per person exclusion from recognition of gain on properties transferred by gift or held at death. Any unused exemption by a deceased spouse will port to the surviving spouse making the exclusion effectively $2 million per couple. Generally, the cost basis to the transferee will be the fair market value of the property transferred. A donee receiving property that qualified for the $1 million exclusion of the donor will have a carryover basis.

Payment of the tax on the appreciation of certain family owned and operated businesses would not be due until the business was sold or ceases to be family owned and operated. The capital gains tax on appreciated property transferred at death will be eligible for a 15-year fixed rate payment plan. However, publicly traded financial assets will not be eligible for the payment plan. Furthermore, family businesses electing the deferral will not be eligible for the payment plan. Transfers to S corporations and C corporations do not appear to generate gain, assuming those transfers qualify for the deferral provisions of Section 351.

Gain from Like-Kind Exchanges

Gains in excess of $500,000 ($1 million for married individuals filing jointly) from like-kind exchanges of real estate would be taxed in the year the property is transferred. Deferral of gain only up to $500,000 for each taxpayer ($1 million for married individuals filing jointly), each year, from like-kind exchanges of real estate would be allowed. The proposed effective date would be for exchanges completed in taxable years beginning after December 31, 2021.

Prospects of Tax Legislation

Although the White House, House of Representatives and Senate are each in Democratic hands, the path to enacting tax legislation remains unclear.

Some of these proposed changes are time sensitive and would require action in 2021.  This means taxpayers will need to begin planning to be positioned to act quickly if/when these proposals become law.

Our team will continue to monitor the status of these and any other tax laws that change. Please contact your trusted Scheffel Boyle team member with questions. We are always here to help!

Appreciating the Helpful Balance of Bonds

Stock market swings may bring fortune or fear, so investors shouldn’t forget about the helpful balance of bonds. Perhaps the most “user friendly” is a U.S. government savings bond. Buying one means you’re essentially lending the federal government money at a certain interest rate in exchange for a future return. U.S. savings bonds don’t offer as high a yield as other investment instruments, but they’re highly stable. Interest on U.S. government bonds is taxable on federal income tax returns, but it’s often exempt on state and local returns.

Another government investment option is a Treasury bill. These are short-term government securities with maturities ranging from a few days to 52 weeks. For a more long-term option, look into Treasury notes. These government securities are generally issued with maturities of two, three, five, seven and 10 years and pay interest every six months.

If you’re looking to preserve capital while generating some tax-free income, consider a tax-exempt state or municipal bond. Here you lend money to a more localized government entity in exchange for regular payments. Keep in mind that interest may be taxable on state and local returns.

There are corporate bonds as well. These generally offer a higher yield than their federal or municipal counterparts, but there’s greater risk in terms of price fluctuation because of market interest rate changes and even default by the issuer. Plus, you’ll need to anticipate the tax implications. Interest from corporate bonds is subject to federal and state income tax. Plus, as with other types of bonds, you could incur capital gains if you sell the bond at a profit before it matures.

3 Things to Know After Filing Your Tax Return

3 things to know after filing your tax return

Most people feel a sense of relief after filing their tax returns. But even if you’ve successfully filed your 2020 return with the IRS, there may still be some issues to bear in mind. Here are three important things to know:

  1. You can check on your refund. The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Get Your Refund Status.” You’ll need your Social Security number, filing status and the exact refund amount.
  2. You can file an amended return if you forgot to report something. In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So, if you filed your 2020 tax return on April 15, 2021, you would typically have until April 15, 2024, to file an amended return.However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.
  1. You can throw out some tax records. You should keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. The statute of limitations is generally three years after you file your return.That means you can probably dispose of most tax-related records for the 2017 tax year and earlier years. (If you filed an extension for your 2017 return, hold on to your records until at least three years from when you filed the extended return.) However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%.You’ll need to hang on to certain tax-related records longer. For example, keep actual tax returns indefinitely so you can prove to the IRS that you filed legitimately. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.)

    Keep records associated with retirement accounts until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years. And retain records related to real estate or investments for as long as you own the asset, plus at least three years after you sell it and report the sale on your tax return. (You can keep these records for six years if you want to be extra safe.)

Always available

Contact us if you have further questions about your refund, filing an amended return or record retention. We’re here all year!

The Tax Treatment of Start-up Expenses

With the economy expected to improve in the months or quarters ahead, many business owners and entrepreneurs may decide to launch new enterprises. If you’re among them, be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

General rules

Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one. Under the Internal Revenue Code, taxpayers can deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins.

As you know, $5,000 doesn’t get you very far today! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.

In addition, no deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to begin earning revenue. To determine whether a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Applicable expenses

In general, start-up expenses include all amounts you spend to investigate creating or acquiring a business, launching the enterprise, or engaging in a for-profit activity while anticipating the activity will become an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the expenditure must be related to creating a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Thinking ahead

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the elections described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

Bolster Wealth Management with Trusts

Trusts can be a useful tool for affluent individuals and families when it comes to wealth management, protection and growth. But there are a wide variety to choose from, so it’s important to clearly understand the benefits and limits of a trust before choosing any one type.

What’s a trust?

A trust is a legal document that dictates how an individual’s assets will be managed for another person’s (or other people’s) benefit(s). There are usually three parties to a trust: the grantor who creates the trust, the beneficiary (or beneficiaries) who’ll benefit from the trust and the trustee(s) who’ll manage the assets according to the trust’s terms and in the beneficiary’s best interests.

All trusts fall into one of two broad categories: living trusts and testamentary trusts. Living trusts are set up during an individual’s lifetime to transfer property to the trust. Testamentary trusts are established as part of an individual’s will and take effect after he or she dies.

Living trusts can be further categorized as revocable and irrevocable. With a revocable trust, the grantor retains control of the trust’s assets and can revoke or change its terms at any time. With an irrevocable trust, the grantor no longer owns the assets and, thus, can’t make changes to the trust without the beneficiary’s consent.

How can one protect you?

Individuals looking to manage their wealth in a patient and prudent manner can achieve various financial and estate planning goals from a trust, depending on its type. For example, many affluent individuals, professionals and business owners use a Delaware statutory trust to protect their assets from a loss resulting from a legal judgment, such as malpractice or personal injury liability. A Delaware trust also can be used instead of a prenuptial agreement by a spouse to preserve his or her assets in case of a divorce.

When establishing a Delaware trust, you transfer the assets you want to protect to an irrevocable trust — these assets can include cash, business ownership interests, real estate, and securities like stocks and bonds. These assets generally will be protected from future creditors. Although you must give up some control of the assets when you place them in the trust, you can retain some powers, such as the right to direct the investment of trust assets and to receive income and principal distributions from the trust.

A trust with a funny name

If one of your professional advisors suggests creating a trust that’s “intentionally defective,” you might consider hanging up the phone. However, despite its funny name, an intentionally defective grantor trust is a completely valid way to minimize gift and estate taxes when transferring certain assets, such as an ownership interest in a closely held business, to the next generation.

The key is that contributions of ownership interest to the trust must be considered gifts. This removes the assets and their future appreciation from your taxable estate. The trust’s income is taxable to you, not your heirs. As a result, trust assets can grow unencumbered by income taxes, which increases the amount of wealth your heirs may receive upon your passing.

Who can help?

There are many other trust types to consider. The rules for establishing and maintaining any trust can be complex, so please contact our firm for guidance.

U.S. Small Business Administration Awarding Funding Through the Restaurant Revitalization Funding Program

On March 11, 2021, the American Rescue Plan Act (ARPA) was announced as public law (P.L. 117-2) Section 5003, which appropriated $28.6 billion for the U.S. Small Business Administration (SBA) to award as funding to restaurants, bars, and other similar places of business that serve food or drink. Recipients are not required to repay the funding as long as funds are used for eligible uses no later than March 11, 2023.

Who is Eligible?

Eligible entities are businesses not permanently closed and include businesses where the public or patrons assemble for the primary purpose of being served food or drinks. Some examples include restaurants, food stands, food trucks, food carts, caterers, bars, saloons, lounges, taverns, and snack/nonalcoholic beverage bars. Bakeries, brewpubs, tasting rooms, taprooms, breweries, microbreweries, wineries, and distilleries must show documentation with their application that on-site sales to the public comprised at least 33% of gross receipts in 2019. Restaurants and bars also need to meet this 33% test, but do not appear to have a requirement to submit documentation with their application.

Per the SBA Program Guide (as of April 20, 2021), “Those entities without additional documentation requirements, such as restaurants and bars, are presumed to have on-site sales to the public comprising at least 33% of gross receipts in 2019. All applicants must attest in the application to the following: “The Applicant is eligible to receive funding under the rules in effect at the time this application is submitted.””

Where to Apply

The SBA is providing three ways of applying for the funding:

  1. Through an SBA recognized Point of Sale Restaurant Partners
  2. Directly through SBA Form 3172
  3. By calling SBA directly at (844) 279-8898

Currently the SBA has set registration for the application portal to begin on Friday, April 30, 2021, at 9:00 a.m. ET and application will open on Monday, May 3, 2021, at noon ET.

When to Apply

The SBA will start accepting applications from eligible participants after the pilot program has ended. The application process will be open to all who are eligible to receive funding, but for the first 21 days they will only process and fund those in the priority groups. The priority group is defined as those who are at least 51 percent owned and controlled by individuals who are women, veterans, and/or socially and economically disadvantaged individuals. After the initial 21-day period, the SBA will begin to process applications for all eligible participants.

The funding is on a first come, first serve basis, and the SBA has stressed the importance of applying as soon as possible as demand may exceed available funding. 

Funding Amounts

The funding amounts for eligible participants are as follows:

  • Calculation 1: For applicants in operation prior to or on January 1, 2019.
    • 2019 gross receipts minus 2020 gross receipts minus PPP loan Amounts
  • Calculation 2: For Applicants that began operations partially through 2019.
    • (Average 2019 Monthly gross receipts x 12) Minus 2020 gross receipts minus PPP Loan Amounts
  • Calculation 3: For Applicants that began operations on or between January 1, 2020 and March 10, 2021 and applicants not yet opened but will have eligible expenses incurred.
    • Amount Spent on eligible expenses between February 15, 2020 and March 11, 2021 minus 2020 Gross receipts minus 2021 gross receipts (through March 11, 2021) minus PPP loan amounts

Gross receipts for the purpose of this program does not include:

  • Amounts received from Paycheck Protection Program (PPP) Loans (First draw or Second draw)
  • Amounts received from Economic Injury Disaster Loans or Grants
  • State and Local grants (via CARES Act or otherwise)
  • SBA Section 1112 payments

Allowable Use of Funds

Funds may be used for specific expenses including business payroll costs, payments on any business mortgage obligation, business rent payments, business debt services, business utility payments, business maintenance expenses, construction of outdoor seating, business supplies, business food and beverage expenses, covered supplier costs, and business operating expenses.

Documentation Required

For all applicants, a completed SBA Form 3172, verification of tax information IRS Form 4506-T and gross receipts documentation which includes but not limited to tax returns, bank statements, etc.

In Summary

The SBA is awarding funding for those eligible applicants that have been affected by the COVID-19 pandemic. Participants will be required to report, no later than December 31, 2021, via the application portal, how much of the grant has been spent on each category of eligible use of funds. Click on the links below access the SBA RRF Program Guide and RRF Sample Application:

It is indicated in the American Rescue Plan that amounts received from SBA in the form of a Restaurant Revitalization Funding grant shall not be included in the gross income of the entity that receives such funds. In addition, no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied by reason of the exclusion from gross income provided above.

How We Can Help

Our team is available to assist you during the process of filing for the SBA Restaurant Revitalization Funding. We will update you with any changes to the program or application when released by the SBA. Please contact your trusted Scheffel Boyle team member with questions. We are always here to help!

Considering a Roth IRA Conversion

Investors have long grappled with the conundrum of whether to opt for a traditional or Roth IRA. One factor that might tip the scales toward a Roth is a downturn in the value of your investments. If you have a traditional IRA, a decline may provide a valuable opportunity to convert your traditional IRA to a Roth IRA at a lower tax cost. Let’s review the ins and outs of IRAs and then delve deeper into this strategy.

Key differences

What makes a traditional IRA different from a Roth IRA? Plenty. Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you (or your spouse) participate in a qualified retirement plan, such as a 401(k). Funds in the account grow tax deferred.

On the downside, you generally must pay income tax on withdrawals from a traditional IRA. In addition, you’ll face a penalty if you withdraw funds before age 59½ — unless you qualify for a handful of exceptions — and you’ll face an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 72.

Roth IRA contributions, on the other hand, are never deductible. But withdrawals — including earnings — are tax-free as long as you’re age 59½ or older and the account has been open at least five years. In addition, you’re allowed to withdraw contributions (not earnings) at any time tax- and penalty-free. You also don’t have to begin taking RMDs after you reach age 72.

The ability to contribute to a Roth IRA is subject to limits based on your MAGI. Fortunately, no matter how high your income, you’re eligible to convert a traditional IRA to a Roth. The catch? You’ll have to pay income tax on the amount converted.

Saving tax dollars

This is where the “benefit” of a downturn in the value of investments comes in. If, for example, your traditional IRA is invested in the stock market and has lost value, converting to a Roth now rather than later will minimize your tax hit. Plus, you’ll avoid tax on future appreciation when the market goes back up.

It’s important to think through the details before you convert. Ask yourself some important questions when deciding whether to make a conversion. First, do you have money to pay the tax bill? If you don’t have enough cash on hand to cover the taxes owed on the conversion, you may have to dip into your retirement funds. This will erode your nest egg. The more money you convert and the higher your tax bracket, the bigger the tax hit.

Also, what’s your retirement horizon? Your stage of life may affect your decision. Typically, you wouldn’t convert a traditional IRA to a Roth IRA if you expected to retire soon and start drawing down on the account right away. Usually, the goal is to allow the funds to grow and compound over time without any tax erosion.

Keep in mind that converting a traditional IRA to a Roth isn’t an all-or-nothing deal. You can convert as much or as little of the money from your traditional IRA account as you like. So, you might decide to gradually convert your account to spread out the tax hit over several years.

Right move

Of course, there are more issues that need to be considered before executing a Roth IRA conversion. If this sounds like something you’re interested in, contact us to discuss whether it’s the right move for you.

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