I know there are some accountant types around here....

[Abagadro]

I have a real specific question about the 1040 accounting done when you convert portions of a traditional IRA to a Roth and whether the amount you take as taxable income for the converstion that year is subject to itemized deductions.  Anyone around here up on that stuff?

[Johny Cee]

Did a bit of research, since I've only done a couple.

1. Rollover from a Traditional to a Roth is taxable.  Should flow to the "pension, etc" line.

2. You can only rollover if you have less than $100,000 in Adjusted Gross Income, not counting your rollover.

3. The rollover is considered regular income.  The related tax liability can be reduced by adjustments to income (self-employed health insurance, etc.),  and itemized deductions.

Generally, my firm isn't particularly fond of recommending Roths.  We like to recommend Traditionals/Simples,  as there are significant tax planning advantages.

I take it that,  with your taxable income down with your change in careers, this rollover would happen for very little taxable liability?

[Abagadro]

Ya, I will have significantly more deductions this year than income because of health insurance payments, new kid, mortgage insurance, unreimbursed theft losses, etc.  Those will basically go to waste if I don't have offsetting income, so I thought changing the traditional to the Roth would use those up and I could get the Roth advantages without basically paying any income tax on the contributions. I was wondering if the Roth conversion went into the general AGI mix so that these dedecution could be used to offset the income. Thanks for th answser. I appreciate it.

I thought Roth were generally considered more advantageous than traditionals if you can equalize the present-day income tax issues because of the tax-free vs. tax-deferred growth, not to mention the ability to dip into the principal contributions if you need it. My thought being is that if I can convert at least some of it completely tax-free I would ultimately come out ahead compared to a traditional.  Maybe I'm mistaken about that.

[Johny Cee]

Ya, I will have significantly more deductions this year than income because of health insurance payments, new kid, mortgage insurance, unreimbursed theft losses, etc.  Those will basically go to waste if I don't have offsetting income, so I thought changing the traditional to the Roth would use those up and I could get the Roth advantages without basically paying any income tax on the contributions. I was wondering if the Roth conversion went into the general AGI mix so that these dedecution could be used to offset the income. Thanks for th answser. I appreciate it.

I thought Roth were generally considered more advantageous than traditionals if you can equalize the present-day income tax issues because of the tax-free vs. tax-deferred growth, not to mention the ability to dip into the principal contributions if you need it. My thought being is that if I can convert at least some of it completely tax-free I would ultimately come out ahead compared to a traditional.  Maybe I'm mistaken about that.

I think the Roth was being pushed,  but limits on contributions and "catch-up" provisions have given the edge to Traditionals/Simples/etc.

Essentially, a Traditional pushes the date you would recognize the income (when it is withdrawn after reaching the age of 59 1/2) from your high marginal rate productive years, to retirement when you have littlle if any earned income.

In your case,  if you wouldn't pick up any income tax on the conversion, it makes sense.  I'll warn you,  it sounds like most of your deductions will be itemized (below the line) rather than adjustments to income (above the line).  You can run into other snags.

Most 401Ks and related plans (I believe traditional IRAs as well, but unsure right now) allow you to take loans from the plan using you retirement savings as collateral at pretty good rates.

/shrug.....  Traditional vs. Roth shifts with the whims of the tax code.  Much like the best form of legal orginazation for small business.  We used to push S-Corps,  but LLCs are pretty much the go to for small businesses providing the same limited liability protection with less potential for paying tax for your business organization on top of individual taxes (corporate double taxation, which does kick in for S-Corps above certain net income minimums).

Belated Congrats on F13, LLC?  Just noticed the bottom of my window.

I'm not sure how I'm going to explain "Frozen Caveman Lawyer .2" in my time book....

[Abagadro]

You can run into other snags.

Would that be AMT problems?

Most of the deductions would be mortgage interest, self-employment medical insurance premiums, a loss-carryfoward and theft losses.

[Johny Cee]

You can run into other snags.

Would that be AMT problems?

Most of the deductions would be mortgage interest, self-employment medical insurance premiums, a loss-carryfoward and theft losses.

Yes, in portion.  AMT is going to be a huge issue in 3 or 4 years when a significant portion of middle class types start running into it.  I wouldn't think it'd be a problem, if income is below thresholds.

You might get dinged for an audit,  if you have tons of itemized deductions matching not much income.  Just hold on to documentation.

Loss carryforwards.....   I take it Long-term Capital Loss?  Limited to amounts of capital gains,  plus 3,000 per year above and beyond.

Mortgage interest,  real estate tax are fine.  Also be aware,  the Federal gov't is letting you take a deduction for sales tax paid if it's greater than your state income tax.  Hold on to receipts or documentation for large purchases. (Cars primarily)

Donations, medical expense, etc need to be above a floor of 2% of AGI to be deductible.

Self-employed HI.....  is good.  My question would be, do you have the requisite self-employment to change it from an itemized to an adjustment to income?  Wouldn't care to comment without more knowledge.

My brother was a grad assistant while working on his Masters.  Got a W-2, and I would say, not eligible to claim HI as an adjustment to income.  (Now the little bastard is consulting in multiple countries and inflicting Canadian returns on me....)

On the other hand,  a grant or fellowship might more properly go on a Schedule C as a business or employment income, opening up the HI Adjustment to Income.


Professional Advice:

- If you are in a W-2 situation with no benefits,  are you still consulting or working part time in law?  If so, get 1099s,  and list it under a schedule C.  You'd be able to take some travel, office supplies/expense, etc as business expenses to offset the income.  And it would give you very good grounds to take HI as an adjustment.

  If you go this route and have a home office or work computer, some further deductions ensue.  Generally, the rule with home offices is that it has to be a separate room used solely for your business work.  And a computer would generally need to be all business.(dining room doesn't count, nor your new gaming rig)

- Tuition credits:  You'll be eligible for the Life-long Learning Credit ($500),  as well as any similar state credits on tuition.  Should get a statemnt from your school on tuition expense.  If not, then pull it from your University bills.  BOOKS, ETC ETC NOT COVERED BY THIS.  Just tuition

- Student Loans:  Not sure if you're taking any,  but student loan interest is deductible as an adjustment to income.

- Warning:  I'm mostly corp tax (alot of Canadian subsidiary stuff) and non-profits.  I do a fair amount of tax planning and individual work, but it's not my prime specialty.

- For peace of mind, you might just want to go to a tax professional.  Organize and refine your questions and concerns on paper and from these points, to limit the chargeable time.  You might even be able to get a decent deal if you talk to someone during the slow season in the summer and get a quote ahead of time.  Most CPA offices go kind of dead now,  and are looking for work.

  For years after,  you can use the CPAs work as a template to prepare your own taxes.  You have a firm basis to work from, instead of wading through the forms yourself.

  Honestly,  you could probably make more in the time it would take you to do this yourself with some sort of contract or part-time legal work than the hours it'd take you on your own.

[Abagadro]

Thanks for all the tips. My income is exclusively 1099. My wife is on W-2 and 1099 for her various part-time gigs.  I think I will take up your advise and get a CPA to go over all our stuff in anticipation of next year.  Thanks for taking all the time.

[CmdrSlack]

Hey, since this is an accountant thread...I figured I should just post this question here...

I'm running my own law practice out of my house and am starting to realize that my business is picking up to the point that I need to start doing my taxes quarterly....or maybe not.  What's the point where my monthly income gets high enough to warrant doing quarterly taxes to avoid getting slammed on 4/15?

Also, is it possible for a renter to count a portion of rent as  a deduction if that portion reflects the space in the apartment used as a home office? 

I'm sure once I find a good accountant here in Chicago, a lot of those questions will be easily answered by him/her but I'm hoping to get a general sense of this stuff BEFORE I go to the accountant.  I like to know what I'm getting into.

[Johny Cee]

Hey, since this is an accountant thread...I figured I should just post this question here...

I'm running my own law practice out of my house and am starting to realize that my business is picking up to the point that I need to start doing my taxes quarterly....or maybe not.  What's the point where my monthly income gets high enough to warrant doing quarterly taxes to avoid getting slammed on 4/15?

Also, is it possible for a renter to count a portion of rent as  a deduction if that portion reflects the space in the apartment used as a home office? 

I'm sure once I find a good accountant here in Chicago, a lot of those questions will be easily answered by him/her but I'm hoping to get a general sense of this stuff BEFORE I go to the accountant.  I like to know what I'm getting into.

Go get an accountant.

1. If your business is run as a schedule C, you should be paying quarterly estimates on your income tax.  This is a requirement.  It's not just so you don't get slammed on 4/15.  It's also because the IRS will start assessing penalties and interest.  It's not just income tax,  you'll owe Self Employment tax as well.

And the IRS will err on the side of overassessing you.  Dragging your feet just means that you get to pay an accountant to get a Power of Attorney and draft some nice letters to the IRS for you.  Which they WILL charge you a bit for.

2.  You can claim a portion of your rent as a home office.  It should be:

    A. A room or rooms ONLY used for business.
    B. Based on a reasonable allocation of your total rent and utilities.  Square footage usually stands up to inquiry.

3. Set up a separate checking account for your business, if you haven't already.  Don't comingle your personal and business assets.  Get some bookkeeping software (Quickbooks is a pretty good solution for small business,  Quicken is a piece of dog shit.  Reconcile your business account regularly.) 

4.  The fees CPAs charge work the same as legal.  It's all chargeable time.  The better order you have your business records in, the less chargeable time accrued.  Most CPA firms willl offer bookkeeping services as well.  They can set up the books and chart of accounts for you to handle, so it's not an abominable mess.

Go out and get a CPA,  if for nothing else,  tax planning and figuring your estimates.  I can't give you a handy-dandy off the top of my head estimate that would be in the ballpark without more information and a fair amount of number crunching

[Johny Cee]

By the way,  we had a big discussion on theft/casuality losses in CPE the other day. 

Pretty much Abagadro, you're limited to a deduction equal to your basis in the stolen property, i.e. cost.  NOT fair market value or appraised value.  So any heirlooms, antiques, etc. which have not been through an estate would have no loss deduction,  or a deduction at the cost when the heirloom was purchased.

Yes, this sucks.

[Nazrat]

Shouldn't the personal property receive the same step up in basis that is allowed for real property that is inherited? 

It seems problematic that Grandma's wedding ring receives no increase in basis due to an inheritance when Grandpa's farm will receive it. 

[Abagadro]

I would think you do get the step-up (I don't think the IRC differs between real and personal property) as long as it has been accounted for in the estate. Nearly all my stuff was listed on either my grandfather's or father's Form 706 at FMV so I think I am entitled to take the step-up.

But thanks for the heads-up for something to keep an eye on.

[Johny Cee]

Yes, there would be a step up in basis if it went through an estate.  Some valuable heirlooms tend to be gifted, though, which would not cause a step up in basis.

Sounds like you're on top of it.

Brain a little frazzled.  Started a Single Audit today,  and I hate reading fucking grant agreements.  And dealing with no nothing government employees.

[shiznitz]

Roth is better. That is why the rollover was  limited to <$100,000 AGI. Otherwise, everyone would have rolled over into a Roth.

[Johny Cee]

Roth is better. That is why the rollover was  limited to <$100,000 AGI. Otherwise, everyone would have rolled over into a Roth.

In what income and lifelong earning situations?

I thought most of the advantages in Roths had been eaten up by increased contribution limitations and catch-up contributions on other IRAs.

But I'm not as educated on the subject as I could be.  The vast majority of my work is corp tax and non-profit auditing.