June 25, 2013

Does Roth IRA Conversion’s Still Make Sense?

Roth IRA conversions became the hot topic in 2010 when Congress lifted the income limitation allowing all taxpayers to take advantage of converting their Traditional IRA’s to Roth IRA’s.  At the time, the lower Bush era tax rates were in effect and set to expire at the end of 2010.  Subsequently, President Obama extended the lower rates for 2011 and 2012, allowing many taxpayers to continue to take the opportunity with the lower rates.

Once a taxpayer converts their Traditional IRA to a Roth IRA, the amount converted is includable in gross income in the year converted.  An important factor is this is not an all or nothing opportunity, you can convert a portion of your IRA to Roth and use the tax brackets to your advantage.  Another item to note is that the IRS gives you an undo opportunity.  If you convert your IRA to Roth in 2013, you have until October 15, 2014 to undo the conversion and recharaterize the Roth back to a traditional IRA.  This is important if the market would go down or for some reason you do not want to convert and pay the tax this gives you some additional flexibility.

Now 2013 is upon us and the tax brackets for individuals over $400,000 (single) or $450,000 (married) have increased from 35% to 39.6%.  Additionally, there are two new taxes enacted under President Obama’s Patent Protection and Affordable Care Act.  A new 3.8% surtax on net investment income and 0.9% surtax on earned income.

Now the question is if Roth IRA conversions still make sense.  The answer is it depends; every individual’s situation is different.  Have you recently retired, are you self-employed and you incurred a substantial loss due to the business starting up or for some other reason, or does your income fluctuate from year to year?  If you answered yes to any of these questions, there may be an opportunity to consider a Roth IRA conversion.  If none the situations above apply to you, again every situation is unique, and should be examined to determine if this strategy fits your overall estate plan.

If you have questions or need assistance in evaluating if a Roth conversion would fit your situation, please contact Anders or your tax advisor.

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June 20, 2013

Taxation of Major League Baseball Signing Bonuses

With the Major League Baseball draft done and teams working on signing their respective draftees for hundreds of thousands of dollars, even millions for some, there are some unique tax planning opportunities that can be taken advantage of.

The first thing that needs to be understood is what constitutes a “signing” bonus in the eyes of the taxing authorities.

  • The bonus is not conditional on playing any games for the team
  • It’s payable separately from any other compensation
  • And it’s not refundable

For many of the draftees it will be their first exposure to a significant amount of money and paying a significant amount of tax.  Signing bonuses are subject to federal tax irregardless of whether they meet the above criteria.   Where tax planning opportunities may arise is related to state tax. If all three of the above criteria are met “signing” bonuses are not subject to state tax apportionment.

Typically a team will withhold state tax of the team state where the player is assigned.  If their bonus is deemed a “signing” bonus it will not be apportioned as wages and will be taxed in their resident state.  Where a player resides can have dramatic effect on their overall tax situation.

Below is an illustration; player A bonus treated as a “signing” bonus – Player B bonus not treated as a “signing” bonus

Player A Player B
Signing Bonus $1,000,000 $1,000,000
Team St. Louis Cardinals St. Louis Cardinals
Residential State Florida Florida
Minor League Team Assignment Springfield, MO Springfield, MO
Team State Tax Rate (Estimate) 0% 6.00%
State Tax Estimate $0 $60,000

Another scenario to be aware of would be if a player is a resident of a state that has income tax i.e. Missouri and they would be assigned to a minor league team in Florida, the team would not withhold any state tax since Florida does not have a state tax; the player would be liable for state income tax in their resident state of Missouri.

Tax planning is often missed in the first year of a player’s career so it’s important to work with the Sports Advisor, Certified Public Accountant and Financial advisor to determine the most beneficial factors to be addressed in a player’s contract.

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June 18, 2013

Missouri passes Amateur Sporting Events Tax Credit

In an effort to attract amateur sporting events to the state of Missouri, the St. Louis Sports Commission, with the help of others, lobbied for a third straight year to receive state funding.  As the saying goes, the third time is a charm.  Governor Nixon signed the Amateur Sporting Events Tax Credit earlier this year, taking effect August 28th.

Organizers of an amateur sporting event are required to front expenses themselves or solicit private funding from local corporations.  Due to combination of high costs and the economic instability, it is difficult to raise corporate funds to cover the costs of an event.  In 2009, St. Louis hosted the Women’s Basketball Final Four and the event’s local organizers tapped into their financial reserves by about $500,000.

With the newly approved state tax credit, Missouri will be able to better compete with other markets to host sporting events.  Event owners are more comfortable awarding tournaments to cities knowing money is available to offset event expenses.  The state of Missouri has earmarked a total of $3 million in tax credits to dish out if an organization brings a sporting event to the region.  The state will issue certified-sponsors a refundable tax credit of $5 per ticket (capped at $3 million) if they bring events to Missouri through a competitive bid.  Entities should now be more inclined to help fund amateur sporting events.  In addition to generating additional revenue from the event(s) itself, individual and corporations will also see a reduction in their tax liability.

Only time will tell; but hopefully St. Louis will now be able to lure more amateur sporting events to the city.  If you have any questions related to the new Amateur Sporting Events Tax Credit, please contact your Anders tax professional.

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