Florida Estate Planning and Probate Law Blog focused on recent case law and planning ideas.

IS THIS THE YEAR TO MAKE A ROTH IRA CONVERSION


The crazy 2015 stock market offers some excellent planning opportunities, if you qualify.  While year-end has not brought the stock market back to where it started the year, it opens the door to those interested in making a Roth IRA conversion. Converting a traditional Individual Retirement Account (IRA) to a Roth IRA would allow the assets to grow tax-free, while remaining in your account, and tax-free distributions once you start withdrawing funds.

There is no income limit or other restrictions on who is eligible to convert a traditional retirement account to a Roth IRA. The account owner will have to pay income taxes on the account’s value on the date of conversion.  However, the new investment account will never again be subject to income taxes or required minimum distributions. Considerations that should be reviewed include (i) whether your income tax rate be lower now, or during your future retirement years; and (ii) do you have funds to pay the income taxes, other than the converted funds (if you’re under age 59 ½ and use a portion of the IRA to pay the tax bill, the payment is treated as an early distribution of the traditional IRA). 

2015 YEAR END TAX PLANNING CONSIDERATIONS

2015 Year-End Planning Moves:

·  Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later.
·  Postpone income until 2016 and accelerate deductions into 2015 to lower your 2015 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2015 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
· Consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2015.
·  If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion, transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer.
·  Use a credit card to pay deductible expenses before the end of the year. This will increase your 2015 deductions, even if you don’t pay the bill until 2016.
·  If you expect to owe state and federal income taxes when you file your return next year, ask your employer to increase withholding of state and federal taxes (or pay estimated tax payments of state and federal taxes) before year-end to pull the deduction of those taxes into 2015 if you won’t be subject to the alternative minimum tax (AMT) in 2015.
·  Estimate the effect of any year-end planning moves on the AMT for 2015, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses of a taxpayer who is at least age 65 or whose spouse is at least 65 as of the close of the tax year, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. If you are subject to the AMT for 2015, or suspect you might be, these types of deductions should not be accelerated.
· You may be able to save taxes by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses, and other itemized deductions.
· Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70- 1/2. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2015, you can delay the first required distribution to 2016, but if you do, you will have to take a double distribution in 2016, the amount required for 2015 plus the amount required for 2016. Think twice before delaying 2015 distributions to 2016, as bunching income into 2016 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that year.
· Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
·  Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2015 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next.

Tax Factors for Consideration:

Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax. The latter tax applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case).  The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year; others should try to see if they can reduce MAGI other than NII, and still other individuals will need to consider ways to minimize both NII and other types of MAGI.

The 0.9% additional Medicare tax also may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be overwithheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s combined income won’t be high enough to actually cause the tax to be owed.

Tax Breaks Not Extended, as of Yet:

Some of these tax breaks ultimately may be retroactively reinstated and extended, as they were last year, but Congress may not decide the fate of these tax breaks until the very end of 2015 (or later). These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70- 1/2 or older; and the exclusion for up to $2 million of mortgage debt forgiveness on a principal residence.

FLORIDA GUARDIAN DENIED FEE FROM MEDICAID RECIPIENT'S ASSETS

On November 25, 2015, the Second District Court of Appeals, in the case of Lutheran Services Florida, Inc. v. Department of Children and Families (Fl. Ct. App., 2nd Dist., No. 2D13-5840, Nov. 25, 2015) held that the guardian of a Medicaid recipient may not deduct a guardianship fee from the recipient's income because the fee is not medically necessary. The case originated from a court order which authorized a professional guardian to deduct a monthly sum from an indigent and incapacitated individuals income and patient responsibility amount. The professional guardian then petitioned the Department of Children and Families (DCF) to deduct the monthly guardianship fee on their behalf, which they denied to do. DCF took the position that the fee could not be deducted from a Medicaid recipient's income because it is not "medically necessary" under state law. A hearing officer upheld the determination, noting that state law defines medically necessary as services provided in accordance with generally accepted standards of medical practice and reviewed by a physician. The 2nd DCA affirmed the decision on appeal.