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Federal Employees News Digest : Oct. 15, 2012
October 15, 2012 Vol. 62, No. 14 7 Visit us on the Internet at www.FederalDaily.com Oct. 15 is the deadline for filing 2011 federal and state income tax returns and is also the deadline for "recharacterizing" Roth IRA conver- sions performed during 2011. This column dis- cusses both deadlines. 2011 income tax filing deadline Individuals who have not filed their 2011 federal and state income taxes must do so by midnight Oct. 16, 2012. The deadline is for filing the returns; any balance due on a 2011 income tax return should have been paid when a filing extension was request- ed last March or early April. The filing deadline of Oct. 15, 2012, is also the deadline for electronically filing 2011 income tax returns. Any 2011 income tax returns filed after Oct 15 must be filed via paper. Those individuals who did not request an exten- sion last spring to file 2011 income taxes should nevertheless file their taxes before the Oct. 15 deadline. If a refund is due, there is no penalty for late filing. But if there is a balance due, a late filing penalty and interest charges will apply. Filing as soon as possible will mitigate the penalty and interest charges. 2011 Roth IRA recharacterization deadline Those individuals who performed Roth IRA conversions during 2011 have until Oct. 15 to "undo" their conversions via a Roth recharacterization. If the value of a converted Roth IRA has declined substantially, it makes sense to recharacterize---to "undo" the conversion---in order to recoup the income tax paid on a converted Roth IRA that is worth less now compared to what it was worth on the day of conversion. For the first time since Jan. 1, 2010, when the law changed allowing all individuals to convert traditional IRAs to Roth IRAs, the majority of Roth IRAs being considered for recharacterization should be up in value. This is particularly important for converted Roth IRA owners who see the long-time benefit of Roth IRAs and who converted their traditional IRAs and paid taxes due when federal income tax rates are currently relatively low compared to pre-2003 rates. Unless Congress acts when it returns after the November 2012 elections, income tax rates are set to increase effective Jan. 1, 2013, with the top tax rate increasing to 39.6 percent from the current 35 percent. Some higher-income individuals may also have to pay the Medicare surtax of 3.8 percent on net investment income. This includes single individuals with adjusted gross incomes of $200,000 or more and married couples filing jointly with adjusted gross incomes exceeding $250,000 during 2013. While a recharacterization may make sense, individuals consider- ing a recharacterization should note that a recharacterization may lead to a greater tax liability in the future. Also, anyone considering a recharacterization by Oct. 15 can later reconvert the traditional (recharacterized) IRA later in 2012 to a Roth IRA. If a reconversion is performed before Jan. 1, 2013, then the reconver- sion will result in no more than a 35 percent federal (and appropriate state) income tax hit. Restrictions on reconversions A Roth IRA conversion performed during 2011 that has been recharacterized before Oct. 15, 2012, can be reconverted to a Roth IRA only if at least 30 days have elapsed since the recharacterization. Among the reasons some individuals may want to reconvert their recharacterized Roth IRA are: (1) unexpectedly high income during 2011 pushed the individual into a higher-than-expected tax bracket and resulted in a larger tax due for the Roth IRA conversion, but during 2012 the IRA owner is in a lower tax bracket and less tax is due on a reconversion; or (2) an individual was unable to pay the taxes due on the Roth IRA conversion per- formed during 2011, but now that individual's economic situation during 2012 has improved. Any individual who recharacterizes a 2011 Roth IRA conver- sion before the Oct. 15, 2012, deadline and who has already filed 2011 income taxes should file an amended federal tax return for 2011. Upon filing an amended return, the individual should receive a refund of any taxes paid on the conversion, plus inter- est. If an individual lives in a state that has a state income tax, the individual should also file an amended state tax return for any refunds applicable. Individuals who plan to perform a recharacterization on Roth IRA conversions performed during 2011 should follow all the rules associated with recharacterization including: (1) perform the recharacterization before Oct. 15, 2012, deadline; (2) ensure the correct amount of funds are transferred from the recharacter- ized Roth IRA to the traditional IRA; the amount transferred is the amount of the Roth IRA conversion desired to be recharac- terized, plus or minus the gains or losses attributable to the funds while they were in the converted Roth IRA; and (3) move the funds from the converted Roth IRA to the traditional IRA in a "trustee-to-trustee" (direct) transfer and not through a rollover. Note that if the recharacterization is performed incorrectly, an individual could end up with a tax liability and have no Roth or traditional IRA. Those individuals thinking about a recharacterization are strongly encouraged to contact a qualified tax professional for more information and guidance. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor Deadline for 2011 income tax returns, Roth IRA recharacterizations
Oct. 8, 2012
Oct. 22, 2012