Monday, November 30, 2009

Additional Tax Caps for 2010

The IRS has released the final numbers for 2010 on many tax items. Here is a listing of many relevant caps for 2010:

Nanny Tax: If the amount you pay any given worker for domestic help in your home is less than $1,700, you will not owe any Social Security taxes.

Gifting Limit: $13,000 per person per year (same as 2009).

SEP/401(k) contributions: the maximum remains at $49,000. The annual salary limitations remain at $245,000 (for which 20% of this amount is $49,000, or the cap on the maximum annual contribution).

SIMPLE plan contributions: $11,500

Elective Deferrals (for a retirement plan) is $16,500 (the same as in 2009).

Catch-up contributions: For individuals aged 50 or more in 2010, you can make an additional contribution of $5,500 for 401(k) based retirement plans. For IRA plans, the amount is $1,000 in excess of the normal contribution limits.

Tuesday, November 10, 2009

Tax Court Rules on Roth IRA Tax Planning

The Tax Court, in Taproot Administrative Services, Inc. v. Commissioner, 133 TC 9 (2009), has ruled that a Roth IRA is NOT an eligible shareholder for an S corporation.

An S corporation, as opposed to a C corporation, taxes its earnings on the shareholder(s) tax returns and is not typically assessed tax at the corporate level. In this case, the sole shareholder of the corporation was a Roth IRA. The IRS issued a notice revoking the S status of the corporation (and thus changing it to a C corporation) due to the “fact” that a Roth IRA cannot be an eligible shareholder (and thus none of the earnings of the S corporation would ever be taxed with this entity set-up). To be an eligible shareholder requires the shareholder to be an individual (US resident), estates, certain trusts and certain exempt organizations. This was a case of first impression with the Court.

The Court noted at the outset that there were no rules which specifically prohibited a Roth IRA from being a shareholder in an S corporation. While there are current regulations to prohibit this (Regulation § 1.1361-1(h)(1)(vii)), there were none back in 2003 (the year at issue in this case). The court relied upon a older IRS Revenue Ruling (passed in 1992) which prohibited a traditional IRA shareholder to be a shareholder in an S corporation as primary authority for ruling against the taxpayer in this case. The rationale of this older Revenue Ruling was basically that an S corporation cannot have any shareholders that are not taxed currently on any profits of the business. In fact, all shareholders, including the eligible trusts previously mentioned, had this attribute.

A Roth IRA, by definition, is not currently taxed on any of its income and, in fact, is never taxed on its income. The court reviewed the facts and Congressional intention to rule that it would not permit a Roth IRA account to be the owner of shares in an S corporation.