NORTH BAY – Several important tax changes will impact filers on both the state and federal level this year.
In California, in an attempt to balance the budget last year, the Legislature changed the required estimated tax payments for individuals and C corporations.
Historically, the payments were 25 percent per quarter. To get more money right away, the percentages were changes to 30 percent in the first two quarters and 20 percent in the last two quarters.
For 2010, this has been changed yet again. Now for the first quarter, estimated tax will be 30 percent for the first quarter, 40 percent for the second, none in the third quarter with the remaining 30 percent due in the fourth.
On the federal level in 2010, for the first time anyone, regardless of income, will be able to convert traditional Individual Retirement Accounts to a Roth IRA.
Since the Roth IRA legislation was written in 1998, only people with modified adjusted gross income of less than $100,000 could make the conversion.
If an individual wants to convert a traditional IRA to a Roth IRA, he or she will have to pay federal income taxes on any pre-tax contributions as well as any growth in the investment’s value. Once converted to a Roth, however, all of the investment can be withdrawn on a tax-free basis once certain conditions are met.
There are both benefits and pitfalls to making this conversion.
Traditional IRA contributions are not taxed. Distributions are taxed, and the holder of the account must start to take distributions at 70 1/2 whether they need or want to.
So a benefit for converting to a Roth IRA is distributions are tax-free and are not required after the account holder reaches 70 1/2. But the tax must be paid upfront.
The tax rates in the next 10 to 15 years will change. The idea is to pay the tax in what many believe is a period of lower tax rates.
But it depends on when the account holder wants to pay the tax.
If, for instance, the account holder of a traditional IRA is going to leave the account to a beneficiary, converting to a Roth IRA will mean no taxes when the money is withdrawn by the heir.
But if the person thinks they may live off the funds and will take most out of a traditional IRA in the next few years, it may be better to leave it where it is.
A major fear is that the income tax may be pushed to a future generation at higher rates. And one of the factors that could play a role is if Congress, as expected, doesn’t extend the Bush tax cuts.
If not, tax rates will revert to 2001 levels, making the top four brackets 39.6 percent, 36 percent, 31 percent and 28 percent from what they are now, 35 percent, 33 percent, 28 percent and 25 percent.
Another choice to make is if the conversion is made, the account holder can opt to pay all the tax in 2010, or half in 2011 and half in 2012.