This is that time of year when you may be anticipating a beefy tax refund that could be anywhere from hundreds to thousands of dollars. the next question you may be asking is what to do with the money you get back from the IRS. you have a lot of options, and some are better than others. here are a few ideas on how to spend your tax refund.

What to do with Your Tax Refund originally appeared on About.com Financial Planning on Thursday, March 29th, 2012 at 21:41:59.

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What to do With Your Tax Refund

Sure your 2011 tax return is due in a few weeks, but you might want to put it aside for bit and look at your 2008 records. if you didn’t file a return for that tax year, the Internal Revenue Service could have some money for you. in fact, it could be as much as… …

IRS has $1 billion for taxpayers who didn’t

The IRS said today it?s got $1 billion in unclaimed tax refunds, owed to people who didn?t file a return in 2008. Read that story, plus find out how the housing market is faring, what?s happening with mortgage rates, and investing insights, in today?s Personal Finance Daily.

Personal Finance Daily: IRS has $1 billion in unclaimed tax refunds

IRS Wants More Penalties

The 1031 industry is in some ways brand new.  as a result, it’s pretty difficult to determine which firm you can trust.  to help sort through the wheat from chaff, we’ve put together a "due diligence list" below to help you more rigorously research firms to work with.  as always, consult your tax and financial advisors.

To better serve you, we’re looking to launch a feedback project on 1031 service providers (find out more link) .  if you think this would be valuable, please post  comment or email us at nesteggemail@gmail.com

1) Firm background: Find out how long your 1031 syndicator has been in business, how many transactions they have performed, and how credible the leadership of the firm looks.  many firms have grown out or are subsidiaries of title or brokerage companies.  So be careful about differentiation between the track record of the 1031 company and the parent company.

2) Offering:  first take a look at what type of offering (Tenants in Common, Tenants in Common Triplenet Leases, UpREIT). Generally, we feel that the UPREIT still has not been approved by the IRS and is thus more risky.  second, look at the properties themselves:  research the geography, the tenants, and the general quality of the assets.  Finally, how big is their property portfolio.  the bigger usually will indicate a larger and more established firm.  Also, when you go to exchange it’s more likely that they will have a property available.

3) Promised Return:  be careful about exactly what return the firm is promising.  some firms advertise "cash on cash yields"  which are really returns to your equity.  Others advertise capitalization rates which are returns to equity and debt. 

Diligence List Continued (Link)

1031 TIC Exchange Firm Due Diligence List

A great article on deferring capital gains on your primary residence.  Check out our more formal analysis:  1031-121 Analysis Link

2/10/05 Wall St. J. D1
2005 WL-WSJ 59840615

The Wall Street Journal
(Copyright (c) 2005, Dow Jones & Company, Inc.)

Thursday, February 10, 2005

IRS decision Aids Home Sellers

Recent move Allows Those With Home Offices, Rental Units, to Defer Taxes on
Some Gains

A RECENT decision by the Internal Revenue Service could provide considerable relief to many homeowners facing huge price gains when they sell. the sharp appreciation of house prices in recent years means many people could face steep capital-gains taxes. but in late January, the IRS put forth new guidelines that allow certain homeowners to defer paying taxes on a
significant portion of those gains. the new break doesn’t apply to all homeowners, only to those who have home
offices, or those who convert their house — or a portion of it — into a rental. the deferral applies only to the portion of the house used for
commercial purposes.

Still, that affects a substantial amount of people. according to the IRS, the number of individual tax returns filed claiming deductions for home offices
rose to about 2.5 million in 2002, the latest data available, from about 1.7 million in 1997. In a 2004 survey, the National Association of Realtors
found that 12% of respondents said they were buying other houses, but keeping their existing homes — presumably for investment purposes.

Some observers say the IRS’s move will lead more people to rent their homes or set up a home office — or lead people who already have such offices to
report them. "People in the past would always question whether it was worth it to deduct a home office," says Julie A. Welch, an accountant and director of
the tax department at Meara, King & co., a Kansas City, Mo., auditing and accounting firm. "but now with this new pro-taxpayer guidance, it makes a
whole lot more sense. if you structure it right, you can exclude or defer gain in almost all cases."

Next week, the IRS is scheduled to formally publish the new guidelines. Previously, homeowners weren’t sure which circumstances allowed them to
defer or exclude the gains from the "commercial" parts of their residences.

The guidance comes at a time when many homeowners, especially those who have lived in their houses for a number of years, are sitting on huge price
gains. Home prices in the U.S. have risen 63% from the third quarter of 1999 to the third quarter of 2004, according to home-price research company Fiserv CSW
Inc., of Cambridge, Mass. A number of housing markets have seen increases far beyond that.

Given the complexity of the guidelines, known as Revenue Procedure 2005-14, it makes sense to consult with a lawyer or tax adviser before attempting to
take advantage of them. For one thing, the IRS has complex rules on claiming expenses for business
use of your home. In general, you must use part of the home "exclusively and regularly" as your principal place of business, or exclusively and regularly
as a place to meet or deal with patients, clients or customers in the normal course of work — or for rental use. if you are an employee, your business
use must be for your employer’s convenience, not yours.

Additionally, in order to take advantage of the deferral, the owner must purchase another property through what is called a 1031 "like-kind"
exchange, and it must be either a commercial property or have a commercial component equal or greater to the value of the commercial portion of the property
being sold. For people selling a home, the top capital-gains rate, currently 15%, typically applies to profits of more than $250,000 for most single people
and $500,000 for married couples filing jointly. For owners who bought in fast-appreciating markets five years ago, the profits from a sale could
easily exceed those limits, meaning they would have to pay capital-gains taxes. When the current limits were set in 1997, lawmakers assumed few people would
cross the profit threshold.

Here is how it works: if a married couple sells for $900,000 a house that cost, say, $200,000, the couple can exclude $500,000 of their $700,000 gain.
Assuming they had rented the entire house before the sale, they could defer paying taxes on their remaining $200,000 gain by buying a replacement
commercial property costing at least that much through a 1031 exchange.

If the couple had instead maintained a home office that was valued at $75,000, they could defer paying taxes on that amount if they purchased a commercial
property of the same or greater value.

"It’s a good thing for homeowners who also have a home business because it clarifies that they can later sell the house and still use the principal
residence exclusion for the entire house, even if they were using part of it for business," says Randy Markowitz, an accountant and partner with FGMK
LLC, in Bannockburn, Ill.

Another benefit: the couple also can defer back taxes on any depreciation deduction they took earlier on the commercial part of the property. Gains
from depreciation deductions are taxed at 25%, much higher than the 15% capital-gains tax.

While the new guidance helps homeowners, it also can open up a legal and accounting minefield. "Trouble could come from trying to claim the
home-office treatment when it’s not eligible, claiming too large a percentage of a residence as a home office, or not satisfying the highly technical 1031
rules," says Louis S. Weller, of Deloitte & Touche LLP’s national real-estate tax services group in San Francisco.
Some homeowners may find the road to qualifying for this new break a little daunting. For example, when trying to sell a home and defer the gains on the
commercial portion, it no longer is simply selling a house but structuring an exchange transaction, which means filling out more tax forms and adhering to
strict deadlines and rules. it is more akin to being a commercial investor than a homeowner.

In a 1031 exchange, the replacement property has to be identified within 45 days, and the exchange has to be completed within 180 days, or the tax
deferral is forfeited. A specialized 1031 intermediary has to be retained to handle the transaction. Fees for intermediaries run as much as $1,000.

"if you don’t set it up as an exchange, then you won’t get the tax-deferral treatment," says Adam Handler, of the like-kind exchange services group with
PricewaterhouseCoopers in Los Angeles. "most people, if they’re thinking about selling a house, are not thinking about the exchange machinery."

A new decision by the IRS could help cut your taxes when you sell your home.

– you must have lived in your house for at least two of the past five years.

– the profit on the sale of your home must be greater than the capital- gains tax exclusion — $500,000 for married joint filers.

– you must have established a home office or converted your home into a rental property, and you must purchase a similar property when you sell.

How to Lower Your Home Capital-Gains Taxes

New guidance from the IRS clarifies how to avoid or defer paying capital- gains taxes on the sale of your primary residence.

– Set up a home office or rent out your property. to qualify for a federal home-office tax deduction, you must use part of the home exclusively andregularly as your principal place of business, meaning for administrative or
management activities; as a place where the owner meets or deals with patients, clients or customers in the normal course of trade or business; or
for rental use.

– Make sure you file Form 8829 to claim the home-office deduction, or the IRS may not recognize the office portion of your home.

– When you re ready to sell, you can claim the standard capital-gains tax exclusion, up to certain limits: $250,000 (for most singles) and $500,000
(for joint filers). to qualify for the full exclusion, you must have lived in the home and used it as your primary residence for at least two of the five
years prior to the sale. if your gains exceed those limits due to the commercial portion, you can defer taxes on those gains by buying another commerical
property, if that property is worth as much or more than the value of the commercial portion of the house you are selling.

Avoiding Capital Gains on Your House: Wall Street Journal Article

The Traditional IRA was the original individual retirement plan which came into existence when the Employee Retirement Income Security Act of 1974 was passed by Congress. the intent of these plans was to allow a worker, who was not covered by a pension or 401k plan, to accumulate tax advantaged savings for eventual retirement. In 1997, the Roth IRA came into existence which allowed workers even more flexibility in saving for retirement.

Other plans have come into existence for specialty purposes, but each of these is an offshoot of either the Traditional IRA or Roth IRA concepts. These special IRA’s are the Spousal IRA, Educational IRA, Rollover IRA, and the Inherited IRA.

Here we will concentrate on the original Traditional IRA since it is still a very popular and rewarding means of saving for your retirement.

The purpose of a Traditional IRA is to allow you to make contributions to a saving account, or mutual fund or brokerage account, and take a current tax deduction for the amount of contribution. the advantage is similar to why you put money in your 401k.

Since you get a tax deduction, the IRS wants to ensure that you are using this plan for retirement saving, and not just as a place to stash tax deferred assets. So a number of rules and limitations are imposed.

Eligibility Rules

There are only two rules which determine if you are eligible to open a Traditional IRA. the first rule is that you must be under age 70 ½ at the end of the year in which you make a contribution.

The second rule is that you receive some form of earned income. this income can be from salary, commissions, or any form of payment that you receive from performing work. Earned income does not include interest income, dividends or any other passive type of payment.

Income Limits

Once you have determined if you are eligible to open a Traditional IRA, you then need to look at the income limits to determine if you can actually make a tax deductible contribution. if you do not satisfy these limits, you can still make a contribution, but you can’t take a tax deduction for that amount.

You also have an issue if you are covered under another pension, profit sharing or 401k plan. if you are, then you must satisfy a different and lower set of income limits, as shown below.

Contribution Limits

Now that you have determined you are eligible to contribute, and meet the income limits, you can then look at how much you can contribute.

You can contribute a maximum of $5,000 per year to a Traditional IRA, regardless if you are taking a tax deductible. if you are over age 50, you can put in $6,000 per year. you cannot contribute more than your actual compensation. So, if you earn $2,500, this will be our maximum contribution allowed.

These limits also apply to both spouses together. each spouse could open his or her own IRA, but the total of the contributions cannot exceed the above limits.

These limits will be increased to reflect inflation increases.

Withdrawals

You can make withdrawals without penalty after your reach age 59 ½. but you will have to pay ordinary income tax on the amount withdrawn, including your own contributions. this is because you took a tax deduction for your contributions when they were deposited.

If you make a withdrawal before age 59 ½, the IRS imposes a 10% penalty on the amount you take out, unless you an exception applies. These exceptions are the taking of a withdrawal due to death, disability, and certain education expenses.

You are required to start taking minimum withdrawals once you reach age 70 ½. if you do not start minimum withdrawals by this age, the IRS will hit you with a 50% additional penalty on the amounts not withdrawn. this is one of the stiffest penalties found in the tax law, and is intended to stop taxpayers from extending their tax deferrals indefinitely.

Rollovers into a Traditional IRA

You can move assets from another retirement plan into a traditional IRA. you might want to do this if you lose your job and want to consolidate your assets. you will probably have more flexibility of investments than you did under the former retirement plan.

To do this you simply notify your employer and your current IRA provider that you want to move the funds. they will then perform a tax free direct rollover from one institution to the other. make sure it is a “direct” rollover between the two institutions. you never want to have your employer send you a check so that you can deposit it in your IRA. there are time limitations, tax considerations and potential nightmare’s involved in doing this. always have the money flow from one institution to the other without you being in the middle.

Roth IRA

You should read material concerning Roth IRA’s. under a Roth, you do not receive a tax deduction for contributions, but all withdrawals are totally tax free when you retire. this may be better suited to your particular financial situation.

You might also be able to contribute to a Roth even though you are over the limits for a Traditional IRA. again, you should understand the advantages and disadvantages of each form of IRA before you make a contribution.

Traditional IRA’s need Consideration

Tax deductible contributions for your eventual retirement can really increase your savings and provide for a more comfortable retirement. Don’t simply procrastinate if you don’t understand them. Reading and asking questions will lead you in the right direction.

Tagged as: Traditional IRA, Traditional IRA Limits, Traditional IRA Rules

What is a Traditional IRA

There are several retirement savings accounts, and 1 of the most popular is most likely the Roth IRA. Here, we ll look at some of the advantages and also drawback to Roth IRAs in comparison with other kinds of retirement savings accounts.

Absolutely no Tax Liability

The central advantage to Roth IRAs refers to their taxation status. all of the contributions made to Roth IRAs are made right after paying income tax. Because of this, the principal in the Roth IRA account grows without becoming subject to taxation. Additionally, withdrawals aren’t held to tax liability either.

Numerous account holders enjoy the idea that a Roth IRA decreases the level of reporting they need to do towards the IRS. considering that most of contributions are made along with post-tax dollars, the Roth IRA doesn’t require special reporting.

Furthermore, Roth IRAs don t experience many of the withdrawal restrictions of traditional IRAs. considering that tax contributions are resolved just before investment, Roth IRA account holders encounter fewer restrictions when compared with some other account holders.

Capability to Diversify Holdings

Account holders of Roth IRAs are likewise able to put money into various types of securities, for example stocks, bonds, mutual funds, and many more. the government will set limits for Roth contributions, and these types of limitations are income-dependent.

Roth IRAs do have certain specifications. To begin with, account holders is only able to deposit money produced from earned income (gifts or perhaps inherited funds do not qualify for a Roth.) Since 2010, you can contribute $5,000 to a Roth if the income is usually down below $105,000 for a one person, and $166,000 for the married person registering a joint tax return. you love a phased out contribution limit if one makes profit the next incremental status.

Roth IRAs is usually great accounts that provide quick access to funds. this type of account can work well for account holders who want to produce tax-free contributions for retirement savings.

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Benefits of Roth IRAs and Retirement Savings Accounts

Converting your Individual Retirement Account funds into a Roth IRA has never been easier — but that doesn’t mean it’s right for everyone.

The IRS opened up Roth conversions to everyone this year regardless of income and introduced a three-year window in 2010 to pay taxes on the conversion.

It’s a great opportunity to put together tax-free retirement income, but it’s not without its perils. Bankrate.com spoke with IRA expert Ed Slott about some of the traps taxpayers might not be aware of — and the dangers associated with them.

Trap no. 1: Watch out for conversion taxesMany people are under the impression that you’re able to split the taxes that come with converting a traditional IRA over a two-year period. That’s wrong. It’s the income from the IRAs that can be split.

That means the taxes could be wildly different on that income, depending on changes to the tax laws and your own salary and bonuses. As you decide whether to pay one lump sum or split it, it’s smart to keep an eye on your tax bracket and make some educated guesses about how it could change in the coming years.

Trap no. 2: Don’t use IRA funds to payThe lure of tax-free retirement income is strong, but you may face substantial taxes on money you convert. sometimes, those taxes are more than people can afford.

Let’s say it’s a $100,000 IRA being converted. Some people won’t be able to pay the taxes on that, so they’ll put $80,000 in the Roth and save $20,000 to pay the taxes. bad idea.

“Money that’s converted is exempt from penalties,” says Slott. “But if you use part of it to pay the tax, there’s a penalty if you’re under 59½. It’s something people don’t think about — and it’s too late when the tax bill comes.”

Trap no. 3: other benefits could be lostThe money you convert from a traditional IRA counts as income on your taxes — and that can impact your near-term future spending plans.

For example, if you’re about to buy a home, converting to a Roth could cost you the $8,000 homebuyer tax credit being offered by the government. Or if your college-age child is looking for financial aid, the sudden surge in your income could dramatically hurt his or her chances.

Trap no. 4: Some premiums will increaseThose higher income levels from your conversion will also mean you take a hit on Social Security and Medicare premiums. The threat of that could scare people away from converting, but that’s the real trap.

Those higher premiums aren’t as bad as they seem. Yes, you’ll take a hit for a year or two, but you’ll never have to deal with them again. If you stick with a traditional IRA, you’ll have to pay higher premiums for both programs every year once you hit 70½.

8 IRA conversion traps to avoid when you convert to a Roth IRA

What are the Roth IRA distribution rules?

Do you owe taxes and penalties for early distributions?

If you know the distribution rules before you make a withdrawal, you’re far less likely to make a costly mistake.

For instance, did you know the IRS mandates that any withdrawals from your Roth IRA must be made in a specific order?

If not, you could find yourself hit with taxes and penalties from a distribution you thought was tax and penalty-free.

So make sure you know these Roth IRA distribution rules.

Roth IRA Distribution Order

The Roth IRA distribution rules mandate that your withdrawals must occur in a particular order.

According the IRS, you must take distributions in the following order:

• Annual Principal Contributions
• Rollover and Conversion Funds
• Earnings and Investment Gains

And lest you think otherwise, the order of your Roth IRA distributions does matter.

Each of the three categories – your original contributions, any rollover or conversion funds you may have, and any investment gains you generated – are treated differently under the Roth IRA distribution rules. So it’s very important to know the proper order.

Let’s take an in-depth look at how each type of distribution is treated.

Distribution Rules for Original Contributions

The Roth IRA distribution rules treat your original contributions differently than other funds in your Roth IRA.

While in most cases an early withdrawal of rollover funds, conversion funds, or investment gains triggers an income tax liability and a 10% early withdrawal penalty, your annual after-tax Roth IRA contributions are the only funds you can withdraw tax-free and penalty-free at any time, under any circumstance, and for any reason.

You don’t have to reach a certain age or meet any other arbitrary requirements to withdraw your original contributions.

And that makes sense. Right? after all, it’s your money, and you already paid taxes on it.

Let’s say you’re 45 years old, and you open and fund a Roth IRA, contributing the maximum amount.

Ten years later, your account has a total market value of $131,000 – $50,000 from ten $5,000 annual contributions and $81,000 in investment gains.

Under the Roth IRA distribution rules, Roth IRA principal withdrawals are tax-free and penalty-free.

That means you can withdraw up to $50,000 before you have to worry about income taxes or early withdrawal penalties.

But what if you take an early distribution of non-contribution funds from your Roth IRA?

Distribution Rules for Other Funds

If you take an early distribution of other funds, such as rollover funds, conversion funds, or investment gains, odds are you’ll owe income taxes and a 10% early withdrawal penalty.

The Roth IRA distribution rules state that, in order to avoid taxes and penalties on most early distributions, you have to meet two conditions:

• Be age 59 or older
• Meet the 5 year rule requirements

The first rule is self-explanatory. in most cases, you need to be age 59 or older in order to take a tax-free, penalty-free distribution of non-contribution funds – although there are Roth IRA withdrawal exceptions.

The second rule – the Roth IRA 5 year rule – isn’t as obvious and needs to be explained. But it too must be met before you take tax-free, penalty-free distributions of non-contribution funds.

So what’s the 5 year rule?

In short, it states that you must open and fund your Roth IRA for at least five tax years before you can distribute non-contribution funds tax-free and penalty-free.

For instance, let’s say you open a Roth IRA in 2014 and fund it with a $1,000 contribution.

The clock starts ticking, and 2014 is your first tax year.

2015 is number two, then 2016 is three, 2017 is four, and 2018 is five.

As a result, on the first day of 2019, your Roth IRA is in compliance with the 5 year rule.

Does that make sense?

If you aren’t in compliance with these two Roth IRA rules, then any distributions of non-contribution funds are subject to taxes and penalties.

10% Early Distribution Penalty and Income Taxes

Under the Roth IRA distribution rules, most early withdrawals of non-contribution funds are subject to income taxes and a 10% early withdrawal penalty.

For example, let’s say you’re 42 years old and in 25% income tax bracket. your Roth IRA has a total market value of $150,000 – $50,000 in original contributions and $100,000 in investment gains.

What happens if you close your account and withdraw all of the funds?

In this scenario, the first $50,000 you withdraw is tax-free and penalty-free.

Because, as you remember, you can withdraw your original contributions tax-free and penalty-free at any time and for any reason.

But what about the $100,000 investment gain?

Since you’re under age 59 , the $100,000 is added to your annual income and treated just like earned income for income tax purposes. So you’ll owe income taxes on it at your current rate.

In this case, you owe 25% of $100,000 – or $25,000 in income taxes.

But that’s not all. You also owe a 10% early withdrawal penalty which is applied to the entire balance of your investment gains.

In this case, that’s 10% of $100,000 – or a $10,000 early withdrawal penalty.

So all together, you owe $35,000 in taxes and penalties ($25,000 in income taxes and a $10,000 early withdrawal penalty).

Now that you understand the basics, are there any additional Roth IRA distribution rules you need to be aware of?

Make sure you understand one particular rule regarding Roth IRA conversions.

Conversion Distribution Rules

One of the Roth IRA distribution rules you can’t afford to forget is this…

Each Roth IRA conversion you perform is independently subject to the 5 year rule.

That means, even if your overall Roth IRA account is in compliance with the 5 year rule, your conversion funds must also be in compliance before you can take tax-free, penalty-free distributions of those conversion funds.

Let’s say it’s the year 2011, you’re 57 years old, and you convert $50,000 in your Traditional IRA into a Roth IRA.

You first opened your Roth IRA at age 45, and you’ve made the maximum annual contribution every year since.

When 2014 rolls around, you’re 60 years old, and your Roth IRA has a total market value of $200,000 – $50,000 in original contributions, $50,000 in conversion funds, and $100,000 in investment gains.

How much can you withdraw tax-free and penalty-free before taxes and/or penalties kick in?

Because your $50,000 in original contributions is always tax-free and penalty-free.

And while your overall account is in compliance with the 5 year rule and you’re older than age 59 , only four tax years have passed since you made your Roth IRA conversion.

So withdrawing your $50,000 in conversion funds will trigger an income tax liability and a 10% early withdrawal penalty.

And while your investment gains are tax-free and penalty-free because you’re 60 years old and your account has been open and funded for at least five tax years, you can’t withdraw a single penny of investment gains until you’ve withdrawn every penny of conversion funds.

Remember the Roth IRA distribution rules regarding the order of withdrawals?

• Annual Principal Contributions
• Rollover and Conversion Funds
• Earnings and Investment Gains

So keep this rule in mind if you’re thinking about taking a distribution any time soon and you’ve recently performed a Roth IRA conversion.

Roth IRA Rules for Distributions

The Roth IRA distribution rules dictate:

• The order in which your contributions are withdrawn
• Which distributions are tax-free and penalty-free, and
• When conversion funds are tax-free and penalty-free

Knowing the rules can save you from making a costly mistake, so take the time to commit the basics to memory. And unless you’re absolutely certain you’re aware of the consequences, never do anything without first seeking the advice and counsel of a qualified financial professional.

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