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March 2016


by Andrew D. Schwartz, CPA

Anyone with money in the market can't be happy with the recent correction.  If you've been thinking about converting some of your IRAs and other retirement accounts to a Roth IRA, however, the current down market might provide you with the perfect opportunity.

As we explained 10 years ago in our August 2006 newsletter, the Tax Increase Prevention and Reconciliation Act, signed into law on May 17, 2006, eliminated the income limitation for people looking to convert their IRAs to a Roth IRA, effective in 2010.  For the past five years, anyone can move retirement savings held in IRAs, 401ks, and 403b plans into a Roth IRA regardless of their income.

Yes, you will owe income taxes on some or all of the amount converted. But money held in your Roth account will grow tax-free as of the conversion date (assuming the government doesn't change these rules during your lifetime.)  That means you won't owe a dime of federal income taxes on money withdrawn from your Roth account down the road.

Roth Versus Traditional

Just to make sure we're all on the same page with these two type of retirement savings accounts:

  • Roth IRA or 401k: Money contributed to a Roth account is never tax deductible, but earnings can be taken tax-free upon turning 59.5 years of age.

  • Traditional IRA, 401k, or other retirement account: Money contributed is usually tax deductible, and then amounts withdrawn down the road are taxed as ordinary income.

Should You Convert?

What steps should you take now as you consider whether to convert your IRAs and other retirement accounts to a Roth IRA during the current down market?


Step 1: Check Your Balances


The first step is to see how much you have in your IRA accounts.  Yes, even though the Dow is still way down from it's recent peak, I'm asking you to do the unthinkable and open your statements to tally up the value of all of your IRA accounts.  Don't forget to include all of your traditional IRAs, rollover IRAs, SEP IRAs, and SIMPLE IRA accounts.


Step 2: Verify Your Non-Deductible Contributions


Next, figure out the total of your non-deductible contributions you've made over the years.  The easiest place to find this number is to pull out your most recent personal tax return, and take a look at the Form 8606 attached.  This is the IRS tax form used to keep track of your cumulative post-tax IRA contributions.


Don't despair if you haven't submitted a Form 8606 each year or the number reflected on the current year's 8606 is incorrect.  The IRS allows you to file this form as a stand alone form.


Simply enter the correct totals for the non-deductible contributions made through 2015, sign the form on the bottom of page 2, and submit the signed Form 8606 to the Internal Revenue Service where you would otherwise file your Form 1040.  It's very important that the IRS have the correct info on file in anticipation of your converting your IRAs to a Roth IRA in 2016.


Step 3: Figure the Tax Burden


Here is where things might get a little tricky.  Does it make sense for you to convert your IRAs to a Roth IRA?


If the value of all of your IRA accounts is less than the total of your non-deductible contributions as reflected on your 8606, there is no reason not to convert to a Roth in 2016.   As an added bonus, you can even claim your remaining IRA basis as a miscellaneous itemized deduction provided you convert 100% of your IRAs by the end of the year.


What if your IRAs are worth more than your after-tax contributions?  Expect to pay taxes on the percentage of each dollar converted that represents the pre-tax portion of all of your IRAs. 


For example, let's say your IRAs are worth $60,000, and you made a total of $20,000 of non-deductible contributions over the years.  In this example, there would be $40,000 of pre-tax dollars built into the $60,000 of IRA value, which means two-thirds of each dollar converted would be taxed. 


Basically, the smaller the percentage of post-tax dollars within your IRAs, the tougher this decision becomes.  And remember, if you have multiple IRA accounts, you need to determine the pre-tax amounts included within all of those accounts - even if you only ever made your non-deductible contributions into just one IRA account, and that's the only IRA you plan to convert.

Step 4: Roll A Portion of Your IRA Into Your 401k or 403b Accounts

Moving pre-tax dollars out of your IRA into an employer sponsored retirement plan by 12/31/16 will reduce the taxes owed on a Roth conversion by increasing the percentage of post-tax dollars in your IRAs.  A common strategy for many people is to move all the pre-tax dollars out of their IRAs through a direct rollover into their non-IRA retirement accounts.

In the example above, you'd roll $40k of your traditional IRAs into your work 401k or 403b plan (assuming the plan accepts rollovers from IRAs), and then would convert the money remaining in your IRA. With your IRA now worth $20k which is equal to the $20k of post-tax dollars in your IRA, there would be no federal income taxes due on any amounts converted.

What if you are self-employed and don't have access to an employer sponsored retirement plan?  Consider setting up a Solo 401k, and then rolling over your SEP IRA and other pre-tax IRA dollars into your new plan.  Pre-tax assets held in the Solo 401k do not count as part of your total IRAs included in the denominator when figuring the percent of the converted assets that will be taxed.

De-Convert If Necessary

If the market continues to correct after you convert your IRA, or you don't have money next year to pay taxes on the income portion of the Roth conversion, you can always undo the Roth conversion prior to the due date of the conversion year's tax returns. 

Don't forget that you are not allowed to reconvert your recharacterized IRA account during the same calendar year.  According to the IRS, "You cannot convert and reconvert an amount during the same tax year or, if later, during the 30-day period following a recharacterization. If you reconvert during either of these periods, it will be a failed conversion." So be careful about reconverting a previously de-converted account.



We're pleased to announce that our YouTube channel has exceeded more than 10,000 views.  "I'm not sure what percent of YouTube channels have hit this milestone," says Andrew Schwartz CPA, "but we're definitely very happy that our videos have been viewed more than 10,000 times."

Please check out our YouTube channel for a listing of all the videos currently available.  

Suggestions for Future Recorded Presentations???

If you have any suggestions for information you'd like us to include in our 2016 recorded presentations, please e-mail me.  Please note that we plan to add a few more videos to our channel after April 15th.



IR-2016-29, Feb. 19, 2016

WASHINGTON — The Internal Revenue Service today wrapped up its annual "Dirty Dozen" list of tax scams with identity theft topping this year's list but with phone scams and phishing schemes also deserving special mention. Taxpayers need to guard against any ploys to steal their personal information, scam them out of money or talk them into engaging in questionable behavior with their taxes.

During the past year, as part of the Security Summit initiative, the IRS partnered with states and the tax industry to enhance coordination and create a more secure system for taxpayers. Participants now regularly share details of fraudulent schemes detected so both industry and government can provide increased protection. Many enhancements are invisible to taxpayers.

"We are working hard to protect taxpayers from identity theft and other scams this filing season," said IRS Commissioner John Koskinen. "Taxpayers have rights and should not be frightened into providing personal information or money to someone over the phone or in an email. We urge taxpayers to help protect themselves from scams — old and new."

The IRS this week also renewed a consumer alert for e-mail schemes after seeing an approximate 400 percent surge in phishing and malware incidents so far this tax season. (IR-2016-28)

Perpetrators of illegal scams can face significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them. Taxpayers should remember that they are legally responsible for what is on their tax return even if it is prepared by someone else. Be sure the preparer is up to the task. For more see the Choosing a Tax Professional page.

Here is a recap of this year's "Dirty Dozen" scams:


Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. The IRS continues to aggressively pursue the criminals that file fraudulent returns using someone else’s Social Security number. Though the agency is making progress on this front, taxpayers still need to be extremely careful and do everything they can to avoid being victimized. (IR-2016-12)

Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent years as scam artists threaten taxpayers with police arrest, deportation and license revocation, among other things. (IR-2016-14)

Phishing: Taxpayers need to be on guard against fake emails or websites looking to steal personal information. The IRS will never send taxpayers an email about a bill or refund out of the blue. Don’t click on one claiming to be from the IRS.Be wary of strange emails and websites that may be nothing more than scams to steal personal information. (IR-2016-15)

Return Preparer Fraud: Be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest high-quality service. But there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers. Legitimate tax professionals are a vital part of the U.S. tax system. (IR-2016-16)

Offshore Tax Avoidance: The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. The IRS offers the Offshore Voluntary Disclosure Program (OVDP) to enable people catch up on their filing and tax obligations. (IR-2016-17)

Inflated Refund Claims: Taxpayers need to be on the lookout for anyone promising inflated refunds. Be wary of anyone who asks taxpayers to sign a blank return, promises a big refund before looking at their records, or charges fees based on a percentage of the refund. Scam artists use flyers, advertisements, phony store fronts and word of mouth via community groups where trust is high to find victims. (IR-2016-18)

Fake Charities: Be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally-known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities. has the tools taxpayers need to check out the status of charitable organizations. (IR-2016-20)

Falsely Padding Deductions on Returns: Taxpayers should avoid the temptation of falsely inflating deductions or expenses on their returns to under pay what they owe or  possibly receive larger refunds. Think twice before overstating deductions such as charitable contributions and business expenses or improperly claiming such credits as the Earned Income Tax Credit or Child Tax Credit. (IR-2016-21)

Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is generally limited to off-highway business use, including use in farming. Taxpayers should also avoid misuse of the research credit. Improper claims generally involve failures to participate in or substantiate qualified research activities and/or satisfy the requirements related to qualified research expenses. (IR-2016-22)

Falsifying Income to Claim Credits: Don’t invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. Taxpayers are sometimes talked into doing this by scam artists. Taxpayers are best served by filing the most-accurate return possible because they are legally responsible for what is on their return. This scam can lead to taxpayers facing big bills to pay back taxes, interest and penalties. In some cases, they may even face criminal prosecution. (IR-2016-23)

Abusive Tax Shelters: Don’t use abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. (IR-2016-25)

Frivolous Tax Arguments: Don’t use frivolous tax arguments in an effort to avoid paying tax. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims. Even though they are wrong and have been repeatedly thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes. The penalty for filing a frivolous tax return is $5,000. (IR-2016-27)




Income Taxes

Saving and Investing



  • To have your returns completed by 4/15, please get your information to one of the MDTAXES CPAs during March
  • Use your tax refund to pay off some debts, fund an IRA, and/or invest.


2015 & 2016 TAX FACTS

  • For 2015, the standard deduction for a single individual is $6,300 and for a married couple is $12,600. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2015, the personal exemption is $4,000. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $118,500 for 2015 and 2016, up from $117,000 in 2014.
  • The standard mileage rate is $.54 per business mile as of January 1, 2016, down from $.575 for 2015.
  • The maximum annual salary deferral into a 401(k) plan or a 403(b) plan is $18,000 in 2015 and 2016, up from $17.5k in 2014.  And if you'll be 50 or older by December 31st, you can contribute an extra $6,000 into your 401(k) or 403(b) account this year.
  • The maximum annual contribution to your IRA is $5,500 for 2015 and 2016.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2016 to make your 2015 IRA contributions.


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This Month's Topics

Down Market Proves A Great Opportunity To Convert Your Retirement Accounts To A Roth IRA

Over 10,000 Views And Climbing

IRS Wraps Up The "Dirty Dozen" List Of Tax Scams For 2016

The FICA Refund for Medical Residents 

2015 & 2016 Tax Facts

Tax and Financial Planning Calendar for March 2016


Browse our index of previous months' newsletter topics

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In a shocking development, the IRS recently announced that they will be honoring the FICA tax refunds submitted by residency programs and individual doctors.  The catch is that only FICA taxes paid prior to 4/1/05 qualify.

For more information, go to our April 2010 Newsletter, our January 2009 Newsletter, or our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Let's work together to keep current on this hugely valuable tax break.  Please post whatever you read or hear regarding this FICA issue on our new Message Board we set up just for this topic.


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