For those taxpayers wanting to get a jump on their tax-filing obligation the challenge comes in making sure that they truly have accounted for all forms of income received throughout the entire year.

As a reminder, the United States taxes all worldwide income, so a taxpayer has an obligation to report all of this worldwide income earned during the year.

We are all familiar with the most common form of income — wages and self-employment earnings — but we may have other income which needs to be reported. Examples would be gain or loss from the sale of stocks, dividends and interest earned, earnings from a partnership whether your participation is active or passive, income from debt forgiveness as well as income from a hobby.

In addition, there are other situations where taxpayers may not think that the income needs to be reported; prize winnings at a community or church festival are considered gambling winnings. The sale of one’s own plasma is another type of taxable income that can be easily forgotten.  Just because a 1099 was not received does not mean that the income need not be reported. There are a number of transactions that taxpayers may not think need to be reported but do, in fact, need to be reported. Two examples are bond transactions with no gains and the sale of a primary residence.

Many of the 1099 forms are not received until mid to late February or even later, so it is important to really be aware of what taxable income a person has.  When a taxpayer receives any type of W-2 form or 1099 form, the IRS also receives a duplicate copy of that same form from the issuing organization.

When a taxpayer fails to report income that the IRS becomes aware of through their receipt of this tax information, the IRS will send a notice to the taxpayer.

These notices come months or even years after the tax return is filed and processed. If additional taxes are due at that point, the IRS will not only collect the tax but will charge penalties and interest as well. I recently had a client receive an income under-reporting notice for 2021 even though their return was filed over 18 months ago. This client failed to report over $60,000 of interest income from government bonds that were cashed back in 2021. They did not recall receiving the proper 1099 form. However, even if a 1099 form was not properly received, they are still required to report all worldwide income.

When gathering the tax information and preparing to either bring the information to a tax preparer or to prepare the returns on your own using one of the various commercially available tax preparation software programs, it is important that a taxpayer gather and collect all of their income and deduction information. Those taxpayers who have moved around a lot or have had multiple jobs or those taxpayers who have investments in multiple financial institutions can be very challenged in remembering all of their income sources and obtaining and gathering all of the tax-reporting information necessary.

It seems that almost every tax season I have a client that comes to me very early in the tax season and they want to get their taxes prepared. They are firmly convinced that they have all of their information necessary to file. We file the returns and then several weeks down the road they call me back and explain that they received some additional tax information or forgot about a certain transaction or account that they had.

We certainly prefer our clients to come in earlier rather than wait until the very last minute. However, it is important that a taxpayer has a good understanding of all of their various income sources and to make sure that they have received and report all of the information to avoid having to amend the return at a later date or even worse, receiving a notice from the IRS down the road.

Paul Pahoresky is the owner of PRP & Associates.  He can be reached at 440-974-1040 extension 214 or at paul@prpassoc.com.  Consult your tax advisor for your specific situation for additional information and guidance on these topics.

We pay into them for decades of our working life, but most Americans, including myself, have little knowledge of how you actually start receiving the benefits that you pay into. Many of us also have been led to believe that once you reach age 65, your health insurance is free as a result of Medicare. As a result of working in the field of income tax preparation, I have come to realize that Medicare is ultimately not free when you begin to receive benefits.

Recipients of Medicare receive a monthly charge called the IRMAA fee.

IRMAA is the acronym for Medicare’s income related adjustment amount. This is the premium charged for Medicare Part B and Medicare Part D to individuals based on their income. IRMAA is an increased premium that many Medicare beneficiaries pay based on their income. Medicare uses the most recent tax return provided by the IRS to compute the IRMAA charge. As a result, the IRMAA charge is based on the income from several years ago. For example, the 2024 IRMAA charges are generally based on the 2022 taxable income of the recipient.

The 2022 IRMAA charges for Medicare Part B are as follows:

Individual income                            Joint income                      Monthly Premium

$103,000 or less                              $206,000 or less               $174.70

$103,000-$129,000                         $206,000-$258,000           $244.60

$129,000-$161,000                         $258,000-$322,000           $349.40

$161,000-$193,000                         $322,000-$386,000           $454.20

$193,000-$500,000                         $386,000-$750,000           $559.00

Greater than $500,000                  Greater than $750,000        $594.00

For those Medicare recipients who also participate in Medicare Part D there is an additional premium as follows:

Individual income                            Joint income                      Monthly Premium

$103,000 or less                               $206,000 or less               $0

$103,000-$129,000                          $206,000-$258,000           $12.90

$129,000-$161,000                          $258,000-$322,000           $33.30

$161,000-$193,000                          $322,000-$386,000           $53.80

$193,000-$500,000                          $386,000-$750,000           $74.20

Greater than $500,000                    Greater than $750,000      $81.00

I am bringing these charges to your attention primarily because of a learning experience that I have encountered several times when preparing tax returns.

Often it is financially beneficial for Ohio taxpayers to file their tax returns as married filing separately rather than married filing jointly.  If both parties have relatively the same amount of taxable income this often is the case. The tax savings from filing separately can often be hundreds and even thousands of dollars. However, what the tax software does not compute in the analysis of married filing jointly versus married filing separately is the impact on the IRMAA charges that are impacted several years down the road.

I have found that the additional IRMAA charges generally more than offset any tax savings that would occur. Recently I picked up a new client from another tax preparer as a result of this because they needed their tax return amended back to married filing jointly, so that they could have the reduced IRMAA charges two years down the road.

It is possible to appeal the IRMAA charges if a major life changing event occurred in the time from the original tax filing used to compute the IRMAA charges to when you are actually receiving the corresponding Medicare benefits. However, this can be a complex and bureaucratic process that is timely and can be very frustrating.

Your taxable income does have an impact on the subsequent cost to you of Medicare. Having a basic understanding of this often-mysterious world will help you prepare and possibly reduce or avoid these Medicare premium surprises. As the saying goes, “there is nothing free in life.”  The Medicare premiums that many of us were led to believe were ultimately free as a result of paying into Medicare throughout our working life is an example of this saying.

Paul Pahoresky is the owner of PRP & Associates.  He can be reached at 440-974-1040 extension 214 or at paul@prpassoc.com.  Consult your tax advisor for your specific situation for additional information and guidance on these topics.

Beginning with tax year 2021 individual taxpayers and pass-through entities can claim an Ohio tax credit for financial contributions made to an eligible scholarship granting organization (SGO). The credit equals the lesser of $750 or the total amount contributed per individual to the SGOs during the year.  A married couple can claim up to $1,500.

This dollar-for-dollar state tax credit will offset the 2023 Ohio income tax liability for qualified donations made by Dec. 31, 2023. The taxpayer will receive a 100% tax credit for contributions claimed on the 2023 tax return. In other words, the taxpayer’s state tax can be reduced dollar-for-dollar up to $750 for an individual filer and $1,500 for a married couple on these qualifying SGO contributions.

The tax credit is limited to the total Ohio state income tax due for the year that is reported on the second page of their individual income tax return on line 13 of form Ohio IT 1040. Taxpayers can contribute more than $750 per individual to the SGO, but the credit is capped at $750 per individual taxpayer and $1,500 for a couple filing married filing jointly.

The taxpayer can also receive a federal tax deduction for this charitable contribution as it is considered a qualifying charitable contribution. So, there could be both a state and a federal tax benefit for this charitable contribution depending upon the taxpayer’s specific situations.

Gifts must be made to a qualified SGO.  A link to the list of the qualifying SGO’s is at charitable.ohioago.gov.  This list is continuing to grow as more charitable education groups apply for acceptance and become certified by the State of Ohio as qualified SGOs. In 2021 there were seven accepted organizations, in 2022 33 additional organizations were added, and in 2023 there were an additional 55 new organizations added.

For instance the Diocese of Cleveland has a website. Within this website there is a dropdown that includes numerous local schools including St. Mary’s Mentor, All Saints of St. John Vianney and Notre Dame Elementary to name a few. This allows the donor to designate their contributions for a given school that they may have an interest in supporting.

This contribution will reduce your State of Ohio income taxes on a dollar-for-dollar basis since it is a tax credit. For those taxpayers who itemize it could also reduce your federal income tax obligation as it would be considered a charitable contribution. Make sure you retain the receipt for your records as this will need to be attached to your Ohio tax filing to secure the tax credit.

As part of your year-end planning, you have a few weeks until the end of the year to make this contribution. Since you will be paying the same amount of money one way or the other, why not direct your funds to a qualifying SGO, rather than paying the same amount of money to the State of Ohio in your income tax obligation. I personally would rather have my money go to this type of scholarship granting organization rather than to the general fund of the State of Ohio.

Paul Pahoresky is the owner of PRP & Associates. He can be reached at 440-974-1040 extension 214 or at paul@prpassoc.com. Consult your tax advisor for your specific situation for additional information and guidance on these topics.

Some of us are limited to merely vacationing in Florida, while other more fortunate folks are able to escape our cold weather for even longer periods. With Florida’s warm weather and no state or local income taxes this becomes a common destination for many from Northeast Ohio. Whether it is Naples, Sarasota or Bonita Springs, it seems many from Northeast Ohio have a visual map of all of the communities in Florida.

So the question arises from time to time as to what it takes to change your state residency from Ohio to Florida or some other warm-weather state.

For taxpayers who maintain a home in both Ohio and another state such as Florida there are specific guidelines spelled out in the Ohio Revised Code so that you would no longer be considered an Ohio resident. Generally, any individual with an abode in Ohio is presumed to be a resident. The abode can be either owned or rented. Temporary absence from your Ohio abode, no matter how long, does not change your residency status.

An individual is considered a resident for Ohio income tax purposes if their only home is located in Ohio. If a home outside of Ohio is also maintained, then the taxpayer must compute the number of overnight stays in Ohio to determine if residency requirements are met.

If a person spent some of their time residing in Ohio and part of their time residing outside of Ohio, there is a formula based on contacts within the State of Ohio to determine residency.

If during a taxable year an individual has 182 or less contacts in Ohio and they maintain a home outside of the State of Ohio, they are presumed to be a nonresident.  A contact is effectively considered to be an overnight period, although there is a very technical legal definition within the Ohio Revised Code. If a person spent their entire year outside the State of Ohio and were domiciled elsewhere, they are considered a nonresident as well.

There are other factors that are used to support a taxpayer’s residency including driver’s license and voter registration. Keep in mind that the burden of proof for an existing Ohio resident that wishes to no longer be considered an Ohio resident rests with the taxpayer. The Ohio Department of Taxation will presume that an individual continues to remain an Ohio resident if they have been an Ohio resident and continue to maintain a residence in Ohio. The taxpayer has the burden of proof that they were not domiciled in Ohio for more than 183 days, and the individual may be asked to provide clear and convincing evidence to the contrary when they are moving their domicile.

Furthermore, keep in mind that there are numerous consequences beyond the income tax obligations that go with changing your state of residency including in-state college tuition benefits, deductibility of 529 contributions, and other benefits that are determined at the state and local level.

So as your friends and family are traveling south for some or part of the winter, and working remotely is becoming a more viable option for many professions, make sure that you consider all of the implications of changing your residency. You will need to take a number of steps to ensure that you handle this residence change appropriately so that the taxing authorities have evidence that you are not simply attempting to avoid State of Ohio income taxes.

Paul Pahoresky is the owner of PRP & Associates. He can be reached at 440-974-1040 extension 214 or at paul@prpassoc.com. Consult your tax advisor for your specific situation for additional information and guidance on these topics.

Every year 200,000 Ohioans lose track of their funds. They either put money in financial institutions and forget about it, or simply cannot track it in their records. This could be a deposit with a utility, or unclaimed insurance proceeds.

Whatever the case the State of Ohio may have money waiting for you to claim.

The Ohio Department of Commerce, Division of Unclaimed Funds exists to protect money lost by Ohioans in various financial institutions, find the people the money belongs to, and then return it as quickly as possible. More than $1 billion currently is in the custody of the Division of Unclaimed Funds. The Ohio Treasury makes Ohioans aware of the Division of Unclaimed Funds, so that they get back money rightfully theirs.

A good place to start your search is at com.ohio.gov/unfd.  If you identify an item you believe is yours, you then initiate the claim process by filling out a claim form that is on the website and mailing it to the Ohio Division of Unclaimed Funds, 77 S. High Street 20th Floor, Columbus, OH  43215-6108. This is a lengthy process which may require 120 days. You may need to provide verification that the funds belong to you.  Amounts over $1,000 must be notarized. If you are claiming the funds for a deceased owner, a copy of the death certificate must be provided.

The process to claim the funds can be a bit challenging in providing all of the information that is necessary to complete the claim. This is especially the case if you are trying to claim funds on behalf of a deceased parent or other relative.

If you are not the actual owner of the account the process of claiming becomes more involved.

My grandmother has funds out on the site and I cannot claim them as I do not have the proper information. I have tried to get other family members, but I am not sure they have the proper death certificates, wills and other necessary documentation.

The State of Ohio receives these funds and the detail behind them through the annual filing requirement for all businesses. Businesses, financial institutions and other entities that maintain account balances, write checks or hold funds in escrow for another person or persons, must file an Annual Report of Unclaimed Funds even if they have no unclaimed funds to report. The annual report is due by Nov. 1, for accounts dormant as of the preceding June 30, for all entities except life insurance companies. Annual reports from life insurance companies are due by May 1, for accounts dormant as of the preceding Dec. 31.

Organizations are required to report the following information for accounts with identifiable owners and a balance greater than or equal to $50: full name and last known address of the owner, social security number if available, account number, amount, date of last transaction, nature of the funds and the owner’s relationship to the account. They must provide the account number, amount and date of last transaction for accounts with a balance greater than $50 with an unknown name and address. Applicable accounts less than $50 are reported as aggregate totals. Companies must maintain a list of the accounts and balances that make up the aggregate total in order to provide account verification if the owner makes a claim.

Unclaimed accounts should be closed out and listed with the state.  A check for the total of all of a business’ unclaimed funds should be sent to the state. This allows the entity to remove the unclaimed funds from their books. Certificates for unclaimed stocks should be issued to the Ohio Division of Unclaimed Funds.

So, check out if you may have funds awaiting you at www.missingmoney.com.  You, like me, may find some extra spending money for Christmas.

Paul Pahoresky is the owner of PRP & Associates. He can be reached at 440-974-1040 extension 214 or at paul@prpassoc.com. Consult your tax advisor for your specific situation for additional information and guidance on these topics.

When this happens the taxpayer is often concerned and frustrated and wants to know what generated the notice. The notice generally does not mean that the taxpayer is under audit.  Rather, the notice means that the taxpayer has not filed a required return or the information on the return that was filed does not correspond with other information received by the taxing authority.

One of the most common types of notices that is generally received quickly after the tax filing submission is a notice where the estimated tax payments that the IRS or other taxing authority shows do not match what was reported on the tax filing.

As a preparer it is very difficult to verify the estimated tax payments that a taxpayer actually made. When these payments are different from what the IRS shows receiving, a notice is generated. It is the taxpayer’s responsibility to keep track of the estimated tax payments that were made as well as any credit carryforwards that may have occurred as well.

Another common cause of notices from the IRS is unreported income.

When a taxpayer receives a form 1099 or a W-2, the IRS is also receiving a separate copy of that same notice from the issuing organization. The taxpayer who fails to fully report all of their dividend or interest income on their tax return will receive a CP-2000 notice from the IRS for the unreported income. The bank or brokerage house that issued the 1099 also provided a copy to the IRS which is how the IRS knows that the income was not reported on the taxpayer’s return.

Whether it was by accident, carelessness or an intentional effort to not report this income, the IRS will compute the income taxes and interest — and possible penalties — for the unreported income. The penalties will depend on a number of circumstances including the magnitude of the unreported income and the number of days since the tax payment was due.

In a number of situations, taxpayers have received a notice for unreported stock or bond sales.

The taxpayer felt that they did not need to report these sales since they had no gain or even a loss on these investment sales. The gross proceeds of these sales are reported on form 1099-B. The IRS is not aware of the cost basis that corresponds with these sales, and since these sales went unreported the IRS automatically assumes a zero cost basis. So, regardless of whether there is a gain or loss, these capital sales must be reported on the tax return to avoid receiving a notice from the IRS.

Recently I had a client who received a notice from the IRS for unreported self-employment income. The taxpayer had failed to report one of several 1099-MISC forms that they received on their Schedule C. In this case the IRS totaled the gross self-employment income reported on Schedule C and compared this to the total of the 1099-MISC forms that had been submitted to the IRS. Since the total of these 1099-MISC forms was greater than the gross income reported on Schedule C,a notice was issued to the taxpayer. In this case the IRS was correct, and the taxpayer had to pay the tax and the interest charged.

Of course, if a taxpayer fails to file a tax return, then they will likely receive a non-filing notice from the respective taxing authority.

This is a further reason why it is so important to keep a copy of all returns that are filed. For those returns that are mailed to the taxing authority rather than electronic submission, best practice is to send the documentation with a return receipt to verify that the return was received.

Attention to detail and accurate record keeping will help reduce or eliminate receiving notices from the IRS and other taxing authorities.

And when you do receive a notice, it is important that you follow up and respond to the notice as ignoring the notice will lead to more significant problems including additional interest and penalty charges.

Paul Pahoresky is the owner of PRP & Associates. He can be reached at 440-974-1040 extension 214 or at paul@prpassoc.com. Consult your tax advisor for your specific situation for additional information and guidance on these topics.

Most people think about insuring their house or their car, but few think about or even know what long-term care insurance means. With people living longer and longer and families becoming more spread out and smaller, the possible need for long-term care continues to increase.

Long-term care insurance provides supplemental income to cover care and needs associated with extended care. This care can be either in the home or in a facility such as a nursing home. Medicare and health insurance do not necessarily cover these costs for an extended period. In order to qualify for Medicaid you must meet certain income and asset requirements otherwise you are required to spend down your assets until you meet the requirements.

LTC is different from traditional medical care. It helps one live as he or she is now and may not help to improve or correct medical problems.

People without long-term care insurance are sometimes forced to sell their home and other assets in order to pay for the necessary care as they age. No one wants to have to be supported by someone else or sell off their nest egg for the necessary care, but the reality is that without long-term care insurance this is a real possibility.

A qualified long-term care insurance contract is an insurance contract that only provides coverage of qualified long-term care services.

The contract must meet all the following requirements.

• It must be guaranteed renewable.

• It must provide that refunds, other than refunds on the death of the insured or complete surrender cancellation of the contract, and dividends under the contract may be used only to reduce future premiums or increase future benefits.

• It generally must not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regards to expenses.

If you are self-employed you can deduct a portion of the cost of your long-term care premium on the front page of your tax return as part of your health insurance deduction. The amount that you can deduct is limited to your actual cost or an amount based on your age at the end of the year according to a table provided by the IRS.

If you are employed and receive a W-2, the deduction for long-term care insurance which you personally have purchased is on Schedule A as a medical expense deduction. These policy payments are separated between the taxpayer and the spouse. The amount you can deduct on schedule A is also limited to the greater of your actual cost incurred or the amount found in an age-based table provided by the IRS. The older a person is the larger the allowable deduction amount for long-term care coverage. The longer you wait though, the higher the premium will be for long-term care coverage as well.

When you receive payments under a long-term care insurance policy these payments are netted against your out-of-pocket costs to determine your medical expense deduction on Schedule A. In other words, payments received under a long-term care insurance contract reduce the amount that you can deduct as a medical expense as these expenses were paid by a third party and are not ultimately paid by the taxpayer.

As an effective way to protect your assets and to enjoy some tax benefits, you may want to consider obtaining a long-term care insurance policy. There are quite a number of factors to consider in evaluating these types of policies. I personally do not want to have to rely on my children to take care of me if I need extended assistance due to deterioration in health and ability to take care of myself. Who knows, my children may want to pay me back for how “mean” I was as a parent!

Paul Pahoresky is the owner of PRP & Associates. He can be reached at 440-974-1040 extension 214 or at paul@prpassoc.com. Consult your tax advisor for your specific situation for additional information and guidance on these topics.

There is a formal process that the IRS and other taxing authorities have in place to allow you to report changes to a previously filed tax return. Amending a return effectively changes what you originally reported to what you would like to, or should, report. Generally speaking, it is far better to amend your own return than to wait until you receive a notice from the IRS informing you of a mistake that was made.

You can amend a return for up to three years from the initial filing deadline. In other words, presently you can amend 2020, 2021 and 2022 tax filings as those years are still considered open by the taxing authorities. You will need to use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended return. You will use this Form 1040X to amend Form 1040. So, regardless of what form that you originally filed you will need to use this Form 1040X. If the changes involve another schedule or form, you must also attach that schedule or form to the amended return.

If you are amending more than one return, prepare a 1040X for each return and mail them in separate envelopes to the appropriate IRS location. The 1040X instructions list the address to mail the amended return, and this mailing address varies based on your location. You now can also amend federal and Ohio returns electronically. Furthermore, be sure that you enter the year of the return that you are amending at the top of the Form 1040X as indicated.

Please be sure to include a detailed explanation of the reason for the amended return in the space provided on page 2 of the 1040X Form. If you are filing to claim an additional refund, it is advisable that you wait until you receive your original refund before filing Form 1040X. You may cash that original refund check while waiting for the amended return to be processed if it entitles you to an additional refund.

If you owe additional taxes as a result of the need to amend the return, pay the taxes as soon as possible. The IRS charges late payment penalties and interest if there is a balance due and the amended return is being filed after the original filing deadline. Paying the taxes due that are associated with the amended return as soon as possible will help to reduce the amount of penalties and interest charged to the account.

Your state tax liability may be impacted by amending your federal return, and it may be necessary for you to amend your state or local returns as well. In Ohio, if your adjusted gross income from page 1 of your federal 1040 return, or the number of exemptions you claim is changed, then you will need to file an amended Ohio return as well.

So, if you have discovered that you have an error on a previously filed return or additional corrected information is received after the original tax filing, be proactive and amend the affected returns. It is a far easier process for you to initiate a change to a previously filed return than to have to follow up and respond to IRS notices when they determine that a reporting mistake of some type has occurred.

Paul Pahoresky is the owner of PRP & Associates. He can be reached at 440-974-1040 extension 214 or at paul@prpassoc.com. Consult your tax advisor for your specific situation for additional information and guidance on these topics.

Making the most out of the remaining days of the year financially will serve you well in the future. The good news is if you pay attention to these tips now, you can make the transition to the new year as smooth and easy as possible.

Plan for the holidays: Ready or not, they’re coming, and they’ll wreak havoc on your finances if you don’t plan ahead. In fact, the average holiday spending in 2022 was $1,802 per person. If you haven’t been planning for this already, now is the time to start.

Assess your progress: Review your financial goals and evaluate where you stand. Are you on track to achieve what you set out to accomplish this year? Take a moment to celebrate your successes and identify areas that need attention.

Maximize retirement contributions: If you need to max out your retirement contributions, now is the time. By taking advantage of tax-advantaged accounts, you can reduce your taxable income while building a substantial nest egg. The limits on 401K contributions and IRA contributions increase each year. Make sure you are maximizing this retirement savings opportunity.

Rebalance your portfolio: As year-end approaches, ensure that your asset allocation aligns with your long-term objectives and consider rebalancing if necessary to manage risk and optimize returns.

Review insurance coverage: Life changes, and so do your insurance needs. Assess your current coverage for life, health, disability and property insurance. Make any adjustments to ensure you and your loved ones are adequately protected.

Optimize tax planning: Take advantage of available tax-saving strategies by exploring deductions, maximizing contributions and reviewing your investment strategy with tax implications in mind.

Consider a gift to family and friends: For those individuals who make significant gifts to friends and family members the annual exclusion from filing and reporting a gift tax is $17,000 per individual recipient from each gift giver. So, a couple can give $34,000 per year to a child and not have to file a gift tax return. This annual exclusion is a use-it or lose-it benefit and it resets each Jan. 1 but cannot be then taken retroactively for the prior year. Gifts beyond the $17,000 per year require a gift tax return to be filed and generally count against the lifetime estate tax exclusion. Although this will not reduce your taxes it is a great way to assist family members that has no tax consequences to either the donor or the recipient.

Get smart with capital gains: Consult a financial advisor or accountant to help determine which investments are best to sell in order to take advantage of tax-loss harvesting.

Revisit your legacy goals: You don’t need to be nearing retirement to plan for your legacy; there are things you can do at every stage of life to ensure your family is cared for. That said, if you don’t have a will, make an appointment with a trusted attorney to draw one up. If you already have one, ensure it’s up-to-date and consider a medical and financial power of attorney.

Clear financial clutter: Keep organized by tidying up your financial documents and paperwork. Consolidate accounts, shred unnecessary documents and research ways to track expenses and receipts if you haven’t already (or your current system isn’t working). Prepare a list of all accounts and who the contact is and provide this to your loved ones. This will assist them greatly if something were to happen to you.

Planning and reviewing items will help to make the most of these remaining 100 days and build a strong foundation for a successful financial future.

Paul Pahoresky is the owner of PRP & Associates. He can be reached at 440-974-1040 extension 214 or at paul@prpassoc.com. Consult your tax advisor for your specific situation for additional information and guidance on these topics.

There are a number of tax strategies that are worth exploring for the next several years before these reduced tax rates may expire.  Many economists believe that the current lower tax rates are not sustainable given the ongoing federal government deficit, and that ultimately these low rates will need to be increased substantially.

There are several benefits of a Roth IRA over a traditional IRA.

Foremost among the benefits is that qualifying distributions from a Roth IRA are not subject to federal or state income taxes. This difference could therefore impact the taxability of other income sources such as social security or capital gains. The amount of social security benefits that are taxable is determined by the taxpayer’s taxable income, while the tax rate applied to capital gains is also determined by taxable income. In addition, since distributions from a Roth IRA are not taxable, they will not push a taxpayer’s income up into the next tax bracket.

Taxpayers want to pay as little income tax as possible.

Converting to a Roth IRA could allow a taxpayer to significantly reduce their income tax obligation in the long run by effectively paying the taxes up front on a smaller balance than when they subsequently withdraw the funds in retirement. The belief is that your retirement funds will grow due to investment returns and that when you make withdrawals at some future date you will withdraw more than the present balance within the account.

Converting to a Roth IRA will ensure that the taxpayer will have paid the taxes in full on those funds including any earnings growth that may occur. The resulting and ongoing balance in the Roth IRA provides flexibility that can be utilized during retirement as there will be no tax consequences associated with a distribution from these accounts.  A distribution from a Roth IRA does not affect the taxability of other sources of income.

Another significant benefit is that, unlike a traditional IRA, there are no required minimum distributions that begin at age 72 from a Roth IRA. Some taxpayers who do not need take a distribution from their traditional IRA to meet living expenses would prefer to leave the money in their IRA where it would accumulate additional earnings but are required to take the RMD. Often this RMD is enough to move the taxpayer into the next higher tax bracket.

A third benefit to converting to a Roth IRA is that if you pass away, your heirs will inherit any funds remaining inside the Roth IRA tax free, as long as the Roth IRA has been opened for at least five years. An inheritance from a traditional IRA on the other hand would be subject to ordinary federal and state income taxes for the beneficiary when they make distributions.

I have had several clients over the years that I advised to convert some or all of their traditional IRA to a Roth IRA when they were younger who opted not to take my advice because they could not stomach the large one-time tax bill that occurs as a result of the conversion. Many years later when they turned 72 and were forced to begin making distributions from this tax-deferred investment, they regretted not taking my advice. In addition, the required minimum distribution amount continues to grow as the traditional IRA account holder ages.

A Roth IRA conversion may not be for all taxpayers, and it is indeed a big tax obligation to swallow in the year that a conversion may occur. The conversion does not have to be for the entire balance in one year but can be a portion of the traditional IRA balance staged over several years. Prudent tax and retirement planning may prove that paying the tax now on a smaller account balance at a lower tax rate may offer significant long-term savings as compared to waiting to pay the taxes on the traditional IRA distributions at a later date.

Paul Pahoresky is the owner of PRP & Associates.  He can be reached at 440-974-1040 extension 214 or at paul@prpassoc.com. Consult your tax advisor for your specific situation for additional information and guidance on these topics.