Roth Conversion Strategy

If your taxable income for a given year is going to be very low due to various factors such as a net operating loss carryforward from a failed business, then it would be the right year to convert part of your regular IRA , 401(k) or any qualified retirement plan with pretax funds into a Roth IRA. The amount you convert is taxable income which can be offset by the net operating loss carryforward and still result in no tax for the year. You also then have a Roth that allows you a lot more flexibility in the timing and amount of distributions. There is no required minimum distribution and no required beginning date for distributions like in a regular IRA.  You do have to leave the funds in the Roth for at least 5 years before you start pulling the funds out or you are subject to a 10% penalty if you under age 59 1/2.

Georgia Likes Old People

Georgia has a nice retirement income exclusion for those aged 62 and over. Between ages 62 and 64 the amount is $35,000 per person and applies to most income except earned income like salaries and wages which is limited to a maximum of $4,000. If you are age 65 and up, you get a $65,000 exclusion. If you are filing a joint return with your spouse and both of you are 65, then the exclusion is a total of $130,000. Not bad. Business income from a Sub S corporation where you materially participate is considered earned income.

What is the Basis of Gift Property?

If your grandparents gave you some stock which you then sold, how would you determine if you had a gain or loss on the stock for tax purposes? In most cases the grandparents have had the stock for a long time so the current value is higher than their original cost so the basis for determining gain would be your grandparents' original cost of the stock. You would have to pay tax on the capital gain. However, to prevent taxpayers from moving capital losses to other taxpayers the IRS has a rule that if the fair market value of the gift property at the time of the gift is lower than the donor's basis and you sold at a loss, then your basis in the gifted property is the fair market value. This reduces any capital losses you can take. Your holding period starts on the day after the date of the gift if your basis is determined by the fair market value and you sold at a loss.  For example, you received 1 share of stock from your uncle that he bought for $10 a share which had an $8 value on the date you received it. If you sold the stock for $7, then your capital loss would be only $1 since your basis is the fair market value. If you sold the stock for $11, then you would have a capital gain of $1 a share since your basis is the uncle's basis of $10 a share.