Reporting for Unclaimed Property – Update

I recently had a client contact me about a check that had been issued to a participant in their retirement plan which had not been cashed – “My investment company said that I needed to file some report regarding this check, can you help me?”

I wrote a post a few years ago on the subject of the State of Michigan’s Unclaimed Property Reporting that discussed the filing requirements.  While many of our clients are now reporting, I’m sure that this is still a law that many overlook.  Given the recent notice sent out be the State of Michigan, I thought I would post an update:

Beginning in 2011, changes to the Uniform Unclaimed Property Act, mandate a new due date to file the unclaimed property holder report as well as a shortened dormancy period for most property types.  Every business or government entity incorporated in Michigan must report to the Michigan Department of Treasury abandoned property belonging to owners where there is no known address.

Medical and Dental practices will have unclaimed property from time to time resulting from normal business operations.  The retirement plan distribution check noted above is just one example.  Others would include – uncashed payroll checks, payments to vendors, and patient refund checks.  Based upon the dormancy period, the business would have the obligation to report and submit this payment to the State of Michigan assuming the original owner could not be found.  Taking the effort to find the person and contacting them regarding their outstanding matter seems to be the best “first step”, in my opinion.  However, if you can’t find the person, then you need to file with the Michigan Department of Treasury.  They have recently changed the compliance rules and here is what you need to know:

  • New date for reporting Unclaimed Property is July 1.
  • Dormancy periods for most property types have been shortened to three years (payroll items are one year).
  • A 25% penalty may be levied for those failing to comply, in addition to being responsible for interest charged on the amount you were holding.
  • Those voluntarily reporting the preceding four years are exempt from the penalty

To obtain additional information on filing requirements, forms, or to utilize available software go to this link –  www.michigan.gov/unclaimedproperty

Small Business Healthcare Credit Calculator

Although the recently enacted health reform legislation will impose penalties on certain businesses for not providing coverage to their employees, most of our medical and dental client practices will not have to worry about this provision because they are considered “small business employers” who  employ fewer than 50 employees and aren’t subject to the so called “pay or play” penalty.  However, even though you may not be required to do so, the competition for good employees may necessitate that you give consideration to offering your employees such benefits, especially if your employees are going to be required to have insurance.  Given this thought and that many of our clients already offer their full-time employees health insurance coverage, let’s take a look at key provision of the legislation that we will look to utilize in our year-end tax planning efforts with clients – Tax credits to certain small employers that provide insurance. 

The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for nonelective contributions to purchase health insurance for their employees. The credit can offset an employer’s regular tax or its alternative minimum tax (AMT) liability. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000. 

The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase.

For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer’s non-elective contributions toward the employees’ health insurance premiums. The credit phases out as business-size and average wages increase.

Keep in mind that there are some special rules. The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees’ health insurance coverage and the amount of the tax credit is 35% of that cost (for tax year 2010), the employer can only claim a deduction for the other 65% of the premium cost.

Self-employed individuals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages.

To determine your potential tax credit for 2010, you can review and fill-in the  Health Care Credit Worksheet  Or, if you complete my Health Care Credit Questionnaire prior to July 1st, I will send you a complementary computation for your review and to help you mind your own business.

Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™ and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client of Mike’s, contact him at www.vmde.com

Here’s to Your Health

I took this picture of a dental office that doubles as a pharmacy on a recent trip to Honduras.OLYMPUS DIGITAL CAMERAI saw several medical offices during, what felt like, “roller coaster” taxi rides around the city of Tegucigalpa.  Many were similar to this building except that the others I saw had a fence or a wall in front of their establishment and it wasn’t unusual to find rolled barbed wire adorning the top of the barrier. We only spent about four days in Honduras and found the Central American people to be very hospitable. However, in that short time I realized, once again, that we live in the best country in the world.  While I’m thankful for where I live and for the health-care system we have here in the United States, I’m afraid that our costs for this privilege are about to increase.

Did you have similar thoughts on March 23 when you saw President Obama sign the new Health Care Bills into law?  No matter what side of the fence you are on regarding the issues that face us as a nation, one thing is certain – we are about to experience change in our businesses.  The passage of the Health Care Act (a 906-page document) and the Reconciliation Act (a 2,310 page document) is not only historic, it is massive and will be complicated to implement. While the centerpiece of the new law is the mandate for most residents of the U.S. to obtain health insurance, it comes with a host of new tax rules, and ill-defined regulations.

In an effort to help you through the changes that will occur, we will continue to review various aspects of this law and others to help you manage your practice effectively.  This month, let’s begin looking at some implications of the new health-care law.

W-2 Reporting

Beginning in 2011, employers will be required to report the value of employee health care coverage on Form W-2.  For this reason, we will begin asking you to separate the costs you pay for health care coverage by individual employee.  We will be working on a plan for implementing this plan soon so that it doesn’t become a burden in early 2011.

Higher Payroll Taxes

Beginning in 2013, a new 0.9 percent increase in Medicare tax will be levied on taxpayers who file single and earn more than $200,000. Married couples will see the effects of this additional tax once their incomes hit $250,000. Currently, all taxpayers pay 1.45 percent of their earned income in Medicare taxes, which is matched dollar for dollar by their employer. While the employer will not be required to match the additional new tax, they will be required to withhold the amount on wages their employees earn above the applicable amount.

Medicare Taxes on Unearned Income

Also in 2013, people with incomes above the $200,000 (single) or $250,000 (married) will be required to pay Medicare taxes on unearned income.   For every dollar of dividends, capital gains, annuities, royalties, and rents you will be required to give almost 4 cents to Uncle Sam for Medicare taxes.

How this will affect individual taxpayers will depend on the source of their income. For example, if a doctor who is married has $200,000 in wages and net investment income of $100,000, the couple will pay the additional Medicare tax on $50,000 of their investment income ($200,000 + $100,000 less $250,000).  Their additional tax would be $1,900 ($50,000 X 3.8%).

Should the doctor have a higher wage in our example, say $300,000, the couple’s additional tax would total $4,250 (0.9 percent of earned income over $250,000 plus 3.8 percent of $100,000 net investment income).

Given these additional Medicare tax rules, it makes sense to explore ways in which you can defer more money in your qualified retirement plans.  If you are not maximizing your contributions, consider doing so if you become subjected to these new taxes.  Income from tax deferred retirement accounts such as a 401(k) or similar accounts will not be included in income subject to the additional tax.

Individuals without Coverage

Beginning in 2014, nonexempt U.S. citizens and legal residents will be required to maintain a minimum amount of health coverage. Individuals who fail to do so will be subject to certain penalties beginning in 2016. The penalty will be the greater of 2.5 percent of household income over the minimum income required to file a tax return or a per-person penalty rate. The rate for each adult in the household would be $695 while the rate for uninsured children under 18 years old will be half of the adult rate. The overall penalty cannot exceed 300 percent of the per-adult penalty, or $2,085.

Even though small employers will not be required to do so, the competition for good employees may necessitate that you give consideration to offering your employees such benefits.

Employer Health Care

After December 31, 2013, applicable large employers (generally those with at least 50 full-time employees) will be required to offer affordable coverage to all of their full-time employees. They will pay a penalty if one of their employees is certified as having purchased health insurance through a state exchange and the employee receives a tax credit or cost-sharing reduction.

Employers offering coverage through an eligible employer-sponsored plan and paying a portion of the cost will have to provide vouchers to their employees that can be applied to the cost of a health plan with an insurance exchange.

Certain small employers might be eligible for a credit if they provide health coverage to their employees.

The Health Care and Reconciliation Acts are complicated and will take time to sort out.  We will continue to review the effects of the changes and offer information that will help you mind your own business.

Consider Converting your Traditional IRA to a Roth IRA in 2010 – Part 3

I have a few clients that started a Roth IRA in their college or residency years, however most physicians and dentists with whom I work, do not have Roth IRA’s because the income limitations associated with Roth contributions have made it impossible for them to start one.

Recently, I have had several physician clients inquire about the possibility of converting their “Traditional IRA” account to a “Roth IRA” in 2010.   Beginning on January 1, 2010, the modified adjusted gross income limit of $100,000 that has precluded most physicians and dentists from converting  traditional IRA balances to a Roth account will be repealed.   This change in the tax law will allow affluent taxpayers the significant opportunity to move funds from a tax-deferred status to a situation where future distributions may be tax-free.

The intent of this series is to provide you with some basic strategies and information on Roth Conversions for 2010. The concepts and strategies offered here may not be right for you.  For a more specific tax analysis of your personal situation, you should schedule a consultation with your tax preparer or financial planner.

For the final post on this matter (Part 3 of 3) – let’s review a strategy where hindsight can be beneficial to making a Roth conversion work for you:

Over the years of preparing taxes for physicians and dentists, I have come across the situation where a client’s Roth contribution for the year was in excess of the allowed amount because their income for the year was too high.  Rather than withdrawing the excess contribution to avoid the potential tax and penalty consequences, I would suggest that they contact the trustee of their IRA and “re-characterize” their contribution, or portion thereof, to a traditional IRA before we filed their income tax return.  This, after-the-fact, corrective action would allow the client to keep any built up earnings in a tax deferred account rather than paying the tax consequences.For the purpose of converting your traditional IRA to a Roth IRA in 2010, utilizing a similar “re-characterization” strategy may prove beneficial to you if, in hind-sight, you determine that converting wasn’t as beneficial as you might have hoped.  Under the current tax law, a taxpayer has until October 15 of the year following the conversion date to “re-characterize”, or undo, your conversion. Let’s look at a couple examples:

Let’s say that you convert all of your traditional IRA accounts to a Roth IRA right away in 2010.  At the time of your conversion the value of your traditional IRA’s was $100,000. You would have up to October 17, 2011 to re-characterize all or a portion of your conversion.  In late summer or early fall of 2011 you check the value of your now Roth IRA and find that the market value of your account is $125,000.  In this situation, choosing to keep the 2010 conversion would make sense because you will have sheltered $25,000 of income from future income tax.

Now let’s assume the same facts as above, but in this case when you open your statement in late summer or early fall of 2011 you find that the value of your account dropped to $80,000.  If you would have known that your account was going to drop in value when you made the original conversion, you would have put off the conversion of your traditional IRA until the later date to avoid paying tax on the higher value of $100,000, right? Well, in this case, you would simply “re-characterize” the Roth conversion back to a traditional IRA before October 17, 2011 and then reconsider converting the lower value to a Roth at later date.

While the above examples present a fairly straight-forward reason for using the strategy of “re-characterizing” a Roth, your personal situation may present a whole set of different circumstances requiring further analysis.  Regardless, having the option of looking back and re-considering your decision makes the initial decision to convert from a traditional IRA to a Roth IRA a whole lot easier and less risky.

Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™ and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client of Mike’s, contact him at www.vmde.com

Consider Converting your Traditional IRA to a Roth IRA in 2010 – Part 2

I have a few clients that started a Roth IRA in their college or residency years, however most physicians and dentists with whom I work, do not have Roth IRA’s because the income limitations associated with Roth contributions have made it impossible for them to start one.
Recently, I have had several physician clients inquire about the possibility of converting their “Traditional IRA” account to a “Roth IRA” in 2010.   Beginning on January 1, 2010, the modified adjusted gross income limit of $100,000 that has precluded most physicians and dentists from converting traditional IRA balances to a Roth account will be repealed.   This change in the tax law will allow affluent taxpayers the significant opportunity to move funds from a tax-deferred status to a situation where future distributions may be tax-free.
The intent of this series is to provide you with some basic strategies and information on Roth Conversions for 2010. The concepts and strategies offered here may not be right for you.  For a more specific tax analysis of your personal situation, you should schedule a consultation with your tax preparer or financial planner.
For today’s post on this subject (Part 2 of 3), here are six reasons and strategies for physicians and dentists to consider in converting from a Traditional IRA to a Roth:

  1. Take advantage of today’s lower tax rates – obviously, no one really knows for sure what direction income tax rates will go in the coming years, but it seems very likely, based upon current and proposed government spending, that future income rates will increase.   By converting dollars from a traditional IRA to a Roth IRA and paying the tax required on this income at current rates for 2010, you stand to save tax dollars.  If you desire, you can elect to pay the tax due over tax years 2011 and 2012, but the chances of tax rate increases in those years are greater.  If you aren’t so sure that rates will go up in the future, but you don’t want to take a chance that they will, then convert just a portion of your IRA.  Higher income tax rates in your future may also be caused by the distributions you will need in future years.  If your planned lump-sum distribution will cause you to move up a tax bracket in the year in which you need the money, consider converting a series of distributions that will keep you in the lower bracket each year leading up to the year in which you anticipate needing the money.   
  2. Use up charitable deduction carry-forwards – I find that clients in their retirement years who are inclined to continue their charitable contributions may have limits placed upon their contributions because their taxable income isn’t high enough to take the full deduction.  By converting a portion of their IRA to a Roth we are able to take a larger charitable deduction and not necessarily increase their tax liability.
  3. Utilize high basis in non-deductible IRA – Over the past several years, I have recommended that physician and dental clients consider making contributions to their IRA account even though it was not tax deductible (see Part 1 for a discussion on deductible vs. non-deductible IRA’s).   This action has caused their “basis”,  or portion of the balance that represents their contribution, to be high as compared to the IRA overall value.  Of course, the stock market decline prior to this year has also contributed to this factor.  Converting your regular IRA to a Roth in situations where you have a high “basis” could mean that you will pay minimal or no additional tax.  Keep in mind, though, that all IRA balances are considered and not just the non-deductible account that you may have segregated into a separate account. 
  4. Estate Planning – you may find, in your retirement years, that you don’t need the all of the “nest egg” that you have acquired over many years of saving and you desire to leave a portion of this money to your heirs.  Roth IRA’s provide a for a more efficient way of leaving retirement plan money to your children or grandchildren.  Distributions from traditional IRA’s, for example, require that your kids pay income taxes on the money they receive at their rates.  Roth IRA distributions from an inherited Roth IRA would be exempt from personal income taxes.  The other advantage that Roth IRA’s have over Traditional IRA’s is the fact that you are not required to take an required minimum distributions after age 70 1/2.  
  5. Use non-qualified money to pay the tax – Physicians and Dentists should use money outside of their qualified retirement plan money to pay the tax associated with the conversion.  Using funds, outside of your qualified retirement money, even if you are 59 1/2, will generally enhance your overall future wealth.
  6. Contribute and then Convert – As noted above, the income limitations for converting from a traditional IRA are soon to be repealed.  However, the income limits for making a current Roth contribution remain in effect.  Assuming you don’t have a traditional IRA to convert and you are subject to the income limits for making a contribution, you can still make a contribution to a Roth IRA by first making a non-deductible contribution to a traditional IRA account and then immediately converting it to a Roth IRA.
There’s an old saying that hindsight vision is 20/20.  On the next post we will consider a strategy that will allow you the ability to correct the timing of your Roth conversion.

Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™ and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client of Mike’s, contact him at www.vmde.com

Consider Converting your Traditional IRA to a Roth IRA in 2010 – Part 1

I have a few clients that started a Roth IRA in their college or residency years; however, most physicians and dentists with whom I work do not have Roth IRA’s because the income limitations associated with Roth contributions have made it impossible for them to start one.

Recently, I have had several physician clients inquire about the possibility of converting their “Traditional IRA” account to a “Roth IRA” in 2010.   Beginning on January 1, 2010, the modified adjusted gross income limit of $100,000 that has precluded most physicians and dentists from converting  traditional IRA balances to a Roth account will be repealed.   This change in the tax law will allow affluent taxpayers the significant opportunity to move funds from a tax-deferred status to a situation where future distributions may be tax-free.

The intent of this series is to provide you with some basic strategies and information on Roth Conversions for 2010. The concepts and strategies offered here may not be right for you.  For a more specific tax analysis of your personal situation, you should schedule a consultation with your tax preparer or financial planner.

For today’s post (Part 1 of 3), let’s consider some basic concepts of the two types of IRA’s that are generally available today:
Traditional IRA – these Individual Retirement Accounts allow the income or capital gains in your “nest egg” to accumulate without having to pay current taxes on your earnings.  Contributions are either tax deductible as an income adjustment on your personal tax return, providing for tax current tax savings.  Or, because of participation in another qualified retirement plan and income limitations, the contribution to your account is considered to be a “Non-Taxable” contribution.  In the case of the non-taxable contributions, taxpayers file a form 8606 with their tax returns, which reports the contribution type to the IRS and tracks your contributions from year to year as additional contributions are made.  The filing of this form becomes an important factor for the year in which you receive distributions from your IRA or, for the purpose of this summary, the year in which you convert to a Roth IRA.  When you convert to a Roth or begin to take distributions from a regular IRA you pay taxes on this ordinary income based upon a computation that takes into consideration your non-tax contributions.
Roth IRA – like the traditional IRA’s, your “nest egg” can grow without having to report and pay current taxes on the earnings in your account.  Unlike the traditional IRA, contributions to a Roth do not afford the ability to deduct the contributions from your taxable income and thus, do not allow for current year tax savings.  Your savings comes in future years when “qualified” distributions are made from your account and considered exempt from income taxes.   A distribution is considered to be qualified if made: once you reach age 59 1/2, upon death or disability, or (up to $10,000 per lifetime) for first-time homebuyer expenses.  However, and this is a key considerationa distribution is not considered qualified if made within the five-year period beginning with the first tax year you made a contribution to a Roth IRA.

The first, and probably the most important, reason for converting your traditional IRA to a Roth IRA (even if it is a partial or small contribution) is that you need to get the “five-year period clock” ticking to take advantages of the strategies that I will outline in my next post.

Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™ and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client of Mike’s, contact him at www.vmde.com

“Making Work Pay” Tax Credit

The recently enacted “American Recovery and Reinvestment Act of 2009” contains a wide ranging tax package that includes tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers. The centerpiece of the tax package is a “Making Work Pay” tax credit of up to $400 per year for individuals, or $800 per year of couples. While this tax credit will not likely be available for you as a healthcare professional, it may affect the employees working for you. Unlike the $600 per worker lump-sum rebates that were issued last year, this credit will be received as a reduction in the amount of income tax that is withheld from the employee’s paycheck, or through a credit on a tax return. For the last half of 2009, it is expected that employees will experience about $13 a week of less Federal withholding from their paychecks. The IRS has issued the new income tax withholding and advance earned income credit payment tables, which can be found here. Clients utilizing our payroll services or the ASP version of the Client Bookkeeping Solution will have their tax tables updated automatically by us. If you are doing your own payroll, the IRS asks that employers start using the new tables as soon as possible, but no later than April 1, 2009.

Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™ and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client of Mike’s, contact him at www.vmde.com