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Traditional Vs. Roth IRAs: Key Differences

05 Aug 2021
SDG Accountants
Accounting, Tax
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Many individuals take retirement for granted; the idea of no longer being useful to the industry in which you worked for years is ridiculous to consider. That emotion is unavoidable. You’re forced to abandon a field that used to be your passion when you were younger. After you retire, you’ll need a source of money to keep you afloat. Even in your 70s, after working your entire life to secure your future, you should not be required to work. Your best option is an automatic source of income, which you can obtain if you begin working for it as soon as you begin your profession. Individual Retirement Accounts (IRAs) are the best option for your financial future. In every manner, it’s correct. Many Americans begin saving in Individual Retirement Accounts (IRAs) as soon as they begin their careers since it is the most advantageous option. Traditional IRAs and Roth IRAs are the two most popular IRAs in the United States.

The Employee Retirement Income Security Act (ERISA) of 1974 established the Traditional IRA. On the other side, Sen. William Roth introduced the Roth IRA 23 years later, in 1997. The sponsors’ name was then added to the IRA. We’ll go through all the important distinctions so you can figure out which IRA is best for you.

Tax Breaks:

Traditional IRAs and Roth IRAs both offer the same tax breaks, but they do not allow individuals to pick when they can claim their payments. Let’s start with the traditional IRA. The traditional IRA reduces your taxable income by collecting tax before making a payment to you. Traditional IRA contributions are taxable on both the state and federal levels for the tax year in which they are made. The money you get when you retire, as well as any withdrawals, are all taxed at your marginal tax rate. All of this lowers your Adjusted Gross Income (AGI), making you eligible for various tax benefits such as the child tax credit.

Moving on to Roth IRAs, they deduct taxes from your contributions at the time of contribution, thus your AGI for that year will not be reduced. This strategy has the advantage of not requiring you to pay any taxes when you withdraw your money in retirement. Because you paid the tax when you made the contributions, your future will be tax-free.

To put it another way, with a traditional IRA, you pay taxes when you withdraw money at retirement, whereas with a Roth IRA, you pay taxes when you make contributions, so your withdrawals are tax-free.

Income Limits:

There are also income limits for both retirement accounts; you will be able to choose your retirement account based on your income. However, this is merely a restriction for one account; anyone with an earned income of any amount can contribute to a traditional IRA. Different tax rates may apply.

Roth IRAs, on the other hand, have income eligibility requirements. In 2020, singles must have a MAGI of less than $139,000, with payments phasing off at $124,000. Married couples must have modified AGIs of less than $206,000 to contribute to a Roth, and contributions begin to phase down at $196,000.

In 2021, singles must have a MAGI of less than $140,000, with contributions phasing off at $125,000. Married couples must have adjusted AGIs of less than $208,000 to contribute to a Roth, and contributions begin to phase out at $198,000.

IRAs Withdrawal Rules:

Another significant distinction between a regular IRA and a Roth IRA is that the contributors’ withdrawal criteria are different. Traditional IRAs require Required Minimum Distributions (RMDs), which are taxable withdrawals of a percentage of your savings that must be taken by the age of 72, even if you don’t need the money. The IRS provides a worksheet on their website to assist contributors in determining their annual RMD. The estimate is based on your age and the amount of money you have.

Roth IRAs, on the other hand, do not force you to take any RMDs and do not even compel you to withdraw your money at any point throughout your life. It is not necessary or essential to take any money out because there is no tax at the time of withdrawal.

There are numerous more important distinctions between traditional and Roth IRAs; to learn more about which account is right for you, call your Miami Tax Accountant now. Excellent guidance at a minimal cost.

The Complete Guide to Inheritance Taxes

03 Aug 2021
SDG Accountants
Accounting, Tax
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Many people in the United States wonder if they have to pay taxes on inheritances. Let us begin by defining what inheritance is. An inheritance is a gift from a deceased person; a relative, or a friend. If you have received an inheritance, you may now be subject to three types of taxes. Inheritance tax, capital gains tax, and the estate tax would be the three taxes.

Inheritance Tax: An inheritance tax is a tax levied on a decedent’s property.

Capital Gains Tax: After the property you inherited has been sold, you must pay a capital gains tax. The tax would be levied on the selling earnings rather than the property itself.

A tax on the value of the inherited property is known as an estate tax. The estate, not the heirs, would be responsible for this tax. It may potentially lower the inheritance’s worth.

Inheritance Taxes at the Federal Level:

The Internal Revenue Service (IRS) is more concerned with capital gains tax than with all other sorts of inheritance taxes. Inheritances aren’t often subject to income taxes, and the federal government doesn’t levy one either. In many circumstances, inheritances are made in cash, such as your cousin leaving you $30,000 in cash, which is tax-free because it is not considered income.

Inheritance Taxes at the State Level:

Only 6 of the 50 states in the United States collect inheritance taxes; if you don’t live in one of these states, you won’t have to worry about inheritance taxes. Iowa, Kentucky, Maryland, Nebraska, and New Jersey are the six states that collect inheritance taxes. Even if you live in one of the six states, you can consider yourself tax-free as long as the decedent lived in one of the other 44 states. It’s also possible that property was left to an alive spouse, which would be exempt from inheritance taxes in all 50 states of the United States. Only Nebraska and Pennsylvania would levy an inheritance tax if the property was left to the decedent’s children or grandchildren.

Income Taxes for Inheritance at the State and Federal Level:

As previously stated, inheritance property is not considered taxable income and hence is not subject to income taxation. Depending on the sort of property you inherited, you may be required to pay some built-in income taxes.

Capital Gains Tax:

Capital gain is the difference between the asset’s worth and the amount you sell it back for. Because the capital gain is taxable income, you will have to pay capital gains tax to the IRS when you sell the inheritance property. If, on the other hand, the inheritance was sold for less than its worth, it will be regarded as a capital loss, and so no capital gains tax will be due.

For inheritance properties, the IRS imposes a different tax bracket than for regular income. This benefits taxpayers who are subject to capital gains tax as a result of the sale of their inherited property. Keep in mind that capital gains are calculated using the asset’s value on the day of the decedent’s death, not the asset’s worth when it was first purchased. This is beneficial to the taxpayer because they will have to pay fewer taxes.

State and Federal Level Estate Taxes:

Your inheritance property may be subject to state and federal estate taxes. The federal estate tax exemption is $11.4 million as of 2019. If an estate’s worth is less than this, there will be no estate tax. As of 2021, the District of Columbia and 12 other states also impose a state-level estate tax. Connecticut, Maine, Maryland, Hawaii, Washington, Rhode Island, Massachusetts, New York, Oregon, Minnesota, Vermont, and Illinois are the twelve states. If the inherited property is located in one of these states, you will be subject to state estate taxes.

If you do not live in one of those 12 states or the District of Columbia, the state’s estate tax will only apply if the exemption amount is surpassed. On the other hand, state-level exemptions are substantially lower than federal exemptions, with some states offering exemptions as low as $1 million.

Keep in mind that state-level estate taxes will be due and paid before you receive your inheritance.

Contact your Downtown Miami Tax Accountant for help with your inheritance taxes. Book a consultation using the in below or contact SDG Accountants by phone: +1 (786) 706-5905 or by email: admin@sdgaccountant.com.

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Alternative Minimum Tax (AMT)

29 Jul 2021
SDG Accountants
Accounting, Tax
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Although most taxpayers pay a fixed rate, some are paying a parallel tax rate. This may apply to everyone for various reasons. Exemptions and varied tax rates are included in Alternative Minimum Tax (AMT). Read below to find out more.

What is Alternative Minimum Tax (AMT)?

An AMT is another method to calculate income tax for individuals. AMT is a different way. To calculate your tax, if your income reaches a specific level, the IRS uses a parallel tax system. You have two ways of calculating your taxes if you are subject to the AMT. The taxpayer has to pay a higher fee when the AMT results in a larger tax bill. The AMT has several restrictions on the income and deductions that it employs.

For taxpayers earning above specific limits, the IRS has established an alternative minimum tax. The basic goal of the AMT is to recalculate income tax so that adjusted gross income includes certain tax benefits. After allowing deductions, the AMT applies a new set of criteria for calculating the tax, and primary deductions are then re-added to the income for calculating a minimum taxable alternative income. The final amount is then calculated by the exemption from AMT.

The primary goal of the AMT is for all taxpayers to have a fair tax rate to pay the minimum tax. This is a method for avoiding the use of deductions for wealthy taxpayers. The AMT guarantees that all taxpayers, rich or poor, pay the same minimum level of taxation.

Calculating AMT

The AMT uses the taxpayer’s regular tax income to adjust it by making use of its preferences. Alternatively, the calculations add additional income to the usual taxable income or deductions to provide for the alternative minimum taxable income (AMTI). Following adjustments, the exemption for AMT is subtracted and the implementation of the AMT tax rates determines the tentative minimum tax.

You can determine if you are subjected to the AMT in various ways. If you claim certain itemized deductions on your Schedule A, exercise Intensive Stock Options (ISOs), but don’t sell your stock in the same year, and have interest received through private activity bonds, you may be subjected to the AMT.

AMT Exemptions

The AMT exemption is applied after the alternative minimum taxable income, or AMTI is determined by removing or adding adjustment and preference items. The amount of the exemption is determined by your AMTI and your tax-filing status for the year. For the tax year 2020, if you are married and filing jointly or a qualifying widower, your exemption amount is $113,400. If you’re a single or head of household taxpayer, the figure is changed to $72,900, and if you’re married filing separately, it’s now $56,700.

It’s important to note that an AMTI exemption for taxpayers having AMTI beyond a specific threshold isn’t available. For taxpayers married filing jointly or qualified widowers, the amounts free for 2020 are gradually lowered to a rate of 25 cents for every $1 of AMT income exceeding $1,036,800. For single taxpayers or head-of-household taxpayers, the phase-out begins at $518,400. The phase-out begins at $518,400 for married taxpayers filing separately.

These exemption amounts will be deducted from your AMTI depending on your filing status, and the remaining income will be subject to the AMT rate. Individuals can use a tax software program or fill out IRS Form 6251 to see if they owe AMT. Medical expenditures, home mortgage interest, and other deductions are all requested on the form. Other information, such as tax refunds, capital gains, and so on, is also requested on the form. Contact a Miami Tax Accountant or a Tax Preparer in Miami for a thorough estimate of your AMT and to see if you qualify.

Some taxpayers may wish to avoid the AMT, and this is doable. You must understand how the AMT works and how it differs from the ordinary tax system if you wish to avoid the AMT. Many deductions and expenses that count towards AMT are listed on IRS Form 6251. Taxable income, standard deductions, deductible expenses, tax refunds, investment interest, depletion, and net operating loss are some of the lines on the form. It also inquires about stock income incentives and stock options. You may lose tax benefits such as low-income housing or work opportunity credits because of the AMT.

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