Mariner Tax Preparation

Backdoor Roth IRA

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A Backdoor Roth IRA is a strategy used by high-income earners to contribute to a Roth IRA even if their income exceeds the limits for direct contributions. Here’s how it works:

  1. Income Limitation: Roth IRAs have income limitations. In 2022, if you’re single and your modified adjusted gross income (MAGI) is above $144,000 (or $214,000 if married filing jointly), you’re not eligible to contribute directly to a Roth IRA.
  2. Traditional IRA Contribution: With the Backdoor Roth IRA strategy, you first make a nondeductible contribution to a traditional IRA. Nondeductible means you don’t get to deduct this contribution from your taxable income.
  3. Conversion: After making the nondeductible contribution to the traditional IRA, you then convert the traditional IRA funds into a Roth IRA. There used to be a rule that prevented high-income earners from converting traditional IRAs into Roth IRAs, but as of 2010, that restriction was lifted, allowing anyone, regardless of income, to convert traditional IRA funds to Roth IRA funds.
  4. Tax Implications: Since you’ve already paid taxes on the money you contributed to the traditional IRA (because it was nondeductible), you won’t owe taxes on the amount you convert to the Roth IRA. However, if you’ve made any earnings on your traditional IRA contributions before converting, those earnings will be subject to income tax in the year of conversion.
  5. Pro Rata Rule: It’s essential to be aware of the pro rata rule, which may affect the tax consequences of a conversion if you have any existing traditional IRAs with pre-tax contributions or earnings. This rule considers the total balance of all your traditional IRAs when calculating the tax owed on a conversion.
  6. IRS Reporting: When you file your taxes, you’ll need to report the nondeductible contribution to the traditional IRA on Form 8606. This form helps the IRS keep track of the basis (nondeductible contributions) in your IRAs.

Overall, the Backdoor Roth IRA strategy allows high-income earners to take advantage of the benefits of a Roth IRA, such as tax-free growth and tax-free withdrawals in retirement, despite the income limitations. However, it’s crucial to understand the tax implications and rules surrounding this strategy and, if necessary, consult with a tax professional or financial advisor to ensure it’s the right approach for your financial situation.

It’s 2024. Here’s some changes for the 2023 Tax Season

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Adjusted Income Tax Brackets:

  • The income tax brackets for 2023 have undergone slight adjustments to accommodate inflation. Despite still maintaining seven tax rates, each rate’s income ranges (tax brackets) have shifted.

Increased Standard Deduction:

  • After adjusting for inflation, the standard deduction for 2023 has slightly increased. It stands at $13,850 for single filers, married couples filing separately, and $20,800 for single heads of household. For married couples filing jointly, the standard deduction rises to $27,700.

Itemized Deductions:

  • Itemized deductions remain largely unchanged for 2023. Notable points include:
    • A $10,000 cap on deductions for state and local income taxes, property taxes, and real estate taxes.
    • A limit of $750,000 on the mortgage interest deduction.
    • Medical expenses are deductible only if they exceed 7.5% of adjusted gross income (AGI).
    • Deduction limits for charitable donations stand at 30% of AGI for contributions of non-cash assets and 60% of AGI for cash contributions. The overall limit is typically 50% of AGI for both cash and non-cash assets.

Increased Contribution Limits for Retirement Accounts:

  • Contribution limits for traditional IRAs, Roth IRAs, tax-deferred 401(k)s, and Roth 401(k)s have slightly increased for 2023. Individuals can contribute up to $6,500 to an IRA, with an additional $1,000 catch-up contribution for those aged 50 and older. Contribution limits for 401(k)s have risen to $22,500, with a $7,500 catch-up contribution for individuals aged 50 and older.

Expanded Health Savings Account (HSA) Contributions:

  • The maximum contributions to HSAs have increased for 2023. Individuals can now contribute up to $3,850, with an additional $1,000 catch-up contribution for those aged 55 and older. Family contributions have risen to $7,750.

Child Tax Credit:

  • The Child Tax Credit remains at $2,000 per child under age 17 for 2023. However, it is subject to phase-out starting at $400,000 for joint filers and $200,000 for single filers. A $500 credit is available for other qualified dependents.

Adjustments to Alternative Minimum Tax (AMT) Exemption:

  • The AMT exemption for 2023 has increased, affecting mainly households with incomes over $500,000. Exemptions stand at $81,300 for single filers and $126,500 for married taxpayers filing jointly. Phase-out thresholds are $1,156,300 for married taxpayers filing jointly and $578,150 for all other taxpayers.

Higher Estate Tax Exemption:

  • The estate and gift tax exemption for 2023 has risen to $12,920,000, indexed to inflation. The annual gift exclusion also increased to $17,000 per recipient.

2021 Preparation

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Happy new year! I’m looking forward to working with everyone this year.

I will not be having in person appointments this year. I will be offering new preparation options this year.

Anyone who took an early distribution from retirement in 2020 under the special Covid rules should wait until Feb 18th to schedule – The IRS has not produced the necessary forms yet. This makes it impossible to finish returns until the forms are finalized.

Scheduled Zoom Appointments

Schedule a Zoom call as you would a regular appointment. The only difference is I will need your documents at least two days in advance. Documents can be dropped off through the mail slot at any time. They can also be mailed to the office. Additionally documents can be submitted online through Intuit Link.

If I do not receive your documents in advance, I may have to reschedule your appointment. I need to review them beforehand in order to maintain my time schedule.

Remote Appointments

Remote appointments will have a scheduled preparation time but will not have a Zoom component. Documents should be submitted at least two days in advance of preparation time. Documents can be dropped off through the mail slot, mailed in, or submitted online through Intuit Link.

You might want to file a 2019 return to receive your stimulus check

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The IRS’s website currently does not have information available regarding how the stimulus checks will be distributed. I will make updates as more information is made available to us.

Who is eligible for a stimulus payment

  • Single taxpayers who have an adjusted gross income of $75,000 or less
  • Head of household who earns $112,500 or less
  • Married taxpayers who earn $150,000 or less
  • The credit is $1,200 per adult, and 500 per child

As income increases over these thresholds, the amount of credit received will diminish.

I didn’t file a 2019 tax return

You should be okay. If the IRS doesn’t have 2019 on file, they will base it on the 2018 return.

Who should consider filing a 2019 return

There are some instances where it may be in your best interest to file a 2019 return.

  • Your income was abnormally high in 2018. Maybe you unloaded stocks, sold property, or cashed in retirement to buy a house. If your income was over the threshold you won’t receive a payment.
  • You don’t normally file a tax return. This doesn’t apply to people receiving veterans benefits or social security. There are some taxpayers who don’t file a return. Maybe you graduated college and didn’t have income yet. The way I’m reading it, you won’t get a stimulus payment if they don’t have a return on record.
  • You closed your bank account that was used on your 2018 return. So far they’re saying if you provided direct deposit information on your return the stimulus payment will go into that account. When a direct deposit is rejected the IRS cuts a check and mails it to you. This usually takes months.
  • You moved after 2018 and didn’t have direct deposit. If the IRS mails a check to the wrong address a couple of things could happen. It might get forwarded if you still have a forward on your mail (might want to renew that if your in this situation). The check might also get returned. Again, there will probably be a lengthy process to have it reissued.

I’m currently prioritizing any clients who meet the above criteria. This process will probably change as the IRS provides more information.

What if I was underpaid or overpaid?

So far if your advance payment is LESS than what you’re owed when you compute your 2020 return, you’ll get the excess as a credit on that return. But if your advance credit is GREATER than what you’re actually owed when you file your 2020 return, there currently is no mechanism to 1) repay the excess payment, or 2) recognize the excess amount as income.

Remote preparation recommended. IRS Pushes Tax Deadline To July 15

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All filings can be delayed until July 15. I’m also hearing from clients in emergency positions that a shelter and place order is going to be announced.

If there is a shelter in place order and it’s similar to New York I should be able to go back and forth to the office. I’d ask clients to utilize Intuit Link when possible. It’s safest and quickest.

I shifted to preparing returns from home. My wife is working at her job remotely and the kiddos can be a handful 🙂 All in all, we’re doing quite well. I hope you are as well.

Let’s work together for the best possible outcome.

Jim

Mailing in or Dropping off return materials

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EDIT: I recommend working through Intuit Link. It’s fast and secure. The IRS and State has extended the deadline to July 15.

Covid 19 is quickly changing the way everyone does business. I am not having face to face appointments. 10-20 clients are submitting paper documents daily. So I’m observing social distancing, but is that enough?

I’ve asked several people who specialize in the field. I’ve received several different answers. Here’s what I’m doing. –

  • When documents come in they are quarantined for three days.
  • My work space (desk, keyboard, mouse) is sanitized between files.
  • I am changing disposable gloves between client files.

I’d like to wear a mask, but they are not available. I hope I’m over reacting, but I’m 44, and I have asthma. I also have a lot of clients who are high risk. I want to be proactive. I hope you do as well. Here’s a couple of ways you can help…

Submit your documents online

This is the safest way to do it. We have a secure system through intuit link. All you need is a phone camera or a scanner. Mike is working from home and will be happy to walk you through it. This also avoids us surcharging you for shipping.

Only send paper

Please, no plastic, staples, or paperclips. The virus lasts longer on those surfaces.

I’ll be updating as this progresses. So far, it’s going quite well. Thank you for your support in these matters.

Jim

Social Distancing Update

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Out of concern for all I stopped having in office appointments last week. Clients can –

  • (Our Preference) Share documents online via Intuit Link. This is the safest way to do it.
  • Drop their materials through our mail slot
  • Mail their materials to my home office at 4 Alma Rd in Millis

How we’re handling returns

Documents received are processed 2-3 days after they arrive. They are returned to clients via priority mail with signature forms and an invoice.

How much will it cost for preparation

Except for unique circumstances where someones return changed you will be billed the same as last year plus $10 for shipping.

Can I just come in and sign?

No. That defeats the purpose of social distancing. We’re handling all documents individually and keeping things as sterile as possible. It’s our sincere hope that we are over reacting. But we’ve decided to be proactive in uncertain times.

There’s changes from last year. I need to talk to Jim about them.

No problem. Let us know what is going on and we will be happy to help.

Thank you for supporting this effort. We need to take measures to contain the virus. I’ve spoken to many healthcare workers, and they are concerned. Let’s do all we can to make their jobs manageable in these challenging times.

Mariners – Unemployment and State Income Tax

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  • I am a client of yours and would like to ask if you can tell me where I can find the IRS decision that allows Merchant Mariners to receive unemployment when not permanently employed with a company?

Unemployment is governed by the individual states. Hence it is not an IRS related activity. It also isn’t specific to mariners.

Temporary Employment and Maritime Rotary Positions

mariner unemployment and state taxesA good industry for comparison would be the trade unions (electricians, plumbers, etc…) They receive a rotary position from the union. When the position is no longer available they are eligible for unemployment benefits (State specific). Mariners are also given a rotary position. When they are relieved the position is no longer available.

Most unemployment programs require the applicant to be “actively seeking work”. The contention can be made to deny a claim when a mariner has been relieved if they are not actively seeking new employment. Most programs provide a derivative of the following –

    • If your usual occupation is seasonal, you must look for other types of work in the off season. If you are on temporary layoff, you may seek temporary work until recalled.
  • If you belong to a “hiring hall”, a union that does not allow you to look for work on your own, you do not have to personally seek work. However, you must be in good standing with the union and on their work referral list.

Accordingly, mariners who are union members do not have to seek alternate employment if the Union forbids it.

Mariners identifying Tax Home vs. Unemployment Home?

One of the issues encountered in recent years has been with receiving unemployment benefits from a Mariner’s state of residence. For example, if the mariner resides in Massachusetts, but works for a California based company, Massachusetts will generally deny the claim requiring the Mariner to apply for benefits directly in California.

This presents some interesting issues. While 46 USC 11108 only directly identifies limitations on tax jurisdiction specifying a mariner on interstate or foreign articles “is not subject to the income tax laws of a State or political subdivision of a State, other than the State and political subdivision in which the individual resides, with respect to compensation for the performance of duties”, it does set specific guidelines.

The purpose of this legislation was to limit the imposition of taxes to mariners from states outside of their tax home. Like other protective acts, it prevents companies (and States) from assessing taxes from mariners who very well may have never been physically present in the State in question. It seems that the intent of congress was to establish that mariners are not tax transients and to treat all income as sourced to their tax home.

Confusion Setting In

If a mariner living in Massachusetts working for a company based in another state cannot have income in any other state besides their state of residence, how can they be required to apply for unemployment in another state? By law, they have no earned income in the other State.

Simply stated – All of the mariners’ wages are required to be reported as sourced to their state of residency. Accordingly, unemployment claims should be processed and sourced via the Mariners tax home.