Never before has there been such hubbub over the benefit of converting your traditional IRA account to that other tax-friendly alternative known as the Roth IRA.
Unless you haven't heard, there has been a certain magic associated with Roth retirement accounts since they allow money that has been set aside for retirement to grow tax free. Better yet, when the money is pulled out it is still tax free - whether you take it out during retirement or your kids do so as your beneficiaries.
In recent months, the Roth conversion strategy has grown in popularity among financial advisers who hasten to remind you that, starting in 2010, new planning opportunities are available, including an open-door policy that allows everyone to make the switch.
That's right - even big-time earners are now qualified to convert to the tax-friendly Roth.
The Roth IRA (and its lifetime insulation from taxes) is particularly attractive if you expect that you will be paying higher taxes in the future during retirement. Moreover, there are many who are convinced that, in view of the way our economy is headed, tax rates can only be headed upward.
The downside? As you probably know, a Roth conversion requires that you ante up the taxes up front on the amount being converted.
Traditional vs. Roth
Experts have long argued that under the bird-in-hand theory it is a waste of time and money to try and beat the economic advantages of the traditional IRA. Why not get your tax write-off now when it really matters, they query, rather than later?
Under this argument, you may be wondering why anyone would bother to make a Roth conversion and pay a tax bill up front - only to gain a (hard-to-define) tax benefit at some unknown time in the future.
Under this prevailing mind set, most retirement planners have been reluctant to dip into their non-IRA holdings to pay any taxes whatsoever, especially during these troubling times.
What's so special about 2010? In addition to the newly relaxed rules for eligibility, there are several other reasons why you might want to check to see if you could turn out a winner by making the Roth conversion - notwithstanding the so-called bird-in-hand logic.
Most important, during 2010 you may have the opportunity to gain:
A low market value planning opportunity. Many IRA owners who have been ravaged by the market meltdown of 2008 will find it especially advantageous to convert this year. For them, there will be a relatively small tax cost on the depressed value of their investments at today's favorable tax rates.
And (if qualifications are met) any future rebounds in the market will be unscathed by taxes, regardless of how much the government will increase the tax rates later.
An option to postpone the payment of the tax on the conversion. For 2010 only, you can decide if you wish to report the income from the conversion this year. If you prefer, you can report half the 2010 income on your 2011 return and the other half on your 2012 return at the tax rates in those years - clearly an important advantage for many.
Ideal candidates for a Roth conversion in 2010: The best candidates are individuals who expect that their tax bracket will be the same - or, perhaps, will increase - during retirement years. Particular attention is directed to those who expect an especially down year (income-wise) during 2010.
However, it also includes all those young individuals who have high income potential. There are also great planning opportunities for the wealthy and those who seek to reduce estate settlement costs. But above all, a Roth conversion should only be considered by those with adequate cash reserves on hand to pay the tax bill up front without having to draw out of their retirement account.
Crunch the numbers first: Regardless of your goals, you need to be clear as to what your up-front tax cost will be if you are considering a conversion in 2010. Even the experts can't rely on a rule-of-thumb calculation under the current tax rules.
You (or your tax professional) should run the figures through a tax software program - or make the calculation applying the existing variables in the tax law.
Planning tip: If you are on the fence with your decision, you might want to consider an (inexpensive) compromise since it's not an all-or-nothing proposition. You are allowed to convert any portion of the balance of your traditional IRA, so try a cherry-picking strategy.
Convert only those that took a nosedive with the economic downturn but have a good expectation of recovery. The tax cost could be minimal this year, but the potential tax savings down the road could be a bonanza for you, or your heirs.
As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.
Sunday, February 28, 2010
Rules have changed for car buyers' federal tax breaks
"What kind of tax break can I get on that?" may not be the first thing you ask about the hot-pink hybrid that catches your eye at the auto dealership. But it is worth asking.
While going green doesn't add up to all the green it once did, there are still tax incentives available — including some that are slated to phase out by summer.
And if you are doing your tax return for 2009, don't forget about sales-tax credits for new car purchases during the year. If you bought two cars, you can get two credits, said Mark Luscombe, CCH principal tax analyst.
If you bought last year or have been walking around the dealership thinking it's now time for a new set of wheels, it's good to know some rules:
Going green
You've likely heard about generous tax breaks for buying hybrid cars and trucks. But if your plans include a 2010 Toyota Prius, you won't be able to get a credit.
This month, the Internal Revenue Service rolled out its latest list of tax credits for 2010-model-year hybrid vehicles. No Toyota or Honda models are on it because those companies already sold all the vehicles they were allowed under the Alternative Motor Vehicle Credit.
The 2010 credit list includes hybrid models from BMW, Cadillac, Chevrolet, Ford, GMC, Mercury, Mercedes-Benz and Nissan.
But consumers who are shopping for a Ford hybrid need to buy soon. A phaseout of credits on the company's hybrids started in April 2009. Now the final steps are in place — 25 percent of the full credit for Ford or Mercury hybrids bought between Oct. 1, 2009, and March 31 of this year. If you're looking at a 2010 Fusion Hybrid, the current $850 credit will be gone by the end of March.
The hybrid tax credit is complex. The dollar amount can change based on fuel economy and weight of the model, as well as how many such vehicles the manufacturer has already sold.
The first 60,000 hybrids or lean-technology vehicles sold per manufacturer — on a clock that began ticking in 2006 — qualify for the full credit.
General Motors still isn't anywhere near the cap, so the full credit is allowed on GM vehicles.
A 2010 GMC Sierra Hybrid, for example, would qualify for a $2,200 tax credit. A 2010 Chevy Malibu Hybrid would qualify for a $1,550 credit. A 2010 Cadillac Escalade Hybrid would qualify for a $2,200 credit.
The hybrid tax credit does not come automatically.
You must claim it on your federal return.
If you bought a qualifying hybrid in 2009, you will want to file a Form 8910 (Alternative Motor Vehicle Credit) with your 2009 federal income-tax return. The credit is then listed on Line 53 of the 1040 for 2009 among other credits. Luscombe noted it's not one of those items with its own line on the return.
New-car purchase
Almost all 2009 new-car purchases get you a tax deduction.
To qualify, the new vehicle must have been bought — not leased — from Feb. 17, 2009, through Dec. 31, 2009.
The American Recovery and Reinvestment Act of 2009 allows taxpayers to deduct state and local sales and excise taxes paid on up to $49,500 of the purchase price of new cars, light trucks, motor homes and motorcycles.
The deduction is reduced for joint filers with modified adjusted gross incomes between $250,000 and $260,000 and for other taxpayers with modified adjusted gross incomes between $125,000 and $135,000. Taxpayers with higher incomes do not qualify.
But the special deduction is available even for taxpayers who do not itemize deductions.
If you itemize, Luscombe noted, you report that sales tax on Schedule A. If you do not itemize, you report the sales tax for new-car purchases on Schedule L.
Electric vehicles
The American Recovery and Reinvestment Act of 2009 modified and increased an earlier tax credit for electric vehicles.
The base amount remains $2,500, with an additional amount of $417 for each kilowatt hour of "traction battery capacity in excess of 4 kilowatt hours." The maximum is capped at $7,500 for a light-duty vehicle.
Under the rules, taxpayers may claim the full amount of the credit up to the end of the first calendar quarter in which the manufacturer records its 200,000th sale of a plug-in, electric-drive vehicle. Then the credit starts to go down each quarter.
For some taxpayers, it will be good news that the credit is allowed against the alternative minimum tax.
A tax credit is also available for plug-in electric drive conversion kits.
As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.
While going green doesn't add up to all the green it once did, there are still tax incentives available — including some that are slated to phase out by summer.
And if you are doing your tax return for 2009, don't forget about sales-tax credits for new car purchases during the year. If you bought two cars, you can get two credits, said Mark Luscombe, CCH principal tax analyst.
If you bought last year or have been walking around the dealership thinking it's now time for a new set of wheels, it's good to know some rules:
Going green
You've likely heard about generous tax breaks for buying hybrid cars and trucks. But if your plans include a 2010 Toyota Prius, you won't be able to get a credit.
This month, the Internal Revenue Service rolled out its latest list of tax credits for 2010-model-year hybrid vehicles. No Toyota or Honda models are on it because those companies already sold all the vehicles they were allowed under the Alternative Motor Vehicle Credit.
The 2010 credit list includes hybrid models from BMW, Cadillac, Chevrolet, Ford, GMC, Mercury, Mercedes-Benz and Nissan.
But consumers who are shopping for a Ford hybrid need to buy soon. A phaseout of credits on the company's hybrids started in April 2009. Now the final steps are in place — 25 percent of the full credit for Ford or Mercury hybrids bought between Oct. 1, 2009, and March 31 of this year. If you're looking at a 2010 Fusion Hybrid, the current $850 credit will be gone by the end of March.
The hybrid tax credit is complex. The dollar amount can change based on fuel economy and weight of the model, as well as how many such vehicles the manufacturer has already sold.
The first 60,000 hybrids or lean-technology vehicles sold per manufacturer — on a clock that began ticking in 2006 — qualify for the full credit.
General Motors still isn't anywhere near the cap, so the full credit is allowed on GM vehicles.
A 2010 GMC Sierra Hybrid, for example, would qualify for a $2,200 tax credit. A 2010 Chevy Malibu Hybrid would qualify for a $1,550 credit. A 2010 Cadillac Escalade Hybrid would qualify for a $2,200 credit.
The hybrid tax credit does not come automatically.
You must claim it on your federal return.
If you bought a qualifying hybrid in 2009, you will want to file a Form 8910 (Alternative Motor Vehicle Credit) with your 2009 federal income-tax return. The credit is then listed on Line 53 of the 1040 for 2009 among other credits. Luscombe noted it's not one of those items with its own line on the return.
New-car purchase
Almost all 2009 new-car purchases get you a tax deduction.
To qualify, the new vehicle must have been bought — not leased — from Feb. 17, 2009, through Dec. 31, 2009.
The American Recovery and Reinvestment Act of 2009 allows taxpayers to deduct state and local sales and excise taxes paid on up to $49,500 of the purchase price of new cars, light trucks, motor homes and motorcycles.
The deduction is reduced for joint filers with modified adjusted gross incomes between $250,000 and $260,000 and for other taxpayers with modified adjusted gross incomes between $125,000 and $135,000. Taxpayers with higher incomes do not qualify.
But the special deduction is available even for taxpayers who do not itemize deductions.
If you itemize, Luscombe noted, you report that sales tax on Schedule A. If you do not itemize, you report the sales tax for new-car purchases on Schedule L.
Electric vehicles
The American Recovery and Reinvestment Act of 2009 modified and increased an earlier tax credit for electric vehicles.
The base amount remains $2,500, with an additional amount of $417 for each kilowatt hour of "traction battery capacity in excess of 4 kilowatt hours." The maximum is capped at $7,500 for a light-duty vehicle.
Under the rules, taxpayers may claim the full amount of the credit up to the end of the first calendar quarter in which the manufacturer records its 200,000th sale of a plug-in, electric-drive vehicle. Then the credit starts to go down each quarter.
For some taxpayers, it will be good news that the credit is allowed against the alternative minimum tax.
A tax credit is also available for plug-in electric drive conversion kits.
As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.
Are Lower Small Business Taxes Worth a Move?
Many states will offer lower small business taxes to entice economic development. This is an entirely legal maneuver, and it has been used to sway major companies and industries to develop in new areas. If you are considering a move to save on your small business taxes, think about what the move means in terms of finances as well as personal lifestyle.
Geographic Considerations
Most cities or states that offer tax discounts to entice business lack other mechanisms to draw in business. There may be a lack of natural resources or business infrastructure. A place like New York City, by contrast, does not have to entice financial firms because it is home to Wall Street and can offer other incentives.
Actual Savings
The cost of moving a business to another state can be extremely high. You should price out this option in order to determine when you will break even based on the savings. You should also consider whether you will owe more to your employees in the new area as a result of minimum wage, have to pay more for raw materials due to the remote location of the new office and other factors that may add to your expense.
As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.
Geographic Considerations
Most cities or states that offer tax discounts to entice business lack other mechanisms to draw in business. There may be a lack of natural resources or business infrastructure. A place like New York City, by contrast, does not have to entice financial firms because it is home to Wall Street and can offer other incentives.
Actual Savings
The cost of moving a business to another state can be extremely high. You should price out this option in order to determine when you will break even based on the savings. You should also consider whether you will owe more to your employees in the new area as a result of minimum wage, have to pay more for raw materials due to the remote location of the new office and other factors that may add to your expense.
As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.
How Taxes Affect Your Home Business
There is a common adage that says the only two things that are certain in life are death and taxes. While death is definitely not certain when it comes to a home business, taxes assuredly are. If you are going to operate a home business, there are some things you need to know about taxes or you may find yourself in a world of trouble.
I can not think of one person I know who likes paying taxes, doing taxes or talking about taxes; but the fact of the matter is taxes are an inevitable part of life and if you start a home business, they are probably going to be an even bigger part of your life than they were before.
When you work for someone else, your taxes are taken out of your paycheck and then at the end of the year, you simply file your tax return and you either pay money to the IRS or you get money back. Paying home business taxes gets to be quite more complicated than that. While income taxes are the main concern of those employed by others, home business owners need to worry about use taxes, sales taxes, employment taxes, income taxes and a number of other taxes that may apply to their business.
The first thing you need to take care of in terms of home business taxes is the process of getting an EIN number. A business’ EIN number is much like a social security number for your business. It is the number that is used when reporting taxes to the IRS. Once you have your EIN number and your home business starts generating income, you are going to have to start making estimated tax payments to the IRS.
Unlike the annual tax returns you filed when you were employed by someone else, home business owners have to pay taxes on a quarterly basis. For example, you are going to have to pay taxes on the money you make from January through March in April and for the money you make in April through May, you have to pay taxes on in June. The IRS provides home business tax payers with the Electronic Federal Tax Payment System in order to make paying your quarterly taxes more convenient.
If your home business has employees, you are also going to have to take care of your employees’ income taxes. When you have employees, you are required to withhold their income tax from their paychecks and you must pay that income tax to the IRS. If you have less than one-thousand dollars in income tax liability each year, you can do this annually. However, if your employees’ income tax liability is going to total up to more than one-thousand dollars a year, you are going to need to pay the IRS either monthly or semi-weekly.
Remember, this only applies to you if your home business has actual employees. Independent contractors are not considered employees and taxes do not have to be withheld from payments made to independent contractors.
Home business owners also have to pay self employment taxes. Self employment taxes are taxes self employed people pay to Social Security and Medicare. This tax allows you to receive Social Security and Medicare benefits when you retire.
If you are not sure how to manage your home business taxes, you should hire a small business accountant to consult with you on the best way to approach your tax requirements. Hiring an accountant who is willing to teach you how to do your own home business taxes can be much more cost effective than hiring an accountant who insists on doing all of your taxes for you without any explanation of what is being done.
As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.
I can not think of one person I know who likes paying taxes, doing taxes or talking about taxes; but the fact of the matter is taxes are an inevitable part of life and if you start a home business, they are probably going to be an even bigger part of your life than they were before.
When you work for someone else, your taxes are taken out of your paycheck and then at the end of the year, you simply file your tax return and you either pay money to the IRS or you get money back. Paying home business taxes gets to be quite more complicated than that. While income taxes are the main concern of those employed by others, home business owners need to worry about use taxes, sales taxes, employment taxes, income taxes and a number of other taxes that may apply to their business.
The first thing you need to take care of in terms of home business taxes is the process of getting an EIN number. A business’ EIN number is much like a social security number for your business. It is the number that is used when reporting taxes to the IRS. Once you have your EIN number and your home business starts generating income, you are going to have to start making estimated tax payments to the IRS.
Unlike the annual tax returns you filed when you were employed by someone else, home business owners have to pay taxes on a quarterly basis. For example, you are going to have to pay taxes on the money you make from January through March in April and for the money you make in April through May, you have to pay taxes on in June. The IRS provides home business tax payers with the Electronic Federal Tax Payment System in order to make paying your quarterly taxes more convenient.
If your home business has employees, you are also going to have to take care of your employees’ income taxes. When you have employees, you are required to withhold their income tax from their paychecks and you must pay that income tax to the IRS. If you have less than one-thousand dollars in income tax liability each year, you can do this annually. However, if your employees’ income tax liability is going to total up to more than one-thousand dollars a year, you are going to need to pay the IRS either monthly or semi-weekly.
Remember, this only applies to you if your home business has actual employees. Independent contractors are not considered employees and taxes do not have to be withheld from payments made to independent contractors.
Home business owners also have to pay self employment taxes. Self employment taxes are taxes self employed people pay to Social Security and Medicare. This tax allows you to receive Social Security and Medicare benefits when you retire.
If you are not sure how to manage your home business taxes, you should hire a small business accountant to consult with you on the best way to approach your tax requirements. Hiring an accountant who is willing to teach you how to do your own home business taxes can be much more cost effective than hiring an accountant who insists on doing all of your taxes for you without any explanation of what is being done.
As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.
Food Taxes vs Food Subsidies
In principle, taxing unhealthy food and subsidizing healthy food ought to have similar impacts on consumer behavior. But as we know, actual human decision-making often varies from what that kind of theoretically-correct indifference. Tyler Cowen points to some evidence that taxes would have more impact:
The results, just published in Psychological Science, a journal of the Association for Psychological Science, show that taxes were more effective in reducing calories purchased over subsides. Specifically, taxing unhealthy foods reduced overall calories purchased, while cutting the proportion of fat and carbohydrates and upping the proportion of protein in a typical week’s groceries.
By contrast, subsidizing the prices of healthy food actually increased overall calories purchased without changing the nutritional value at all. It appears that mothers took the money they saved on subsidized fruits and vegetables and treated the family to less healthy alternatives, such as chips and soda pop. Taxes had basically the opposite effect, shifting spending from less healthy to healthier choices.
When you think about it in a broader context, taxes look even more favorable. If you tax unhealthy food, you’ll wind up with a bunch of revenue that you can spend on subsidized preschool or fixing potholes or lower general sales taxes. By contrast, if you subsidize healthy food, you’ll wind up needing to make your preschool subsidies less generous or take longer to fix potholes or raise general sales taxes. If there’s some very compelling reason to think that subsidies will be more efficacious at promoting public health than taxes, then of course you have to consider it seriously. But insofar as the evidence implies the reverse, there’s a very strong case for taxing unhealthy foods. Of course as a first step in an ideal world we’d reduce our spending on agricultural programs that subsidize production/consumption of unhealthy foods, a crazy policy initiative supported by nobody except all the relevant members of congress.
As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.
The results, just published in Psychological Science, a journal of the Association for Psychological Science, show that taxes were more effective in reducing calories purchased over subsides. Specifically, taxing unhealthy foods reduced overall calories purchased, while cutting the proportion of fat and carbohydrates and upping the proportion of protein in a typical week’s groceries.
By contrast, subsidizing the prices of healthy food actually increased overall calories purchased without changing the nutritional value at all. It appears that mothers took the money they saved on subsidized fruits and vegetables and treated the family to less healthy alternatives, such as chips and soda pop. Taxes had basically the opposite effect, shifting spending from less healthy to healthier choices.
When you think about it in a broader context, taxes look even more favorable. If you tax unhealthy food, you’ll wind up with a bunch of revenue that you can spend on subsidized preschool or fixing potholes or lower general sales taxes. By contrast, if you subsidize healthy food, you’ll wind up needing to make your preschool subsidies less generous or take longer to fix potholes or raise general sales taxes. If there’s some very compelling reason to think that subsidies will be more efficacious at promoting public health than taxes, then of course you have to consider it seriously. But insofar as the evidence implies the reverse, there’s a very strong case for taxing unhealthy foods. Of course as a first step in an ideal world we’d reduce our spending on agricultural programs that subsidize production/consumption of unhealthy foods, a crazy policy initiative supported by nobody except all the relevant members of congress.
As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.
Ways to Save on Taxes
Federal tax law can seem like a really complicated issue. But, it’s important to every single one of us, since we all pay federal taxes each year. Each year, thousands of tax filers miss deductions to which they were entitled simply because they failed to know the federal income tax law. Though you may find it complex, it pays to understand federal tax laws, since doing so can help you save money when it comes time to file those taxes this year. There are many ways to save on your tax bill, but you must understand the federal income tax laws as they apply to you. Here are some of the allowable deductions allowed under federal income tax law. Here are a few method s to save from federal tax law.
Saving for Retirement – We all know we need to save for retirement, but not everyone is aware that saving for retirement is also a great way to save on taxes right now. Federal income tax law does, however, have limitations on the amount you can contribute tax free each year.
Adopting a Child – According to federal tax law, you qualify for a tax credit in the year that you incur qualifying expenses related to adopting a child. This however is not deductions but credits. Try reading more and it’s important to research the details of how this credit works.
Get a mortgage – Owning your own home is one of the biggest tax savings opportunities. The interest you pay on your mortgage is tax deductible, and in the first few years of a mortgage, most of your house payments go to interest, so you can save a bundle.
Paying for Education – According to federal tax law, the tuition that you pay for your college expenses or for the college expenses of your dependent qualify for a tax deduction. There are two types of education deductions; once called the Hope credit and one called the Lifetime Learning credit.
Go green – According to federal income tax law, many of your energy efficient purchases come with tax deductions. When you purchase home products, like replacement windows or a hot water heater, be sure they come with the government’s energy star rating. Items with the energy star rating are subject to tax deductions of about 10% of the purchase price in most cases.
Contribute to Charity – Charitable donations are tax deductible. And the federal income tax laws regarding charitable donations don’t just apply to cash donations, either. When you donate items like clothing and household items to charities that accept them, you can donate the value of the items donated.
Losing your job – According to federal tax law, if you lose your job, any monies you receive as part of a severance package or any unemployment you collect is taxable. However, many expenses that you’ll incur in looking for a new job are tax deductible.
As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.
Saving for Retirement – We all know we need to save for retirement, but not everyone is aware that saving for retirement is also a great way to save on taxes right now. Federal income tax law does, however, have limitations on the amount you can contribute tax free each year.
Adopting a Child – According to federal tax law, you qualify for a tax credit in the year that you incur qualifying expenses related to adopting a child. This however is not deductions but credits. Try reading more and it’s important to research the details of how this credit works.
Get a mortgage – Owning your own home is one of the biggest tax savings opportunities. The interest you pay on your mortgage is tax deductible, and in the first few years of a mortgage, most of your house payments go to interest, so you can save a bundle.
Paying for Education – According to federal tax law, the tuition that you pay for your college expenses or for the college expenses of your dependent qualify for a tax deduction. There are two types of education deductions; once called the Hope credit and one called the Lifetime Learning credit.
Go green – According to federal income tax law, many of your energy efficient purchases come with tax deductions. When you purchase home products, like replacement windows or a hot water heater, be sure they come with the government’s energy star rating. Items with the energy star rating are subject to tax deductions of about 10% of the purchase price in most cases.
Contribute to Charity – Charitable donations are tax deductible. And the federal income tax laws regarding charitable donations don’t just apply to cash donations, either. When you donate items like clothing and household items to charities that accept them, you can donate the value of the items donated.
Losing your job – According to federal tax law, if you lose your job, any monies you receive as part of a severance package or any unemployment you collect is taxable. However, many expenses that you’ll incur in looking for a new job are tax deductible.
As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.
IRS Rev Ruling 2010-9
Information for those of you who will be receiving a refund so you can understand how the Internal Revenue Service computes any interest earned in addtion to your refund.
Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. Under section 6621(a) (1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point. Under section 6621(a) (2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.
Section 6621(c) provides that for purposes of interest payable under section 6601 on any large corporate underpayment, the underpayment rate under section 6621(a)(2) is determined by substituting "5 percentage points" for "3 percentage points."
See section 6621(c) and section 301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and section 301.6621-3 are generally effective for periods after December 31, 1990.
Section 6621(b) (1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter. Section 6621(b) (2) (A) provides that the federal short-term rate determined under section 6621(b) (1) for any month applies during the first calendar quarter beginning after that month. Section 6621(b) (2) (B) provides that in determining the addition to tax under section 6654 for failure to pay estimated tax for any taxable year, the federal short-term rate that applies during the third month following the taxable year also applies during the first 15 days of the fourth month following the taxable year.
Section 6621(b) (3) provides that the federal short-term rate for any month is the federal short-term rate determined during that month by the Secretary in accordance with section 1274(d), rounded to the nearest full percent (or, if a multiple of 1/2 of 1 percent, the rate is increased to the next highest full percent).
Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.
The federal short-term rate determined in accordance with section 1274(d) during January 2010 is the rate published in Revenue Ruling 2010-6, 2010-6 IRB 387 to take effect beginning February 1, 2010. The federal short-term rate, rounded to the nearest full percent, based on daily compounding determined during the month of January 2010 is 1 percent. Accordingly, an overpayment rate of 4 percent (3 percent in the case of a corporation) and an underpayment rate of 4 percent are established for the calendar quarter beginning April 1, 2010. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning April 1, 2010, is 1.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning April 1, 2010, is 6 percent. These rates apply to amounts bearing interest during that calendar quarter.
Under section 6621(b)(2)(B), the rate for determining the addition to tax for failure to pay estimated tax for the first15 days in April 2010 is the 4 percent rate that applied to underpayments of tax during the first calendar quarter in 2010.
Interest factors for daily compound interest for annual rates of 1.5 percent, 3 percent, 4 percent, and 6 percent are published in Tables 8, 11, 13, and 17 of Rev. Proc. 95-17, 1995-1 C.B. 556, 562, 565, 567, and 571.
Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling.
As always if you have any questions or comments please email me at rondazaragoza@gmail.com. I will try and reply to your question within 24-48 hours of receipt.
Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. Under section 6621(a) (1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point. Under section 6621(a) (2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.
Section 6621(c) provides that for purposes of interest payable under section 6601 on any large corporate underpayment, the underpayment rate under section 6621(a)(2) is determined by substituting "5 percentage points" for "3 percentage points."
See section 6621(c) and section 301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and section 301.6621-3 are generally effective for periods after December 31, 1990.
Section 6621(b) (1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter. Section 6621(b) (2) (A) provides that the federal short-term rate determined under section 6621(b) (1) for any month applies during the first calendar quarter beginning after that month. Section 6621(b) (2) (B) provides that in determining the addition to tax under section 6654 for failure to pay estimated tax for any taxable year, the federal short-term rate that applies during the third month following the taxable year also applies during the first 15 days of the fourth month following the taxable year.
Section 6621(b) (3) provides that the federal short-term rate for any month is the federal short-term rate determined during that month by the Secretary in accordance with section 1274(d), rounded to the nearest full percent (or, if a multiple of 1/2 of 1 percent, the rate is increased to the next highest full percent).
Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.
The federal short-term rate determined in accordance with section 1274(d) during January 2010 is the rate published in Revenue Ruling 2010-6, 2010-6 IRB 387 to take effect beginning February 1, 2010. The federal short-term rate, rounded to the nearest full percent, based on daily compounding determined during the month of January 2010 is 1 percent. Accordingly, an overpayment rate of 4 percent (3 percent in the case of a corporation) and an underpayment rate of 4 percent are established for the calendar quarter beginning April 1, 2010. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning April 1, 2010, is 1.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning April 1, 2010, is 6 percent. These rates apply to amounts bearing interest during that calendar quarter.
Under section 6621(b)(2)(B), the rate for determining the addition to tax for failure to pay estimated tax for the first15 days in April 2010 is the 4 percent rate that applied to underpayments of tax during the first calendar quarter in 2010.
Interest factors for daily compound interest for annual rates of 1.5 percent, 3 percent, 4 percent, and 6 percent are published in Tables 8, 11, 13, and 17 of Rev. Proc. 95-17, 1995-1 C.B. 556, 562, 565, 567, and 571.
Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling.
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