I don’t practice family law. I don’t litigate. I don’t take worker’s compensation settlements.
I’m a tax lawyer. I do tax law. And sometimes that means I dip into related areas, but when it gets beyond my area of expertise, I tap into the collective experiences of my colleagues.
This makes sense to me. I don’t go to a podiatrist when my chest hurts. I don’t see a dentist for a broken leg. And I don’t leave my eye exams to my gynecologist.
Folks choose specialties because no person, no matter how smart, how brilliant, how talented, can know everything. And thinking otherwise can get you into trouble.
Just ask Seth Fielding. Fielding is a doctor who claims that he suffered a huge tax bill as a result of a settlement negotiated by his divorce lawyer. Dr. Fielding’s settlement required him to make a significant payment out of “immediately available” funds. Only Dr. Fielding didn’t have that much in the way of “immediately available” funds since he was unable to tap into his Upper West Side apartment before the divorce (he had planned on a mortgage or line of credit). Dr. Fielding claims that Kupferman refused to renegotiate, so he had no alternative but to dip into a retirement account to pay the settlement. Dr. Fielding also claims that Kupferman did not advise him that doing so would result in a huge tax bill.
In fact, according to Dr. Fielding, Kupferman was surprised to learn that there would be tax implications from the withdrawal. According to the complaint, Kupferman actually called Dr. Fielding’s broker “to ask why” the entire amount was not immediately available.
A majority of Dr. Fielding’s investment assets (about 75%) were held in a profit-sharing Keogh plan. A Keogh plan is a retirement plan for self-employed persons. It works like a profit sharing plan in that it’s funded with net earnings from your business or professional income. When money is withdrawn from the plan, it is subject to tax at the ordinary income rates (since it’s pre-tax money to begin with) plus an early withdrawal penalty if the participant has not yet reached retirement age.
So, whereas the settlement might have contemplated an equitable distribution based on a total amount of assets, the post-tax total was much lower. As in six figures lower. Dr. Fielding thought that the negotiated settlement would leave each party with $1.2 million. However, due to the tax burden, Dr. Fielding claims that he was left with $850,000 and the burden of an additional mortgage.
Dr. Fielding filed a malpractice claim against Kupferman in October 2007. It was dismissed by the lower court in January 2009. However, the claim was reinstated by a unanimous panel of the Appellate Division, 1st Department, which found that the evidence “clearly establishes” that the Keogh funds were not “immediately available” for purposes of the settlement. As a further *ouch*, the panel found that there was sufficient evidence to allege that had Fielding not received “faulty advice” from Kupferman, Fielding “would not have incurred the tax liability.”
Procedurally, that’s not a verdict. It means that the trial will go on, since the panel reversed the dismissal. Fielding has since amended his complaint to ask for attorney’s fees. No trial date has been set.
You can read the entire decision, as filed in New York on August 11, here.
My inbox is crowded with queries from retirees asking me when the $250 economic recovery payments (some folks also refer to them as additional “stimulus checks”) will be mailed out. Well, I finally have an answer. Vice President Joe Biden and Michael Astrue (the Social Security Commish) have announced that checks will be mailed in May.
But wait. Don’t get too excited. Not everyone gets one. This is a one-time payment of $250 to adults who are receiving Social Security benefits, including SSI recipients, but not including those receiving Medicaid in care facilities such as nursing homes. Disabled children who are receiving SSI benefits are also eligible.
To be eligible, you have to live in one of the fifty states, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands.
You don’t have to do anything to get your check. You must simply be eligible for Social Security or SSI during November 2008, December 2008 or January 2009 and otherwise meet the residential and other criteria.
Of course, I keep saying “check” but you might not be receiving a check. Your payment will be delivered the same way that you currently get a benefit. If you normally get a check, you’ll get a check. If you receive your benefits via direct deposit or debit card, you will receive your one-time payment the same way.
Veterans Affairs (VA) and Railroad Retirement Board (RRB) beneficiaries will also receive a check. However, if you receive Social Security and SSI, as well as VA or RRB benefits, you’re only going to get one check. There’s no double dipping.
While the checks are expected to be distributed beginning in May, you’ll need to be a little patient. About 50 million folks will be getting the checks – and you know that’s going to take some time. The Social Security Administration has asked that retirees not call them unless a payment is not received by June 4, 2009. June 4. Put it in your calendar. And please don’t bother the poor folks before then – they’re not going to be able to help you.
Taxpayer asks:
Hi,
I am currently retired, age of 60.
I have pension income of $48K / yr and investment income of 20K/ yr.
What are the tax consequences of converting a 401k of $120K to a Roth IRA?
To limit taxes, should the conversion be structured over several years?
Thanks,
Taxgirl says:
Retirement planning is so not my forte. So I’m gonna tell you the tax consequences of your transaction – but I’m not going to advise as to whether it makes sense for you or not. I would strongly advise that you check with a retirement or financial planner to make sure that this is the best option for you.
This is the scoop. As of last year, you can roll over a 401(k) into a Roth IRA. When Roth IRAs were originally conceived, this wasn’t something that was allowed.
Since Roth IRAs are funded with after tax dollars, the amount that you roll over is subject to federal income tax. Specifically, any amounts that would have been taxable had you simply pulled out the funds and not funded the Roth IRA are reportable as gross income.
You’re under the income limit for making the rollover – though that will not matter in 2010. In 2006, President Bush signed a bill that changed the eligibility rules for Roth IRA conversions. For 2010 (and so far, only for 2010), taxpayers with modified adjusted gross income of more than $100,000 can convert qualified retirement funds to a Roth IRA. Additionally, for 2010, income tax due on conversions can be spread included as income and paid in 2011 and 2012. This can be a great help, assuming that you remember to put aside enough money to pay the tax bill in those years.
The advantage, of course, is that after all is said and done, future distributions from the Roth IRA are income tax free.
There are some other conversion, limitations and ordering rules that you should familiarize yourself with before making the decision to make the roll over. You may wish to take advantage of that 2010 exclusion – so don’t rush into anything. Find someone who knows what they’re talking about and can run the numbers for you for comparison. Roth IRAs can be great vehicles but they’re not for everyone.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
Taxpayer asks:
What’s the maximum contribution to an IRA for 2008? What about 2009? What happens if I go over?
Taxgirl says:
Argh! Retirement plan questions are tough because they’re so fact specific. Here are the general rules as they relate to IRA contributions:
If you are under 50 years of age at the end of 2008, the maximum contribution for your traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2008. This is the limit for all IRA contributions.
If you are 50 years of age or older at the end of 2008, the maximum contribution for your traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2008. Again, this is the limit for all IRA contributions.
The IRA contribution limits for 2009 are the same as for 2008.
If contributions to your IRA are more than the limit, you can apply the excess contribution to a later year if your contributions for that later year are less than allowed. Otherwise, if you don’t take out the extra contributions by the due date for your return, you’re subject to a 6% tax. There are some tricky bits here, so exercise caution. The easiest thing to do is to plan not to overcontribute. If you do, check in with a tax professional as quickly as possible so that you can mitigate your situation.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
