Self Employed - iQTAXX Tax Services Las Vegas

Individual Retirement Arrangement

A personal savings plan that anyone can take advantage of, whether or not they are self employed or work for someone else, the IRA (Individual Retirement Arrangement) is available in two versions – the traditional and the Roth IRA. It is important to consider your choices carefully as both have tax implications now and when you retire.
With a traditional IRA, any contributions that qualify along with your earnings are not taxable until you begin to claim your IRA distribution. With the Roth IRA, your contributions are taxed at the time that you make them, but the amount you withdraw is not taxable at the time that you take it provided you meet the requirements. Contributions are restricted by age, and taxpayers over the age of 50 can make larger contributions. It is important to note that the money that you contribute in one type of IRA affects how much you can contribute to the other.

Traditional IRAs

When you contribute to a traditional IRA, you may claim all or part of your contributions as a deduction on your income tax return. How much you may claim depends not only on your current level of income but also on whether or not you are covered by your employer’s version of a retirement plan.
Once you have reached 70.5 years of age, you are no longer allowed to contribute to your traditional IRA. Additionally, you must begin to withdraw the required minimum distribution as determined by the government. Special rules exist that are
used to determine how much of your contribution is deductible when you are covered by a retirement plan offered by your employer. The rules use your tax filing status and your adjusted gross income to determine if a deduction is permissible.

Roth IRAs

When you contribute to a Roth IRA, no deduction exists for it on your income tax return. However, one of the benefits of a Roth IRA is that you can continue to make contributions to it even after you have reached the age of 70 and a half. Additionally, you are not required by law to begin withdrawing money from it no matter what age you reach. Your contribution limit depends on your adjusted gross income (AGI). If you satisfy the government’s requirements, your distributions will be tax free.

Converting a Traditional IRA to a Roth IRA

No matter what your modified AGI is or which filing status you select on your income tax return, it is possible to convert a Traditional IRA to a Roth IRA. Of course, you must pay taxes on any portion that was previously included as a deductible contribution to your IRA on previous year’s tax returns.

Converting a Traditional IRA to a Roth IRA

Withdrawals from Traditional IRAs

Anyone with a traditional IRA must begin taking distributions by April 1st of the year following when they have reached 70.5 years of age.

Withdrawals from Roth IRAs

As you may know, you do not need to take any distributions from a Roth IRA no matter how old you are. Plus, any qualified distributions are not included in your income, and this includes qualified earnings. Qualified distributions are defined as those that are taken after your Roth IRA has been in existence for five full tax years as well as having been taken after you have reached the age of 59 and a half years, become disabled, or used in the payment of an allowable exception, such as first-time homeowner expenses. If you take distributions out early from your Roth IRA, then these amounts are subject to an additional 10% tax.

IRS 1031 Tax Exchange Rule

The 1031 Tax Exchange Rule refers to the trading of property that is considered to be “like kind” in nature. While a typical sale and its resultant gain leads to the seller being taxed by the government, the sale of like-kind property does not. At least, not initially.

The government considers (through the IRS 1031 tax exchange rule) the exchange to be an equal swapping of an investment. While the property itself is different since it has changed hands, the actual investment value is the same. One example for a like-kind exchange is the transfer of five acres of hunting ground for a five-acre farming plot.

Is like-kind property exchanges tax free or tax deferred?

In essence, like-kind property exchanges begin as tax free, since no tax is collected on the trade for that tax year. However, in the event that the property is later sold outright, it then becomes subject to being taxed. Any gain on the sale of the property is taxed during the tax year in which it is sold. Therefore, like-kind property exchanges are tax deferred, not tax free.

Can you exchange property for cash under the like-kind property exchange specification?

The 1031 Tax Exchange Rule requires property to be traded for property. No cash can exchange hands. This is true even if the cash is going to be used to purchase different property. The 1031 Tax Exchange Rule clearly states that the property which is switched must be considered like-kind property. The exchange of a primary residence is excluded from this rule. Therefore, two individuals cannot simply exchange each other’s primary residences under the 1031 Tax Exchange Rule.

Is it necessary to document the like-kind property swap to qualify under the 1031 Tax Exchange Rule?

The 1031 Tax Exchange Rule requires taxpayers to utilize a qualified intermediary to handle trading of like-kind property for the purposes of income tax reporting. The intermediary cannot be related to either taxpayer, nor can this individual have a close relationship with either one of the individuals involved in the like-kind exchange. Certain time limits are in place, as well, in order for this type of transaction to qualify under the 1031 Tax Exchange Rule. Additionally, certain types of property, such as the aforementioned primary residence, do not qualify for tax deferment under this rule. For more information regarding the specifics of this rule, please contact one of the staff members of iQTAXX.