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Fall 1998 

Volume 2 Number 1


To Roth or Not To Roth

Last year's tax bill contained a new type of Individual Retirement Account (IRA) named for the Senator that presented it, Roth.

The traditional IRA allows a taxpayer to deposit, and receive a tax deduction for, up to $2,000 per year. The tax on the funds deposited and the income earned is deferred until funds are withdrawn. Upon withdrawal all funds (contributions previously deducted and the income earned) are subjected to income tax.

The Roth IRA also allows the taxpayer to deposit up to $2,000 annually but the taxpayer does NOT receive a tax deduction. Upon withdrawal there is no tax on either the funds contributed or the earnings thereon.

For example, $2,000 contributed into a traditional IRA would save a taxpayer in the 28% bracket $560 in Federal income tax in the year contributed. Invested at 5%, with no additional contributions the $,2000 would grow to $3,295 in ten years. When the funds are withdrawn the entire $3,295 would become taxable. A taxpayer in the 28% bracket would pay $923 in Federal income tax. 

The same facts in a Roth IRA would require the payment of the $560 tax in the year of contribution but no tax on the $3,295 withdrawn.

Taxpayers may convert existing traditional IRAs into Roth IRAs by paying the tax on the amount converted. The future earnings will then not be taxable upon withdrawal. For conversions during 1998 only, the Congress is allowing the tax be paid over the next four years with no interest charge.

While there are taxpayers for whom conversion can result in significant tax savings that is not true for all taxpayers! We urge you to see us to evaluate the possible savings available to you in converting your IRA.

Home Mortgage Interest Revisited

The Tax Reform Act of 1986 eliminated most forms of tax deductible interest. The primary remaining tax benefit related to the interest on a home mortgage.

There was a provision in that Act that had little impact on most taxpayers in 1986 but is now beginning to surprise homeowners.

The Act allowed the deduction of interest on two types of home mortgages, acquisition debt and home equity debt.

The interest on a mortgage incurred to acquire or improve the property is deductible up to the cost of the property & improvement. The interest on home equity debt is limited to $100,000 in debt 

Since 1986 many taxpayers have paid down the mortgage debt incurred to acquire the property and have re-financed to use the equity for purposes other than improvements. It is becoming more frequent that taxpayers find that a portion of the new loan is not deductible.

For example, Fred & Ethel's mortgage in 1986 was $95,000 and the home was worth $175,000. Since then the mortgage has been paid down to $60,000 and the value of the home has risen to $215,000. If Fred & Ethel re-finance and obtain a mortgage loan of $170,000 all of the interest will not be deductible. Only the interest on the "acquisition debt" ($60,000) plus $100,000 for the home equity loan will be deductible.

The gap between deductible and total interest will grow each year because "acquisition debt" is not replaced. Once the acquisition costs have been paid re-financing for a greater amount does not replenish that type of debt. The only way a taxpayer can increase "acquisition debt" is to acquire something; either a new residence or an improvement to the existing one. Then only the interest on the cost of the acquired item is deductible.

This could eventually impact most homeowners. We suggest you call our office to review your home mortgage situation before it is determined the interest is not deductible.

Unclaimed Property?

Under California law any asset that remains "unclaimed" by the owner for more than three years reverts or "escheats" to the state. The rightful owner can thereafter claim the property by contacting the Controller of the State of California.

Unclaimed property covered by this law includes checks written but not cashed by the payee and credit memos issued but not redeemed by the customer.

The penalty for failure to transfer unclaimed property to the state can be $5,000 to $50,000.

Contact Tony at 760-872-1122 for a review of your business's policy with respect to unclaimed property.