Illinois Increases Replacement Tax on Partnerships

In June 2009, Illinois revised the computation of the replacement tax for partnerships by:

• No longer allowing a subtraction modification for personal service income or a reasonable allowance for compensation paid or accrued for services rendered by partners to the partnership; and

• No longer requiring an additional modification for guaranteed payments deducted for federal income tax purposes.

The changes are effective for taxable years ending on or after December 31, 2009, and will likely increase the replacement tax paid by businesses operating as partnerships. If the partnership changes impact your business, now is a good time to talk about compensation options that may lower your tax bill.

Conversion to Roth IRA will no Longer be Limited by Taxpayer’s Income

In a traditional IRA, taxpayers receive an immediate deduction for annual contributions, but are taxed on the funds when withdrawn at a later date. A Roth IRA does not provide for a tax deduction at the time funds are contributed, but allows for virtually all income growth and withdrawals to be received tax-free.

Until now, many individuals interested in contributing to a Roth IRA were prevented from doing so by a modified adjusted gross income ceiling of $120,000 for individuals and $176,000 for couples filing a joint return (for 2009). Likewise, an individual was prevented from converting a traditional IRA into a Roth IRA if household income exceeded $100,000.

As part of the Tax Increase Prevention and Reconciliation Act enacted in 2006, Congress eliminated the ceiling on conversions of traditional IRAs into Roth IRAs beginning on January 1, 2010. As a result, more individuals will soon be able to take advantage of the benefits offered by Roth IRAs.

However, the benefits of converting to a Roth IRA come with a price. At the time of conversion, individuals will pay income tax on all pretax contributions and earnings included in the amount converted.

Individuals converting in 2010 are allowed a one-time opportunity to spread the tax resulting from the conversion equally over the 2011 and 2012 tax years. Of course, if the option to defer the tax is not taken, the tax due on the conversion will be reported on the return due for 2010.

There are many good reasons for converting a traditional IRA into a Roth IRA. Whether it makes good financial sense to convert a traditional IRA into a Roth IRA depends first and foremost on whether you have funds available to pay the tax. If you must rely on the funds in an IRA to pay the tax bill, a conversion is not a good idea.

The rules covering both Roth IRAs and conversions to Roth IRAs can be difficult to understand and include some potential traps. Obtaining sound financial and tax advice up front may make the long-term benefits of a Roth IRA that much better.

Reporting Requirements for Foreign Financial Accounts

Individuals with interests in any foreign financial accounts are required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, with the Internal Revenue Service. While the IRS has made clear in the Form’s instructions that shares in a foreign mutual fund are considered a financial account for purposes of the reporting requirements, it is uncertain whether an interest in a foreign hedge fund or private equity fund would be subject to the reporting requirement.

During a June teleconference hosted by the American Bar Association and the American Institute of Certified Public Accountants, representatives of the IRS suggested that the definition of a financial account would include an interest in a foreign hedge fund. The penalties for failing to file a required report are substantial.

For those holding investments in a foreign hedge fund or private equity fund that have not filed a report for prior years, the IRS recommends those persons file a report for 2008 and the five preceding years (if applicable) by September 23, 2009. The IRS made clear that penalties for failure to file for the preceding years will not be imposed where taxpayers reported and paid tax on all their taxable income for those years.

For more information, please contact a member of the Firm’s Tax Advisory Group: Rich Lieberman 312/840-7011 / rlieberman@burkelaw.com, Julia Turk 312/840-7033 / jturk@burkelaw.com or Greg Winters 312/840-7059 / gwinters@burkelaw.com.