Conversion factors

Whether converting to a Roth IRA is right for you depends on several factors. You should consider converting if:

• You expect your tax rate to be higher in retirement or you don’t think you’ll need the money for living expenses,
• Your investment horizon is long enough to benefit from a Roth IRA’s tax-free growth, and
• You can afford to pay taxes on the conversion using separate funds.

Converting may not be a good idea if:

• You expect that your tax rate will be lower in retirement and that you’ll need the funds for living expenses,
• You lack separate funds to pay the taxes, or
• You plan to donate the entire IRA to charity. (If you’d like to donate only a portion of the IRA to charity, you could split the IRA and convert only the noncharity bound portion.)

How a person transfers assets can affect the recipient’s income tax liability because of the basis he or she receives. Basis is the cost associated with an asset — and, from an estate planning perspective, it’s important because it affects the amount of taxable gain or loss a beneficiary will realize should he or she sell the asset. But the 2010 estate tax repeal has temporarily modified the carryover basis rules. So is this the best time to transfer appreciated assets? The answer is that every person’s situation is unique.

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To trigger a state’s income or sales and use taxes, a business must have a substantial connection — or nexus — with that state. Historically, that meant a physical presence in the state. But, in today’s digital age, most companies — even small ones — do business beyond their state’s borders, and cash-starved states are eyeing out-of-state businesses as potential revenue sources. Ever-changing rules regarding what constitutes nexus increase the risk that multiple states will attempt to tax the same income. Congress might act to establish uniform standards, but, in the meantime, it’s important that businesses review their activities in each state for potential tax liability.

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This issue’s “Tax Tips” briefly discusses the importance of reviewing one’s estate plan in view of present uncertainty regarding estate tax law; recent court rulings in regard to whether limited liability companies (LLCs) can offset business losses against active income; and why now may be a good time to restructure a loan.

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