Claiming the contribution this year is not mandatory - you may wait and claim it on your 2010 return.
Haiti Charitable Contributions
Congress has passed legislation designed to encourage charitable contributions for the relief efforts in Haiti, and the President has signed it. Under the new law, taxpayers may deduct charitable contributions made after January 11, 2010 and before March 1, 2010 for the relief of earthquake victims in Haiti on their 2009 tax return. Only cash contributions made to a qualified charitable organization can be deducted - contribution of goods must be claimed next year on the 2010 return. Cash contributions require a receipt in order to be claimed. If you made your donation via your phone, be sure to keep the phone bill showing the donation for your records.
Claiming the contribution this year is not mandatory - you may wait and claim it on your 2010 return.
A number of clients have inquired about announcements they’ve heard or read regarding the conversion of traditional individual retirement account (IRA) to a Roth IRA. Beginning in 2010, income limitations that prevented taxpayers with modified adjusted gross incomes of $100,000 or more and married taxpayers filing their returns separately from converting a traditional IRA to a Roth IRA are eliminated entirely. Additionally, any income tax payments due on 2010 conversions may be deferred into 2011 and 2012.
Eligibility for a Roth conversion in 2010 does not automatically make it a good decision for every taxpayer. Under the right circumstances, converting to a Roth IRA can provide significant tax and financial benefits. But every individual's needs and circumstances are unique, and a Roth IRA conversion must be assessed in light of your particular tax and financial situation.
The new conversion opportunity does not apply to funds held in a 401(k). The conversion opportunity applies to traditional IRAs, in addition to SIMPLE IRAs and SEP plans.
A conversion to a Roth IRA may be accomplished in one of two ways:
-- Rollover. An IRA rollover involves taking an eligible distribution from your traditional IRA that is rolled over into a Roth IRA within 60 days after the distribution. If the rollover does not occur within 60 days, it will be treated as an early withdrawal subject to a 10 percent early withdrawal tax as well as federal and state income taxation.
-- Trustee-to-trustee transfer. If your IRA trustee is the same trustee for your traditional IRA and Roth IRA, you may have that trustee make the account transfer on your behalf. Additionally, if the trustee is not the same, your traditional IRA trustee can also transfer the funds to your new, Roth IRA trustee on your behalf, even if they are not the same trustee for the accounts.
Income tax consequences
The government is encouraging Roth conversions not only to shore up retirement savings but also to gain short time revenues. It accomplishes the latter because a conversion from a traditional IRA is counted as a taxable distribution in which income taxes must be paid. Unlike such distributions outside of a Roth conversion, however, no early withdrawal penalty is imposed. Since you would be taxed on your traditional IRA distributions eventually anyway upon retirement, having the distribution taxed at the time of a Roth conversion can be viewed as an acceleration of that tax. In return, however, the funds that become part of your Roth account, including future earnings of them, become tax free forever into the future.
For conversions taking place in 2010, you have the option to elect to recognize the taxable income generated on the conversion amount as adjusted gross income (AGI) in 2011 and 2012, instead of recognizing it all in 2010. This election does not spread the tax that would otherwise be paid in 2010 to 2011 and 2012; rather, it spreads the income realized in 2010, half into 2011 and half into 2012. That income, half in 2011 and half in 2012, will be taxed at 2011 and 2012 rates, along with any other income normally realized for those years. Consequently, it is important to "do the math" on this election before making any decision.
The institution or brokerage at which you maintain your traditional IRA will generally have a Roth Conversion Form, or similar document, that you must fill out to complete the transaction. The form may ask you for the name and account number of the IRA that you want to convert, whether you want to convert the entire amount of the traditional IRA, or only a part of the account, and the amount of the IRA you want to convert to the Roth IRA (or number of shares). Typically, the form will also detail your federal and state income tax withholding obligations regarding the transaction. You will have the opportunity to elect withholding, or elect not to have anything withheld from the funds in order to meet your anticipated income tax obligations from the transaction.
Note. Whether you pay the taxes on the transaction from the funds transferred to the Roth IRA itself, or with outside funds, is an important decision you make. In general, taxpayers are better off paying the tax, if they can, with funds outside the account. You should discuss the taxation aspect of the conversion with your tax advisor.
If you have any questions about converting your traditional IRA to a Roth IRA, please contact our office. We can help determine if converting your account is the best decision considering your tax situation.
The information contained in this article was derived from a newsletter prepared by Rita Lewis, EA and published on her website www.dollarssense.com.
THOSE OLD US SAVINGS BONDS
I’ve had a number of calls recently about cashing in old US savings bonds. That’s caused me to do some research that I want to share. So here goes – with thanks to my various research sources and a MarketWatch article by Andrea Coombes.
The first question is always “will I pay taxes if I cash them in?” Yes – you do pay federal taxes on the interest earned, but you don’t pay state taxes.
The second question is usually “should I cash them in or not?” Maybe – it depends. There are a lot of mature (no longer earning interest) savings bonds out there – about $16.7 billion according to the US Treasury. Series H bonds, many Series E bonds and some Series EE and some Series HH bonds no longer earn interest. After June 2010 all Series E bonds will stop earning interest. Holding onto those mature bonds is like keeping money under your mattress – they’re not earning you any money - so the general recommendation by experts is to cash them in.
Redeeming mature bonds should be done carefully. If you have a large number of bonds and redeem that all at once, you may find yourself in a higher tax bracket. Please consult with me before you do anything so we can figure out what the best timing for redemption will be for you.
If you need to cash in bonds that are still earning interest, it’s important that you know when the interest is calculated. Some older bonds have interest calculated only every six months; new bonds are calculated monthly. There’s no sense losing money by cashing them in right before interest is calculated.
There’s an additional concern when you’re cashing in bonds that are still earning interest – if you’ve had the bonds less than five years there may be a penalty of three months’ interest imposed.
Once you’ve determined that you do want to redeem your bonds, there are several ways to proceed. First, make sure you know what the bonds are worth by using the calculator on TreasuryDirect.gov. Then take the bonds to your bank or credit union for redemption. You can also send them directly to the Treasury Department for redemption, but that requires you to have your signature verified by a bank or credit union before mailing them in.
JANUARY 2010 UPDATE
It’s that time of year again – tax returns must be filed by Thursday, April 15th! I will begin preparing returns the week of January 18. Appointments will be available Monday through Saturday from 8 am until 4 pm. Evening and Sunday appointments will be available by special arrangement. Please call as soon as possible to schedule your appointment. If you send your material to me, please put it in the mail as soon as you have it organized.
2009 saw many changes to both federal and state tax laws and regulations – more of the same is expected in 2010. I will do my best to keep you up to date on those as they happen. Because of the cost of printing and mailing, 2010 tax updates will only be sent by email. In order to receive those important notices, please make sure I have your current email address.
In September I sent you an email or a letter telling about all the federal and California tax changes I was aware of at that time. To summarize –
1. Three new federal credits – Making Work Pay Credit ($400/$800), Economic Recovery Payments ($250 mailed out in May and June) and Government Retiree Credit ($250). These programs are interconnected – the maximum you can get is $400 for a single person or $800 for a couple. There is a special form to be filled out and submitted with your federal tax return if you are eligible for more than one credit.
2. Federal withholding was decreased in April. California raised tax rates retroactive to January 1, 2009 and increased withholding in June and again in November.
3. California reduced the exemption for dependents from $309 to $99.
4. Mandatory distributions from IRAs were not required in 2009.
5. The first $2400 of unemployment insurance will not be taxable on your federal return.
6. The Hope Credit for college students was expanded to a four-year program and increased to $2500 per year. Books and course materials can now be claimed, along with tuition and fees. The threshold for eligibility has been raised to make more families eligible.
7. The $500/$1000 addition to the itemized deduction for property taxes will be available again in 2009. You can also claim the sales tax paid on a new car, truck, motor home or motorcycle purchased between 2/17/09 and 12/31/09 that cost no more than $49,500. There is a special form to be filled out and submitted with your federal tax return if you are eligible for any of these add-ons to the standard deduction.
8. The Earned Income Credit was increased.
9. Energy credits are back and more generous, particularly those for solar installations.
10. California has sped up the collection of estimated tax payments. In 2010 you’ll pay 30%, 40%, 0% and 30% instead of four equal payments.
There were two items that were up in the air when I wrote the September update and those have now been clarified.
1. If you received a Cash for Clunkers voucher, it will not be considered income for federal tax purposes but will be considered state income if the original cost of the vehicle you traded in was less than the $4500 voucher you received.
2. If you received mortgage assistance in the form of a reduction in the principal owed on your mortgage, the amount “forgiven” will not be considered income for federal tax purposes but will be considered income for state tax purposes.
And as predicted, both Congress and the California Legislature have been busy this fall. These are the new tax provisions that have been enacted recently –
1. The federal First-Time Homebuyer Credit was extended. You are eligible for an $8000 credit if you purchase a home by April 30, 2010. Escrow can close as late as June 30, 2010 IF you have a binding contract to purchase as of April 30th.
2. There is a new $6500 credit available for existing homeowners who buy a new home and have owned a home for five of the last eight years. The existing home doesn’t have to be sold to qualify – you can turn it into a rental and still qualify for the credit on your new home.
3. The income levels have been increased for these homebuyer credit programs to make more people eligible. Adjusted gross income of $245,000 for a married couple and $145,000 for all other filing categories is now the cut-off.
4. States may no longer tax the income of spouses of a nonresident member of the military. For example – a resident of Kentucky is assigned to a duty station in California. The spouse accompanies the member of the military and obtains employment in California. California may not tax the spouse’s income. However, if the member of the military takes a second job in the private sector in California that income can be taxed by California.
5. California has a new job’s credit. If you increased your fulltime staff in 2009, you may be eligible for up to a $3000 credit. Only businesses with 20 or fewer employers are eligible and only full-time employees qualify you. There is only $400 million available for this credit, so if you think you may be eligible, please be sure to schedule an appointment to have your taxes done before March 31st – that’s the first date the state can cut off the credit. And of course, there’s a new form in order to claim the credit.
6. The income limit for converting traditional IRA’s to Roth IRA’s has been eliminated and taxpayers have choices about when to report conversion income. Taxes must be paid on the money moved from a traditional IRA to a Roth IRA, so be sure to discuss your options with me before proceeding.
Federal and state tax laws and regulations change regularly. As we become aware of changes, we will post them here and, if you are a client who has provided us with an email address, we will also email them to you.