2009 - 2010 - New Recovery Package: What's in It for You?
Here's a summary of important changes in the tax laws. We would be happy to discuss how these impact your specific situation during our appointment or at any other time throughout the year:
Converting to a Roth IRA
This is my favorite tax topic this year because it presents a most interesting opportunity for most clients. Starting in 2010, millions of Americans previously barred from converting a Traditional IRA to a Roth IRA because of the income limitation are now eligible to do so. The $100,000 modified adjusted gross income cap on eligibility to convert, as well as the requirement that married persons file joint returns, have been eliminated; EVERYONE is eligible to convert to a Roth IRA in 2010. The question is: Should you convert and what are the tax implications for doing so. It's more a question of pay now or pay later. When you convert, income taxes will be due - but that takes care of taxes forever on the Roth. Taxes are due on the Traditional IRA when you take withdrawals (after 59 1/2). Our expectation is that tax rates will go up significantly over the next few years (someone has to pay for the bailouts and other proposed government programs). Consequently, your Traditional IRA will be clobbered when you finally take the distribution 10-20 years from now. So, if you can afford it, paying the taxes now and insulating the account against future taxes may be the way to go.
If you convert in 2010, a special rule allows you to split conversion income between 2011 and 2012 unless you opt to report it all in 2010. This deferral opportunity appears to be a good thing. However, it should be kept in mind that the income tax rates for 2011 and 2012 are unknown at this time. If President and Congress allow the "Bush tax cuts" to expire after 2010, then rates will be certainly increase. Moreover, if the health care reform package is adopted as is it will levy surcharges on most of our clients, this will make the effective rate much higher. We repeat, if you can pay for it now, do it now.
Standard Mileage Rates
Good news for 2009 but not for 2010.
-For Business Driving purposes, rates increased slightly to $0.55 per mile in 2009. However, they've been reduced to $0.50 per mile for 2010.
-Medical and Moving mileage is $0.24 per mile in 2009 but will go down to $0.165 in 2010.
First & Second Home (Too!) Buyer Credit
First Time Homebuyer ($8,000) - You qualify for an $8,000 credit (that's cash in your wallet not a deduction from taxable income) if you purchased a home in 2009, meet income limits and haven’t owned a home for at least three years. Moreover, you may amend the 2008 return and take the credit there if we find it to be more tax efficient.
Finally, while the credit for homes purchased in 2008 was subject to a 15-year repayment, those purchased in 2009 have no repayment as long as the home isn’t sold within 36 months.
Second Time Homebuyer ($6,500) - More Good News - If you already own a home and want to sell to buy a new primary residence, you qualify for a credit of up to $6,500 as a second home buyer who has lived in the previous home 5 or more consecutive years - -again, a direct increase in your refund! Moreover, if you closed before December 31, 2009 we have the option of amending 2008 if this turns out to be yield a better result than using in 2009. But keep in mind that the new place that you're purchasing must be your primary residence - investment properties do not qualify.
New Car Purchases
Subject to income limitations you may be able to deduct sales and excise taxes on the purchase of a new car or light truck, even if you don't itemize deductions. Pre-owned or leased vehicles don't qualify.
Home Energy Improvements
This is the one some of you have been holding off for...A credit of up to $1,500 can be claimed for the purchase of an energy-efficient furnace, insulation, storm windows, and other energy savers. There are no income limits.
Solar and Other Alternative Energy Improvements
A BIG CREDIT of up to 30% of cost - no dollar limit - is also available for the purchase and installation of solar electric systems, solar water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Labor costs are included when you figure the credit. When you factor the immediate cost savings, future energy bill savings plus your positive Green Impact this upgrade is more feasible and merits much more serious consideration than in past. See www.energystar.gov to find out how much such improvements may save you in energy usage and cost.
Personal Bad Debts
Now it is not just bad business loans that may be written-off. If you loaned money personally to someone who defaults, you may be able to deduct it as a Short Term Capital Loss.
For example, you loan money to your friend to buy a car and your friend fails to repay the loan; this is considered a non-business bad debt. Non-business bad debts also include loans that you make to protect your investments and un-insured bank deposits.
While the IRS usually taxes all unemployment benefits, under the new law the first $2,400 of unemployment benefits received in 2009 are tax free. There are no income limits.
College 529 Savings Plan Withdrawals
Withdrawals to pay for computer technology, including laptops, software, and Internet access fees, are tax free. Software for gaming or entertainment doesn't qualify unless it is "predominately educational in nature." There are no income limits.
Earned Income Credit
The Earned Income Credit amount increased by 5% for those with 3 or more dependent children. Qualifying income levels also increased.
Foreign Earned Income
Good news - the amount of income earned while working full time or substantially outside the U.S. that is not subject to U.S. taxation increased to $91,400. Housing allowance also increased to $14,624.
Alternative Minimum Tax
This year again the AMT is our Number 1 Nemesis. Exemption amounts were increased by $500. Unfortunately, not nearly enough... what's Congress thinking about ##!!@@X##!$#!