First-time and Existing homeowners TAX CREDITS

The Senate approved a measure on Wednesday to extend the current first-time homebuyers tax credit to 2010.  The bill also included expanding the credit to some existing homebuyers...
The House approved the bill the following date and the president is to sign the bill today into law.

If you were in no rush to buy your first home, or sell your existing one to expand or downsize, pay attention this tax credit.

First-time Homebuyers credit is $8,000 on purchases under contract by contract by April 30, 2010 as long as the contract closes by June 2010.  It applies to first homes only and not to second or vacation homes.

Certain existing homebuyers qualify for a tax credit up to $6,500 if buying a new home.  These homebuyers have to have owned and lived in their current main homes for five consecutives years out of the past eight. 

Income limitations are also expanded under this bill to individuals earning up to $125,000 or couples with income of $250,000, which increased from $75,000 and $150,000.

The credit will apply to all contracts for homes up to $800,000 by April 30, 2010 and closed on by June 30, 2010.  Uncle Sam also is requiring homebuyers claiming this credit to attach the purchase documents to their tax returns.

These credits coupled with a significant inventory and low mortgage rates, should motivate buyers to go out and find their new homes.  It will also boost home prices over the next few months as well.

If you are already in a deal at the moment, like one of my friends, pause and make sure that you meet the above requirements and good luck.....

It has been more than 3 weeks since I posted anything.  Not that news worthy of posting about is scarce, but few other reasons.  The 2008 official Federal and States Income Tax was 10/15, and since I am a tax professional, I had to take a week long vacation to recover.

Now, expect me to post again during the next few days about the latest and greatest personal financial and tax updates....

The Tax Chick

IRA Required Minimum Distributions NOT REQUIRED for 2009

In light of the turbulent stock market and its impact on most baby boomers's retirement accounts, the IRS announced that individuals are not required to take out their IRA Required Minimum Distributions in 2009.

The announcement came after some individuals had already taken out their distributions for the year, so in order to provide these individuals with the same benefits.  The IRS announced in Notice 2009-82
http://www.irs.gov/pub/irs-drop/n-09-82.pdf relief for these individuals.  The 2009 IRA RMD distributed can be rolled over to an IRA or even a Roth IRA as long as it meets these requirements:

Individuals have until Novermber 30, 2009 or 60 days from the date of the distributions from the IRA, whichever date comes later. 

Also qualified plan participants and beneficiaries have the same RMD waiver as with IRA's, so these plans can adopt amendments to allow for the suspension of the 2009 RMD distributions if elected.

Please note that the IRS did not waive the one-rollover-per year rule.  As a result, some taxpayers and clients might not qualify for this rule assuming they had a rollover during the year. 
The one rollover per year rule by the way doesn't apply to ROTH IRA conversions.  So since you have already taken out the distribution and will pay the tax on it, why not roll it over into a ROTH IRA in 2009. 
Next year you can convert more of your retirement account into the Roth and hopefully take advantage of this great vehicle...

One Year after Lehman Brothers’s collapse lessons learned:

Today marked the one-year anniversary of the collapse of Lehman Brothers and the collapse of the financial markets. Lehman Brothers was a company that the Federal Government allowed to fail without leaping to their rescue (as opposed to AIG and Citigroup). This is a decision that many historians will go back and review the ramifications of for a long period.

So much happened during this one year, the financial crisis was exacerbated by the collapse of Lehman Brothers, unemployment numbers went up to numbers we have not seen for years, home values continued their decline, credit and financing froze. Many Americans lost their confidence in the financial systems.

www.Smartmoney.com put a list of major key factors and measures of our economy today vs. a year ago. These factors highlight the impact of the financial crisis:

Unemployment rate
Aug. 2008: 6.1%
Aug. 2009: 9.7%
Source: Labor Department

People working part-time for economic reasons
Aug. 2008: 5.7 million
Aug. 2009: 9.1 million
Source: Labor Department

Dow Jones Industrial Average close
Sept. 12, 2008: 11,422
Sept. 11, 2009: 9,605

Price of gold
Sept. 12, 2008: $750.25 per ounce
Sept. 11, 2009: $1,006.40 per ounce

Consumer Confidence Index
Aug. 2008: 58.5
Aug. 2009: 54.1
Source: The Conference Board

President’s approval rating
Sept. 8-11, 2008: 31%
Sept. 5-8, 2009: 51%
Source: Gallup

Price of a gallon of gasoline
Sept. 15, 2008: $3.867
Sept. 7, 2009: $2.519
Source: Energy Department

Price of a gallon of milk
July 2008: $3.96
July 2009: $2.99
Source: Labor Department

Average price of a SanDisk 2-Gigabyte Secure Digital Card
Sept. 9, 2008: $13.10
Sept. 9, 2009: $11.38
Source: PriceGrabber.com

Manufacturer’s suggested retail price of a new Ford Focus
2009 model: $15,520 (up 7.8% from 2008 model)
2010 model: $15,995 (up 3.1% from 2009 model)
Source: Consumer Guide Automotive

S&P/Case-Shiller home price index for 20 U.S. metropolitan regions
June 2008: 167.69
June 2009: 141.31
Source: Standard & Poor’s

President Obama marked the anniversary by appearing in Wall Street touting today the lessons to be learned from Lehman and its aftermath. The President was reminding us that the measures taken by the Federal Government and Federal Reserve led to the stabilization of our economy. However, beware of the illusion and false sense of security. Let us not forget how we got here, and learn from our mistakes. These mistakes cost us as American Taxpayers billions of dollars.



The Fear and Greed are two emotions that drive most investors. A year ago, you could not get most sophisticated investors to stay in the stock market and invest in equities. Today with the stock markets at year to date highs, we should be careful from our greed sweeping us back in our old habits.

SAVE MORE and set up an emergency fund:

Happy Labor Day Weekend everyone. In the spirit of the long holiday weekend, and the retail sales going on all weekend, I encourage you to save more. Pay yourself first, before going out this weekend and spending it all on the great sales out there.

President Obama announced this week that he would like us to save more, and so do I. The IRS will take certain steps effective immediately to make it easier for Americans to save more.

For years, studies told that our saving rate is virtually Zero. It is true; we spend what we don’t have. We live above our means, and are OK with spending using our credit cards, home equity loans, and even taking loans against our retirement plans if we are able to.

As Americans, who believe in the American Dream, we want it all and we want it now. This is what we call instant gratification. We have instant payday shops to get an advance on our paychecks, credit cards companies extend our credit card limits and increase it on a regular basis to amounts beyond our means, our home values (we thought) go only one way (WAY UP). Even our banks extended us home equity loans and lines of credit, interest only mortgages and several cash out refinance options.

Simply, frugality was out of style and saving for a rainy day was unnecessary.

For starter, we know that we need to save between 3-6 months worth of living expenses as an emergency fund. As financial planners for years, we told our clients that they could use their home equity lines of credit as their emergency fund. Wait a minute, now we have to adjust this theory, since most banks and mortgage companies are scaling back on their mortgage default exposure. These banks have reduced the home equity lines if not completely shut it down. This happened to me personally; I got a letter from my bank indicating that they believe my home value is much lower than it was few years back and I longer have access to my home equity line of credit. Now, I am saving for emergency out of necessity.

Currently, the saving rate is at 4%. This is great news we are saving more, but we should be saving at least 10% of our income. Cease the opportunity and don’t waste time, start saving now. You should start saving systematically by setting up a direct deposit from your checking account into a money market account. I know these accounts currently pay virtually no interest, but this will ensure, you won’t have to use your credit card and pay at least 13% in interest on the balance.

Ready, Set; Convert into a Roth IRA post #2.

Conversions into Roth IRA’s in 2010 should be considered by all individuals unable to convert in 2009, note that partial conversions of your prior employer retirement plans into Roth IRA’s are also possible.

If you are a young professional with a long career ahead of you, chances are you are in a lower income tax bracket now than the tax rate during retirement. You probably also have significant tax deductions including mortgage interest as well as dependency exemptions.

If you are retiring in the next few years, or already retired with significant IRA and qualified retirement assets, it is not too late for you either. You can still consider the conversions for your later retirement stages as well as building an income tax free legacy to your future generations.

Planning points: your strategy should be to convert into the Roth IRA as much as possible without increasing your income tax rate. You should convert your retirement plan early in the year, and extend your tax return to October of 2011. This will allow you to monitor your converted Roth IRA since you can change your mind and re-characterize or undo your conversion. As always, when considering income tax decisions, reach out to your tax advisor to address your specific circumstances.

As we mentioned in my prior post http://thetaxchick.blogspot.com/2009/08/traditional-ira-conversions-into-roth.html#links that starting in 2010, the $100,000 adjusted gross income limitation will no longer apply. Anyone regardless of the income limit can convert into Roth IRA’s.

Five Reasons why you should convert into a Roth IRA:

1) Most retirement accounts are currently trading at lower values than few years ago given the current stock and bond market conditions. Yes, this statement still holds true even with the recent stock market uptick in 2009. Upon the conversions to Roth IRA, the IRS will tax you on the “lower” value of your IRA or retirement plan.
2) Suspension of the required minimum distributions at age 70 ½ provides you with a significant advantage and control over your tax situation now and in the future.
3) Income tax liability should be paid from outside funds (ie, non-IRA/ Retirement Plans), to ensure a successful conversion. Paying the income tax liability on the conversion will reduce your taxable estate and your estate tax liability as a result.
4) The IRS is allowing you to pay the taxes over the following two years, so your first tax bill will be due April 15, 2011 and the next one will be due April 15, 2012.
5) It’s better to die with a Roth IRA than with a traditional IRA…….Grim, but true. Your beneficiaries will also benefit from the income tax free distributions from your Roth IRA as opposed to paying the income tax at their ordinary income rates (up to 35%).

We can run all sort of fancy analysis and calculate the impact in the end on conversions to Roth IRA’s vs. keeping the IRA and other ERISA plans as is. In most circumstances, you come out ahead with the Roth IRA conversion. The factors to consider are income tax rates now vs. in the future, your growth rate on the account, your time horizon as well as the available funds to pay for the income tax.

You can convert the following accounts into a Roth IRA: Traditional IRA’s, 401(K) Plans starting in 2008, 403(B) Plans, Government plans also known as 457 Plans and Profit Sharing Pension Plans. So in general ERISA & Non ERISA plans can be converted directly into a Roth IRA. You can also convert Inherited Pension Plans into a Roth IRA, but not Inherited IRA’s. You also cannot convert Educational IRA known currently as Coverdell Savings Accounts.

Traditional IRA Conversions into Roth IRA in 2009 or 2010? Get ready, set, convert. Post #1

Traditional IRA conversions rules under the current tax law allow taxpayers with adjusted gross income of $100,000 to convert their IRA's into Roth, pay the income tax and enjoy the benefits of Roth IRA's.

Deductible Traditional IRA contribution is similar to your contribution to your employer 401(K) plan on a pre-tax basis. These IRA's provide for a current income tax deduction. However, upon distributions you will pay the tax at your ordinary income rate at that time on your IRA contributions and earnings. Income limitation applies as well as coverage by other retirement plans (through employers, or self employed plans).

Whereas, the contribution to Non-Deductible Traditional IRA is similar to after tax contributions you make to your employer 401(K) plan. As a result, upon distributions you will be taxed on the earnings only and not the dollars contributed to the IRA. (Remember, you already paid the tax on these dollars once already, you won't be double taxed). There are no income limitations on individuals prohibiting contributions to non deductible IRA's regardless of coverage by other employer plans.

Roth IRA contribution is on an after tax basis. You ask me, is it different than the non deductible IRA? Oh Yes, since the earnings are income tax free. Yes absolutely income tax free. Similar to non deductible IRA's, you already paid the tax once on these dollars once; earnings are also income tax free. Moreover, you are not subject to dreaded required minimum distributions after age 70 1/2 as required with the traditional IRA's. This means Uncle Sam can't make you take distributions from your IRA if you don't need to or want to for that matter.

Under the current law, not everyone can setup a Roth IRA by contributing new dollars or converting an existing retirement plan, but income limitations apply. You can contribute $5,000 (or $6,000 if you are at least 50 years old) per person to a Roth IRA if your income is $105,000 for single individuals or $166,000 if you are married filing jointly.

You can convert to a Roth IRA in 2009 if your modified adjusted gross income is $100,000 and you are not filing separate from your spouse. However, in 2010 these income limitations disappear. So IRA conversions into Roth IRA's won't be subject to income limitations. The kicker is, if you convert in 2010, you are not paying the income tax on the conversion until April 2011 and 2012. Yes, the IRS allows the income tax bill to be split between the 2 tax years for conversions completed only in 2010. The benefits of ROTH IRA's weigh the initial cost of tax payments for most people, but if you are considering this, please consult with your tax advisor first and keep on reading our future posts addressing this topic. Now that we covered the different IRAs basics, my next post will address the benefits and strategies for conversions.
Stay tuned.......

Married couples without children and wills- to have or not to have:

Most Americans (including couples without children) should have basic legal documents such as wills as discussed in prior posts. Most of us including educated, professionals and celebrities die without one or intestate. These individuals can’t face their own mortality or just aren’t aware of the implications of this decision.

My friend JT is a married young professional, with no children. When asking him if he had a will or an estate plan, his reply was, do I need one? I do not have any kids yet. My answer to JT and all young couples without children yet: is YES. Here is why and how.

First- employees and self-employed individuals generally opt for life insurance policies offered through work to provide liquidity to survivors on the cheap. They also contribute to their retirement plans offered to benefit of the income tax deductions provided in our tax system. These steps are great ways to start building your nest egg as well as provide some protection to your survivors in case of death, however, beware of some of the following traps.

Both life insurance policies and retirement plans such as 401(K)’s and IRA’s require beneficiary designation forms to be completed when you start the program. MAKE SURE, to check this form on a regular basis since the beneficiary designation forms do not follow your will and last testament. The beneficiary named on these forms will inherit this asset regardless of what you will documents say. For example, if you completed a 401(K) beneficiary designation form naming a sibling when you first started working. Years later, you were married, and named your spouse, as your beneficiary in your simple will document. Guess who will inherit this 401(K)? You guessed right, your sibling will. If you have multiple life insurance policies or switched jobs and have several retirement plans, CHECK THESE FORMS ON A REGULAR BASIS.

Second- The Probate court in your state depending on the intestacy laws in the state will provide one third to one half of your assets to your surviving spouse, providing the remainder to your surviving parents and siblings. So, if your goal is to provide your surviving spouse with all your assets, then drafting a will indicating such a wish is necessary. This is especially important if as a couple you both are jointly liable for your home mortgage as well as other personal debt.

The Tax Chick: New Jersey 2009 Income Tax Rate Increase....

The Tax Chick: New Jersey 2009 Income Tax Rate Increase....

New Jersey 2009 Income Tax Rate Increase....

The state of New Jersey is another state enacting increase in their gross income tax rate for the year of 2009, reducing and limiting their already limited income tax deductions as well as eliminating the state of New Jersey property tax rebates among other provisions. These provisions are efforts taken by Gov. Jon Corzine, who signed the state budget on June 29, 2009 to close the state of New Jersey's budget gap.

· Personal income tax rate increase: The personal income tax rate has been increased from for all New Jersey taxpayers with taxable income in excess of $400,000.
The rates are as follow:
1) 8% for taxable income above $400,000 but not over $500,000;
2) 10.25% for taxable income above $500,000 but not over $1 million;
3) 10.75% for all tax filers who earn more than $1 million.

The temporary New Jersey income tax rate increase is in effect for tax years beginning after 2008 and before 2010. The current maximum tax rate is 8.97% for taxable income above $500,000 which is a 20% income tax rate increase.

No additional taxes or penalties will be imposed by the state of New Jersey for deficiencies on estimates tax payments due on salaries, wages received before October 1, 2009, at which point the new tax rates would take effect. Employers will not be subject to interest, penalties, or other costs that would otherwise be imposed as a result of the insufficient withholding according to the new tax rates.

· Property Tax Deduction limitations: The state of New Jersey provides for limited deductions on the tax individual tax returns including a property tax deduction of up to $10,000 for property tax paid. Starting Higher-income taxpayers will see their deductions limited to a maximum of $5,000 for taxpayers with gross income in excess of $150,000, but not over $250,000. For taxpayers with gross income in excess of $250,000, no property tax deduction will be allowed unless the taxpayer is 65 years old or older, blind or disabled.

· Property Tax Rebates: As if limiting the Property Tax Deduction was not sufficient, the legislation eliminates property tax rebates for non-senior non-disabled homeowners with income over $75,000. Senior and disabled homeowners with income up to $150,000 will still qualify. Homeowners with earnings up to $50,000 will receive last year's Property Tax Rebate, whereas homeowners with earnings above $50,000 but not over $75,000 will receive two thirds of last year's property tax rebate.

The measure eliminates non-senior tenants from the homestead rebate program for 2010 fiscal year, but maintains the Senior and Disabled Citizens Property Tax Freeze Program.

· Lottery Winnings Taxation: Currently, winnings from the New Jersey Lottery are exempt from New Jersey income taxes. Beginning tax years after 2008, New Jersey Lottery winnings in excess of $10,000 will be included in gross income and withholding will be required.

Below is the State of New Jersey Department of Taxation public notice regarding the income tax legislation changes and its impact.
http://www.state.nj.us/treasury/taxation/pdf/webnoticetaxrateincrease.pdf

First time homebuyers- Uncle Sam’s limited time offer of up to $8,000:

First time homebuyers or anyone not owning a main residence in the past 3 years might be in luck this summer. The American Recovery and Reinvestment Act of 2009 included a provision providing for an $8,000 tax credit for home purchases between January 1, 2009 and December 1, 2009. The income tax credit is 10% of the home purchase price with a maximum $8,000. Income limitation applies as the situation with any tax credit. In this case, for single individuals, the tax credit is phased-out (reduced) for individuals with income of $75,000 for single filers and $150,000 for married couples. The first-time homebuyers’ tax credit is completely phased out to Zero for single filers with income of $95,000 and $170,000 for married couples.

The 2009 first time homebuyers’ tax credit is different than the one enacted in 2008. The 2008 credit of up to $7,500 on home purchases between April 9, 2008 and before July 1, 2009 was to be recaptured over 15 years ratably with no interest unless the home is sold earlier than 15 years. As a result, the 2008 first time homebuyers credit was considered an interest free loan by Uncle Sam as opposed to a true tax credit as the current tax credit.

Planning point: For home purchases by first time homebuyers between January 1 and July 1 of 2009, if you filed your 2008 income tax return claiming the tax credit under the 2008 tax law, consult your tax advisor and preparer, and consider amending your tax return to claim the 2009 tax credit.

This tax credit significance lies in the value of a tax credit vs. tax deduction. A tax deduction is merely lowering your income providing you with a proportionate percentage equal to your top tax rate. Whereas with the tax credit your tax liability is reduced dollar for dollar. For example, if you are in the 25% tax bracket, your deduction will reduce your taxes by 25 cents on the dollar vs. your tax credit providing you with $1 for $1 deduction.

Moreover, the first time homebuyer’s tax credit is a refundable tax credit. This means, if you owe low to no income tax liability to reduce, Uncle Sam will send you a check with the difference .…. Enjoy your new home.
For more information on this credit check out the following link: http://www.federalhousingtaxcredit.com/2009/faq.php

9 Steps Joe The Plumber regarding his estate planning:

1) Take a complete inventory of all your assets and their values
2) Confirm the form of ownership of these assets since it will impact your estate plan
3) Verify the beneficiary designation forms on your life insurance policies and retirement plans
4) Consider your minor children and name guardians and successor guardians
5) Set up trusts for your minor children and name trustees and successor trustees to manage these trust assets
6) Provide your spouse with a durable power of attorney to take care of financial decisions when you are unable to
7) Repeat the above providing your spouse with a healthcare power of attorney to take care of healthcare decisions in case of your incapacitation
8) Select an experienced attorney to draft your estate plan and legal documents
9) Review your estate plan on a regular basis since changes do happen to you, your family and the law

Let me tell you about Mr. & Mrs. Joe Small. The Smalls are a couple in their mid thirties, so estate planning wasn't a concern (they are invincible after all). Joe is a hard working small business owner trying to provide for his family, while Jane is a stay at home mom taking care of their 3 minor boys. The Smalls, had none of the basic estate planning documents in place, no wills, or trusts, no financial or healthcare power of attorney, and no guardians named to care for their children.

One day, Jane got a call from Joe's office; Joe had a heart attack and was moved to the nearest hospital. Jane was numb; she depended on her husband completely as he managed their finances. What if anything happened to Joe? What would she do with the business? How about the mortgage and their other debt? Do they have enough life insurance to provide for her and her children?

Jane wakes up from her horrible nightmare, waking Joe up and insisting that they schedule a meeting with their estate-planning attorney to start working on their estate plan.

In addition to the 9 steps above, Joe should draft a letter of instructions, which as the name implies provides specific instructions to Jane (no pun intended) on who to contact (ie, which advisor to call first) to give her the piece of mind they both need to sleep at night.

Stay Tuned for more details about the next steps in the Small’s scenario… This should be fun.

Foreign Bank Accounts Reporting (FBAR) deadline extension update alert:

If you thought tax deadlines end on 4/15, you are in for quite a surprise. Another deadline is yet upon us. Taxpayers and professional prepares are sorting through new treasury guidance and the limited time amnesty program offered for offshore account holders.

The new administration is cracking down on individuals and entities with secret offshore and foreign bank accounts. In general, Residents and US citizens pay tax on their worldwide income and not just their US sourced income. For years, notorious Swiss Banks promoted their accounts as solutions to evade US taxes. These foreign banks resisted disclosing information about their investors to the IRS unless permitted in writing by their clients. This is changing fast with the US government efforts to track tax evaders using offshore investing. So if you are one of the individuals believing you can continue to hide your foreign bank accounts, think again.

The reporting is the FBAR (Foreign Bank Account Reporting) declaring all foreign bank accounts and financial accounts held by US citizens and residents when the total value exceeds $10,000 at any time during the year.
The deadline to file this form with the Treasury Department is June 30th extended to September 30th
The form used for the declaration is Treasury Department Form: TD F 90-22.1
The financial accounts include checking, and savings bank accounts, brokerage accounts mutual funds, credit and debit cards, retirement plans as well as other financial instruments.
The filing requirement of the FBAR also applies to individuals with signature authority over any financial accounts.
The penalties include civil and/or criminal penalties await individuals who fail to file the FBAR form by the due date. Monetary penalties are between $10,000 to no more than $500,000 and potential imprisonment of no more than five years for failure to file, supply information and report false information.
The information required on the form includes:

a- The filer information including name, address and tax identification number
b- The financial institutions information including name, address, account number and the maximum value of the account
c- The financial accounts where filer has signature authority without any financial interest
d- The financial accounts where corporate filers are filing a consolidated report
The amnesty program offered by the IRS runs through September 2009 for late filers to come forward voluntarily and disclose delinquent reporting without facing imprisonment and a paying the tax on the income in addition to a single 20% penalty plus interest.