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2009 tax year

Flash again! Homebuyer’s Credit Expanded to Non-first timers…

Nov 12th, 2009
by jblankenship.
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In an update to the update, I wanted to pass this along:  part of the bill passed last week which extended the first-time homebuyer’s credit through June of 2010, ALSO expanded the types of homebuyers to include “long-term residents of the same principal residence”.

This “long-term resident” is defined as a homeowner who has owned and lived in the same principal residence for five consecutive years within the eight year period ending with the purchase of the new home.

New limits are in effect, as well – originally this credit (maximum $8,000 for first-timers, $6,500 for long-timer homeowners) phased out between $75,000 and $95,000 MAGI for a single individual or between $150,00 and $170,000 for married filing jointly (MFJ).  The new phaseouts begin at $125,000 for singles and $225,000 for MFJ.  There is a further limitation in that the home must cost no more than $800,000 (although this is solely effective for homes purchased after November 6, 2009.

For more information, you can view the video below:

View the First-Time Homebuyer Credit video 

Prepared by Forefield Inc. Copyright 2009 Forefield Inc.


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Flash! Extension for First-Time Homebuyer’s Credit

Nov 8th, 2009
by jblankenship.
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flash I wrote about this credit’s expiration some time ago, (you can see this post for the original article) – and as anticipated, this past week Congress has opted to stretch out the expiration date for 7 months, through June 30, 2010. Note: it was extended again, through September 30, 2010. Briefly, this credit provides up to $8,000 in credit for first-time homebuyers who have MAGI less than $150,000 (for married couples – $75,000 for single filers).

I haven’t seen any numbers to show what impact this particular credit has had on the housing market – but any impact it has had must have been minimal, albeit positive.  The housing market continues to be pretty dismal throughout much of the country, even in the face of continued reductions in mortgage rates, which have now dipped below the 5% level for 30-year typical mortgages.

So, if you weren’t quite ready to take the plunge and buy before December 1, you now have 7 more months to get ready (if you want to take advantage of this credit).

Image by Epix
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Don’t Forget Social Security in Your Roth IRA Conversion Strategy

Nov 4th, 2009
by jblankenship.
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With the coming change to the Roth IRA conversion rules, there is lots of focus on the decisions you face when considering a conversion.  One area that often gets short shrift is the future impact on Social Security benefits taxation.

fatcat by ChikaUnderstandably, this hasn’t really hit the radar for next years’ conversion topics, because this is primarily important to folks with a much lower income.  So if you’re one of those fatcats with an annual retirement income projected above $100,000, then you might not want to bother reading any further – this likely doesn’t apply to you. (But look at the note at the bottom before you leave!)

However, (and there’s always a however in life), this will be important to consider if you are in a position to reduce your net non-Social Security plus ½ of your Social Security Benefit to a level below $44,000 (even moreso if you can reduce it to below $32,000).  Those are the numbers for Married Filing Jointly – the figures for Single, Qualifying Widow(er), Head of Household, or Married Filing Separately are  $34,000 and $25,000, respectively.

Now, it may seem like this is a pretty insurmountable position to be in… after all, you need an income of (for example) $60,000 in order to just get by!  Imagine, though, what would happen if you were able to take a large portion of that $60,000 from a tax-free source, such as a Roth IRA.  In that case, you might be able to get by without having to pay tax on any or a large portion of your Social Security benefits.

social security lips by Aric Riley

The Facts

I guess I got a little ahead of myself – let’s back up and look at the facts.  If your net AGI (not including line 20b) plus ½ of your Social Security Benefit is less than $32,000 ($25,000 for Singles, et al), then none of your Social Security Benefit is taxed.  If the amount described above is greater than $32,000 but not more than $44,000 (between $25,000 and $34,000 for Singles), then 50% of your Social Security Benefit will be taxed.  If that same figure is above $44,000 ($34,000 for Singles), then 85% of your Social Security Benefit will be taxed.

Example (*uses 2009 tax tables – your mileage may vary)

Let’s say for example that John and Mary’s lifestyle need requires an income of $60,000, and they have a combined Social Security Benefit of $25,000.  So, John and Mary take a total of $35,000 from their IRAs (total balance of $500,000) to make up the difference.  Running the calculation, when we add ½ of the SS benefit to the rest of the income ($12,500 plus $35,000) we get $47,500.  Since this is greater than $44,000, 85% of the SS benefits are taxed.

If John and Mary decided to convert 20% of their IRAs to Roth IRAs ($100,000), now instead of taking $35,000 from the traditional IRA each year, they could take $28,000 from the traditional IRA and $7,000 from the Roth.  Re-running the calculation, now ½ of SS benefit plus AGI ($12,500 plus $28,000) equals $40,500.  Now, only 50% of the SS benefit is taxed!  Granted, in the year of the Roth conversion, John and Mary had to pay considerably more tax on the conversion amount, an additional $21,980, but this pays off in reduced taxable SS benefit after just over 9 years.

Taking this a step further, if John and Mary decided to convert 40% of their IRAs to Roth IRAs ($200,000), we can eliminate taxation of SS benefits altogether.  Now we’re taking only $21,000 in income from the traditional IRA and $14,000 (tax free) from the Roth.  Running the calculation again, we come up with $33,500 ($12,500 plus $21,000) – now we’re less than the $34,000 limit.  At this level, NONE of the Social Security benefit is taxed.  Again, there is a significant tax cost in the year of conversion ($51,415), which is paid off in reduced taxes in just over 11 years at today’s rates.  With both examples, if future tax rates increase when future tax rates increase, the payoff is even faster.

So you can see how this could be a great strategy for folks that are capable of reducing their income component by such a factor.  There’s also the added benefit of reduced amounts against which Required Minimum Distributions are calculated.  As you reach the RMD age limit (70½), you may have determined that you don’t need the amount that is prescribed as income.  If you’ve reduced the traditional IRA balance by converting a good portion to a Roth IRA, the RMD amount will be less by proportion.

Of course, you could also reduce the tax hit by drawing out the time within which you do the conversions – such as splitting up that $200,000 over four years, for example – this way you’d have much more of the conversion being taxed at lower rates.  Obviously, your situation is going to vary from the example, so work closely with your tax advisor as you make plans.

Note:  Keep in mind that this strategy could work for literally anyone at any income level – as long as the income isn’t from a fixed source, such as a traditional pension.  If it’s from investment accounts, IRAs, annuities, or some qualified retirement plan, then you should consider this strategy to see if it makes sense for you.

Photo #1 by Chika

Photo #2 by Aric Riley
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Sales Tax Deduction Expires After 2011

Oct 3rd, 2009
by jblankenship.
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cash register by mindluge For the past several years, it has been an option for taxpayers that itemize their deductions to choose between deducting state income tax or a formulaic estimate of their state and local sales tax, plus the specific sales taxes on any “big ticket” items, such as automobiles.

During 2009, there was a new wrinkle added, part of ARRA 2009: for this year only, if you purchase a vehicle between February 17, 2009 and December 31, 2009, you can deduct the sales tax (within a liberal limit) “above the line”, in addition to, your standard or itemized deductions. (see this link for more specifics)

These two provisions are currently set to expire at the end of the 2011 calendar year.  It is unclear how much impact the new, 2009 auto sales tax deduction has had on the automobile industry (which was the primary reason behind this deduction) – so it is possible that Congress may see fit to extend this provision into next year.  We’ll just have to wait and see.

At any rate, it is not likely, in my humble opinion, that the itemized deduction of sales tax will be extended, as this deduction doesn’t appear to have had a stimulating economic impact – most folks don’t even know it’s an option.

Photo by mindluge
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Expiring Tax Provisions From ARRA 2009

Sep 13th, 2009
by jblankenship.
1 comment

10002248Earlier this year, the American Recovery and Reinvestment Act (ARRA 2009) was passed, and it contained quite a few tax incentives that were only good for this year.  Since we’re coming down to the last three months of the year, I thought it would be appropriate to highlight those provisions that will be expiring this year.  Click on the title link for each section to be taken to the original article I wrote about the provision.

First-Time Homebuyer Credit

This provision expires on December 1, 2009*.  This is a credit of up to $8,000 on either an original or amended 2008 tax return, or a tax return filed for 2009 – but the purchase must be closed by December 1, 2009.  To be eligible, you must not have owned a principal residence during the past three years prior to the purchase date of the new home.  Further, this deduction is phased out for MAGI above $75,000 for singles, $150,000 for married individuals.

* Note: this provision has been extended through September 30, 2010.  See this post for details.

New Vehicle Purchase Incentive

State and local sales tax are deductible on the purchase of new cars, light trucks, motor homes, and motorcycles.  The deduction is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle.  The MAGI phaseout for this credit is at $125,000 for singles and $250,000 for married filing jointly.  This provision expires on January 1, 2010.

Reduced Withholding

The “Making Work Pay” Credit lowered withholding tax for most employed individuals earlier this year.  This provision is set to expire on December 31, 2009.  The important point of this provision is that if your tax situation is somewhat complicated – for example, if you have more than one wage-paying job, both spouses in the household work, or if you can be claimed as a dependent by another taxpayer – you should review your withholding now to determine if you’ve had enough withheld throughout the year.  Otherwise, you could inadvertently have an underpayment penalty, receive a much lower refund than you expected, or possibly even owe taxes when you anticipated a refund.

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Gift Tax Changes in 2010 and 2011

Sep 7th, 2009
by jblankenship.
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help-with-taxes

12/17/2010 – with the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Gift Tax law is updated as follows:  35% maximum tax rate, and $5,000,000 lifetime exclusion.  This is simply an extension of the 2010 rate into the future, with the exemption being unified with the Estate Tax exemption and indexed to inflation.

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Estate Tax Changes for 2010 and 2011

Sep 5th, 2009
by jblankenship.
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estate_tax_cartoon

12/17/2010 – with the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Estate Tax law is updated with a retroactive rate for 2010 (although estates that came into being in 2010 can make choices) of 35% and a $5,000,000 exemption.  The rate will continue into the future through 2012, and the exemption is to be indexed beginning in 2013.  In addition, couples can jointly use the full $10,000,000 available between the two on either estate, split however they choose.

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2009 IRA MAGI Limits for a Filing Status of Married Filing Jointly or Qualifying Widow(er)

Jan 1st, 2009
by Jim.
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joints-by-glencharnoch12009 IRA MAGI Limits for a Filing Status of Married Filing Jointly or Qualifying Widow(er)

Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility.

For a Traditional IRA (Filing Status Married Filing Jointly or Qualifying Widow(er)):

If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at work, and your MAGI is $89,000 or less, there is also no limitation on your deductible contributions to a traditional IRA.

If you are covered by a retirement plan at your job and your MAGI is more than $89,000 but less than $109,000, you are entitled to a partial deduction, reduced by 25% for every dollar over the lower limit (or 30% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $109,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2009. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

If you are not covered by a retirement plan at your job, but your spouse IS covered by a retirement plan, and your MAGI is less than $166,000, you can deduct the full amount of your IRA contributions.

If you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $166,000 but less than $176,000, you are entitled to a partial deduction, reduced by 50% for every dollar over the lower limit (or 60% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $176,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2009. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status of Married Filing Jointly or Qualifying Widow(er)):

If your MAGI is less than $166,000, you are eligible to contribute the entire amount to a Roth IRA.

If your MAGI is between $166,000 and $176,000, your contribution to a Roth IRA is reduced ratably by every dollar above the lower end of the range, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If your MAGI is $176,000 or more, you can not contribute to a Roth IRA.

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2009 IRA MAGI Limits for a Filing Status of Single or Head of Household

Jan 1st, 2009
by Jim.
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03-girls-singles-by-coljay722009 IRA MAGI Limits for a Filing Status of Single or Head of Household

. Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on this page to determine eligibility. .

For a Traditional IRA (Filing Status Single or Head of Household):

If you are not covered by a retirement plan at your job, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at work, if your MAGI is $55,000 or less, there is also no limitation on your deductible contributions to a traditional IRA.

If you are covered by a retirement plan at your job and your MAGI is more than $55,000 but less than $65,000, you are entitled to a partial deduction, reduced by 50% for every dollar over the lower limit (or 60% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $65,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2009. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status Single or Head of Household):

If your MAGI is less than $105,000, you are eligible to contribute the entire amount to a Roth IRA.

If your MAGI is between $105,000 and $120,000, your contribution to a Roth IRA is reduced ratably by every dollar above the lower end of the range, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If your MAGI is $120,000 or more, you can not contribute to a Roth IRA.

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2009 IRA MAGI Limits for a Filing Status of Married Filing Separately

Jan 1st, 2009
by Jim.
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separated-by-ikarl672009 IRA MAGI Limits for a Filing Status of Married Filing Separately

Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility.

For a Traditional IRA (Filing Status Married Filing Separately):

If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at your job and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 50% for every dollar (or 60% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $10,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2009. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

If you are not covered by a retirement plan but your spouse is, and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 50% for every dollar over the lower limit (or 60% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $10,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2009. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status of Married Filing Separately):

If your MAGI is less than $10,000, your contribution to a Roth IRA is reduced ratably by every dollar, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If your MAGI is $10,000 or more, you can not contribute to a Roth IRA.

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