Roth IRA Conversions May Make Sense

Starting in 2010, anyone regardless of their income can convert a traditional IRA to a Roth IRA.  In the past, people with more than $100,000 were unable to take advantage of this tax and retirement strategy. 

If you elect to convert, you will have to pay income taxes on any amount converted that has not already been taxed.  (For conversions in 2010 only, Congress has approved a special rule allowing you to treat half of the income from the conversion as received in 2011 and the other half in 2012).  Future withdrawals from the Roth IRA that include earnings are free from federal income tax and penalty after you’ve had your account for at least five years and reached the age of 59 ½ (certain other exceptions may apply).

In addition to income tax free withdrawals, a Roth IRA has several other long-term benefits.

·         With a Roth account, you are not required to take yearly minimum distributions starting at the age of 70 ½.  That could leave more money for your beneficiaries if you do not need it for yourself.  The money your beneficiaries receive from Roth IRA will be free from federal income tax.

·         A Roth IRA can also provide tax diversification.  Tax experts say that if you have  a mix of tax-free accounts (like a Roth IRA) and tax-deferred accounts (such as a 401(k) or traditional IRA), you will have greater income flexibility as your need for money change during retirement.

·         Besides traditional IRAs, a rollover from a retirement plan can be converted to a Roth IRA if you are eligible to take a distribution from the plan.  That could include a 401(k) or a 403(b) plan once you have reach age 59 ½. 

While Congress removed the income limits on conversions to Roth IRAs, the income limits on contributions to Roth IRAs remain.  Thus a higher income investor still cannot contribute to a Roth IRA.  However, a higher income investor could contribute each year to a nondeductible traditional IRA, which has no income limits, and then convert the account to a Roth IRA. 

IRS Continues to Increase Oversight of Tax Return Preparers to Improve Compliance, Taxpayer Service
 
As the April 15 tax deadline approaches, the Internal Revenue Service today announced initial results from its stepped-up effort involving enforcement and education to combat unscrupulous tax return preparers and protect the nation’s taxpayers.

 The IRS said it has conducted more than 5,000 field visits to tax return preparers this fiscal year. In addition, the IRS has worked with the Department of Justice to pursue questionable return preparers, an effort that has led to 56 indictments, 25 convictions and 21 civil injunctions since Jan. 1, 2010.


 “We are working to help ensure taxpayers receive competent and ethical service from qualified tax professionals,” said IRS Commissioner Doug Shulman. “Our efforts this tax season are part of a longer-term effort to improve the oversight of this critical part of the tax system. The vast majority of tax return preparers provide solid service, but we need to do more to protect taxpayers.”

 Shulman announced in January the results of a six-month study of the tax return preparer industry, which proposed new registration, testing and continuing education of tax return preparers. With more than 80 percent of American households using a tax preparer or tax software to help them prepare and file their taxes, higher standards for the tax return preparer community will significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. While this longer-term effort is underway, the IRS has taken several immediate steps this filing season to assist taxpayers.

 Enforcement Efforts

 The IRS has worked closely with the Justice Department this tax season to increase legal actions against unscrupulous tax return preparers, obtaining 21 civil injunctions, 56 indictments and 25 convictions of return preparers so far in 2010. More information is available at the IRS Civil and Criminal Actions page on irs.gov. and at the Department of Justice Tax Division page on DOJ.gov.

 “The IRS appreciates the strong support of the Justice Department for its efforts to pursue and shut down bad actors in the tax return industry,” Shulman said. “This effort makes a real difference for the nation’s taxpayers and helps protect the many tax professionals who play by the rules.”


“While the majority of return preparers provide excellent service to their clients, a few unscrupulous tax preparers file false and fraudulent returns to defraud the government and the tax-paying public. Those actions are illegal, and can result in substantial civil penalties as well as criminal prosecution, for both the return preparers and their customers who knew or should have known better. Taxpayers should choose carefully when hiring a tax preparer,” said John A. DiCicco, Acting Assistant Attorney General of the Justice Department’s Tax Division.

Also during this filing season, the IRS used investigative tools on a broad basis, including agents posing as taxpayers, to seek out and stop unscrupulous preparers from filing inaccurate returns. To date, the IRS conducted 230 undercover visits to tax return preparers. In addition, dozens of search warrants have been completed. The IRS will continue to work closely with the Department of Justice to pursue civil and criminal action as appropriate.


Education Efforts

In January, the IRS sent more than 10,000 letters to tax return preparers. These letters reminded them of their obligation to prepare accurate returns for their clients, reviewed common errors, and outlined the consequences of filing incorrect returns. The letters went to preparers with large volumes of specific tax returns where the IRS typically sees frequent errors, although simply receiving a letter was not an indication the preparer had problems.

The IRS followed up with field visits to about 2,400 tax return preparers who received these letters to discuss many of the issues mentioned in the letter. Separately, the IRS conducted other compliance and educational visits with return preparers on a variety of other issues. All told, IRS representatives visited more than 5,000 paid preparers to encourage and help them avoid filing incorrect or fraudulent returns for their clients. The IRS will be reviewing the results of these letters and visits to determine steps for future filing seasons.

Future Efforts

The IRS has recently begun to implement a number of steps to increase oversight of federal tax return preparers. This includes proposed regulations that would require paid tax return preparers to obtain and use a preparer tax identification number (PTIN). Later this year, the IRS will propose additional regulations requiring competency tests and continuing professional education for paid tax return preparers who are not attorneys, certified public accountants and enrolled agents.

Setting higher standards for the tax preparer community will significantly enhance protections and services for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. Other measures the IRS anticipates taking are highlighted in Publication 4832, Return Preparer Review, issued earlier this year.

Help for Taxpayers before April 15

As the tax deadline approaches, the IRS reminds taxpayers that most tax return preparers are professional, honest and provide excellent service to their clients. But a few simple steps can help people choose a good tax return preparer and avoid fraud:

• Be wary of tax preparers who claim they can obtain larger refunds than others.
• Avoid tax preparers who base their fees on a percentage of the refund.
• Use a reputable tax professional who signs the tax return and provides a copy. Consider whether the individual or firm will be around months or years after the return has been filed to answer questions about the preparation of the tax return.
• Check the person’s credentials. Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
• Find out if the return preparer is affiliated with a professional organization that provides its members with continuing education and other resources and holds them to a code of ethics.

 

Top 10 First-Time Homebuyer Credit Tax Tips 

There is still time to claim the First-Time Homebuyer Tax Credit on your 2009 tax return. If you purchased or entered into a binding contract to purchase a home in 2009 or early 2010, you may be eligible to claim the First-Time Homebuyer Credit. Claiming this credit might mean a larger refund. Here are 10 things the IRS wants you to know about the First-Time Homebuyer Credit and how to claim it.

1.     You must buy – or enter into a binding contract to buy – a principal residence located in the United States on or before April 30, 2010. If you enter into a binding contract by April 30, 2010, you must close on the home on or before June 30, 2010.

2.     To be considered a first-time homebuyer, you and your spouse – if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase.

3.     To be considered a long-time resident homebuyer, you and your spouse – if you are married – must have lived in the same principal residence for any consecutive five-year period during the eight-year period that ended on the date the new home is purchased. Additionally, your settlement date must be after November 6, 2009.

4.     The maximum credit for a first-time homebuyer is $8,000. The maximum credit for a long-time resident homebuyer is $6,500.

5.     You must file a paper return and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit with additional documents to verify the purchase. Though you cannot file electronically, you can still use IRS Free File or tax-preparation software to prepare your return. The return must then be printed out and sent to the IRS, along with all required documentation.

6.     If before May 1, 2010, you enter into a binding contract to purchase a home before July 1, 2010, and you are claiming the credit, attach a copy of the pages from the signed binding contract to make a purchase showing all parties' names and signatures, the property address, the purchase price and the date of the contract. 

7.     New homebuyers must attach a copy of a properly executed settlement statement used to complete such purchase. Generally, a properly executed settlement statement shows all parties' names and signatures, property address, sales price and date of purchase. However, settlement documents, including the Form HUD-1, can vary from one location to another and may not include the signatures of both the buyer and seller. In areas where signatures are not required on the settlement document, the IRS encourages buyers to sign the settlement statement when they file their tax return -- even in cases where the settlement form does not include a signature line.

8.     Buyers of a newly constructed home, where a settlement statement is not available, must attach a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

9.     Purchasers of mobile homes who are unable to get a settlement statement must attach a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.

10.   If you are a long-time resident claiming the credit, the IRS recommends that you also attach documentation covering the five-consecutive-year period such as Form 1098, Mortgage Interest Statement or substitute mortgage interest statements, property tax records or homeowner’s insurance records.

Checking on Economic Recovery Payments

Taxpayers who can’t recall if they received an economic recovery payment should personally contact one of the agencies listed below for confirmation before completing and filing their 2009 tax return.  The IRS will not be able to provide this information.  If taxpayers need to know whether they got a payment, they should contact the agency that would have issued their payment.

 

 

Be Sure to Know Whether You Qualify for the Earned Income Tax Credit

The Earned Income Tax Credit, commonly referred to as EITC, can be a financial boost for working people adversely impacted by hard economic times. However, one in four eligible taxpayers could miss out on the credit because they don’t check it out. Here are the top 10 things the Internal Revenue Service wants you to know about this valuable credit, which has been making the lives of working people a little easier for 35 years.

1.     Just because you didn’t qualify last year, doesn’t mean you won’t this year. As your financial, marital or parental situations change from year-to-year, you should review the EITC eligibility rules to determine whether you qualify.

2.     If you qualify, it could be worth up to $5,657 this year. EITC not only reduces the federal tax you owe, but could result in a refund. The amount of your EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. New EITC provisions mean more money for larger families.

3.     If you qualify, you must file a federal income tax return and specifically claim the credit in order to get it – even if you are not otherwise required to file.

4.     Your filing status cannot be Married Filing Separately.

5.     You must have a valid Social Security Number. You, your spouse – if filing a joint return – and any qualifying child listed on Schedule EIC must have a valid SSN issued by the Social Security Administration.

6.     You must have earned income. You have earned income if you work for someone who pays you wages, you are self-employed, you have income from farming, or – in some cases – you receive disability income.

7.     Married couples and single people without kids may qualify. If you do not have qualifying children, you must also meet the age and residency requirements as well as dependency rules.

8.     Special rules apply to members of the U.S. Armed Forces in combat zones. Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If you make this election, the combat pay remains nontaxable.

9.     It’s easy to determine whether you qualify. The EITC Assistant, an interactive tool available on IRS.gov, removes the guesswork from eligibility rules. Just answer a few simple questions to find out if you qualify and estimate the amount of your EITC.

Here are the top five changes that may show up on your 2009 return.

1. The American Recovery and Reinvestment Act

ARRA provides several tax provisions that affect tax year 2009 individual tax returns due April 15, 2010. The recovery law provides tax incentives for first-time homebuyers, people who purchased new cars, those that made their homes more energy efficient, parents and students paying for college, and people who received unemployment compensation.

2. IRA Deduction Expanded

You may be able to take an IRA deduction if you were covered by a retirement plan and your 2009 modified adjusted gross income is less than $65,000 or $109,000 if you are married filing a joint return.

3. Standard Deduction Increased for Most Taxpayers

The 2009 basic standard deductions all increased. They are:

• $11,400 for married couples filing a joint return and qualifying widows and widowers
• $5,700 for singles and married individuals filing separate returns
• $8,350 for heads of household

Taxpayers can now claim an additional standard deduction based on the state or local sales or excise taxes paid on the purchase of most new motor vehicles purchased after February 16, 2009. You can also increase your standard deduction by the state or local real estate taxes paid during the year or net disaster losses suffered from a federally declared disaster.

4. 2009 Standard Mileage Rates

The standard mileage rates changed for 2009. The standard mileage rates for business use of a vehicle:

• 55 cents per mile

The standard mileage rates for the cost of operating a vehicle for medical reasons or a deductible move:

• 24 cents per mile

The standard mileage rate for using a car to provide services to charitable organizations remains at 14 cents per mile.

5. Kiddie Tax Change

The amount of taxable investment income a child can have without it being subject to tax at the parent's rate has increased to $1,900 for 2009.

Do I have to File a tax return?

You must file a tax return if your income is above a certain level. The amount varies depending on filing status, age and the type of income you receive.

Check the Individuals section of IRS.gov or consult the instructions for Form 1040, 1040A, or 1040EZ for specific details that may affect your need to file a tax return with the IRS this year.Even if you don't have to file, here are eight reasons why you may want to file:

1. Federal Income Tax Withheld If you are not required to file, you should file to get money back if Federal Income Tax was withheld from your pay, you made estimated tax payments, or
had a prior year overpayment applied to this year's tax.

2. Making Work Pay Credit You may be able to take this credit if you have earned income from work. The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers.

3. Government Retiree Credit You may be eligible for this credit if you received a government pension or annuity payment in 2009. However, the amount of this credit reduces any making work pay credit you receive.

4. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund.

5. Additional Child Tax Credit This credit may be available to you if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

6. Refundable American Opportunity Credit This education tax credit is available for 2009 and 2010. The maximum credit per student is $2,500 and the first four years of postsecondary education qualify.

7. First-Time Homebuyer Credit. The credit is a maximum of $8,000 or $4,000 if your filing status is married filing separately. The credit applies to homes bought anytime in 2009 and on or before April 30, 2010. However, you have until on or before June 30, 2010, if you entered into a written binding contract before May 1, 2010. If you bought a home after November 6, 2009, you may be able to qualify and claim the credit even if you already owned a home. In this case, the maximum credit for long-time residents is $6,500, or $3,250 if your filing status is married filing separately.

8. Health Coverage Tax Credit. Certain individuals, who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a Health Coverage Tax Credit worth 80 percent of monthly health insurance premiums when you file your 2009 tax return.

Get Your Refund Faster - Choose Direct Deposit 

If you want to get your refund as quickly as possible, just tell the IRS to deposit your refund directly into your bank account. By choosing Direct Deposit, you can get your refund much sooner than if you chose to have a paper check mailed to you.
Here are the main reasons 73 million taxpayers chose Direct Deposit in 2009:

1.     Security Thousands of paper checks are returned to the IRS by the U.S. Post Office every year as undeliverable mail. Direct Deposit eliminates the possibility you won’t receive your check and prevents your refund from being stolen.

2.     Convenience The money goes directly into your bank account. You won’t have to make a special trip to the bank to deposit the money yourself.

3.     Ease When you’re preparing your return, simply follow the instructions on your return. Make sure you enter the correct bank account and bank routing numbers on your tax form and you’ll receive your refund quicker than ever.

4.     Options You can also deposit your refund into multiple accounts. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts and up to three different U.S. financial institutions. Use IRS Form 8888, Direct Deposit of Refund to More Than One Account, to divide your refund among different accounts. A word of caution: some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your Direct Deposit will be accepted.

Ten Facts About Claiming Donations Made to Haiti

If you are donating to charities providing earthquake relief in Haiti, you may be able to claim those donations on your 2009 tax return. Here are 10 important facts the Internal Revenue Service wants you to know about this special provision.

1.     A new law allows you to claim donations for Haitian relief on your 2009 tax return, which you will be filing this year.

2.     The contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti.

3.     To be eligible for a deduction on the 2009 tax return, donations must be made after Jan. 11, 2010 and before March 1, 2010.

4.     In order to be deductible, contributions must be made to qualified charities and can not be designated for the benefit of specific individuals or families.
 
5.     The new law applies only to cash contributions.

6.     Cash contributions made by text message, check, credit card or debit card may be claimed on your federal tax return.

7.     You must itemize your deductions in order to claim these donations on your tax return.

8.     You have the option of deducting these contributions on either your 2009 or 2010 tax return, but not both.

9.     Contributions made to foreign organizations generally are not deductible. You can find out more about organizations helping Haitian earthquake victims from agencies such as the U.S. Agency for International Development ( www.usaid.gov).

10.   Federal law requires that you keep a record of any deductible donations you make. For donations by text message, a telephone bill will meet the record-keeping requirement if it shows the name of the organization receiving your donation, the date of the contribution, and the amount given. For cash contributions made by other means, be sure to keep a bank record, such as a cancelled check or a receipt from the charity. Receipts should show the name of the charity, the date and amount of the contribution.

Some of the Tax Changes for Individuals for 2009 - 2010

(The hyperlinks will take you to the IRS site discussing the changes.)

Alternative Minimum Tax (AMT)
There are several changes affecting Alternative Minimum Tax for 2009.

Child-Related Tax Changes
Information on adoption benefits, child's investment income, the definition of a qualifying child, and additional child tax credit.

Decreased Estimated Tax Payments for Qualified Individuals With Small Businesses
For 2009, qualified individuals with small businesses may be eligible to make smaller estimated tax payments.

Deduction for Credit or Debit Card Convenience Fees
If you pay your income tax (including estimated tax payments) by credit or debit card, you may be able to deduct convenience fees.

Deduction for Sales and Excise Taxes Imposed on Purchase of New Motor Vehicles
In 2009, you can deduct the state or local sales and excise taxes imposed on the purchase of a qualified motor vehicle after February 16, 2009, and before January 1, 2010.

Earned Income Credit
The earned income credit amounts have increased for 2009 and 2010.

Economic Recovery Payment
Information on new economic recovery payments and credits.

Education-Related Tax Changes
Information on education savings bond exclusion, hope and lifetime learning credits, tuition and fees deduction, and student loan interest deduction.

Health/Medical-Related Tax Changes
Information on Archer Medical Savings Accounts (MSAs), Health Savings Accounts(HSAs), and long-term care premiums.

Home/Residence-Related Tax Changes
Information on mortgage insurance premiums, residential energy credits, and sale of main home by employees of intelligence communities.

Income Averaging for Farmers and Fisherman
New rules apply for averaging farming and fishing income. Information on settlements from Exxon Valdez litigation.

Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion
New limits on exclusion payments made under a long-term care insurance contract.

Increase in Personal Casualty and Theft Loss Limit
General rule for personal casualty or theft loss for 2009.

Itemized Deductions
The itemized deduction phaseout income limits have increased for 2009.

New Rules for Children of Divorced or Separated Parents
For tax years beginning after July 2, 2008 (the 2009 calendar year for most taxpayers), new rules apply to allow the custodial parent to revoke a release of claim to exemption that was previously released to the noncustodial parent on Form 8332 or similar form.

Penalty for Failure to File Income Tax Return Increased
The failure to file penalty has increased.

Personal Exemptions
The deduction amount and phaseout income levels have increased for 2009.

Qualified Transportation Fringe Benefits
Changes to the monthly exclusion for commuter highway vehicle transportation and transit passes and reimbursement for reasonable expenses of qualified bicycle commuting.

Residential Energy Credits
Information on residential energy credits.

Social Security and Medicare Taxes
The maximum amount of wages subject to the social security tax and Medicare tax has increased.

Special Limitation Period for Retroactively Excluding Military Retirement Pay
If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive.

Standard Deduction Increased
The standard deduction increased.

Standard Mileage Rate
The standard mileage rate for business use of your vehicle, medical and move- related use and charitable use have decreased for 2009.

Unemployment Compensation
A portion of unemployment compensation received is excludable.

Wage Threshold for Household Employees
The social security and Medicare wage threshold for household employees is...

IRS Announces Qualified Disaster Treatment for Haiti 

Washington — The Internal Revenue Service today issued guidance that designates the earthquake in Haiti in January 2010 as a qualified disaster for federal tax purposes. The guidance allows recipients of qualified disaster relief payments to exclude those payments from income on their tax returns. Also, the guidance allows employer-sponsored private foundations to assist victims in areas affected by the January 2010 earthquake in Haiti without affecting their tax-exempt status.

Charities usually fall into one of two categories — public charities or private foundations. Under the tax law, a private foundation that is employer-sponsored may make qualified disaster relief payments to employees affected by a qualified disaster. These payments generally include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair or replace the contents to the extent that they were not covered by insurance. Again, these payments would not be included in the individual recipient’s gross income.

Qualified disasters include Presidentially declared disasters and any other event that the Secretary of the Treasury determines to be catastrophic. The IRS has determined that the earthquake in Haiti that occurred this month is an event of catastrophic nature for purposes of the federal tax law.

The IRS will presume that qualified disaster relief payments made by a private foundation to employees and their family members in areas affected by the earthquake in Haiti to be consistent with the foundation's charitable purposes.

IRS Proposes New Registration, Testing and Continuing Education Requirements for Tax Return Preparers Not Already Subject to Oversight

IR-2010-1, Jan. 4, 2010

WASHINGTON –– The Internal Revenue Service kicked off the 2010 tax filing season today by issuing the results of a landmark six-month study that proposes new registration, testing and continuing education of tax return preparers. With more than 80 percent of American households using a tax preparer or tax software to help them prepare and file their taxes, higher standards for the tax preparer community will significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term.

To bring immediate help to taxpayers this filing season, the IRS also announced a sweeping new effort to reach tax return preparers with enforcement and education. As part of the outreach effort, the IRS is providing tips to taxpayers to ensure they are working with a reputable tax return preparer.

"As tax season begins, most Americans will turn to tax return preparers to help with one of their biggest financial transactions of the year. The decisions announced today represent a monumental shift in the way the IRS will oversee tax preparers," said IRS Commissioner Doug Shulman. "Our proposals will help ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of the nation's tax system. In addition, we are taking immediate action to step up oversight of tax preparers this filing season.”

Based on the results of the Return Preparer Review released today, the IRS recommends a number of steps that it plans to implement for future filing seasons, including:

• Requiring all paid tax return preparers who must sign a federal tax return to register with the IRS and obtain a preparer tax identification number (PTIN). These preparers will be subject to a limited tax compliance check to ensure they have filed federal personal, employment and business tax returns and that the tax due on those returns has been paid.
• Requiring competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies.
• Requiring ongoing continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements.

·        Extending the ethical rules found in Treasury Department Circular 230 -- which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS -- to all paid preparers. This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct.

Other measures the IRS anticipates taking are highlighted in the 55-page report released today.

Currently, anyone may prepare a federal tax return for anyone else and charge a fee. While some preparers are currently licensed by their states or are enrolled to practice before the IRS, many do not have to meet any government or professionally mandated competency requirements before preparing a federal tax return for a fee.

Remember Potts' Taxes only uses Enrolled Agents and/or members of the U.S. Tax Court Bar to represent you!