Are Your Clients Covered For Tax Changes, Uncertainties?

Roth IRA: Despite all the hype, 88% of investors are unaware of the Roth IRA conversion opportunity, according to a Fidelity Investments survey. The $100,000 adjusted gross income limit was eliminated as of Jan. 1 so anyone can now take money from a traditional IRA and get a tax-advantaged Roth IRA. An estimated $1.4 trillion is eligible for conversion. Also, employer plans, such as 401(k)s and 403(b)s can be converted to Roth IRAs. Some see opportunities for annuity sales. But such conversions aren’t right for everyone, so advise carefully.

Earned Income Tax Credit (EIC): The credit for 2009 and 2010 rose by $628.50. This is for families with three or more children.

Charitable Contributions: The IRS is cracking down here. Every deduction must be documented from an acceptable and approved charity or organization. Contributions not made in cash will get more scrutiny.

First Time Home Buyer’s Credit: This is extended till April 30. For 2009, taxpayers can take an $8,000 credit if they purchased a home and did not own a home for the three years prior. The deal must close before this June 30. Those who owned or still own a home and then bought a new one as a primary residence may qualify for a $6500 move-up/repeat home buyer tax credit.

Making Work Pay Credit: This was given last spring via employer withholding cuts to qualified workers. It is not taxable but taxpayers need to inform their tax preparer if they received the payment.

Estate Tax Exemptions: For 2009, the federal estate tax exemption is $3.5 million for one person and $7 million for a married couple. Since the federal estate tax expired Dec. 31, there is currently no estate tax in place for 2010. If Congress does nothing, the tax comes back in 2011 at the 2001 level with just a $1 million exemption and a 55% top rate. Expectations are that Congress will enact a “patch” to keep the 2010 rate at the 2009 level and make it retroactive to Jan. 1. But the constitutionality of this will likely be challenged. Meanwhile, insurance folks are reminding us that insurance protects an inheritance regardless of what happens with estate taxes. Stay tuned.

Gift Tax: For 2009, any gift to anybody of $13,000 or less is not taxable. Many advisors urge their clients to take advantage of this. It is a way for families with children to set up their kids with sizable wealth.

Capital Gains: Gain from the sale of assets that are held longer than one year will remain at 0% for people in the 10% or 15% tax brackets. The existing 15% maximum tax rate on long-term capital gains for taxpayers in higher brackets will remain the same.

Business Related Car Mileage: For tax year 2009, the taxpayer may deduct 55 cents a mile but now, in 2010, only 50 cents per mile will be allowed.

Sources: Insurancenewsnet, Suite 101.com, Robert Goldfarb, CPA

Ugliest, Most Expensive Tax Preparation Errors

Millions of taxpayers overpay millions of dollars because of poor or lazy tax advice, according to Jeff Camarda, CFP®, ChFC, CLU, CFA, CFS, BCM of Fleming Island, FL, a Worth Magazine Top 250 advisor. Here are what he sees as the “ugliest and most expensive offenses committed by do-it-yourselfers and big money pros alike:”

1. Lazily taking the Standard Deduction instead of collecting the data, figuring Itemized Deductions and running the tax calculation both ways for the cheapest option.

2. Double taxation on Reinvested Dividends. So many taxpayers pay twice – once when dividends are declared and again when they sell shares but forget to adjust for taxes already paid.

3. Missing the Special Property Tax Deduction. Under a new rule, non-itemizers can take up to an extra $1000 deduction on Schedule L, but millions are expected to miss it.

4. Deduction of State Sales Taxes. It takes a bit of work to figure how much sales tax you paid, but this can be a jackpot for even moderate spenders.

5. Missing the $8,000 Home Buyer Credit. If you have bought a qualifying home recently (or plan to soon) and miss this, shame, shame. An $8,000 tax credit = a $32,000 tax deduction in the 25% bracket.

6. Fear of the IRS. Far too many preparers and taxpayers understate deductions, eschew legitimate, even mainstream strategies, and otherwise intentionally or lazily overpay in some misguided belief that this will somehow appease the IRS into leaving them alone. It just doesn’t work that way. Those who act or advise otherwise are tragically deluded.

FA