First-Time Homebuyer Credit Requires Additional Documentation
January 19, 2010 | 
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The Internal Revenue Service today released the new form that eligible homebuyers need to claim the first-time homebuyer credit this tax season and announced processing of those tax returns will begin in mid-February. The IRS also announced new documentation requirements to deter fraud related to the first-time homebuyer credit.
In addition to filling out a Form 5405, all eligible homebuyers must include with their 2009 tax returns one of the following documents in order to receive the credit:
- A copy of the settlement statement showing all parties’ names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.
- For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties’ names and signatures, property address, purchase price and date of purchase.
- For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.
In addition, the new law allows a long-time resident of the same main home to claim the homebuyer credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. The IRS has encouraged homebuyers claiming this part of the credit to avoid refund delays by attaching documentation covering the five-consecutive-year period:
- Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
- Property tax records or
- Homeowner’s insurance records.
The IRS also reminded homebuyers that the new documentation requirements mean that taxpayers claiming the credit cannot file electronically and must file paper returns.
Submitted by Sam Cohen
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10 Tax Tips to Consider If You Have Children
January 14, 2010 | Subscribe to our RSS Feed
Got Kids? They may have an impact on your tax situation. Listed below are the top 10 things the IRS wants you to consider if you have children.
- Dependents. In most cases, a child can be claimed as a dependent in the year they were born.
- Child Tax Credit. You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax.
- Child and Dependent Care Credit. You may be able to claim the credit if you pay someone to care for your child under age 13 so that you can work or look for work.
- Earned Income Tax Credit The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund.
- Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child.
- Children with Earned Income If your child has income earned from working they may be required to file a tax return.
- Children with Investment Income Under certain circumstances a child’s investment income may be taxed at the parent’s tax rate.
- Coverdell Education Savings Account This savings account is used to pay qualified educational expenses at an eligible educational institution. Contributions are not deductible, however, qualified distributions generally are tax-free.
- Higher Education Credits Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income.
- Student Loan Interest You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions.
Submitted by Sam Cohen
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8 Facts To Determine Your Filing Status
January 8, 2010 | Subscribe to our RSS Feed
It is important that you choose your correct filing status as it determines your standard deduction, the amount of tax you own, and any refund owed to you.
- Your marital status on the last day of the year determines your marital status for the entire year.
- If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
- Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.
- A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.
- If a spouse died during the year and you did not remarry during 2009, you may still file a joint return with that spouse for the year of death, provided the joint return election is not revoked by a personal representative for the deceased spouse.
- A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately.
- Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
- You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2007 or 2008, you have a dependent child and you meet certain other conditions.
Submitted by Sam Cohen
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A New Opportunity with Roth IRA Conversions
December 16, 2009 | Subscribe to our RSS Feed
In January 2010, there will be dramatic changes in planning for Individual Retirement Accounts. Higher income individuals will now be able to take advantage of a conversion opportunity once limited to those taxpayers with an adjusted gross income less than $100,000. The answer to the question “Should I convert to a Roth IRA,” however, is not a simple one.
THE ROTH IRA CONVERSION RULES Currently, taxpayers can convert traditional IRAs and qualified retirement accounts, such as 401(k) accounts, to a Roth IRA as long as their adjusted gross income is under $100,000. In 2010, and for all subsequent tax years, the $100,000 limit is eliminated and all taxpayers will be permitted to convert certain retirement assets to a Roth IRA.
The amount converted to a Roth IRA will be included as ordinary income for the year in which the account was converted. However, for conversion in 2010 only, taxpayers can elect to defer half of their tax liability to 2011 and the other half to 2012.
The Roth IRA can grow and be distributed tax-free as long as distributions are not taken within five years of the first contribution or conversion, and not until after age 59½.
ROTH IRA CONVERSION CONSIDERATIONS Among the factors to consider when converting retirement assets to a Roth IRA include investment timeline; available assets to pay the resulting income taxes; current income tax bracket; anticipated income tax bracket in retirement; and whether income tax rates might be lower or higher in the future. Whether a Roth IRA conversion makes sense will depend on some of these factors and each individual’s specific financial and estate planning goals and objectives.
POTENTIAL REASONS TO CONVERT TO A ROTH IRA There are a number of potential reasons to convert retirement assets to a Roth IRA. Some of the more compelling ones are:
1. Many retirement accounts have recently lost value. Conversion now would result in a lower income tax liability and the ability to shelter any future growth from income taxes. 2. A conversion to a Roth IRA can be “recharacterized” back into a traditional IRA with no tax consequences up to the tax filing deadline, plus extension, for the year of conversion. This provides great flexibility in planning, from both a tax and investment perspective. 3. The ability to recharacterize allows for the diversification of asset classes among multiple Roth IRAs. Those that decrease in value during this period can be recharacterized and those that increase in value can remain Roth IRAs, subject to individual investment and other considerations. 4. If funds outside the IRA are available to pay the income taxes on conversion, the entire amount of the converted IRA will be available to grow tax-free. 5. The conversion provides a hedge against possible increases in income tax rates for future years when distributions may be made in retirement. 6. Unlike traditional IRAs, there are no required minimum distributions from Roth IRAs starting at age 70½. Therefore, if Roth IRA funds are not needed in retirement, the entire Roth IRA can continue to grow tax-free and provide a much larger inherited account for beneficiaries. 7. Additionally, the beneficiaries of the Roth IRA can then stretch the inherited Roth IRA account tax-free over their lifetimes by taking only the minimum required distributions each year. This allows the undistributed account to remain invested and continue to grow tax-free.While considering the possibility of a Roth IRA conversion, this is also an excellent opportunity to review and update beneficiary designations on all retirement accounts because they, not your will, usually control the disposition of the accounts at death. Glass Jacobson’s position as a comprehensive wealth management firm provides us the advantage of having professionals who can address all income tax, estate and investment aspects of the decision making process. Please contact us to discuss your particular situation.
Submitted by Gary Anderson
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gary.anderson@glassjacobsonIA.com
The Facts on 401(K)s – Roth v. Traditional
December 10, 2009 | Subscribe to our RSS Feed
The main difference between a Roth 401(k) and a Traditional 401(k) deals with the taxation of contributions and investment earnings. Key features of both plans are highlighted in the table below: