Stock market investors experienced a roller coaster year in 2009. The market plunged in the first quarter and then surged 65% to finish out the year, one of the strongest market surges in recent history.  This market volatility may raise income tax questions for investors who made stock transactions in 2009.

If you are an investor who made stock transactions last year, especially in mutual funds or retirement plans, it makes sense to meet with your tax advisor to see if there are any income tax implications and/or a tax strategy to follow.

If you took a loss on your 2009 income tax return by selling a mutual fund in December 2009 (outside of a retirement plan), and you want to buy the same mutual fund in 2010, you must wait more than 30 days.  Failing to wait the 30 days violates the “wash sale” rule and you will not be able to use this tax benefit of the loss in 2009.  Contact your tax advisor for more details on this income tax question.

Another income tax question for your tax advisor is whether you should convert your traditional IRA into a Roth IRA.  Starting this year, anyone can convert their traditional IRA to a Roth IRA. Previously, taxpayers with adjusted gross income over $100,000 were prohibited from using this tax strategy.

Taxpayers who convert their traditional IRA to Roth IRA have to pay income tax on the amount converted to the Roth IRA.  However, any after-tax contributions that were made are excluded from the income tax.

There is some good news if you plan on converting your IRA to a Roth IRA in 2010. For conversion made in 2010 only, Congress has approved a rule to allow taxpayers to report the income from Roth IRA conversions over the next two years - half in 2011 and the half in 2012.   Potential Roth IRA converters need to be aware that future withdrawals from a Roth IRA, that includes earnings, are free from federal income tax only after you have reached 59 1/2 and the account has been opened for at least five years.

The Federal Income Tax form and IRS rules can get very complicated when it comes to stock transactions.  If you have made stock transactions or are considering converting your traditional IRA to a Roth IRA, we advise talking to a tax advisor to answer your income tax questions and recommend a tax strategy.

source: valpolife.com