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

Are you one of the lucky ones who were able to contribute to your IRA in 2009? If so, you should be aware of the federal income tax changes as it pertains to traditional IRA contributions and Roth IRA contributions for 2009. They are as follows:

Modified AGI (Adjusted Gross Income) limit for traditional IRA contributions increased.
For 2009, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:

• More than $89,000 but less than $109,000 for a married couple filing a joint return or a qualifying widow(er),
• More than $55,000 but less than $65,000 for a single individual or head of household, or
• Less than $10,000 for a married individual filing a separate return

If you either live with your spouse or file a joint return and your spouse is covered by a retirement plan at work, modified AGI is more than $166,000 but less than $176,000. If your modified AGI is $176,000 or more, you cannot take a deduction for contributions to a traditional IRA.

Modified AGI limit for Roth IRA contributions increased.
For 2009, your Roth IRA contribution limit is reduced (phased out) in the following situations.

• Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $166,000. You cannot make a Roth IRA contribution if your modified AGI is $176,000 or more.
• Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2009 and your modified AGI is at least $105,000. You cannot make a Roth IRA contribution if your modified AGI is $120,000 or more.
• Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

  Modified AGI limit for retirement savings contributions
  For 2009, you may be able to claim the the retirement savings contributions credit if your modified AGI is not more than:

  • $55,500 if your filing status is married filing jointly,
  • $41,625 if your filing status is head of household, or
  • $27,750 if your filing status is single, married filing separately, or qualifying widow(er).

  Temporary Waiver of required minimum distribution rules.
  No minimum distribution is required from your traditional or Roth IRA for 2009

  source: irs.gov

Many taxpayers don’t realize they can reduce their tax burden for the previous year in the first few months of the year. Two of the ways to do that is to make contributions to traditional Individual Retirement Account (IRA) and, if qualified, take advantage of the Saver’s Tax Credit. Both options are permitted by the Internal Revenue Service up until the tax filing deadline, April 15.

Contributions to a traditional IRA are tax deductible, which lowers your taxable income. For the 2008 tax year the IRS allows contributions up to $5,000 or $6,000 if your over age 50.   Let’s say you contributed $1,000 to your IRA, it would lower your taxable income by $250 if you were in the 25 percent tax bracket.

When making a contribution in the first few months be sure to indicate the tax year on your IRA contributions. If you don’t, the contribution will be posted to the wrong year. To prevent this error, indicate the tax year directly on the face of the check or indicate the year in your fund transaction instructions when moving them from a non-IRA account.

Another overlooked federal tax credit is the Saver’s Tax Credit. Established in 2002, it was formulated to help low-to-moderate income employees contribute to IRAs.  The Saver’s Tax Credit allows a credit of up to $1,000 ($2,000 for filing jointly) to reduce federal income tax.

Unlike a tax deduction, the Saver’s Tax Credit will directly lower your tax bill. So a $1,000 tax credit lowers your tax bill by a full $1,000.  To file the Saver’s Tax Credit use IRS Form 8800.

Here are some other things to know about making IRA contributions:

• Traditional IRAs are not taxed until you receive distributions from that IRA.
• You cannot deduct an IRA contribution or take advantage of the Saver’s Tax Credit on Form 1040EZ; you must use either Form 1040A or Form 1040.
• To contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year.
• You must have taxable compensation, such as wages, salaries, commissions and tips. If you file a joint return, only one of you needs to have compensation.

It’s important to understand and take advantage of the options available to reduce your tax liability - especially those that are often overlooked.