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December 2009


by Andrew D. Schwartz, CPA

January 1, 2010 kicks off the Roth Conversion season.  If you plan to convert next year, have you considered rolling some of your IRA money into your 401(k) or 403(b) account at work to save some taxes?

Instituted as part of The Tax Increase Prevention and Reconciliation Act signed into law by President Bush on May 17, 2006, taxpayers earning more than $100k finally have the option to convert their IRAs and other eligible retirement accounts to a Roth IRA starting in 2010.  Please note that this opportunity was included in that Tax Act as a REVENUE-RAISER.  Yes, the government hopes to collect a lot of tax revenue thanks to high-income individuals who convert their IRAs and other qualified retirement accounts to a Roth IRA in 2010.

In our March 2007 Newsletter, we instructed our readers to begin (or continue) making non-deductible contributions into their IRAs each year in anticipation of converting their IRA to a Roth IRA in 2010.   The higher the percentage of post-tax dollars to the total value of your IRAs, the smaller the tax burden on the amount converted.  Remember, you should have been tracking your post-tax contributions on a Form 8606 attached to your federal income tax return.

A Few Examples

Let's look at an example of how you will be taxed on a Roth conversion, assuming you currently have only one IRA account funded with $23k of non-deductible IRA contributions going back to 2006.  If your IRA is worth $30k on the date you convert it to a Roth IRA, you will owe taxes on $7k of income (FMV of $30k less post-tax contributions of $23k).  That's not too terrible of a tax hit to end up with $30k in a Roth account growing tax-free.

But what happens if you also have a rollover IRA or SEP IRA worth $200k?  In this example, since your post-tax IRA contributions remain at $23k while your total IRA value jumps to $230k, your basis in your IRAs falls to just 10% of your total IRA balance ($23k/$230k).  If you convert your $30k IRA to a Roth IRA, you now only shield $3k of the amount converted from taxes, and should expect to be taxed on $27k of income.

Taxability of a Roth Conversion

  $30k IRA $230k IRA
Total post-tax contributions $23k $23k
Value of IRA account $30k $30k
Value or Rollover IRA (or SEP IRA) $-0- $200k
Total Value of all IRAs $30k $230k
Post-tax contributions as % of all IRAs 76.67% 10%
Amount Converted $30k $30k
Taxable % on Amount Converted 23.33% 90%
Taxable Income on $30k Roth Conversion $7k $27k

Save Taxes With a Roll Out

If you have made non-deductible contributions to your IRAs over the years, you might be able to save significant taxes on your Roth conversion by taking advantage of this strategy included on page 23 of IRS Publication 590, Individual Retirement Accounts (IRAs):

Tax treatment of a rollover from a traditional IRA to an eligible retirement plan other than an IRA.   Ordinarily, when you have basis in your IRAs, any distribution is considered to include both nontaxable and taxable amounts. Without a special rule, the nontaxable portion of such a distribution could not be rolled over. However, a special rule treats a distribution you roll over into an eligible retirement plan as including only otherwise taxable amounts if the amount you either leave in your IRAs or do not roll over is at least equal to your basis. The effect of this special rule is to make the amount in your traditional IRAs that you can roll over to an eligible retirement plan as large as possible.

Basically, the IRS is reminding you in their Publication 590 on IRAs that you have the option of rolling money out of your IRAs into an employer sponsored plan that accepts IRA rollovers.  And when you roll money out of an IRA, the non-deductible contributions remain within the IRA.

In our second example above, what would happen if that person rolled his $200k Rollover IRA into his 403(b) account at work?  In this updated example, the total fair market value of his IRAs would revert to just $30k, so the taxable income on the conversion would be the same $7k as in the first example.  This person's taxable income, therefore, would decrease by $20k.  That's a pretty good return on your investment of a few minutes of time spent completing some paperwork.

One way to push this opportunity even further is to convert the exact amount of the post-tax IRA contributions you made over the years, and roll out the remaining IRA balance into your 401(k) or 403(b) account at work.  This strategy allows you to get the maximum amount of money into your Roth IRA without paying a dime of taxes.  Please read through the instructions to Form 8606 if you are skeptical of this strategy.  You also need to check with the retirement plan administrator at work to confirm whether your employer's 401(k) or 403(b) plan accepts IRA rollovers.

I think that famous Polka tune heard frequently on the Lawrence Welk Show sums up this opportunity the best: Roll out your IRA, and you'll save a barrel of taxes....



by Andrew D. Schwartz, CPA

On November 6, 2009, President Obama signed The Worker, Homeownership, and Business Assistance Act of 2009 into law.  As part of this Act, the $8,000 First-Time Homebuyer Tax Credit was extended and expanded.  The Act also instituted a $6,500 tax credit for repeat homebuyers.  Here are the basics:

  • The $8k first-time homebuyer tax credit has been extended to include homes under contract by April 30, 2010 and purchased by June 30, 2010.   Only individuals who have not owned a home for three years up to the date of purchase qualify.
  • A new $6.5k repeat homebuyer tax credit was instituted for post November 6th transactions.   To qualify, you need to own your principal residence for five consecutive years of the eight years prior to the purchase date.
  • The income limitation for this credit has increased for all post November 6th transactions as follows:

Phase-out Range to Qualify for Both Homebuyer Tax Credits

  Pre 11/7/09 Post 11/6/09
Single Individuals $75k-$95k $125k-$145k
Married Couples $150k-$170k $225k-$245k
  • No credit is allowable for homes with a purchase price of greater than $800,000 for post 11/6/09 transactions.
  • The post November 6th credit is not available to children under the age of 18, or to individuals claimed as dependents on another person's tax return.

The IRS has promised to issue an updated Form 5405, First-Time Homebuyer Credit, shortly.  The new version of this form will combine the pre and post-November 6th rules, and will be a good resource for anyone who purchased a home during the year.



by Andrew D. Schwartz, CPA

It's not too late to cut your 2009 tax bill. Prior to December 31st:

  • Increase your 401(k) and 403(b) contributions if you haven't been contributing at the maximum rate all year.  This year you can put up to $16,500 into your 401(k) or 403(b) plan.  Anyone 50 or older by December 31st can put away an additional $5,500.  Contributing to a 401(k) or 403(b) plan at work is one of the best tax shelters available to you during your working years.

  • If you’re self-employed, consider setting up a Solo 401(k) by 12/31.  A Solo 401(k) plan lets a self-employed person hit the $49k retirement plan max with less income than a SEP IRA, and also allows a person aged 50 or older to put away $54.5k into a retirement plan for 2009.

  • Take a look at your withholdings and instruct your employer to withhold additional taxes if you haven’t had enough taxes withheld during the year to avoid getting hit with an underpayment penalty.

  • Consider selling your investments held in non-retirement accounts that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds).  Excess losses can then be used to offset up to $3,000 of wages and other income.  Make sure to wait at least 31 days before buying back a security sold at a loss, or the IRS will disallow the loss under the "wash sale" rules.

  • Send in your January, 2010 mortgage payment early enough so it will be processed prior to 12/31/09.  By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.

  • Clean out your closets and donate your clothing and household items to a charitable organization, since "non-cash" contributions are deductible if you itemize.  Don’t forget to get a receipt.  And you should make a list of each item donated, along with its condition.  Remember, only donations of clothing and household items in "good condition or better" qualify for a deduction.  (To track what you donate, download our Non-Cash Contribution Worksheet - Excel Version  or the PDF version.)

  • For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year's return, even if you don't pay your credit card bill until 2010.  And you always have the option of donating appreciated investments to charities. You get to claim your donation based on the value of the assets donated, without paying any capital gains taxes on the appreciation.

  • Pre-pay your projected state tax shortfall if you'll be itemizing your deductions and not subject to the alternative minimum tax.

  • Pre-pay and pay off your medical bills if your total medical expenses exceed 7.5% of your income and you itemize.

  • Evaluate whether you'll save any taxes by postponing 2009 income or deductions into 2010 or by accelerating 2010 income or deductions into 2009.




Income Taxes

Saving and Investing




  • 4th quarter state estimates should be paid by 12/31 for people who itemize their deductions and won't be hit by the AMT.
  • Keogh plans and Solo 401(k)'s must be established by 12/31
  • 529 Plans must be funded by 12/31 to take full advantage of this year's gift limit of $13,000.
  • Last chance to maximize annual contributions to your 401(k) or 403(b) plan of up to $16,500, ($22,000 if 50 or older).


2009 & 2010 TAX FACTS

  • For 2009, the standard deduction for a single individual is $5,700 and for a married couple is $11,400. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2009, the personal exemption is $3,650. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $106,800 for 2009 and 2010.
  • The standard mileage rate is $.55 per business mile as of January 1, 2009, down from $.585 per mile as of December 31, 2008.
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2009 and 2010.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account that year.
  • The maximum annual contribution to your IRA is $5,000 for 2009.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2010 to make your 2009 IRA contributions. 


You're Invited to Attend Our Complimentary Presentation on:

Tax and Basic Financial Planning Issues Applicable to Young Healthcare Professionals

Here is a list of cities where the presentation will be held:

Boston - 1/21/10


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This Month's Topics

Minimize Taxes On 2010 Roth Conversion With IRA Roll Out

$8k Homebuyer Tax Credit Gets Extended and Expanded

Checklist To Cut Your 2009 Taxes

The FICA Refund for Medical Residents 

2009 & 2010 Tax Facts

Tax and Financial Planning Calendar for December 2009


Browse our index of previous months' newsletter topics

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Check out this recent post on the FICA ForumI've been following this issue for 5-10 years, even submitted paperwork to the IRS many years ago to no effect. Finally, just got a notice that UPenn has hired PriceWaterhouse to try and get the FICA back for its housestaff, I'll definitely be signing up.

For more information, go to our January 2009 Newsletter or our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Let's work together to keep current on this hugely valuable tax break.  Please post whatever you read or hear regarding this FICA issue on our new Message Board we set up just for this topic.

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