Taxes Archives - Page 9 of 9

Bush Tax Cuts Set To Expire In 2011. Will You Be Paying More?

One thing that hasn't received very much notice lately I think is the fact that at the end of 2010, the 2001 Bush tax cuts will be expiring for all taxpayers. If you remember, the tax cuts were across the board for all taxpayers, meaning if they aren't renewed, all of us who pay taxes will be seeing an increase in our taxes next year.

Thankfully for many of us Obama has declared that he wants to renew the tax cuts for all taxpayers making less than $250,000 a year.

Obama wants tax breaks proposed by President George W. Bush to expire this year. His budget would eliminate tax breaks on those making more than $250,000 a year, a move almost certain to be opposed by Republicans and perhaps some Democrats as the economy crawls out of the recession.

“We extend middle-class tax cuts in this budget,” Obama said Monday at the White House, but “we will not continue costly tax cuts for oil companies, investment fund managers, and those making over $250,000 a year. We just can't afford it.”

While that's all fine and good, the tax cuts haven't been extended yet, and some are wondering if in the end they actually will be.

To prepare you for either scenario, here's a graphic from springfieldnewssun.com showing what everyone's tax rates will be if all tax cuts expire, along with if only the tax cuts for those making less than $250,000 (joint) are extended. Personally, I hope they're extended.

What Effect Will Tax Increases Have?

Things You Should Know About The 2010 Roth IRA Conversion Rules

By Mr. Money 3 Comments

Yesterday I wrote about retirement accounts, and talked about which ones are better for different situations. Today I want to talk about another issue that's been getting a lot of press lately, the 2010 Roth IRA conversion.

In the event you've been living under a rock and haven't heard about the Roth IRA conversion event this year, it is basically a one time event where people can convert their traditional IRA’s, SEP IRA’s, Simple IRA’s, old 401k’s, old 403b’s into a tax free Roth IRA account. Because of the conversion event, waves of people are expected to take advantage this year and convert their traditional taxable investment accounts into tax free Roth IRA accounts. Here are the details.

Should I Convert My Traditional IRA To A Roth IRA?

The first thing you need to ask yourself before you even start going down this road of converting your taxable retirement accounts is whether or not it's even a good idea for you in your situation. A lot of people hve explained the benefits or a Roth IRA conversion, while others are saying that the conversion event has been overhyped. Cynics might say it's just a way for our government to collect on future tax money today – at a higher rate than most people would have paid in retirement. Regardless of whether that's the case, there are some things you should consider:

Pay taxes now or later? Do you want to pay your taxes on the money you invest now, or when you retire? The amount of tax you pay can very quite a bit depending upon what tax bracket you fall into either now vs. when you retire. Problem with this – it's hard to know the future and know what tax rate you'll be paying in the future – and whether taxes will increase. (Where's my crystal ball when I need it?)
Is my income too high to contribute or convert to a Roth IRA in the future? If you're a high income earner and you you want to do a bit of tax diversification, this year may be one of your few chances to convert your traditional taxable account to a Roth because of income restrictions.
Do I want to spread out my tax liability from converting? As part of the conversion event people who convert will be able to spread out their tax liability over 2011 and 2012. More time to pay your taxes!

Reasons To Take Advantage Of The 2010 Roth IRA Conversion

Here are a few benefits of converting your taxable retiremenet account to a Roth IRA this year

AGI limit of $100,000 – rule removed: Previously singles and married couples making less than $100,000 were the only ones able to convert their taxable accounts to a Roth IRA. 2010 is big for so many because the $100,000 MAGI rule is lifted, making a conversion possible for even higher earning singles and couples.
Tax payments can be spread out: You'll convert to the Roth IRA in 2010, but the income to be claimed on your taxes and taxes owed can be deferred until 2011 and 2012. Converters can claim 50% of the conversion amount as income in 2011 and the other 50% in 2012. Remember, this is a one year provision for the 2010 tax year only.
Old 401ks can be converted directly to a Roth IRA: Have an old 401k from an old job? You can convert those this year as well.
Your assets grow tax free, and tax free withdrawals: Converting means the money will grow free of tax burdens, and you won’t have to have a minimum distribution requirement until you turn 70 1/2.

Contribution Income Limitations: Still There For New Roth IRA Contributions

One thing to remember about the Roth IRA conversion event is that just because high income earners can convert their taxable accounts, it doesn't mean they can also open and add new contributions to a new Roth IRA. If their income is over the IRA contribution phase out limits, they won’t be able to make new contributions to a Roth IRA.

How To Convert To A Roth IRA

Converting your taxable account to a Roth IRA will be alot like rolling over an old 401k to a Rollover IRA. If you’re not changing the investment company that your funds are with, it could be as easy as filling out a form. The key is to contact a financial professional who can give you advice for your specific situation.

Are you considering whether to rollover a traditional taxable account to a Roth IRA? Will you be deferring on the taxable income until 2011 and 2012? Have you decided not to convert? Tell us why in the comments!

What Type Of Retirement Account Should I Choose? Traditional IRA, Roth IRA And 401k

By Mr. Money 2 Comments

So you're finally out of debt, saved up an emergency fund, and are ready to start saving for retirement. The question that you have now is, what type of retirement account should you choose? An IRA, a Roth IRA or a 401(k)?

If you’re not familiar with these basic retirement account types, you may want to check out IRS Publication 590. It’s free, and it's pretty in-depth in explaining the differences between the accounts. But just to review for this article's purpose – here are the three account types:

Traditional 401k: An employer sponsored retirement savings plan that allows a worker to save for retirement and defer income taxes on the money until withdrawal.
Traditional IRA: A retirement savings plan that allows a worker to save and invest for retirement with pre-tax dollars. Withdrawals are taxed.
Roth IRA: A retirement savings plan where money is invested with post-tax dollars, and are not taxed at withdrawal.

So which account type should you choose for your situation?

IRA Or A Employer Sponsored 401k?

We know that there are some obvious differences in the account types, like tax differences, but there are other non-tax related differences as well.

The 401(k) will often offer a matching contribution from your employer: If your employer offers this, jump on it – it's an immediate 100% return!
A 401(k) often has limited investment options: 401(k) plans will often give you only a limited choice of pre-selected funds and they're often high cost actively managed funds. An IRA will usually give you access to more low cost index funds and other options.
401(k) plans probably usually charge significant administrative fees: A study done by the Investment Company Institute and Deloitte Consulting found that the median employer-sponsored retirement plan charges an administrative fee of 0.72% of assets. (That’s on top of the fees charged by the funds.) By comparison IRA providers usually don’t charge any admin fees at all.

When you examine these three points, I think most people would suggest this example investment strategy.

Put money in your 401(k) until you get the full employer match.
Max out your traditional IRA to take advantage of its lower costs and better investment options.
Go back to your 401(k) and max it out.
Invest via taxable accounts.

Roth IRA or Traditional IRA?

Now if you are able to contribute to a Roth IRA or a Traditional IRA you have something else to consider. Where do you expect your tax bracket to be when you retire? Depending upon where you think your tax bracket will be when you retire, you may want to make a different investing choice.

You think your tax rate will be the same: The ending value of your account will be the same whether you pay tax now or later (Roth IRA Vs. Traditional IRA). With all things being equal, if you expect your retirement tax rate to be the same as your current tax rate, a Roth isusually going to be better. The reason? Roth IRAs are not subject to required minimum distributions and your contributions (with the exception of amounts converted from a traditional IRA) can be withdrawn free of tax and penalty at any time.
If you expect a higher tax rate in retirement: It’s best to contribute to a Roth. Better to pay tax at a lower rate now, than later at a higher rate.
If you expect a lower tax rate in retirement: It’s best to contribute to a Traditional IRA. Better to pay tax at a lower rate later than at a higher rate today.
If you have no idea what to expect, diversify: If you're not sure where your taxes will be, tax diversify and do a little of both. A lot of people do this unknowingly when they contribute to a tax-deferred plan at work, and then a Roth as well.

Have you set up your retirement strategy? What plan did you settle on? Are you going with a 401k, IRA or Roth IRA? Are you tax diversified?

Cash For Caulkers Home Improvement Rebate: Money To Retrofit Your Home For Energy Efficiency

By Mr. Money 2 Comments

Yesterday I talked about the energy efficiency tax credits for home improvements that homeowners can take advantage of through the end of 2010. They can use the tax credits upgrade their windows, heaters, insulation and other energy efficient products. The Obama administration is now trying to get another program passed to give rebates to homeowners to improve the energy efficiency of their homes. It is called the Homestar Program. (No, it isn't related to THIS Homestar)

Here's a video of the president explaining the bill:

WhiteHouse.gov:

Today, while touring a training facility at Savannah Technical College, the President outlined more details of a new “HOMESTAR” program that would help create jobs by encouraging American families to invest in energy saving home improvements. Consistent with the President’s call for a HOMESTAR program, the Senate Democratic leadership included a proposal of this kind as part of their Jobs Agenda released on February 4, 2010. The President looks forward to continuing to work with Members of Congress, business, environmental and labor leaders to enact a HOMESTAR program into law.

So the president wants to get people back to work and increase the energy efficiency of their homes while he's at it. How will the new rebate program for energy efficient home improvements work?

Energy Efficient Home Improvements Rebate

The bill has several goals, among them increasing energy savings, reducing dependence on foreign sources of energy and helping to easeAims of this bill include:

Get contruction workers/etc back to work to help ease 25% unemployment.
Boost demand for energy efficient products.
Increase energy savings for families. (According to the White House consumers in the program are expected to see savings of “between $200 – $500 per year in energy costs”)

Retrofit Program Details

Details Of What You'll Get With The Homestar Program:

Rebates delivered directly to consumers: Like the Cash for Clunkers program, consumers would be eligible for direct HOMESTAR rebates at the point of sale for a variety of energy-saving investments in their homes. Retailers are reimbursed by the government.
$1,000 – $1,500 Silver Star Rebates: For simple upgrades consumers could be eligible for up to 50% rebates of $1,000 – $1,500. Things included in this are insulation, duct sealing, water heaters, HVAC units, windows, roofing and doors. Rebates are up to a maximum of $3,000 per home.
$3000 Gold Star Rebates: More comprehensive energy retrofits would be eligible for a $3,000 rebate for a whole home energy audit and subsequent retrofit tailored to achieve a 20% energy savings in their homes.
Support for financing: The program would include support to State and local governments to provide financing options for consumers seeking to make efficiency investments in their homes.

When Will Homestar Program Become Law?

On May 6th, 2010 the Homestar Program was passed by a vote of the House of Representatives. Next up will be a vote in the Senate. If that vote also passes it will most likely be signed into law by the President.

Remember, this program differs from the current home improvement tax credit that runs until 12/31/2010. This one is a 50% rebate, instead of a 30% tax credit. You could possibly come out ahead if you wait, and use this rebate instead!

Are you working in construction – and do you think this bill would help improve your work outlook? Looking to improve your home's energy efficiency? Will this bill give you the incentive you need to get those changes made? What do you think?

Home Improvement Tax Credits For Energy Efficient Products: Insulation, Windows, Heaters And More

By Mr. Money 12 Comments

Congress took action a few months back and extended energy efficiency tax credits for most homeowners through the end of 2010. If you’ve been looking to upgrade your water heater or windows and doors, you can probably get a tax credit in 2010. Some of the less common of the tax credits for home improvements will be around all the way until 2016. EnergyStar.gov explains:

If you purchase an energy-efficient product or renewable energy system for your home, you may be eligible for a federal tax credit. …

Please note, not all ENERGY STAR qualified products qualify for a tax credit. ENERGY STAR distinguishes energy efficient products which, although they may cost more to purchase than standard models, will pay you back in lower energy bills within a reasonable amount of time, without a tax credit

Energy Tax Credit Is Extended Through 12/31/2010

So how much is the tax credit, and what do you need to do to get it?

Tax Credit 30% of cost of the home improvement, up to $1,500
Expires on December 31, 2010
Important Provision: Must be on an existing home & your principal residence. Brand new homes and rental properties don’t qualify.

Example: So how does the tax credit work? For a qualifying upgrade, the tax credit is 30% of the covered cost up to a $1500 total credit. For instance, if you pay $3000 for a central air conditioning system (excluding installation costs), your credit would be $900, as long as it was bought and paid for by 12/31/2010.

The house must be your principal residence and the credits don’t apply to new construction. Other, upgrade-specific restrictions apply, so see the government site for details.

What Products Are Eligible For The Energy Efficiency Tax Credit?

A variety of products are eligible for the tax credit, however, you need to be careful that your specific product is eligible. Some of the products include:

Energy efficient doors and windows. Installation costs are not eligible for the credit. Other restrictions apply.
Water Heaters. Credit includes installation costs; some restrictions for energy efficiency apply.
HVAC components, including advanced air handlers, air force heat pumps, central A/C units, boilers, propane, and gas furnaces. Tax credits include installation costs.
Insulation, whether spray foam, fiberglass, or blow-in cellulose, they’re all covered so long as they meet IECC requirements. Installation cost is NOT covered.
Biomass Stoves.
Metal and asphalt roofs. Credit doesn’t include installation costs.

Some of the tax credits will take into account installation costs, while other credits do not. It really does depend upon what you're claiming the credit on. To find out if your product is a part of the credit, and whether you can include installation costs, check out the government website here.

What Do I Do To Get The Tax Credit?

To claim the energy efficient products tax credit, you’ll need to claim the credit on your 2010 taxes. To claim it the product would have to be placed in service in 2010.

To claim the credit submit IRS Tax Form 5695 with your taxes.

Frequently Asked Questions (FAQ) About The Tax Credit

Here are the answers to a few of the most frequently asked questions about the credit.

Is the $1,500 tax credit available for each product? Can I get $1,500 for windows and another $1,500 for a new HVAC system? Can I get $1,500 in 2009 and another $1,500 in 2010? Can two people living in the same home both get the $1,500 credit? Even if you purchase multiple products you can only get a maximum of $1,500 over the 2-year period (2009 & 2010). Basically you can spend up to $5,000 during this 2 year period on a single or multiple products, for your principal residence that you own and live in, and get 30% or $1,500 (30% of $5,000 = $1,500) back as a tax credit. If you get the entire $1,500 credit in 2009, then you can’t get anything additional in 2010. (Note: the maximum does not apply to all products)
Can the energy efficiency tax credit be carried over to future years? The tax credit for products at 30% up to $1,500 cannot be carried over to future years. But you can take part of the $1,500 in 2009, and the rest in 2010. A few select products that are not subject to the $1500 limit can be carried forward. Find details here.
Is there an income limit on the tax credit? No, there is no upper or lower limit on the credit, however, these energy efficiency tax credits are technically “non-refundable.” If you don’t pay any taxes, then you can’t get the credit. Details here.

Are you planning on installing insulation, windows or other eligible product and will you claim the credit? Do you think the credit makes it worth it to install a new energy efficient product, or will you still hold off? Tell us your thoughts in the comments!

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