February 2010 tax compliance calendar

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2010.

February 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 27-29.

February 5

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 30-February 2.

February 10

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 3-5.

February 10

Employees who work for tips. Employees who received $20 or more in tips during January must report them to their employer using Form 4070.

February 12

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 6-9.

February 16

Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.

February 18

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 10-12.

February 19

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 13-16.

February 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 17-19.

February 26

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 20-23.

Congress approves 2009 deductions for 2010 Haiti earthquake donations

Congress has passed, and the president has signed, legislation allowing taxpayers to claim a deduction on their 2009 federal tax return for qualified Haiti disaster relief contributions made after January 11, 2010 and before March 1, 2010.

The bill gives taxpayers the option of claiming a deduction on their 2009 or 2010 tax returns for 2010 donations to a domestic U.S. charitable organization assisting Haiti. Taxpayers entitled to the deduction include both individuals and corporations.

However, taxpayers must itemize their deductions in order to take advantage of the early deduction. Additionally, the donation must be monetary. Taxpayers may not claim a 2009 tax deduction for 2010 contributions of marketable securities or other property that is easily convertible into cash. While donations by check or credit qualify, donations of food are not currently eligible. However, at least one Congressional proposal has promised to change this. We will keep you posted.

We encourage you to explore this option and look forward to helping you plan your tax position for a truly worthy donation.

IRS provides new first-time homebuyer credit form

A new Form 5405, First-time Homebuyer Credit and Repayment of the Credit, is now available for taxpayers claiming the credit on their 2009 income tax return. Because taxpayers are required to file a paper version of this form and new documentation requirements must accompany the form, the IRS reported that delivery of refunds may be slower than normal.

Taxpayers purchasing a home for the first time during 2009 may claim a credit equal to 10 percent of the purchase price of the principal residence with a maximum of $8,000 (or $4,000 for married couples filing separate returns). The Worker, Homeownership, and Business Assistance Act of 2009 also created a reduced tax credit (up to $6,500) for taxpayers who are qualified long-time residents of a home, but purchase a new principal residence during 2009.

To claim the credit for the 2009 tax year, taxpayers are now required to include documentation to substantiate their claim, in addition to their paper return. Required documentation includes a settlement statement in the form of a properly executed HUD-1 or a copy of the certificate of occupancy where a settlement statement is unavailable for a newly constructed home. Taxpayers claiming the reduced credit because they are qualified long-term residents should attach Form 1098, Mortgage Interest Statement, property tax records, or homeowner’s insurance records with their return.

Please let us know if you purchased a new home during 2009, and we will be sure to inform you of what documents you will need to gather to file your return and claim the credit.

How Do I … Convert a Traditional IRA to a Roth IRA?

People are buzzing about Roth Individual Retirement Accounts (IRAs). Unlike traditional IRAs, “qualified” distributions from a Roth IRA are tax-free, provided they are held for five years and are made after age 59 1/2, death or disability. You can establish a Roth IRA just as you would a traditional IRA. You can also convert assets in a traditional IRA to a Roth IRA.

Before 2010, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert their traditional IRA (provided they were not married taxpayers filing separate returns). Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income level or filing status.

Comment: While you can only contribute a maximum of $5,000 to a Roth IRA for 2010 (plus a $1,000 catch-up contribution if you are over age 50), you can convert an unlimited amount from a traditional IRA.

Conversion is treated as a taxable distribution of assets from the traditional IRA to the IRA holder, although it is not subject to the 10 percent tax on early distributions. While paying taxes on conversion is undesirable, the advantages of holding assets in a Roth IRA usually outweigh this disadvantage, especially if you will not be retiring soon. Furthermore, if you convert assets in 2010, you have the option of including them in income in 2011 and 2012 (50 percent each year) instead of 2010.

Comment: Generally, this income-splitting would be advantageous to any taxpayer who does not expect a sharp increase in income in 2011 or 2012. A wildcard factor is that the lower income tax rates that have been in effect since 2001 will expire after 2010 and could increase in 2011.

There are four ways to convert a traditional IRA to a Roth IRA:

• A rollover - you receive a distribution from a traditional IRA and roll it over to a Roth IRA within 60 days;
• Trustee-to-trustee transfer - you direct the trustee of the traditional IRA to transfer an amount to the trustee of a Roth IRA;
• Same-trustee transfer - the trustee of the traditional IRA transfers assets to a Roth IRA maintained by the same trustee; or
• Redesignation - you designate a traditional IRA as a Roth IRA, instead of opening a new Roth account.

Comment: The account holder does not have to convert all of the assets in the traditional IRA.

Another advantage of converting assets from a traditional IRA to a Roth IRA is that you can change your mind and put the assets back into the traditional IRA. This is known as a recharacterization. You have until the due date, with extensions, for the return filed for the year of conversion. Thus, if you convert assets in 2010, you have until mid-October in 2011 to undo the conversion.

This ability to recharacterize the conversion allows you to use hindsight to check whether your assets declined in value after the conversion. Since you are paying taxes on the amount converted, a decline in asset value means that you paid taxes on phantom income that no longer exists. However, if you convert assets into multiple Roth IRAs, you can choose to recharacterize the assets in a Roth IRA that decreased in value, while maintaining the conversion for a Roth IRA’s assets that appreciated in value.

The use of a Roth IRA can be a savvy investment, but whether to convert assets is not an easy decision. If you would like to explore your options, please contact this office.

2010 filing season gets underway; IRS expects many early filers