Homebuyer Credit Now Available to "Long-Time Residents"

The first-time homebuyer tax credit that was to expire on November 30, 2009, had been extended to April 30, 2010 (June 30, 2010 if a binding agreement to purchase was signed by April 30, 2010 and closing occurs by June 30, 2010).  The credit has been expanded to include long-time homeowners who purchase another home to use as their new principal residence after November 6, 2009 and by the dates indicated above.  An eligible long-time homeowner is any individual (or the individual's spouse if married) who has maintained the same principal residence for any 5 consecutive year period during the 8-year period ending on the date of the purchase of the new principal residence.  The maximum allowable credit for this purpose is the lesser of $6,500 or 10% of the purchase price.  Homes costing more than $800,000 are not eligible.  The credit is phased out for individual taxpayers with modified adjusted gross income between $125,000 and $145,000 ($225,000 and $245,000 for joint filers).  This new provision can help "empty nesters" downsize to another home.  There is no requirement that the previous home first be sold.

Reporting of ISO and ESPP Stock Issuance Required in 2010

New Treasury regulations were just issued requiring employers to file an information return with the IRS (in addition to providing information to the employee) regarding stock issued to the employee upon the exercise of an incentive stock option (ISO) or an employee stock purchase plan (ESPP).  While information to the employee has been required since 2007, the information to the IRS has been postponed until 2010.  The IRS will develop new Form 3921 for ISOs and new Form 3922 for ESPPs, effective for stock transfers after 2009.  The objective of the new form is to provide sufficient information to enable the employee to calculate their tax obligations.  The information to be reported includes the name and tax identification number of the employee and the corporation, the dates the option was granted and exercised, the exercise price per share, the fair market value per share on the date of exercise, and the number of shares transferred to the employee pursuant to the exercise of the option.  For an ESPP, additional information pertaining to the fair market value of the stock on the date of grant of the option is required.

Should You Convert to a Roth IRA in 2010?

A Roth IRA is a special type of an individual retirement account (IRA) that has many important differences from a traditional IRA.  Those differences may make the use of the Roth IRA superior to using a traditional IRA, depending upon your situation.  Contributions to a Roth IRA are not deductible, but qualifying distributions (including earnings) from the Roth IRA are not taxable.  Inherited Roth IRAs will also provide income tax-free distributions to your beneficiaries.  Furthermore, unlike a traditional IRA, contributions can still be made after age 70 1/2 and the lifetime minimum distribution rules do not apply.

Those having a traditional IRA may convert or change to a Roth IRA.  However, the ability to convert is denied those having AGI in excess of $100,000.  In the year 2010, this AGI limitation is removed.  A conversion is treated as a taxable distribution not subject to the 10% premature penalty tax for those under age 59 1/2.  If income tax is due on the amount converted, why should you convert?

There are many factors to consider, and your specific situation must be analyzed before proceeding with a conversion.  However, timing for the conversion may be the very best in 2010 for the following reasons:

• The value of your IRA may be temporarily depressed because of market conditions, so the tax cost on conversion will also be less.
• Income tax rates are scheduled to increase in 2011.
• Taxable income from 2010 conversions may be recognized 50% each on your 2011 and 2012 tax returns instead of 100% on your 2010 return, possibly staying in lower tax brackets by splitting the income between tax years.  Conversions after 2010 must be 100% recognized in the year of conversion.

If you decide to convert and pay the conversion tax in 2010, you should consider certain additional tax planning steps such as shifting deductions to 2010 when your tax bracket may be higher than in 2009 or 2011 because of the additional conversion taxable income.