As the new laws and acts unfold, there are certain changes in the law that we feel our clients/prospects should be aware of. Here is a current list. If you have any questions about these laws and their applicability, please contact us.

ROTH IRA CONVERSIONS

Amounts in a traditional IRA can be rolled over or converted into a Roth IRA but only if: (1) the taxpayer's adjusted gross income for the tax year does not exceed $100,000, and (2) the taxpayer is not married filing separately. Generally, amounts transferred or converted from a traditional IRA into a Roth IRA must be included in gross income but are not considered when determining the $100,000 AGI limit. For tax years beginning after 2009, the adjusted gross income limit will be eliminated, allowing higher income taxpayers to convert traditional IRAs to Roth accounts.

Here's the best scenario for this idea: Your traditional IRA is (or was) loaded with equities and took a major beating during the stock market downturn. So, your account is now worth a lot less than it once was. Correspondingly, the tax hit from converting your traditional IRA into a Roth account right now would also be a lot less than before. While even the reduced current tax hit from converting is unwelcome, it may be a small price to pay for future tax savings. After the conversion, all the income and gains that accumulate in your Roth account, and all withdrawals, will be totally free of any federal taxes-assuming you meet the tax-free withdrawal rules. In contrast, future withdrawals from a traditional IRA could be hit with tax rates that are much higher than today's rates.

Of course, conversion is not a no-brainer. You have to be satisfied that paying the up-front conversion tax bill makes sense in your circumstances. In particular, converting a big account all at once could push you into higher 2009 tax brackets, which would not be good. You must also make assumptions about future tax rates, how long you will leave the account untouched, the rate of return earned on your Roth account investments, and so forth. Taxes on income recognized in 2010 from a Roth conversion are deferred until 2011 and 2012. Taxes on income recognized after 2010 are taxable in the year of the conversion.

FEDERAL TAX CREDITS FOR ENERGY EFFICIENT PURCHASES 

Tax credits are now available for home improvements:

• must be "placed in service" from January 1, 2009 through December 31, 2011
• must be for taxpayer's principal residence, EXCEPT for geothermal heat pumps, solar water heaters, solar panels, and small wind energy systems (where second homes qualify)
• $1,500 is the maximum total amount that can be claimed for all products placed in service in 2009-2011 for most home improvements, EXCEPT for geothermal heat pumps, solar water heaters, solar panels, fuel cells, and small wind energy systems which are not subject to this cap, and are in effect through 2016
• must have a Manufacturer Certification Statement to qualify
• for record keeping, save your receipts and the Manufacturer Certification Statement
• If you are building a new home, you can qualify for the tax credit for geothermal heat pumps, photovoltaics, solar water heaters, small wind energy systems and fuel cells, but not the tax credits for windows, doors, insulation, roofs, HVAC, or non-solar water heaters.
• For a complete listing of all the eligible items, click here.
• Here is the 2011 Update on Two Tax Credits for Energy-efficient Home Improvements

The Internal Revenue Code includes two different tax credits for energy-saving home improvements. The rules for one of the credits have changed significantly for the worse since 2010, and that credit expired on 12/31/11. The other credit, which covers more exotic and expensive improvements, is still generous. Here's what you need to know for to cash in on the credits this year.

The First (Modest $500) Credit for Basic Energy-saving Improvements

The first credit equals 10% of certain qualified expenditures plus 100% of certain other qualified expenditures, subject to a maximum overall credit of $500. That's pretty skimpy, and the $500 maximum must be reduced by credit claimed in any earlier post-2005 year. This restriction will cause many to be completely ineligible for 2011. For instance, say you claimed a $1,500 credit in 2010 (when the rules were much more generous) for installing energy-efficient windows. You would not be able to claim any of this type of credit in 2011. Sorry about that! The good news is the credit (when allowed) covers a broad range of energy-saving expenditures for a principal U.S. residence. Plus, it's available against Alternative Minimum Tax (AMT), and there are no income restrictions. However, expenditures for vacation homes and foreign residences are ineligible.

Note: The 2010 version of this credit was much more generous. It equaled 30% of qualified expenditures, subject to a $1,500 cap and expired on 12/31/11.

Here are some more details on the this first credit.

Eligible Improvement Costs. For the following improvements to a U.S. principal residence, the maximum credit equals 10% of qualified 2011 expenditures up to the overall $500 credit cap, reduced by any of these credits claimed in any earlier post-2005 year.

• Exterior windows, including skylights, that meet or exceed Energy Star program requirements—subject to a separate $200 credit cap for all post-2005 years. For instance, if your client claimed a $200 or more credit for new windows installed in 2010, no credit can be claimed for windows installed in 2011.
• Exterior doors that meet or exceed Energy Star program requirements.
• Insulation material or systems designed to reduce heat loss or gain that meet criteria established by the 2009 IECC.
• Metal and asphalt roofs that meet or exceed Energy Star program requirements and have pigmented coatings or cooling granules designed to reduce heat gain of the residence.

Note: For these items, costs for site preparation, assembly, and installation cannot be counted for purposes of determining the allowable credit amount.

Eligible Equipment Costs. For the following items of energy-saving equipment installed in a U.S. principal residence, the maximum credit equals 100% of qualified 2011 expenditures up to the overall $500 credit cap, reduced by any  of these credits claimed in any earlier post-2005 year.

• High-efficiency central air conditioners; electric heat pumps; electric heat pump water heaters; water heaters that run on natural gas, propane, or oil; and biomass fuel stoves used for heating or hot water—subject to a separate $300 credit cap for 2011 for these items.
• Furnaces and hot water boilers that run on natural gas, propane, or oil—subject to a separate $150 credit cap for 2011 for these items.
• Advanced main air circulating fans used in natural gas, propane, and oil furnaces—subject to a separate $50 credit cap for 2011.

Note: For these items, expenditures for site preparation, assembly, and installation are counted in determining the allowable credit amount.

The Second (Generous 30%) Credit for Big Ticket Energy-saving Equipment

The second credit, equals 30% of qualified expenditures to buy and install more-exotic (and more-expensive) energy-saving equipment for a U.S. residence (manufactured homes are apparently eligible).

Qualified Expenditures. In general, 30% of the cost for the following types of equipment (including costs for site preparation, assembly, installation, piping, and wiring) count as eligible expenditures credit.

• Qualified solar water heating equipment for a U.S. residence, including a vacation home.
• Qualified solar electricity generating equipment for a U.S. residence, including a vacation home.
• Qualified wind energy equipment for a U.S. residence, including a vacation home.
• Qualified geothermal heat pump equipment for a U.S. residence, including a vacation home.
• Qualified fuel cell electricity generating equipment for a U.S. principal residence . Vacation homes are ineligible for the fuel cell credit. Also, the maximum annual fuel cell credit is limited to $500 for each .5 kilowatt hour of fuel cell capacity added during that year.

Big Expenditures Translate into Big Credits. Because expenditures for the aforementioned items can be big numbers, these credit amounts can be big too. And there are no income limits—even billionaires are eligible. Plus, it's available against AMT. If your 2011 credit is so large that it cannot be fully utilized on this year's return, the excess can be carried forward to 2012 and beyond.

No Hurry for This Credit. This second credit is available through 2016, so there is no need to rush to take advantage.

Note: The credit cannot be claimed for equipment used to heat swimming pools or hot tubs. 

Manufacturers' Certifications Are Required for Both Credits. A good place to start your search for an energy efficient product is at www.energystar.gov/taxcredits , where you'll find requirements for various products. But, to be sure that the product purchased satisfies the required energy saving conditions for the credit, the client must obtain the manufacturer's certification that the product in question qualifies. The certification may be on the product packaging or it may be available on the manufacturer's website. In any case, the certification should be kept with the your tax records. Certifications need not be attached to your tax return.

ESTATE TAXES

The 2010 Tax Relief Act (TRA) revives estate tax for decedents dying after 2009 and before December 31, 2012. Under TRA the maximum estate tax is 35% with an applicable exclusion of $5.0 million. This eliminates the 2010 modified carryover rules and replace them with the stepped up basis rules that applied before 2010. The TRA gives estates of decedents dying in 2010 the option to elect not use the revived estate tax rules from the TRA. Instead they can choose to pay no estate taxes but only receive a stepped up basis on the first $1.3 million of property with the remaining property taking a carryover basis equal to the lesser of the decedent’s basis or fair market value on the decedent’s death.

TEMPORARY EXTENSION OF INCREASED SMALL BUSINESS EXPENSING

The 2010 Small Business Jobs Act (SBJA) increased the Code Section 179 dollar and investment limits to $500,000 and $2.0 million, respectively, for tax years beginning in 2010 and 2011. The TRA provides for a $139,000 dollar limit and a $560,000 investment limit after 2011 and provides inflation increases for both figures. For 2010 and 2011 (only) the SBJA allows taxpayers to elect up to $250,000 of $500,000 expensing benefits for qualifying real property, leasehold improvement property, and restaurant property.

In addition, the TRA provides for temporary 100% bonus depreciation for new property acquired and placed in service after September 8, 2010, and before January 1, 2012. This means that taxpayers are able to claim a 100% depreciation deduction for property acquired and placed in service in the latter third of 2010 and all of 2011 (and 2012, for certain property); property placed in service during 2012 (2013 for certain property) is eligible for 50% bonus depreciation.

DOES MY CHILD NEED TO FILE THEIR OWN RETURN AND WHO GETS TO CLAIM THE EDUCATION CREDIT FOR COLLEGE TUITION

Per the IRS regulations, anybody needs to file a return if they have ANY of the following:

• Unearned income (interest, dividends, capital gains, gross proceeds from the sale of securities without a gain/loss schedule) of more than $950; OR
• W-2 income of more than $5,800; OR
• The total of the above 2 items is more than the greater of $950 or the W-2 income (up to $5,500) plus $300.
• If, however, the taxpayer is for a child (defined as either under age 24 as of 12/31/11 and a full time student; or under age 19), their income can go on Form 8814 of the parent if the child has ALL of the following:
• Unearned income (interest, dividends, capital gains, gross proceeds from the sale of securities without a gain/loss schedule) of LESS than $9,500; AND
• Did not receive a W-2; AND
• Has no overpayment of federal taxes from a prior year that is being carried forward to this year; AND
• Had no estimated tax payment paid in for the current year

The information here is not being provided to be comprehensive, so please contact us to help you determine if your child should file their own return.

There are many rules about which Education to take: the American Opportunity Credit or the Lifetime Learning Credit. There are also various limitations as to your income limit, etc. In general, a married filing joint couple cannot take the credit if their income is greater than $180,000. In this case, it MAY be beneficial to give the credit to the student, but only if certain circumstances exist. The information here is not being provided to be comprehensive, so please contact us to help you determine the best way to maximize the credit.