Don't Rush into IRA Conversion

So, maybe you are running down your financial to-do list and you've come to this one...

• Convert Traditional IRA to Roth

Good for you. You know that the recent changes in IRA conversions opens up this possibility to many more people and that the change took place this year.

You also know that getting in on Roth has it's advantages. Such as:

• Tax-free withdrawals once you hit age 59.5
• No mandatory minimum distributions when you reach age 70.5
• Dipping into your Roth earnings doesn't have tax implications
• No age limit on contributions

In contrast the Traditional IRA

• Contributions may be tax-deductible
• Withdraws can begin at age 59.5, but are mandatory when you reach 70.5
• Taxes are paid on earnings when withdrawn

The biggest difference, however, between the two is seen in how they handle taxes. The Traditional IRA is tax-deferred and the Roth is tax-exempt. Both vehicles let you earn income without paying taxes on profits along the way, but the Traditional IRA will bring you a tax bill later (deferred). Earning on the Roth are not taxed, though you will pay taxes now on the money you contribute.

On the surface the Roth definitely looks like the more winning deal. But before you rush into conversion you've got some thinking to do. Take a look at the last sentence in the previous paragraph for a clue. What happens when you convert from a Traditional IRA to a Roth is that the chunk of money that you pull out of the Traditional is a contribute to your new Roth and you'll have to pay taxes on it. You can either take the taxes out of these funds or if you've got extra cash laying around, you can use that to pay the taxes. Either way the tax man cometh.

In some cases the conversion is painless and makes perfect sense. For others the amount of money you'll lose to upfront taxes will not justify the end gain. Before you move forward you may want to consult the Investment and Retirement Team at Coors Credit Union. They can offer a no-cost, no-obligations review of your situation.

New Car? Remember the Tax Credit

Early in the year the government announced the new car tax credit as part of the economic stimulus package. There hasn’t been much attention given to this lately, but if you bought a car this year (or plan to purchase before Dec. 31) don’t short yourself on this break.

The credit allows you to deduct sales and excise taxes and other fees on as much as $49,500 of the purchase price.

Most important—Applies Only to NEW Cars

Only brand-spanking new car purchases qualify. So if it’s used, but new to you, the purchase doesn’t qualify for the credit. But, any car, light truck, motor home, or motorcycle counts

More Details

You must have completed your purchase between February 17, 2009 and December 31, 2009.

The credit is limited to the taxes on vehicles with a purchase price up to $49,500. If the vehicle costs more you can still get credit, but only for the taxes on $49,500 of it.

The income limit is high enough to make it easy for you to qualify. The credit to phase begins at $125,000 for individuals and $250,000 for couples.

You won’t receive this credit at the time of sale. You can claim the credit as on your 2009 taxes. You do not need to itemize credit.

Need more time for taxes?

Getting an extension for filing your taxes is not hard. But, an extension doesn't mean you can pay your taxes late. It only means that you can file the paperwork later. Any payment will still be due on April 15th.

So why might you want to file for an extension?

• You are missing important tax documents such as W-2s or 1099s


• You have unanswered tax questions that could make a big difference in how much you owe

If you expect you'll be making a payment, but don't have your forms completed for the reasons above you'll need to estimate your payment. Your best bet is to estimate on the high-side to avoid any penalties. You can even request your estimated tax payment to be withdrawn electronically by supplying your bank’s routing and account numbers. For identification purposes, you’ll need your adjusted gross income (AGI) from your 2007 tax return.

To file an extension you can visit the IRS website and download form Form 4868, Application for Automatic Extension of Time. Typically this will give you an automatic 6 month extension.

You'll then need to send your extension request along with any payment by April 15th. Don't be fooled into paying to file for an extension. You can file this form for free online through the IRS site and a few other reputable sites. Anyone who asks that you pay to file for an extension is just making money off you.

And if you can't make your payment contact the IRS about payment plans.

Procrastinators are in luck.

I'd guess that if you still haven't filed your taxes then you probably haven't contributed to your 2008 IRA either. Am I right? Well it's okay because this still gives you time to open and contribute to an IRA. You can do so before the April 15th tax deadline and fortunately this gives you three more days to make it happen.

Why would you want to put money into an IRA, anyway?

Well the obvious is that IRAs have annual contribution limits. Putting money into your 2008 IRA now will allow you to still legally add money to your 2009 IRA later.

The contribution limit for 2008 was $5,000, so if you only contributed $2,000 but you have $1,000 that you'd like to add to it, you can file it under the 2008 contribution and still have the full maximum contribution available for the remainder of 2009.

You may be able to save on your taxes.

If you have a standard IRA you’ll be able to take a tax deduction for any money contributed. Roth IRAs are funded with post-tax money, so they don’t provide any deduction.

Be sure your IRA contributions are posted to the correct year before the tax deadline.

What if you can't pay the tax man?

Normally 75% of people who file taxes get a rebate. Wow! It's kinda crazy, but I guess most people would rather over pay (a.k.a. give the government an interest free loan) than get hit with an April tax bill. But what about the other 25%? Well, some people actually plan for an April tax bill, instead of giving it interest free, they get it interest free. Maybe. It's more likely that most people don't plan for that bill. And these days many of those people aren't prepared to gingerly hand out extra cash to anyone, especially not the IRS.

So what if you are one of those that owe taxes? What options do you have? Do you dig into your emergency fund? Or put it on a credit card? Delay filing until you have the cash? HOLD IT! Those aren't options.

You're best bet when dealing with the IRS is to give it to them straight. If you can't afford to pay what your owe contact them immediately. File your return by the deadline. If you owe less than $10,000 you can setup installment payments using Form 9465 (the Installment Agreement Request) with your return. On that form, you can suggest your own easy payment plan to the IRS. You'll need pay the amount within 36 months.

Once they receive your proposal you'll get an an approval notice (which should happen within 30 days). They'll charge you a one-time $52 setup fee. You'll also be subject to interest charged on your deferred payments (which is currently 5% annually, subject to quarterly adjustments), plus a "failure to pay" penalty of 0.25% a month. Together, those two charges equate to an 8% annual interest rate on your unpaid tax balance. That might sound like a lot, but compare that to putting the charge on a credit card or tapping your hard earned savings.

If you think that you can just skip paying altogether you should know that you'll incur a 5%-a-month "failure to file" penalty. That continues to accrue until it equals 25% of your unpaid tax balance. So you could end up owing your unpaid bill plus 25%.

If you owe more than $10,000 or need more than 36 months to pay your bill contact the IRS. They are usually willing to work with you, but may need more information about your financial situation.

Dealing with the bill upfront will save you a lot of headache later. But, note that if you should setup payment plans five years in a row, you'll be drawing unwanted IRS attention.

Have your taxes done free this Saturday

The IRS is calling this Saturday, March 21st, Super Saturday. On this day IRS volunteers under the VITA (Volunteer Income Tax Assistance) program will offer free tax preparation and filing services. To qualify you must have an income of $42,000 or less. Free tax prep services are also available to the elderly and military.

Even if you don't qualify for the free preparation you can ask a trained volunteer questions regarding special credits, such as Earned Income Tax Credit, Child Tax Credit, and Credit for the Elderly.

The IRS also recognizes that many people may have a difficult time paying the amount owed this year. If you fall into this group, you'll want to visit a Super Saturday sight as well. Volunteers will help you set up payment option plans that will prevent even greater penalties and interest.

The IRS will open more than 250 local offices from 9 a.m. to 2 p.m. Community partners will open approximately 1,000 sites on March 21. Tax return preparation is limited to people who earn $42,000 or less. There is no income limitation for people needing IRS assistance for other services at Taxpayer Assistance Centers. To find a Colorado center click here. For those who don’t want to make a trip, the IRS also offers other free services for tax preparation including the Free File program on IRS.gov.

If you go don't forget to bring the following:

• Valid driver’s license or photo identification (self & spouse, if applicable)


• Social Security cards for all persons listed on the return


• Dates of birth for all persons listed on the return


• All income statements: Forms W-2, 1099, Social Security, Unemployment, or other benefits statements, self-employment records and any documents showing taxes withheld


• Dependent child care information: payee’s name, address and Social Security Number or, Taxpayer Identification Number


• Proof of account at financial institution for direct debit or deposit (i.e. cancelled/voided check or bank statement)


• Prior year tax return (if available)


• Any other pertinent documents or papers

Little Known Education Tax Credits

Every little bit counts especially when it comes to saving on taxes. Here are two education related tax credits that you may not know about. For more specific information check out National Association of Student Financial Aid Administrators (NASFAA).

The Hope Scholarship Tax Credit
This is nonrefundable tax credit, not a scholarship or tax deduction. To receive the Hope tax credit, a family or student must file a federal tax return and owe taxes. Families and students that don't pay taxes cannot receive money are not eligible.

For 2008, the amount of a Hope or Lifetime Learning Credit is phased out for those with a modified adjusted gross income (AGI) between $48,000 and $58,000 ($96,000 and $116,000 for joint returns). Those with a modified AGI of $58,000 or more ($116,000 for joint returns) are not eligible.

Beginning in 2008, the amount of the Hope credit (per eligible student) is the sum of:

• 100% of the first $1,200 ($2,400 for students in a Midwestern disaster area) of qualified education expenses paid for the eligible student, and
• 50% of the next $1,200 ($2,400 for students in a Midwestern disaster area) of qualified education expenses paid for that student.
• The maximum amount of Hope credit in 2008 is $1,800 per student ($3,600 for students in Midwestern disaster areas).

Tuition and Fees Tax Deduction

This tax deduction was set to expire in 2008, but Congress extended it until Dec. 31, 2009 as part of the $700 billion economic stimulus package.

The Tuition and Fees Tax Deduction can reduce taxable income by as much as $4,000 for 2008. This deduction may benefit taxpayers who do not qualify for either the Hope or Lifetime Learning Education Tax Credits.

It is taken as an adjustment to income, which means you can claim this deduction even if you do not itemize deductions on Schedule A of Form 1040.

An eligible taxpayer must file a federal tax return to claim the Tuition and Fees Tax Deduction. The taxpayer must also claim an eligible student (an individual enrolled in one or more courses at an eligible educational institution) as a dependent on the tax return. The deduction may also be for the taxpayer or the taxpayer's spouse.

Lifetime Learning Tax Credit
This tax credit for 2008 is gradually phased out for those with modified AGI between $48,000 and $58,000 ($96,000 and $116,000 for joint returns). The Lifetime Learning Credit is a nonrefundable tax credit available to individuals who file a tax return and owe taxes.

An eligible student may be enrolled in an eligible program leading to an undergraduate or graduate degree at an eligible school during the calendar year OR may be enrolled in any course of instruction at an eligible school to acquire/improve the student's job skills during the calendar year. Students may claim the credit themselves if they are not claimed as a dependent by another taxpayer.

Weird but True IRS Policy

photo by Kimblahg

A man from Detroit got a letter from the IRS telling him that he owed five cents. It was the standard "pay now to avoid penalties and interest" letter. Then he got a second letter stating that he was due a refund of four cents. This letter said that he would need to send a request to the IRS to receive the refund since it was less than $1.

This isn't a joke or some crazy SAT problem. It's real--and yes, weird. The MSNBC article covering this story didn't say whether the man intended to send a request or if he applied his refund to what he owes. But it does make you wonder how much money the IRS is pocketing in change.

In December the IRS released the figures for unclaimed tax refunds and tax rebates of $110 MILLION. The $110 Million in unclaimed money is owed to 115,478 Americans, with the average unclaimed tax refund check totaling $953. But I'd be willing to bet that there are more than a few of those refunds that are less than $1. Hey, it costs more than $1 just to send a request including an envelope, postage, paper and your time.

You have three years from the date the return was filed to claim your refund. After that? It's your gift to the government.

One of the biggest reasons refunds go unclaimed is because the IRS has your address wrong. So be sure it's up to date. You might find out if you owed money by visiting the IRS site Where's My Refund.

Even the unemployed must file taxes

If your among the many people who were out of work in 2008 make note that you're not off the hook for filing taxes. The IRS requires anyone who received a W2 from their employer and made at least $8,950 (if you're single and under 65 years old), or made at least $400 if you're self employed, to file a tax return. Hey, it could be in your favor to file. Without filing you can't receive a refund.

What Income do the Unemployed have?
If you have received unemployment benefits you may have to pay taxes on those funds. It is taxable on the Federal returns and on most state returns. Also if you received a severance package when you left your job that money is taxable. The IRS also wants to know about other taxable income such as freelance work or odd jobs that you've taken on. And if you took money out of your 401(k)--that's considered income.

Don't Overlook Job-Related Deductions.
Of course you knew that you couldn't make money without the IRS wanting their piece, but did you know that there are some deductions associated with hunting for a new job? You can deduct the following, but be sure to have all of your receipts:

• anything you spend on creating, printing and mailing your resume
• career coach or headhunter expenses
• interview transportation costs such as: bus, taxi, train, plane, parking, tolls and driving mileage (Driving: between Jan. 1, 2008, and June 30, 2008--50.5 cents per mile, between July 1, 2008 and Dec. 31, 2008--58.5 cents per mile.)
• meals and lodging for out of town interviews
• relocation costs that are not reimbursed by the employer (note that the move must be over 50 miles from your previous location)

Not deductible--your time for a job hunt, interview clothing or accessories. Oh, and if your employer pays for your relocation costs--that's considered income, don't forget it.

6 Last minute tax moves

Before you dance on the grave of 2008 and welcome in a new year along with a potential at financial recovery there are a few things you can do to lessen the pain that comes in April. But act quickly because you need to take care of this list before the clock strikes minute on December 31st, otherwise you might loose a glass slipper. Most of this comes from

#1 Dump your loser stocks

Yep it hasn't been fun watching your investments plummet. You can sell your losers and offset as much as $3,000 in ordinary income for 2008. Anything exceeding $3,000 can be applied, first, to offset 2009 capital gains and then to offset ordinary income in 2009.
But remember: To get the tax treatment, sell by Dec. 31. If your losses are inside a retirement account, you can't deduct them.

#2 Help out the Non-profits

Charities appreciate your minute contributions. So if you've been thinking about it, do it before Dec. 31. And, before filing your tax return, make sure you have receipts from the organizations that benefited from your generosity.

To deduct a cash donation, regardless of the amount, you must have a bank record or a written communication from the charity showing its name and the date and amount of the contribution. Acceptable bank records would include canceled checks or bank or credit union statements containing the name of the charity, the date and the amount of the contribution.

If you don't have the cash, you could even make a donation by credit card. It sounds crazy, but it could help you on the 2008 return. Or, if you could donate clothes or household goods must be in good condition or better to qualify for a deduction. If a single item has a value of $500 or more, you will need an appraisal. So donating your car to public radio might need a bit more documentation than the clothing drop-off to Goodwill.

#3 Don't forget your Flexible Spending Account

Okay, I'll admit this doesn't really have anything to do with your taxes but don't forget to use and report the dollars you spent toward your Flex Account. The IRS allows purchases made through March 15, 2009, to count. Be careful, however. The IRS may allow the extended March 15 date, but, unless your employer's plan is amended to allow it, you won't qualify.

#4 Mortgage interest
Make your January mortgage payment by Dec. 31. Send in a check or pay it online.
Remember to add the interest you paid to what your bank reports on its Form 1098. Your bank will get your payment in 2009 and won't report it for 2008. But because you paid it this year, it adds to your 2008 deduction. Of course, is that you won't be able to deduct the payment from your 2009 return.

#5 Real-estate taxes
If you pay your own real-estate taxes, make any payments due in the beginning of 2009 by Dec. 31. Note: Taxes aren't allowed as a deduction under the alternative-minimum-tax computation. If you expect to get hit by the AMT, don't prepay.

#6 Medical and miscellaneous deductions
Prepay your orthodontist or your tax preparer. Send in your payment either online or via the U.S. mail by Dec. 31. Remember only those medical expenses in excess of 7.5% of your Adjusted Gross Income count. Health insurance premiums count so long as you're not paying them out of a flexible spending account.

Miscellaneous itemized expenses have to exceed 2% of your Adjusted Gross Income to qualify.