Ask Leyla

There is a lot of discussion in the press about Roth IRA conversion opportunities in 2010. What are the changes and what do I need to know about qualifying?

Starting in 2010, two things everyone should know about the Roth conversion are:

1. The existing $100,000 maximum individual income level for converting a traditional IRA to a Roth IRA will no longer apply.
2. Conversions that occur in 2010 will be able to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012.

So what does that mean to you? Simply put, it means you can convert your tax-DEFERRED retirement accounts to tax-FREE accounts by paying taxes at the current rates. But just because you can, does that mean you should? The answer depends on many factors, including your income tax rate, the length of time you can leave the funds in the Roth IRA without taking withdrawals, your state's tax laws, and how you'll pay the income taxes due at the time of the conversion. Here are some rules of thumb:

• Generally you shouldn't convert to a Roth IRA if you would need to hold out some of the IRA money to pay taxes on the conversion. You'll pay a 10% early distribution penalty on the amount you hold out if you are younger than 59½.
• If your retirement tax bracket will be 15%, avoid paying 25% or higher on your conversion. Remember that a partial conversion may permit you to avoid pushing into a higher tax bracket in the year of the rollover. But keep in mind that a conversion could potentially push you into a higher bracket.
• If your traditional IRA contains mostly nondeductible contributions, converting it to a Roth IRA should produce handsome benefits.
• Even if all contributions to your traditional IRA were deductible, converting it to a Roth IRA may produce benefits if the first two points above don't apply.

Also, if you make a Roth conversion and it turns out not to be advantageous, IRS rules allow you to "undo" the conversion (within certain time limits).

My daughter started going to college in 2009, does she qualify for any education tax credit?

Yes. For tax years 2009 and 2010 the hope scholarship credit is now American opportunity tax credit (AOC). The allowable credit is up to $2,500 per eligible student for qualified tuition and course materials (books, supplies, computer technology and equipment) paid for each of the first 4 years of post-secondary education. Generally, 40% of the AOC is now a refundable credit for most taxpayers, which means that you can receive up to $1,000 even if you owe no taxes. The credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). For more information, see chapter 2 of Publication 970, Tax Benefits for Education. California does not conform to this law provision.

I bought a new vehicle in 2009. Can I get any tax credit in 2009?

Yes. Vehicle sales tax can be added to the standard deduction on a new auto purchased from Feb. 17, 2009, through Dec. 31, 2009, up to $49,500. The deduction is reduced for joint filers with modified adjusted gross income (MAGI) between $250,000 and $260,000 and other taxpayers with MAGI between $125,000 and $135,000. Taxpayers with higher income do not qualify. For more information refer to Publication IR-2009-88, Special Sales Tax Deduction for Car Purchases Available through End of 2009.

I sold my personal home in 2009 at a loss. Is loss on the sale of my personal home deductible?

The loss on the sale of a personal residence is a nondeductible personal loss. For more information refer to Publication 523, Selling Your Home.

I receive social security benefits. Are they taxable?

Yes. Taxpayers may be required to include up to 85% of their Social Security and disability benefits in the taxable income. 50% are included in taxable income for married people with income from $32,000 to $44,000, and singles with income from $25,000 to $34,000.