Happy Autumn! Well, almost.
I hope you all had a pleasant summer and are enjoying the transition to cooler weather. And how about those Brewers, eh? The boys of summer look to hang around just a little bit longer, and that’s all right with me.
What’s going on in the world of taxes? The President and Congress are girding their loins for the annual mud-wrestling competition that is the federal budget negotiations. As this process grows more contentious every year, it means that the final tax laws won’t be written until the week between Christmas and New Years. So stay tuned for that.
But now is a great to be taking steps to save on your taxes based on the laws we have in hand – at least until the end of the year.
Charitable Contributions. The cooler weather means it’s a great time to spend the weekend cleaning out the attic, basement, or garage and (finally) taking some of that old stuff off to the Salvation Army, Goodwill, Amvets, or whomever. Remember that you can claim Fair Market Value for items that you donate, which roughly means what you would expect to get for the item if you sold it on Craigslist or at a garage sale. Goodwill of SE Wisconsin has a handy guide available online and you can find it by clicking here.
Recharacterizing your Roth IRA Conversion. Recent tax laws have made it possible for people to convert their Traditional IRA to a Roth IRA, but this required people to pay taxes on the amount of the Traditional IRA that was converted. Now there are some circumstances where you might what to consider “recharacterization,” which basically means that you’re taking the money out of your Roth and putting the money back into your Traditional IRA. It’s as though the conversion never happened – at least for tax purposes.
Why do this? Let’s say you converted $100,000 in a Traditional IRA to a Roth, and so now you’re going to pay taxes on $100,000. But if that $100,000 in the Roth IRA has declined to $50,000 you’re STILL going to pay taxes on the $100,000 you converted, and not the amount that it’s worth currently. So in addition to being pushed into a higher tax bracket because of the conversion, you might wind up paying double the taxes based current value of the Roth. You might want to just call the whole thing off by recharacterization.
But you have until October 17th to do this.
Unemployment Compensation. Unfortunately, the job market continues to struggle and many people who have never filed for unemployment compensation before and getting a taste of what that’s like. Here are two things to remember. The first is that unemployment compensation is taxable income, so if you’re not having anything withheld from these checks, you could face a tax liability next year when you file.
The second thing to remember is that job search expenses are deductible as a Miscellaneous Deduction (that’s the one where the deduction has to be at least 2% of your income before you can take it). You probably won’t have deductible expenses for routine things like printing resumes and such, but if you’ve hired an employment consultant or are traveling out of town to job interviews, those costs are significant and could be deductible.
Sale of Your Home. The U.S. housing market continues to be a challenge, but if you’ve sold your home recently, here are a few things to remember. If you’ve lived in your house for two of the past five years, then you may be able to exclude some or all of the capital gains from the sale of the house. A capital gain is defined as the difference between what you paid for the house (including closing costs) and what you received after closing costs when you sold it.
The IRS allows you to exclude $250,000 in capital gains ($500,000 for married couples) from the sale of your home, so if you bought several years ago and the value has appreciated over time, most if not all of the gain in value on your home will be tax free. But more relevant to more recent home buyers and sellers, you cannot deduct a loss on the sale of your primary residence.
As always, if you have any specific questions, you can find me at jeffrey.ritchie@yahoo.com or follow me on Twitter at http://twitter.com/#!/MilwaukeeTaxPro
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