If you planned on converting your Traditional IRA to a Roth IRA in 2010 because of the repeal of the AGI limitation of $100,000, don’t panic! Even though you can no longer defer paying taxes until 2011 and 2012 (now you have to pay tax on the conversion in the current year), at least you can still make the conversion in 2011 if you want. Just remember you have to pay income taxes on your 2011 conversion by April 15, 2012, so make sure you have the money outside of the IRA to pay the tax. You also have to keep the money in the account for the later of 5 years or when you turn 59 1/2 or you pay 10% in penalties, although you can take the contributions back without penalty any time.There may also be a planning opportunity. Say you make too much to make a Roth contribution but you have a 401K at an old job or aTraditional IRA; you could convert some or all of it. Let me know if you have questions.
Brian’s Tax Musings
Do you have an FSA (Flexible Spending Account) at your work? This allows you to contribute an amount specified by your employer as before-tax money to pay for your medical expenses. Sometimes the amount allowed has been as much as $5000. You can still use FSA money to pay for a lot of medical expenses, but over-the-counter medication is no longer allowed in 2011 unless you have a doctor’s prescription. See this link for more info as well as some future changes under the Health Care Bill limiting the maximum contribution to these plans:http://www.fivecentnickel.com/2010/08/30/flexible-spending-account-changes-for-2011-and-beyond/The thing is, even with the new restrictions, it still is smart to contribute to these plans if your employer provides them. WIth tax rates only going to go up in the future, any tax-advantaged vehicle can save you taxes on money you would have spent anyway.
Brian’s Tax Musings
Today I want to discuss gambling winnings and losses. All gambling winnings are taxable and should be reported on your federal and state tax returns (California State Lottery winnings are not taxable in California and don’t have to be reported on your CA return). Gambling losses are deductible as a miscellaneous itemized deduction not subject to the 2% exclusion, but if you don’t itemize your deductions you can’t deduct them. Gambling losses can only be deducted up to the amount of gambling winnings, so they zero out. Certain gambling winnings are required to be reported by the casino on a form 1099G and there may be withholding taken out, so you have to file your federal tax return to get the money back. Keep a log of casino gambling activities plus cashier receipts and horseracing tickets, etc to verify your gambling deductions, Here is a link to the IRS regarding gambling income and losses:http://www.irs.gov/taxtopics/tc419.htmlYou can always call me if you become a millionare in the lottery or other gambling and we will discuss tax strategy and how much money you are willing to lend me.