Tax Law Changes

Conversion to Roth IRA

Starting in 2010, there is no income limit on converting a traditional IRA to a Roth IRA. A taxpayer can convert a traditional IRA to a Roth IRA in 2010 and pay the tax on the amount that would be included in income on the conversion in equal amounts in 2011 and 2012. The taxpayer can choose to include the entire amount in income in 2010.

Gulf Oil Spill

The IRS has provided guidance to individuals and businesses affected by the oil spill in the Gulf of Mexico. BP payments for lost income are taxable in the same way that the wages or business income these payments are replacing would have been. The law requires that a taxpayer include in gross income payments the taxpayer receives for lost business income, lost wages or lost profits. A self-employed individual who receives a payment that represents compensation for lost income of the individual’s trade or business should include the amount of the payment in net earnings from self-employment for purposes of the self-employment tax.

A taxpayer is not required to include in gross income payments the taxpayer receives for property damage or destruction if the payments do not exceed the taxpayer’s adjusted basis in the damaged or destroyed property. If the payments for property damage or destruction exceed the taxpayer’s adjusted basis in the damaged or destroyed property, the taxpayer will realize gain for federal income tax purposes.  If the damage or destruction is an “involuntary conversion,” the taxpayer may defer the tax on any gain if the taxpayer purchases qualifying replacement property that costs at least as much as the payments received for the damaged or destroyed property. (Tax is deferred until the qualifying replacement property is later sold.) An involuntary conversion occurs when a taxpayer’s property is destroyed, stolen, condemned or disposed of under the threat of condemnation and the taxpayer receives other property or money in payment, such as a condemnation award or insurance

A taxpayer may be able to claim a casualty loss deduction if the payments (including insurance proceeds or payments for damages) the taxpayer receives, or reasonably expects to receive, are less than the taxpayer’s adjusted basis in the property. 

An individual generally is not required to include in gross income payments the individual receives on account of personal physical injuries or physical sickness.   

Tanning Tax Takes Effect July 1

Unless you spray on a tan, or bask under the sun, those ultraviolet rays may soon cost you more.  Starting July 1, tanning salons using ultraviolet rays must charge their customers a ten percent tax.  The salon is responsible for paying the taxes in quarterly installments, by filing Form 720, Quarterly Federal Excise Tax Return.  There are some exceptions to the rule. If the tanning is considered phototherapy and prescribed and administered by a licensed medical professional, the tax is not applicable. If tanning is offered at a fitness facility, but not specified in membership dues or on a list of membership services, there’s no tax for tanning.

First-Time Home Buyer Credit is Extended Again For Eligible Buyers Who Have Signed  a Contract  

Some first-time home buyers who have been scrambling to meet the deadline to qualify for the first time home buyer credit can breathe a little easier.  The credit has been extended through September 30, but only for those who qualify, and have signed contracts dated before May 1.    

Those serving in the military may be eligible to take advantage of an even longer extension.  The closing deadline to enter into a binding contract on a new home for military personnel and members of the intelligence community is extended until April 30, 2011, and June 30, 2011 to close on the home.  If the residence ceases to be the primary residence for the required period of time due to extended military duty, the credit will probably still be allowed.  

To qualify for the later deadline, the taxpayer must be a member of the uniformed services or Foreign Service or an employee of the intelligence community and be on qualified official extended duty outside the United States for at least 90 days during the period beginning after December 31, 2008, and ending before May 1, 2010.  First-time home buyers claiming the credit must file a paper return that includes Form 5405 and additional documentation.  Generally, that’s a copy of the HUD-1 settlement statement or a retail sales contract if the home is a mobile home.  

First-time home buyers who have not owned a principle residence for three years prior to the purchase of a new home can take a credit of up to $8,000.  Long-time home owners” may qualify for a credit of up to $6,500. To qualify, the homeowner must have owned a home and used it as a principal residence five of the last eight years ending on the date the new residence was purchased.