TaxCoach Briefs:    December 4, 2008

Volume 3, Number 47

• Spotlight on Strategy: Market Losses Create Tax Opportunities
• Client Alert: Zero Percent Capital Gains Rate
• Member Q & A: Printing Single Modules

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WHAT THE $*&$%!
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If you're a TaxCoach subscriber, you may be wondering why the December Lineup you just received is actually another copy of the November issue. Well, funny you mention that . . . .

It just so happens that our printer had a little too much eggnog on Thanksgiving . . . and sent the wrong file to the press. He told us this afternoon, with profuse mea culpas, that we could curse him all we wanted, as long as he didn't have to hear it. (Apparently his head is still a little sore.) Anyway, we'll add our apologies to his: the real December Lineup will be in the mail by the end of the day tomorrow.

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SPOTLIGHT ON STRATEGY (EAL)
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MARKET LOSSES CREATE TAX OPPORTUNITY

The holidays may be approaching, but the stock market isn't giving much reason to cheer. 401ks have become 201ks. Stock prices are slipping like Christmas shoppers hitting black ice. A couple of you have even told me of clients breaking down in tears when faced with their latest account balances.

It used to be that when markets plunged, you could retreat to the safety of cash. But now even cash and cash equivalents are suspect. Supposedly "safe" auction-rate securities are frozen, and the country's first money market fund "broke the buck." Is it any wonder clients are eyeing their mattresses with new respect?

But even the darkest clouds sometimes hide silver linings. You can help reinforce your value for your tax and investment clients by helping them determine whether this may be time to convert IRAs and other retirement accounts to Roths. There are two reasons why this may be a "silver" opportunity: (1) tax rates and (2) market values.

Roth IRAs, in contrast to traditional IRAs, offer “back-end” tax breaks: contributions aren’t deductible; but withdrawals are generally tax-free. And Roths offer another significant advantage: no required minimum distributions (RMDs). This lets your account grow tax-free until your death, at which point your heirs can withdraw the funds, tax-free, over their life expectancies.

Choosing between traditional and Roth IRAs depends mainly on whether you expect your tax rate to be lower today, when you fund the account, or tomorrow, when you take it out. The general rule is that if you expect your future rate to be higher than today's, choosing the Roth saves more than accumulating funds in a traditional IRA.

Under current law, you can convert your traditional IRA to a Roth if your adjusted gross income (excluding the conversion) is less than $100,000 and, if married, you file jointly. The full amount you convert is taxed as ordinary income. Beginning in 2010, you can convert your ordinary IRAs into Roth IRAs regardless of your income.

The same factors that guide choosing between regular and Roth accounts also guide whether or not to convert. Specifically, if tomorrow’s tax savings justify today’s tax bill, you can profit from paying less tax today in exchange for for bigger savings tomorrow.

And today's battered market may gives you even more reason to convert. That's because converting now lets you pay tax today on the market's currently depressed value and avoids tax you would pay if you converted when markets were higher.

• Example One: "Let it Ride" You start 2008 with $100,000 in stocks in your regular IRA. You ride the market down, then back up through recovery. When you reach retirement, the account is worth $200,000. You've deferred tax until then -- but your withdrawals will be subject to ordinary tax and required minimum distributions.

• Example Two: "Convert Now" You start 2008 with $100,000 in stocks in your regular IRA. You ride the market down to $60,000, then convert your account to a Roth and pay $15,000 in tax. When you reach retirement, the account is worth $200,000. But -- your withdrawals will be tax-free, and you'll avoid minimum required distributions. (This example assumes you pay the tax with outside funds -- but you may still come out ahead even if you use account assets to pay the tax.)

Are you afraid that if you convert, the market will keep falling, forcing you to pay tax on evaporated assets? The Tax Code actually gives you an "escape hatch." That's because if you convert, you have until the due date for that year's return (including extensions!) to undo the conversion and avoid tax!

That would mean, in the "Convert Now" example above, that if you convert a portfolio worth $60,000, then watch it fall further to $50,000, you would have until the following October 15 to undo the conversion. If the portfolio goes back up to, say, $70,000, you keep the Roth and pay tax on just $60,000.

If you convert in 2008, your "free look" can last until as late as October 15, 2009. If you convert in 2009, your free look can last until as late as October 15, 2010.

Evaluating Roth IRA conversions isn't for the faint of heart. But presenting the concept to your clients will help reinforce your value as an "appreciating asset" in difficult times!

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CLIENT ALERT (EAL)
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ZERO PERCENT CAPITAL GAINS RATE

We've talked about clients with losses in retirement accounts. But what can you do for clients with gains in taxable accounts?

If you have clients with appreciated assets and who are in the 10% or 15% tax bracket, the Tax Code gives them a special break. Specifically, tax on most long-term capital gains from property held more than 12 months is cut to zero percent. That’s right – tax-free capital gains! (For 2008, that includes single filers with taxable incomes up to $32,100 and joint filers with taxable incomes up to $65,100.)

As 2008 moves to a close, your clients should have a pretty good idea what their incomes will be. If they expect their taxable incomes to be below the applicable limit, they might want to consider selling some of their appreciated assets to pocket tax-free income.

Even clients who have appreciated assets they’d like to keep might consider selling them now -- then immediately repurchasing them. (Remember that there's no "wash sale" rule to consider with gains.)

Why would clients consider such a thing? Because it will raise their basis from the price they originally paid to the new price and save them tax when they sell down the road. And make no mistake -- rates are likely to go up. The special zero percent rate is scheduled to expire after 2010, and President-elect Obama has proposed to raise the top rate on capital gains to 20%. (Of course, you’d want to consider transaction costs before taking advantage of this strategy.)

We've created a new Client Alert letting investors know about this opportunity. When you click on the 'Client Alerts' button in TaxCoach, you'll see a list of alerts, with this latest on top. The file 'zerocgrate.doc' contains letters addressed to each of your clients whose TaxCoach records indicate they own taxable stocks or mutual funds and who fall in the 10% or 15% tax brackets.

You can download the file to your computer, and print on your letterhead using MS Word, or any word processor which supports Rich Text Format ('RTF'). You'll find instructions on the Client Alerts page.

Those of you with securities licenses will probably want to check with your broker-dealer's compliance department before using this Client Alert. Those of you who don't offer securities can still score points by identifying an opportunity in your area of expertise.

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MEMBER Q & A (KAV)
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Q: I'm trying to find the info on Hiring Children on the web site. I found the checklist but I know there was a longer written piece.

A: Good to hear from you. All of the TaxCoach strategy modules are available on the Reports screen, which is enabled once you select a client. The module about hiring children is in the Your Business section of the modules list, titled "Hire Your Family".

If you want to print off just that strategy, all you need to do is this:

• Select one of the sample clients in the drop-down list on the Home Page, once you sign in.
• Click on the green "Create Tax Plan Report" button. (This is the last button in the column which appears when you select the client).
• On the "Reports" screen, click on the gray "Clear Selections" button.
• Select just the "Hire Your Family" module, which is about halfway through the "Your Business" list.
• Click the orange "Generate Report" button, and you'll get a report PDF with just that strategy in it.

Many of TaxCoach's modules, such as the "Hire Your Family" module you asked about, the Medical Expense Reimbursement Plan, and the entity selection discussions, have accompanying "Implementation Guides" you can also give clients to make your handouts more useful.

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We're happy to answer your questions on TaxCoach content, features, or marketing. While we give first priority to our All-Star and Hall of Fame members, we work to answer all questions. For best response, email support@taxcoachsoftware.com. If we think the answer will be useful to all of our members, we'll publish it (anonymously) here in the 'Member Q & A' section of TaxCoach Briefs.

Regards,

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