What will our tax law look like in 2010, 2011, and 2012? No one knows. There are currently three major tax bills working their way through Congress as well as the Health Care bill which contains significant tax legislation to pay for the increase in Medicare. Rumour has it that the White House is pushing hard to have the Foreign Tax Compliance Act signed by December 31, 2009 and it is expected that this legislation will be retroactive to January 1, 2009.

Converting Your IRA to a Roth IRA

One clear known is that in 2010 all individuals will have a one time opportunity to convert their traditional IRA to a Roth IRA. What are the pros and cons of doing so?

In a traditional IRA your investment grows tax free until you start withdrawing funds at which point you start paying tax. Also, under a traditional IRA you must start withdrawing funds once you reach the age of 70-and-a-half.

Roth IRA

Contributions to a Roth IRA are made with after tax income and are not deductible when made. In a Roth IRA you do not pay taxes on any investment gains if you start taking withdrawals after age 59-and-a-half and after you have had the account for at least five years.

Withdrawals of your nondeductible contributions can be made at any time without being subject to either income tax or penalty. And as noted above investment gains can be taken tax free when you have met the above requirements.

Under a Roth IRA you are not required to take a minimum distribution at age 70-and-a-half. You can keep the funds in your account as long as you wish, or pass them on to your heirs.

From an estate tax view point, if you convert from a traditional IRA to a Roth IRA, and pay income tax at the time of conversion, your heirs will benefit by receiving tax free withdrawals.

Considerations in Converting to a Roth IRA

Suppose that you have $300,000 in a traditional IRA, are currently at the top of the 28 percent tax bracket and are considering converting it to a Roth IRA in 2010. The conversion will likely push you into the 33 percent and 35 percent tax bracket. While the conversion must be made in 2010, the actual taxes are not due until 2011 and 2012. It is a forgone conclusion that the tax rates in 2011 and 2012 will be much higher than they are in 2010. However, you can make an election to have the taxable convertible income taken into account in your 2010 tax return and pay taxes at the lower 2010 tax rates.

Assuming a 33 percent tax rate, you now owe $100,000 in income tax. Do you have the money to pay this tax? While you can take the $100,000 out of the $300,000, you lose the benefits of tax free growth on $100,000 and if you are under 59-and-half-years-old you will also incur a 10 percent penalty for early withdrawal.

Once you covert to a Roth IRA you must wait five years before making a withdrawal or you will incur a 10 percent penalty for early withdrawal.

So before you decide to convert your traditional IRA to a Roth IRA you need to consult with your tax advisor to ascertain whether it makes sense for you to do so.

Health Care Reform

In whatever form health care is passed, the IRS will be responsible for managing a major part of the plan. By 2013 it is expected that all US citizens and resident aliens will be required to prove that they have health care coverage or pay a penalty when filing their tax returns. IRS will be required to match documents from insurers with tax returns to ascertain if a penalty that was to be paid was in fact paid.

To assist individuals who fall below an income level pay for coverage the IRS will have to obtain information about the amount of credits that individuals qualify for and send these amounts directly to their insurance companies. In turn the IRS must first send information to the exchanges verifying that those who apply for assistance are qualified to do so. The IRS will also be responsible for collecting penalties from companies that do not provide affordable coverage to employees. Given that the IRS has difficulty in properly tracking simple things like estimated tax payments and refunds, we are skeptical of it's being able to handle a social welfare program for which it has zero experience and expertise.

Employee Stock Purchase Plans and Incentive Stock Options

As of 2010 employers will be required to report to the IRS information such as grant date, grant price, exercise date, and exercise price as well as the name, address and social security number of the recipient.

Golf Cart Credit

Do you live in a community where you can drive your golf cart down the street? If so, you can take a tax credit of $2,500 on the purchase of a new golf cart plus an additional credit of $1,500 to $3,500 depending on the capacity of the battery.

Cash Gifts to Relatives

Each person can use the $13,000 annual exclusion to make a tax free gift to a child, grandchild, nephew, niece, etc. If your spouse joins in the gift you can give $26,000 to each person without incurring a gift tax, even if the entire amount comes from one spouse's bank account. Tuition paid directly to a school for a child, grandchild, nephew, niece, etc. does not count toward the $13,000 exclusion.

If you are a foreign national making a gift to a US person be sure to do this from assets held outside the United States. There have been a few instances where a foreign national has made a gift to a US citizen or resident alien from a bank account within the United States and the IRS has taken a position that such transfer of assets is subject to US gift tax. If a US citizen or resident alien receives a gift from a foreign national they do not have to pay tax on the gift, but if the gift is $100,000 or more the recipient needs to report this gift to the US Treasury.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is president of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsaboexpatriatetaxservices.com