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January 20, 2010 Dear Client: Your statement is now posted to Your Online Access. Please call or email us if you require assistance logging in. Q4 2009 Market Update
Index Returns for the Period Ending December 31, 2009
Predictions for 2010 Equities continued their upward trajectory in the fourth quarter. U.S. large-cap stocks gained 68% from their March 9th low through December 31, 2009; small-cap stocks gained 84% and foreign equities gained 78% from March 9th through December 31, 2009. Even bonds gained 7% during the same period. Very few people predicted the collapse, and even fewer predicted the subsequent 70+% recovery. I don't know of anyone, professional or personal, who was able to capitalize on both sides of the crisis. There is no shortage of people making predictions for 2010 (on CNN, in the Wall Street Journal, in Barron's, etc.), despite their own recent failures. "Markets will have small gains"; "the Dow will hit 5,000"; "bond yields will rise"; "housing prices will decline"; "oil will reach $100 per barrel"; "gold will reach $3,000 per ounce". Regardless of their record, the same prognosticators attract listeners and followers. I'm going on the record: "I have no idea what is going to happen to the markets in 2010." Tax Topics Here is a good summary of 2009 changes and 2010 updates. Some of the changes are beneficial, such as an $8,000 credit for home buyers (referred to as "first-time" buyers, but defined as those who have not owned a home for three years), a credit of up to 65% of COBRA premiums for some terminated employees, the exclusion from tax of the first $2,400 of unemployment compensation, and increases in residential energy credits, to $1,500. Capital gain tax rates remain at 0% for taxpayers in the 10% and 15% income tax brackets. The top capital gain and qualified dividend tax rate is 15%. Capital gain and qualified dividend tax rates will sunset in 2011, reverting to a top rate of 20% for long-term capital gain property and qualified dividends. The estate tax has been repealed in 2010. Under current law, the estate tax will be revived in 2011, with a $1,000,000 exemption and a 50% maximum tax rate. Similarly, the top income tax rate is scheduled to revert to 39.6% in 2011, from 35% in 2010. Some changes are detrimental. Until 2009, the $250,000 capital gain exclusion upon the sale of your primary residence was available as long as you met the two year residence requirement. If you owned a vacation home or rental property, you could move into the property, making it your primary residence for two years, then sell the property and receive the full capital gain exclusion. (Note: depreciation taken has always been subject to tax as "recaptured income".) Since January 1, 2009, the capital-gain exclusion for home sales is prorated according to the proportion of qualifying use (use as your primary residence) to total ownership. A portion of any capital gain will be taxable: the ratio of time after 2008 that was "non-qualified" use to the total ownership period. Let's say you've owned a vacation home since January 1, 1992, and plan to make it your primary residence on January 1, 2010. You plan to live in it for two years and sell it on January 1, 2012. The proportion of gain that will be taxable will be 1/20 = 5% (vacation home in 2009 / 20 years owned). The other 95% of the gain qualifies for the home-sale exclusion, up to $250,000 ($500,000 for joint owners.) If you have claimed a deduction for home office use in earlier years, the home-sale exclusion is reduced ONLY if the home office was in a separate structure. If your office is in a separate structure, such as a barn or apartment, a portion of the capital gain will be subject to tax. Minimum distribution requirements for IRA owners were reinstated in 2010, after a two year moratorium. Distributions are based on a life expectancy factor applied to account balances as of December 31, 2009. IRA owners may be surprised by the size of the required distribution in 2010 after two years of waiver and after investment growth in 2009. We have seen more notices to clients from taxing authorities recently, including:
The IRS has noted its interest in activities not engaged in for profit (i.e., hobbies) that are reported as business losses in its Audit Techniques Guide published in June 2009. CPAs and IRS Enrolled Agents are seeing increased scrutiny of the mortgage interest deduction, as we've noted in several communications. I would not be surprised to see increased scrutiny by the IRS of charitable donations, home office deductions and capital gain cost basis. Roth IRA Conversions Perhaps the largest new opportunity in 2010 is the ability of anyone to convert a traditional retirement account to a Roth IRA. Until this year, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert a traditional IRA to a Roth IRA. In 2010 the $100,000 income ceiling is removed. Any individual can transfer (convert) all or some funds from a traditional IRA to a Roth IRA. The amount transferred is included in gross income, subject to ordinary income tax. Once converted to a Roth, the funds are tax-free forever. Further, there is a one-year provision for 2010 conversions. The taxpayer can elect to have the income from the conversion added to income in 2011 and 2012, delaying the tax and spreading it over two years. The Roth IRA owner is not required to take distributions during his or her lifetime, unlike a traditional IRA, where an owner is required to take distributions based on a life expectancy factor each year starting at age 70. The Roth is a wonderful gift to children and grandchildren. Beneficiaries of your Roth do have to take distributions over their life expectancy, but the distributions remain tax-free forever. Some of our clients with gross income below $100,000 have taken advantage of this opportunity in earlier years, in some cases converting hundreds of thousands of IRA dollars to Roth IRAs over time, for little or no cost. There has been an enormous amount of information published about this opportunity, and a wide range of generic recommendations. But the determination of whether, when, and how much to convert depends on your individual circumstances. Let us help you make the decision based on your unique combination of resources, needs and expectations. As always, please do contact us with any questions.
Regards, |
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