If you’ve been thinking about whether to convert a traditional IRA or 401(k) account to a Roth account, it’s worth giving the matter another hard look before the end of the year. When you convert a traditional IRA to a Roth IRA, or a traditional 401(k) account to a Roth 401(k) account, the converted funds are subject to federal income tax in the year that you make the conversion (except to the extent the funds represent nondeductible after-tax contributions). With tax rates set to go up next year, waiting to do a conversion could mean that your immediate tax hit for doing the Roth conversion goes up as well. Converting now can also have a long-term benefit–future qualified distributions from Roth IRAs and Roth 401(k)s will be free from federal income tax. That could make a big difference in retirement if you’re paying income tax at a higher rate at the time. Whether a Roth conversion makes sense for you depends on a number of factors; but if it makes sense for you, it might pay to think about acting this year, rather than waiting. One more thing to consider : If you convert a traditional IRA to a Roth IRA and it turns out to be the wrong decision (e.g., current tax rates get extended, and you think you would have been better off waiting to convert), you can recharacterize (“undo”) the conversion. You’ll have until October 15, 2013, to recharacterize a 2012 Roth conversion–effectively, treating the conversion as if it never happened for federal income tax purposes.

If you need assistance, please contact Steve Siesser at ssiesser@verizon.net

If you have young children, the most important part of your estate plan is naming the guardians to raise your children if something happens to you and your spouse.

Typically, the guardians are named in the will. If the estate plan has a revocable living trust, the guardians are named in the pour-over will.

Naming guardians is not easy.  But if you have young children, you have to do it. If you don’t name guardians and something happens to you and your spouse, the court will have to decide who will raise your children.

Some of my clients have an easy time naming guardians. They have parents or siblings who are well qualified.

But many of my clients aren’t so lucky. They have a hard time deciding on the right people.

Here’s what I tell my clients who can’t decide on a guardian.

First. No one will be as good as you. No one is perfect (except you of course). If you are gone, someone you choose is better than the court choosing.

Second. The only people you can really choose from are those already in your personal network. Your network consists of your family and close friends. Be realistic and make the best choice of those in your network. That’s all you can do.

Third. You can always change your mind later.  Be prepared to change your guardians every few years as your situation changes. You may meet someone with similar nurturing skills or your relatives may have matured into better parents.

Just know your choice is not permanent. Every decision we make today can only be made based on what we know today. If tomorrow changes, you can change your plan.

If you need assistance, please contact Steve Siesser at ssiesser@verizon.net

There is much uncertainty surrounding the estate-planning options that may be available in 2013.  Until the end of this year it’s possible to give away up to $5.12 million per person ($10.24 million per couple), without incurring a gift tax of up to 35%. Currently you can give up to $13,000 each year ($14,000 beginning in 2013) to as many recipients as you would like without even dipping into the $5.12 million exclusion amount. Spouses can double up on annual gifts to jointly give $26,000 to any person tax-free.  However, once you’ve succeeded these limits you do you start drawing down the $5.12 million.

The easiest way to use the annual exclusion is to give cash or other assets each year to each of as many individuals as you want. Another possibility is to put money in Section 529 education savings plans. Establishing these plans for relatives could relieve siblings or children of the need to save for college at a time when they are overwhelmed with current expenses.

You can set up a separate account for each family member whom you wish to benefit. Although your contributions to a 529 account are considered gifts, there are two unusual benefits: money in these accounts grows tax-free and can be withdrawn tax-free, provided it is used to pay for college, a graduate, vocational or another accredited school, or for related expenses.

Unless Congress acts before year-end, at the end of this year the current $5.12 million per-person exclusion from the federal estate and gift tax will automatically drop to $1 million and the tax on transfers above that amount will go up to 55%. There is a question as to whether gift or estate tax could be owed on the value of the previously gifted asset if the exemption returns to $1,000,000 in 2013 or future legislation results in a gift and estate tax exemption in an amount less than $5,000,000.  This is referred to as the potential for “claw back.”

In the simplest terms, an individual can make a large gift in 2012 without owing any gift tax, while the same gift in 2013 would result in a large gift tax liability. For example, for a single person or married couple with a taxable estate of $3 million, the scheduled estate tax changes could mean a $945,000 federal estate tax bill next year, versus zero under current law.  That’s why it’s important to think about your estate and gifting strategies over the next few months, and to talk with your attorney about a plan that you can execute as the tax-law changes get closer. Future uncertainty should weigh into any decision you make.

For additional assistance, please contact Steve Siesser at ssiesser@verizon.net.

Income that you receive for the rental of your vacation home must generally be reported on your federal income tax return.

However, if you rent the property for only a short time each year, you may not be required to report the rental income.

The IRS offers these tips on reporting rental income from a vacation home such as a house, apartment, condominium, mobile home or boat:

• Rental Income and Expenses Rental income, as well as certain rental expenses that can be deducted, are normally reported on Schedule E, Supplemental Income and Loss.
• Limitation on Vacation Home Rentals  When you use a vacation home as your residence and also rent it to others (mixed use property), you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.
  You are considered to use the property as a residence if your personal use is more than 14 days, or more than 10% of the total days it is rented to others if that figure is greater. For example, if you live in your vacation home for 17 days and rent it 160 days during the year, the property is considered used as a residence and your deductible rental expenses would be limited to the amount of rental income.
• Special Rule for Limited Rental Use  If you use a vacation home as a residence and rent it for fewer than 15 days per year, you do not have to report any of the rental income. Schedule A, Itemized Deductions, may be used to report regularly deductible personal expenses, such as qualified mortgage interest, property taxes, and casualty losses.

Major sporting events, conventions, holidays, etc., provide an opportunity to rent out all or a portion of a main or second home on a short term rental basis.  Make sure your rental agreement includes a security deposit or other damage reimbursement plan since repair costs are not deductible where the number of days rented is less than 15.  If you need assistance or have questions, please contact Steve Siesser at ssiesser@verizon.net