In an attempt to boost sales and promote a more environmentally friendly initiative (and perhaps in part alleviate the nation’s dependency on fossil fuels and their impending disappearance) the US Government has imposed a series of tax credits for those purchasing and using electric vehicles.

In part, the system sounds too good to be true.  And fortunately, there isn’t much of a catch.

First and foremost, what accompanies the purchasing of an electric vehicle is a tax credit.  A tax credit is different than a tax break or a tax deduction, which are three terms used interchangeably (and incorrectly) in American vernacular.

The tax credit serves as a dollar-for-dollar substitution for owed taxes.  This differentiates from a tax break because it doesn’t alleviate your currently owed taxes.  Similarly, it’s also not a tax deduction, because a deduction only lowers the percentage of taxes owed on any particular facet.

The tax credit is ultimately a far better deal.  With a tax credit you simply don’t have to pay a portion of the taxes you would have otherwise owed.

In essence, by purchasing an electric vehicle you’ll get a (potentially) large chunk of your required tax payment taken care of.

These regulations have been in effect since the end of 2005, but given the lack of commercial electric vehicles it hasn’t been very prominent.

However, 2010 saw the development of such cars as the Nissan Leaf and Chevy Volt (among others) which makes the governmental regulation more relevant.

First off, there’s a long list of what qualifies as an electric car.  You’d think that might be an easy call to make (ultimately, it is) but for the sake of legislation it has to be mapped out.  If you’ve purchased an electric car or are contemplating purchasing one, don’t make a silly mistake—consult the list first.  There’s high odds what you’re buying is going to be on there but you definitely don’t want to drop the $20K or more on a vehicle that’s not going to give you the appropriate tax break.

Secondly, there’s a bunch of regulations regarding when you purchase the car and when you can claim it on your taxes.  In short, the car you purchase won’t be tax eligible until the following calendar year.  And the quarter in which you purchase it makes all the difference.

The legislation is clearly designed to encourage the purchasing of new electric cars.  For example, you get the biggest tax break when you purchase a car in the third or fourth quarter of a fiscal year.  It doesn’t matter when you actually end up with the car in your possession, it matters entirely when you purchase it.

Furthermore, if you purchase at the beginning of the year (hence purchasing the previous year’s model) the tax credit you get is reduced to 25%.  Clearly, this discourages purchasing older models—even only a year old.

Although something is better than nothing—and when it comes to tax credits, many of them extend past the previous year’s purchases. As mentioned, when you purchase in the first or second quarter of a year your credit decreases.  But if you’ve purchased a car, you may as well get the tax credit for it.

The same applies to purchasing cars earlier than a year before.  Anything purchased between the end of 2005 and the end of 2010 is, in some capacity, eligible for a tax credit, but the circumstances vary wildly and should be checked out thoroughly.

In short, your biggest tax break is going to come from purchasing a brand new model in the third or fourth quarter, when the new lines are introduced to the public.  If you don’t receive the car for another six months it’s still relevant on your tax statement due April 15^th of the following year.

There are four different H&R Block At Home Tax Software packages:

Basic

This package is meant for those of us who haven’t complicated their life yet or managed to simplify it again. You have a job, rent a place to live in and live your life. Many of us envy the uncomplicated tax preparation we had back then, but watching people new to taxes start the process convinced me that it is all a matter of perspective. Even the simplest tax forms look complicated to someone who hasn’t had to work through them before. So the step by step instructions provided are nice to have, so you can feel confident that you are doing it correctly. I would recommend using step by step instructions to any first time user.

Deluxe

This is the one likely to capture the majority of our tax concerns. You have purchased your home and are paying off a mortgage, you own a few stocks or bonds and you donate to some of your favorite charities. The deluxe software will handle your situation and provide you with personalized tax guidance. This level of software also comes with assistance should you be the lucky winner of the audit lottery. H&R Block will help you with correspondence initiated by the IRS and let you know how to prepare for the audit. They will even offer you the assistance of an enrolled agent who can attend your audit with you and provide tax advice.

Premium

Are you a budding entrepreneur. Then this one was designed for you. You have gone into business for yourself as a sole proprietor or picked up some rental property along the way. With this software you can handle all of the issues the simpler packages deal with plus the issues that creep up when you run your own business. As an added bonus you can have a session with a live tax adviser with this package. All of these packages allow you to prepare state returns as well for an additional fee.

Premium & Business

This is for those among you who really know how to complicate life as far as taxes are      concerned. This software can handle all sorts of business entities, estates, trusts, non-profits and     all those pesky payroll and employer forms you have to deal with. With any business that owns property you are likely to deal with depreciation as well, so that is included too. And since many successful businesses cross state lines, you can download unlimited business state programs with this purchase.

If you are a procrastinator, you are in luck. All of these programs can be downloaded, so you can start doing your taxes right away. These four packages range in price from about $20 to around $80. All of them include 5 free e-files for personal federal income taxes. Tax season is upon us. What are you waiting for? Check out H&R Block At Home Tax Software today.

The Roth IRA contribution limits have gone up over the years. Here is the maximum contribution allowed over the past four years based on your age as of the end of the year:

49 and younger                    50 and over

• 2007                $4000                                      $5000
• 2008                $5000                                      $6000
• 2009                $5000                                      $6000
• 2010                $5000                                      $6000

Keep in mind that these contribution limits are a combined limit with any Traditional IRA contribution you made. You can read the details at the IRS’s website. These limits are also reduced based on your adjusted gross income. For 2010 your AGI cannot be over $177,000 if you are married filing a joint return in order to contribute to a Roth IRA or $120,000 if you are single. If you have that kind of income, you can probably find other ways to recover your retirement nest egg.

As you can see in the table above, the Roth IRA contribution limits 2010 have not changed from the previous year. So what has changed in 2010?

2010 is the year you can convert your traditional IRA into a Roth IRA no matter what your income is. Previously, there has been an income cap to being allowed to convert from one type of account into another. Of course, just because you can, doesn’t mean that you should, but it may make sense for you.

If you are a high income earner and you keep bumping into the contribution limits, this may be your way to get around the Roth IRA income limits. For high income earners, a Roth IRA can be a great estate tool. Any income you earn in a Roth comes out tax-free. So if you want to create a fund for your children to inherit, this is a great tool.

The year 2010 is likely the year you want to make the switch in that case. Not only is it the first year you are eligible as a high income earner, this is the only year you will be able to split the tax burden in half by distributing it between 2010 and 2011. You are probably one of the lucky few that doesn’t have to worry about their retirement funds but this will give your kids a great start on theirs.

For the rest of us, bumping up what we save to the Roth IRA contribution limits will certainly help recover our strained retirement funds. After all, this is money that can earn money tax-free and be withdrawn without having to pay taxes on it when we need it in retirement.

Roth IRAs make the most sense for people with a long time horizon. If you think taxes will go down as you near retirement, it does not make sense to pay taxes now when you could be delaying that painful requirement. However, if you have enough time left in your working career to make that Roth IRA grow significantly, or if you are a master stock picker, you can’t beat earning money tax-free.

So maybe increasing your contributions to a Roth IRA won’t get rid of your retirement blues but it certainly could ease it. If you haven’t yet checked into the differences between a Roth IRA and a traditional IRA, check out this article at the Motley Fool’s website.

Some of the main changes have occurred in the last decade. While an IRS whistleblower reward used to be discretionary, the awards are now formalized in the law. To submit information and apply for an award in regard to that information, the IRS even has a form to file, IRS Form 211. This form should be filed with the new IRS Whistleblower Office at Internal Revenue Service, Whistleblower Office, SE: WO, 1111 Constitution Ave., NW, Washington, DC 20224. The rewards can be substantial, up to 30% on cases involving over $2 million or individuals earning over $200,000 per year, and up to 15% on smaller cases. There are even websites trying to entice you into becoming a professional whistleblower. 

The most recent changes to the law regarding IRS whistleblowers occurred in 2006. Since there appear to be some questions as to the legality of the new law, the policy hasn’t changed much yet. Rewards for information leading to the recovery of less than $2 million in taxes are still not required. The IRS may or may not pay an award, at their discretion. 

The main concerns an IRS whistleblower may have are confidentiality and protection. In most cases, the IRS tries to keep the identity of the informant a secret. However, if the IRS whistleblower is needed to testify in court, they will inform the whistleblower of this and then make their decision whether to proceed. We have all heard of famous whistleblowers. Their lives change drastically once they decide to proceed. Of course, not all of them were IRS whistleblowers. Some were able to keep their identity hidden for decades, such as Deep Throat. 

For the most part, you have to follow your conscience when you decide whether to become an IRS whistleblower. The types of crimes committed haven’t changed significantly. Even back in the old westerns, you could see the bad guys keeping two sets of books, one for the government officials and one, the real one, for themselves. That is still a common problem, as is paying employees with cash and then not reporting the income to the IRS. For a while fraudulent income tax shelters were leading the news. They haven’t disappeared. 

Another common crime is making up fictitious deductions on your income taxes. Sure, that houseboat was a business expense, why didn’t I think of that! Maybe because keeping your family entertained while you work is not a business expense? The IRS is most interested in the large cases, the ones that cost the taxpayers millions of dollars. If you find yourself privy to information which could lead the IRS to recover that kind of money owed to the government, you should seriously consider reporting the fraud on IRS Form 3949-A. It should be mailed to Internal Revenue Service, Fresno, CA 93888. If   you were hoping to call the IRS whistleblower phone number, try calling your local IRS tax assistance center. An overall number does not appear to exist. 

If you have a family that could be impacted by your decision to report a fraud, be sure to at least inform the adults in your immediate family of your decision and the impact it may have on their lives as well.

Your Roth IRA taxable income is just one of those. A 401k consists of tax deferred savings. A Roth consists of tax free savings once the tax has been paid on the money you put into it. When you choose to roll a 401k into a Roth IRA, you will have to pay the income tax on the entire amount you are rolling over. For 2010 you do get a small break, you will be able to spread the taxes over the next two years instead of one. If you have to pay the taxes out of the money you are rolling over, it may not be worth it.

Your tax bracket also makes a big difference. Do you expect it to be higher or lower when you retire? If you expect it to be higher then you are better off paying the taxes now and increasing your funds tax free after that. You also should consider your retirement plan. Do you have at least five years before you need the funds? If not Roth IRA withdrawals will force you to pay the 10% penalty. That could easily wipe out any benefit the Roth IRA provided.

If you have a significant number of years left before retirement and you can afford to pay the income tax on the 401k to Roth IRA conversion from other funds, you will most likely find that you will be better off by the time you reach retirement if you convert the 401k into a Roth IRA. Of course, this assumes that you have earnings.

If you are like most people that saw their 401k funds dwindle over the last few years, you may have lost your faith in the stock market. Stocks are not the only investments you can hold in a Roth IRA. When you estimate your earnings, make sure you put in a reasonable figure for the amount of growth you expect to average each year.

You can find a Roth IRA calculator at http://www.dinkytown.net/java/RothIRA.html . Other tips for what to consider when making your decision can be found at http://personal.fidelity.com/products/retirement/rollover/rolloverintro.shtml.cvsr . Every person’s situation is slightly different, so there are no universal rules.

Personally, I found the Roth IRA conversion attractive. Having made the decision ten years ago, before the disastrous stock market conditions, I have already reached the point where the Roth IRA was the better investment choice but then I was a fairly aggressive investor. If your risk tolerance is lower, it may be difficult to see the benefits within that time frame. All you have to do, is look at the stock market performance for the last few years to know how difficult it can be to have any earnings. If you end up with no earnings, converting to a Roth IRA will not have been worth the effort.

Look at your investment style, your past performance and your risk tolerance. Those will provide you with additional clues as to whether you can expect to benefit from a roll over of 401k funds into a Roth IRA. Many financial advisors will caution you to take a slightly less aggressive approach to investing with your retirement funds. That could also have an affect on your decision and your results. Choose wisely.

In a living trust assets are held in the name of the trust so no probate is necessary. If the reason for setting up a living trust is avoiding probate, make sure all of your assets are held by the trust or it will have missed its purpose. If you do go through probate, the probate service gives the executor a grant of representation which can come in several forms depending upon whether the estate has an administrator or executor. The document issued will allow that person to conduct the affairs of the deceased by proving their legal authority to do so to banks etc.

Usually, a will automatically causes an estate to go into probate. You can expect probate to cost up to 10% of the value of the estate. That is one of the reasons, people with larger estates are motivated to avoid probate. Avoiding probate will not avoid inheritance tax, however. Dying in 2010 in the United States will though. Due to a law passed in 2001 under President George Bush, the inheritance tax is abolished for people that die in 2010. It will return in 2011. It has been reported that people on artificial life support in 2009 were kept alive long enough to live into 2010 so their heirs could benefit from this rare event.

Inheritance tax is also known as death tax or estate tax. The limits below which you did not have to pay estate tax had risen to $3.5 million in 2009 but will reset to $1 million in 2011. The level of the estate tax will also return to 55%. You can see why it is so attractive for the millionaires and billionaires in the United States to die in 2010 or, if they happen to have scheming relatives, why they should be extra cautious this year if they aren’t ready to pass it on. Imagine the incentive provided here for the disgruntled children of a wealthy grinch. People have been killed before by their own relatives so the relatives could enjoy their riches sooner. Having just a one year window to benefit from this tax freedom makes me grateful I do not have scheming relatives or a large estate.

I would like to think my next of kin love me and would not wish me any harm. If you die without a will the state decides who inherits your estate. In most cases the estate will be divided between your spouse and your children. Check your state of residence to confirm the laws applicable to you. If you should die without any next of kin, generally the state will inherit your assets unless you have a will. In most states next of kin are considered in the following order: spouse, children, grandchildren of dead children, parents, siblings.

As with most legal and financial considerations, everyone’s case is slightly different. The cost and length of probate depends in large part on the size of your estate, the size of your family and the thoroughness with which you prepared for the event.

If you answered yes, it is time to change things. The IRS provides a W4 calculator on their web site, http://www.irs.gov. With this calculator you can enter your income and your spouse’s income if you are married, and find out how many W4 allowances you should claim on your W4 form. If you are currently claiming fewer allowances, it is time to go to your employer and request to file a new W4 form.

Won’t it be nice to get an instant pay raise? If you have been using your withholdings as a forced savings plan, you should immediately set up a separate savings account or money market account to deposit the money in that represents the increase in your paycheck. Better yet, have that extra money deposited directly into that new savings account. You won’t miss the money since you never saw it in your paycheck before but now the money is working for you instead of the IRS. Granted, with interest rates at all time lows, you won’t be earning much interest but at least you will have control over that money and not the government.

If you are one of those people with lots of investments or other income sources, you should fill out the W4 worksheet. It will give you a more accurate number for the W4 allowances you should claim. The W4 form is one of the easier forms the IRS requires of us but it can make a big difference in your take home pay. Beware of overestimating your allowances though. If you claim too many allowances, you will end up owing taxes at the end of the year. The IRS does not look upon this kindly. If nothing changed in your job situation or the number of dependents you have, the IRS expects you to know how much should be withheld. You will have to pay penalties if you did not have enough taxes withheld.

I prefer getting a refund to having to pay penalties. The idea is to make that refund fairly small. The IRS does allow unpredictable changes as reasons for not having withheld enough taxes, so you shouldn’t have to pay penalties if something unforeseen changes your income. Your child suddenly being too old to count as a dependent is not unpredictable. It is your responsibility to keep up with changes in the law that may affect your situation. It is your job as a citizen of the United States.

You don’t think so? You should. When is the last time you heard the defense  “I didn’t know that was illegal,” work in court? It doesn’t hold up. As a responsible adult you should make a point of listening to financial news occasionally or reading a magazine when you hear about changes having been made. The news media do a reasonable job of reporting important changes when they happen. If you hear something that may affect you, check into it. Trust me, it is a lot easier to keep up than to extricate yourself from a misstep.

In this case, nothing has changed with the W4 form but if you found yourself with that big tax refund, you may want to change your W4 form.

April is coming.  Unless you plan on dying soon, you’ll need to take care of your taxes.  If you do pass away, someone else will need to pay them on your behalf.  Rimshot.  That’s my only tax joke for this post.

It also means that many people are interested in finding out about the standard federal mileage rate so that they can deduct the costs of using their cars for work, medical or charity purchases.  Hey, every deduction counts and no one wants to overpay Uncle Sam, right?

Looking at the Numbers

The federal mileage rate was at fifty-five cents per mile in 2009.  While the cost of living seems to be going up, the rate won’t.  The Internal Revenue Service recently announced the 2010 federal mileage rate–it’s actually dropping back to fifty cents for this year.  Charity driving will only be work fourteen cents per mile and eligible medial and moving miles will only be reimbursed at 16.5 cents, down from the previous twenty-four cent rate.

That’s not just an effort to stuff more cash into the government’s coffers, though.  It’s also a reflection of reality.  While we may not feel like we’re all doing better than we were last year, the price of operating  vehicle has dropped.  We’re not paying five bucks per gallon for gas these days and there’s little reason to anticipate a return to the sky-high prices in the near future.  Thus, the feds feel as though it only makes sense to let the federal mileage rate take a dip.

Claiming the Mileage Rate Deduction

Here are a few things you should know about claiming the mileage deduction.

First, you don’t need to do it to recover the costs associated with eligible vehicle use.  The IRS gives taxpayers the option to eschew the mileage rate and of determining the real cost of vehicle use as an alternative.  Look into all  options to see which makes better financial sense for you.

Second, the miles aren’t the only thing that matters.  The federal mileage rate is only a piece of the puzzle.  You can also deduct things like tolls paid, parking fees and other transportation-related expenses, consistent with the tax code.

Third, you need to have good records.  This isn’t a good area for eyeballing, especially if the vehicle in question is used for something other than eligible work.  A Wall Street Journal piece reminds us of that:

When the open road is your second office, it may be worth the effort to track mileage on your passenger vehicle or lightweight truck, says Fran Coet of Coet & Coet CPAs in Westminster, Colo. “If you use the IRS standard mileage rate, you have to keep a log, especially if it’s for mixed use,” she says.

Fourth, don’t try to double-dip.  Calculating your deduction based on the federal mileage rate is one of a few different options, but that doesn’t mean you can use more than one system.  The IRS states that a “taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recover System (MACRS) or after claiming a Section 179 deduction for the vehicle.”  Plain English:  No double-dipping!

Be Careful or Call in the Professionals…

The federal mileage rate and its impact on your taxes is one of many different factors that may influence your tax bill or refund.  However, it’s important to use it correctly.  In other words, consult the code and the supplemental material provided by the IRS if tax time is a “do it yourself“ matter in your household.  Alternatively, fork over the cash to hire a good accountant who can make sure you find all of the deductions to which your properly entitled.  While all of the information provided in this post is believed to be accurate and correct, seek out the opinion or a professional and/or do your own homework in official materials regarding the federal mileage rate.

- Medical expenses by you, your spouse or any other dependent

- To cover the purchase of a primary residence(can’t be your summer home)

- All tuition related costs, which includes books and room and board

- To cover the cost of being evicted or to prevent foreclosure on your home

- Funeral expenses(including your own)

- Some home repair expenses(be careful here)

Under normal circumstances you can start taking withdrawals penalty free when you reach age 59 ½, however there are some additional circumstances when you can even take withdrawals penalty free as early as age 55.  Please refer to the document here for more information on that.

So you now decide that you must withdraw money and it doesn’t fit into one of the above categories then it is considered a hardship withdrawal.  Let’s look at what that will actually cost you.

The first cost is that you lose the long term compounding effect of your money and that can be significant.  Let’s say you are 35 years old and you plan to retire at 60.  You currently have $50,000 in your 401(k) and you have an issue requiring a $20,000 withdrawal.  Your current salary is $75,000 per year.  You contribute 10% to your 401(k) annually and your company matches 4%.  Finally we are assuming a 8% rate of return and 3% annual raises.  If you didn’t take the withdrawal and left your money alone you would have approximately 1.38 million available at retirement.  On the other hand if you did take the withdrawal you will have approximately 1.24 million.  That $20,000 withdrawal will actually cost you close to $140,000 in retirement money.  Unfortunately for many people they can’t fathom numbers like this and the price of doing this gets lost in our got to have it now society.   However any way you look at it that is a lot of money.  By the way this is the website I used to calculate those numbers.

Secondly there are penalties that must be paid as well.  The first penalty is an early withdrawal penalty which is equal to 10% of the amount of the withdrawal.  So in our example that penalty would equal $2000.  It doesn’t stop there because Uncle Sam needs his piece of the pie so you will pay federal income tax on the amount you withdrew.  In our example you would probably be in at least a 30% tax bracket which means additional taxes of $6000 on your withdrawal.  Finally Mr. State has to put his hand in the pot as well and you have to pay state taxes.  Let’s assume 6% which means another $1200.

So when you add up the grand total that $20,000 hardship withdrawal will actually wind up costing you about $150,000 in lost income taxes and penalties.  I know you are still thinking is it worth it.  I guess the real answer to that question is what do you need the money for?  Once you answer that question then you have to think is this really worth $150,000.

Here is another good article on the topic -

As recently as September, 2009, people were predicting a decrease in maximum allowable contributions.  That’s because of the formula the government uses to set limits and the way it’s tied to inflation.  Mark Miller explained the calculation and why it seemed like we were headed for lower limits:

The issue here is the low inflation rates we’ve been experiencing as a result of the recession. By law, the Internal Revenue Service sets the 401(k) annual maximum contribution using a formula tied to inflation rates in the third quarter of each year, with adjustments up or down in $500 increments. The ceiling has been rising steadily in recent years; for 2009, it’s $16,500–up from $15,000 as recently as 2006. Workers over age 50 can kick in an additional $5,000 in catch-up contributions.

The IRS will compare third quarter inflation to the same period a year ago–a time when consumer prices temporarily spiked just before the economy crashed. So, the formula almost certainly will indicate a lower contribution ceiling for 2010–probably $16,000 and $5,000 for catch-ups.

Well, “almost certainly” isn’t the same as “certainly.”  We managed to dodge the reduction bullet because the government decided it was more important to allow more in contributions than it was to follow their own formula.  Michael Rubin notes the government’s motivation for keeping the 2009 401k contribution limits in place:

Although the formula which determines how much the 401k contribution changes each year would have led to a $500 decrease in the permissible 401k savings level, the IRS has decided to permit the limit to remain unchanged. Largely to help companies and service providers from various software modifications, the limits will be the same as 2009’s limit.

So, that leaves us right where we were a year ago, with annual 401k contribution limits set at $16,500 for individual employees.  If you’re over 50 and trying to make up for those years where you didn’t sock enough away, the catch-up contribution limit will stay put at $5,500. 401kPlanning.org notes some of the other deferral and threshold limits.

Those who realize the value of making a maximum contribution to a 401k might have originally hoped for an increase in the contribution limits, but the state of inflation rendered that idea complete non-starter.  Hey, it could’ve been worse.  Uncle Sam could’ve followed his own rules, which would have resulted in a decreased limit.

While we’re on the subject of these limits, it’s worth making a pitch for 401k participation.  You might think that these limits would have a widespread effect–in reality, though, they don’t matter to most people.  That’s because experts estimate that less than 10% of eligible people actually butt up against their 401k contribution limits.  In other words, the limits are important to those who really recognize the value of utilizing their retirement accounts, but it has very little impact on the population as a whole.

401kMaximum.org explains why that’s unfortunate:

Why contribute when you have to lock up your money for so long? Just the idea that you are contributing with pre-tax dollars is a huge benefit. In addition, all the investment income earned inside a 401K is tax deferred which means that you don’t have to pay taxes on the money until it is withdrawn. That is another huge benefit.

Between those two it is hard for any other investment to compare- unless of course, you were willing to take a lot of risk to make up for all the tax advantages you would lose with an investment in a 401K plan. When you make contributions to your 401K it is like the government is helping you pay for a part of your retirement plan.

So, while it would be nice for a sliver of the population to encounter higher 401k contribution limits, there are still way too many people out there who need to increase their involvement.