October 15 deadline to change Roth IRAs for tax savings

Last year's stock-market meltdown was hard enough to stomach without having to lose a chunk of losses to taxes. If you converted from a traditional IRA to a Roth IRA last year and paid taxes on an account that's been decimated, you have until October 15 to reverse it. 

Say your IRA was worth $100,000 last year when you converted it to a Roth, and your account is only worth $60,000 now. You essentially paid taxes to convert the IRA on an additional $40,000 you no longer have. The tax code allows you to reconvert, or recharacterize, the Roth back to a traditional IRA and get a refund on the taxes you paid. And if you want, you can then convert it back to a Roth, but pay taxes only on the new account value. If you undo a Roth conversion that you made in 2008, you only have to wait 31 days to reconvert it into a Roth. However, if you converted in 2009, you'll have to wait until Jan. 2, 2010 to reconvert.

To do the deal, talk with the custodians of your Roth IRA; they’re the ones who need to set up a new IRA in which to transfer your Roth money, says Jim Wagner, CEO of Trust Administration Services, a Carlsbad, Ca.-based company that provides services for self-directed retirement plans. Depending on your administrator, there may be fees involved. You’ll need to fill out IRS Form 8606, Nondeductible IRAs. Your accountant can tell you whether you’ll need to amend any tax returns as a result of the change.

For a more in-depth discussion see this article in Financial Planning magazine by IRA guru Ed Slott  and this article from Bankrate.com. For more information on tax-law changes that will give many more people the chance to convert to Roth IRAs next year, read "New Twists on Roth IRAs" from Consumer Reports Money Adviser.–Chris Fichera 

Home buyers: For $8,000 tax credit, aim to close soon

Some sage advice from HSH Associates, a provider of loan and mortgage data: If you want to take advantage of the economic stimulus package's $8,000 tax credit for first-time homebuyers, get going now. You need to close by December 1. There’s always the possibility that Congress may extend the deadline, but that’s probably not something you’ll want to count on in the middle of a contract.

Even in a normal environment, it usually takes four to six weeks to get from the contract to the closing table.  But these aren’t normal times. Loan processors still can’t keep up with the surge in applications that began in January, and you can expect much more rigorous scrutiny by underwriters.

For more details on the credit, check out the IRS Web site.–Chris Horymski 

Beware these new identity theft scams

The IRS warned this week of a new spate of e-mail and fax scams, involving the Making Work Pay provision of the 2009 economic recovery law; promises of inherited money, lottery winnings and cash consignment; and bogus tax refunds.

Making Work Pay scam. In one type, a phishing e-mail claims to come from the IRS, mentions President Obama and the Making Work Pay provision of the 2009 economic recovery law. It says that there is a refundable credit available to workers, consumers and retirees that can be paid into the recipient’s bank account if the recipient registers their account information with the IRS. The e-mail contains links to register the account and to claim the tax refund.

The IRS says that in reality, most taxpayers receive their Making Work Pay tax credit, which was designed for wage earners, in their paychecks as a result of decreased tax withholding, not as a lump sum distribution from a federal fund. Consumers and retirees who are not wage earners are not eligible for this tax credit.

Form W-8BEN scam. In one other type of fraud, scamsters modify a geniune IRS withholding form, the W-8BEN, e-mail or fax it to recipients, and request it be returned with personal and financial information. "In reality, taxpayers file the genuine Form W-8BEN with their financial institutions, not with the IRS," the agency states. "Additionally, the genuine W-8BEN does not request the taxpayer’s passport number, bank account number, security or similar information."

For details on other scams and on spotting a scam in general, click here. And keep in mind that the only genuine IRS Web site is IRS.gov. All IRS.gov Web page addresses begin with http://www.irs.gov/. Anyone wishing to access the IRS Web site should initiate contact by typing the IRS.gov address into their Internet address window, rather than clicking on a link in an e-mail.

Buzzword: Automatic IRA

The Automatic Individual Retirement Account is a concept that’s been kicking around for a few years and may actually happen now that it’s included in both President Obama’s 2010 budget and the Treasury Department's Financial Regulatory Reform proposals released earlier this week. Basically, the Automatic IRA would make a mini 401(k)-like retirement plan available to millions of American workers who currently aren’t covered.

The law would apply to employers with 10 or more workers, that have been in business for at least two years, and that don't currently offer a retirement plan. They would be required to enroll their employees in an IRA and fund it through regular payroll deductions.

Employees would be allowed to opt out. But to lessen that possibility and encourage participation, the proposal would also modify the current saver’s credit for workers with modest incomes by making it “refundable.” That means participating workers could receive a credit, deposited into the automatic IRA, even if they owed less than that amount in taxes. We'll report on this in greater detail if it comes to pass. Meanwhile, more about the saver’s credit and how it currently works here. —Greg Daugherty

Greg writes the “Retirement Guy” column each month in the Consumer Reports Money Adviser newsletter.

New tax break for students

With college costs rising at almost twice the rate of inflation, it can be tough to make those tuition bills in any economy. But this economy has prompted some federal help to cut college costs with the American Opportunity Tax Credit. 

The new tax cut, which was included in the stimulus package that passed earlier this year, actually beefs up an old college tax break, the Hope Scholarship Credit, says Eric Smith, spokesperson for the Internal Revenue Service. The new version increases the tax credit for higher education costs to $2,500 from $1,800 and can now be claimed for four years instead of two. Costs of books and course materials have been added to qualifying expenses. Income levels have also been raised so that more people can qualify—couples earning up to $160,000 and individuals earning up to $80,000 are eligible for the full credit. Those earning more—couples up to $180,000 and individuals up to $90,000—would get a partial credit. 

The stimulus package also has increased the Pell Grant by $500 to $5,350 for 2009 and $5,550 for 2010. 

For more college saving advice for these tough times, check out Consumer Reports Money Rebuild Your Finances special publication, available on newsstands or visit our online bookstore.—Cora Daniels

Identity theft update

Since sharing my story earlier this month as the victim of identity theft, many readers have asked whether the IRS has gotten any closer to resolving the protracted mess. Just to recap, some scoundrel filed a phony 2007 Federal tax return with my name and Social Security number on it, seeking a refund check for thousands of dollars. The return had a mailing address for an apartment in New York City. 

My experience with identity theft

With the April 15 tax deadline looming, I thought I’d share my own timely tale as the victim of identity theft, an ordeal that began 13 months ago when I tried to file my 2007 Federal tax return online only to have it rejected because some fraudster beat me to the punch. 

IRS still wants your tax money, but won't outsource collection duties

The Internal Revenue Service is ending it's contracts with private debt collection companies and will hire as many as 1,000 federal workers to collect delinquent taxes, the agency announced today.

"I believe this work is best done by IRS employees, and I believe we have strong support from the Administration and the Congress for increased IRS enforcement resources going forward," IRS Commissioner Doug Shulman said in a statement, citing a study that showed it was more cost-effective for the IRS to do its own collections work.

The agency head also said that IRS personnel could do the job better than outside contractors because they have "more flexibility handling cases."

"In these challenging economic times, I have asked all IRS employees to go the extra mile to help financially distressed taxpayers," Shulman said. "IRS employees have more options available to them to resolve difficult collection cases."

The IRS hired outside companies to assist in collecting delinquent taxes in 2006 after Congress passed voted to permit the practice in 2004. The current one-year contracts expire today, according to the IRS.

Plan To End Private Debt Collection May Face Senate Resistance

Three Senators are fighting to maintain a controversial program that allows private debt collectors to recover debts owed to the United States Treasury. As currently written, the $410 billion omnibus spending bill moving through Congress would end what is known as the private debt collection program.

Senators Chuck Grassley, Charles Schumer, and Tom Harkin recently sent a letter to the Treasury Department and the Internal Revenue service asking them to retain the program and the jobs it supports.

"Make no mistake," the Senators wrote. "If the program is genuinely unsuccessful, we would be among the first to concur that it should be terminated. However, we remain very concerned that IRS will terminate the PDC program before a complete and thorough accounting of the program is conducted. For example, while some are critical of the effectiveness and efficiency of the PDC program, we have yet to see solid, reliable numbers. Criticism of the program’s return on investment do not account for its start-up or investment costs, and ignore the fact that the program has not been fully operational for any of its two years."

Critics of the program claim that since its inception in 2006, the IRS has spent $80 million on the program only to recover $60 million, not including $13 million in commissions for the private firms. The president of the National Treasury Employees Union President, Colleen Kelley, has characterized the private debt collectors as "bounty hunters who collect taxes from vulnerable people for profit."

The Senate is set to consider the omnibus spending bill this week.

IRS: First-time homebuyers can claim tax credit this year or next

Through the economic stimulus package, first-time homebuyers are eligible for a tax credit worth up to $8,000, and today the Internal Revenue Service announced that those who qualify and buy a house before the end of 2009 have the option to claim the tax credit in this year's taxes or next year's.

"For first-time homebuyers this year, this special feature can put money in their pockets right now rather than waiting another year to claim the tax credit," said IRS Commissioner Doug Shulman. “This important change gives qualifying homebuyers cash they do not have to pay back."

Some details from the IRS:

This year, qualifying taxpayers who buy a home before Dec. 1, 2009, can claim the credit on either their 2008 or 2009 tax returns. They do not have to repay the credit, provided the home remains their main home for 36 months after the purchase date. They can claim 10 percent of the purchase price up to $8,000, or $4,000 for married individuals filing separately.

The amount of the credit begins to phase out for taxpayers whose adjusted gross income is more than $75,000, or $150,000 for joint filers.

For purposes of the credit, you are considered to be a first-time homebuyer if you, and your spouse if you are married, did not own any other main home during the three-year period ending on the date of purchase.

Please check IRS.gov for more information.