Janell A. Israel & Associates

1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814 Phone: 808-942-8817

December 2009 Tax Newsletter

What's new in taxes:

Homebuyer’s Credit Extended

Under prior law, an eligible first-time homebuyer could claim a maximum credit of $8,000 for a principal residence purchased before December 1, 2009. The credit began to phase out for single filers with a modified adjusted gross income (MAGI) above $75,000 and joint filers above $150,000.

Under a new law signed November 6, 2009, the credit is available for home purchases made before May 1, 2010 (July 1, 2010, if a binding contract exists before May 1). Also, the phase-out threshold increases to $125,000 of MAGI for single filers and $225,000 for joint filers. The homebuyer credit may be elected on a 2009 tax return for a qualified purchase in 2010.

Not just for first-timers: If you buy a home after November 6, 2009, and have owned and used the previous home as your principal residence for five consecutive years in the last eight years, you may claim a credit of up to $6,500.

New limit for everyone: No credit is allowed for purchases after November 6, 2009, if the price exceeds $800,000.

New Rules In 2010 Open Roth IRA Conversions To Everyone

Beginning in 2010, the rules governing Roth IRA conversions will undergo a significant change.

Traditional IRA to Roth IRA conversions will be available to everyone, creating a financial planning opportunity that didn't exist previously. Under the 2009 rules, taxpayers with income of more than $100,000 cannot convert a traditional IRA to a Roth IRA. Tax legislation enacted in 2006 changed the rules and ends the $100,000 income limit, effective January 1, 2010.

The Roth IRA has been a popular investment vehicle, with its ability to give taxpayers tax-free distributions once the account has been in existence for five years and the taxpayer has reached age 59½. Another Roth benefit is the lack of required minimum distributions once the owner reaches age 70½.

The conversion to a Roth does have a cost. When you convert a traditional deductible IRA to a Roth, you must include the entire amount converted in your taxable income.

If you do a conversion in 2010, you are allowed to report half of the income on your 2011 tax return and the remaining half on your 2012 tax return. You can also choose to pay the taxes due on the conversion on your 2010 return. While prepaying seems counterintuitive, remember that present federal tax rates are set to expire December 31, 2010. Postponing income into future years could mean a bigger tax bill.

The new conversion rules are particularly advantageous to those upper-income taxpayers who could never participate in a Roth. Now taxpayers in high tax brackets will have access to Roth IRAs. One possible strategy is to set up a traditional IRA with nondeductible contributions in 2009 and then convert it to a Roth in 2010.

It's important to weigh the pros and cons of a conversion in your individual situation. Please give us a call if you would like to discuss an appropriate strategy for you.

What's New in Finances:

Try a Different Gift Idea This Year

Are you searching for gift ideas for the holiday season? It's never easy, especially for older children and teenagers. They're too old for toys, but do they really need another sweater or computer game?

Have you thought of giving financial gifts? They may sound less exciting, but in the long run they'll be much more appreciated. And financial gifts can grow in value over time.

Here are a few ideas you might want to consider.

* Fund a child's Roth IRA. If your teenagers worked this summer, chances are they spent their earnings. But they can use your gift to open a Roth IRA, up to the amount of their earnings or the regular $5,000 limit. The IRA may grow tax-free, and by the time the teenager retires, your gift would have been invested for a long period of time.

* Fund a 529 education account. Anyone can contribute to a child's Section 529 college savings plan, which accumulates savings for tuition and living expenses. There are no income restrictions on the donor, and few practical limits on the amount that can be saved. Your gift will grow tax-deferred in the plan and any withdrawals used for qualified education are federally tax-free.

* You could also make your gift to a Coverdell education savings account. Earnings on these accounts also grow tax-deferred and withdraws are federally tax-free as long as it’s used for qualified education. But there's a limit on total contributions of $2,000 a year from all sources. The amount of your gift may also be limited, depending on your income.

* Consider this gift if you just want to encourage an interest in saving and investing. Buy a small number of shares in a mutual fund and package them with a book on basic investing. The child can watch the investment over time and may even enjoy dividend payouts too. Modest amounts of investment income can be tax-free to children, although the kiddie tax may apply at higher levels.

Please contact our office for more ideas and information on the tax aspects of giving financial gifts.

* Withdrawals not used for qualified education will generally be charged income tax and an additional 10% federal tax penalty. An investor should consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. Most States offer their own 529 programs which may provide advantages and benefits exclusively for their residents and taxpayers. The tax implications of a 529 plan should be discussed with a qualified tax advisor.

Develop Three Habits To Stay Out Of Debt

Staying out of debt is simple, but it's not easy. It requires fortitude. It means foregoing impulsive purchases in exchange for long-term financial freedom. Staying out of debt requires that you deny cravings, at least temporarily, for the "must-have" stuff that beckons from every mall, television advertisement, and magazine.

Personal debt can be categorized as necessary or unnecessary. Necessary debt can generally be linked to assets such as your home mortgage, a basic car for getting to work, or a college degree. Unnecessary debt, on the other hand, might include routine credit card charges or installment loans for items that rapidly decline in value.

If your goal is long-term financial freedom, avoiding unnecessary debt is crucial. Three simple habits can help you achieve this goal.

1. Live below your means. Much of the stuff that seems so essential today will, in fact, grow less desirable over time. Of course, living below your means requires that you discover what those "means" are. For many people, this means tracking your income and expenses over a period of time — a month or more — to learn where your money comes from and how it's spent. You might be surprised. That cup of gourmet coffee on the way to work, that weekly meal at the fine dining establishment, that car payment for the latest sedan — all cut into your disposable income. By spending less on such items, you'll be able to save for the future and develop long-term wealth.

2. Save for emergencies. By setting aside money in easily accessible accounts, you avoid racking up credit card bills when unexpected expenses occur. Such expenses could include trips to the emergency room, replacing the water pump on the family car, or patching a hole in the roof. A reserve fund can also help you survive periods of unemployment without incurring additional debt.

3. Use debt wisely. If you decide to incur debt, know what you're doing. Slow down, take a deep breath, think about how valuable this item will seem three months from today. Also ask yourself whether you can pay off these new charges out of next month's income.

Staying out of debt isn't glamorous, and it requires more than a little self discipline. But the long-term benefits are substantial. If you'd like additional suggestions for developing habits of financial discipline, give us a call.

Take a Break

Season's Greetings

This is the time of year to pause and reflect on our blessings and to express our appreciation to the many people who enrich our lives.

May we take this opportunity...

* To wish you and yours the happiest of holidays and a healthy and prosperous 2010.

* To thank you for your business in 2009.

* To remind you that we welcome your referrals. We would be pleased to have you mention our name to friends and associates who may need our services.

***********************************************************************************************************************************************************

The information contained in this newsletter is provided by Mostad & Christensen, Inc. The information is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in this newsletter, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.

Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Janell Israel & Associates and NPC are separate and unrelated companies.

This message and any attachments contain information which may be confidential and/or privileged and is intended for use only by the addressee(s) named on this transmission. If you are not the intended recipient, or the employee or agent responsible for delivering the message to the intended recipient, you are notified that any review, copying, distribution or use of this transmission is strictly prohibited. If you have received this transmission in error, please (i) notify the sender immediately by e-mail or by telephone and (ii) destroy all copies of this message. If you do not wish to receive marketing e-mails from this sender, please send an e-mail reply or a postcard to 1585 Kapiolani Blvd., Suite 1604,Honolulu, Hawaii 96814.

Please visit www.janellisrael.com for up-to-date financial information & www.postoplanning.com for information regarding long term care insurance.