1. THE LINK Newsletter
Provided by Nexus Financial Management
March 2009
Nexus Financial
Management LLC
Will the Estate Tax Stay Repealed for 2010?
Bryan Dudones
4600 Touchton Road E.
•
In 2001, a law was Replacing the step-up in basis rule with a
Building 100, Suite 150
passed that gradually
Jacksonville, FL 32246 carryover basis rule (also transferring the
Phone: 904-334-1376 phased out the tax burden to heirs in the form of capital
bryan@nexusfm.com
federal estate tax gains tax)
www.nexusfm.com
through 2009, and
President Obama has endorsed the following
repealed it altogether
Hi to all,
reforms:
in 2010. That law,
Another rough month for the
stock market and the economy.
however, quot;sunsetsquot; or expires in 2011 and • Freezing the estate tax at 2009 levels
The US govt continues to pump
reinstates pre-2001 tax law levels (with an
liquidity into the economy and
($3.5 million exemption and 45% top rate)
several of our largest financial
exemption of $1 million and a top tax rate of
institutions. So far, there have
• Indexing the exemption for inflation
55%). Since 2001, the economic and political
been very minor improvements.
I feel the govt really needs to
climate in the United States has changed sig-
•
entice the return of private Disallowing or limiting valuation discounts
nificantly. The federal budget deficit has bal-
capital to our markets.
The stock market sank further
looned, the financial markets have been in Planning for continued uncertainty
in February, with the DJIA down
turmoil, and most importantly, power has
for a sixth consecutive month.
All indications point to the estate tax remain-
The Dow finished lower by
shifted to the Democrats. So, the question is:
11.7% for the month, with the
ing for the foreseeable future. While the un-
just how likely is it that 2010 will be an estate
S&P 500 shedding 11%.
certainty that continues to surround the exact
Technology stocks held up
tax-free year?
better with the Nasdaq losing
components of the estate tax may tempt some
6.7%.
Chance of repeal?...virtually zero individuals to do nothing or wait and see, it
GDP was revised downward to
a decline of 6.2% for the 4th
may be wiser to review your plans now to en-
Of course, anything can happen, but Presi-
quarter of 2008 from negative
sure that they can withstand the winds of
3.8%, reflecting a deeper
dent Obama has made it clear that he be-
recession than originally
change.
lieves the estate tax should continue in some
thought. A weak GDP number
for the 1st quarter 2009 is
form or other. And in the Senate, Finance Creating a flexible estate plan is the key to
certain, but I expect some
Committee Chairman Max Baucus has firmly avoiding the pitfalls of future tax law changes,
improvement toward year end.
This is a very challenging
stated quot;...repeal isn't going to happen.quot; With as well as changes that may occur in your
environment. Please contact me
increased Democratic majorities in both cham- personal life. A flexible estate plan uses lan-
anytime to discuss your
personal situation.
bers of Congress, it seems highly likely that guage and provisions in wills and trusts that
Bryan
some action will be taken soon to head off the maximize the ability to pass estate assets free
one-year sabbatical scheduled for 2010. of estate taxes. And other tools, such as dis-
In this issue:
claimers and powers of appointment, can al-
Future of the estate tax
Will the Estate Tax Stay
low heirs or trustees to respond to circum-
Repealed for 2010?
Several bills have been introduced in Con- stances existing at the time of your death.
gress in the intervening years since 2001,
2008 Tax Filing Season: New
Beyond tax
and Noteworthy
some calling for full repeal, others for reform.
Reforms that have been proposed include: Remember that dealing with estate taxes, no
What You Don't Know Can
matter what the future may hold, is just a
Hurt You
• Raising the exemption and/or lowering
piece of your estate plan. An experienced
the tax rates
Can I convert my traditional
financial professional can help you identify
IRA to a Roth in 2009?
strategies that may help you achieve your
• Making the exemption quot;portablequot; between
overall estate planning goals.
spouses (allowing surviving spouses to
use any unused portion of the deceased
spouse's exemption)
• Replacing the estate tax with an
inheritance tax (transferring the transfer
tax burden to heirs)

2. Page 2
2008 Tax Filing Season: New and Noteworthy
The tax filing season is often a period of high more than the amount of your economic
anxiety, and this year brings an additional stimulus payment from the IRA (and you make
challenge: a series of legislative acts last year the withdrawal by the due date of your return,
ushered in multiple changes. The good news, including extensions), however, you do not
though, is that most of those changes work in have to pay tax or penalties on this amount.
your favor. So, whether you're completing (You actually have until the due date of your
your own IRS Form 1040 or relying on a pro- return, including extensions, to withdraw the
fessional tax preparer, here are a few new stimulus payment amount from your IRA with-
wrinkles to keep in mind. out tax consequences.) Follow the IRS in-
structions for lines 15a and 15b (Form 1040),
2008 stimulus payment redux Exception 5, or lines 11a and 11b (Form
1040A), Exception 5.
Remember the economic stimulus payments
issued by the federal government last year?
First-time homebuyer credit
Individuals who filed 2007 federal income tax
returns, and had $3,000 or more of income If you bought a home on or after April 9, 2008
(including amounts received from Social Se- (or if you purchase a home before July 1,
curity and certain veterans' benefits), gener- 2009), and you qualify as a first-time home-
Not everyone
ally qualified for a stimulus payment of up to buyer, you may be eligible for a refundable tax
qualified for a
$600 per individual ($1,200 in the case of credit equal to 10% of the purchase price, up
stimulus payment
married couples filing jointly), with an addi- to $7,500 ($3,750 if married filing separately).
in 2008
tional $300 for each qualifying child under the For homes purchased in 2009, you can claim
age of 17. the credit on either your 2008 or 2009 federal
Rebate payments
income tax return.
were phased out for
That stimulus payment you may have re-
individuals with
ceived in 2008 was actually an advance pay- The home has to be your principal residence,
adjusted gross
ment of a credit against your 2008 taxes, and--to qualify as a first-time homebuyer--you
incomes exceeding
based on your 2007 information. When you must not have had an ownership interest in a
$75,000 ($150,000 for
complete your 2008 return, you determine the principal residence in the United States for the
married couples filing
amount of credit you're entitled to (calculated three-year period immediately preceding the
joint returns), and
in the same manner as the economic stimulus purchase. You can't claim the credit if your
certain individuals
payment was in 2008, except that your actual modified adjusted gross income (MAGI) is
didn't qualify (for
2008 tax figures are used) and subtract the $95,000 or more ($170,000 or more if married
example, individuals
amount that you received as a stimulus pay- filing jointly), and you're only entitled to a par-
who could be claimed
ment last year. If the credit is more than you tial credit if your MAGI exceeds $75,000
by someone else as a
received as a stimulus payment, the differ- ($150,000 if married filing jointly).
dependent).
ence is claimed as a quot;recovery rebate creditquot;
This credit, however, is essentially an interest-
on your 2008 income tax return. If the credit is
free loan. Two years after you claim the credit,
less than the stimulus payment you received
you have to start paying it back (generally
last year, you don't have to pay back the
over 15 years in equal installments). Special
difference.
rules apply if you sell the home during the
So, if you didn't qualify for an economic stimu- repayment period, or if the home ceases to be
lus payment last year, or received less than your principal residence.
the full amount, you get a second bite at the
Standard deduction for real estate taxes
apple. For example, maybe your 2007 ad-
justed gross income was too high to qualify for Even if you don't itemize deductions on your
a stimulus payment, but your 2008 adjusted 2008 return, you may be able to deduct at
gross income is below the threshold. If you least some of the real estate taxes you paid.
had a child born in 2008, you could also end That's because, for the first time, individuals
A worksheet for
up with additional recovery rebate credit who do not itemize deductions will be able to
calculating the
dollars. claim an additional standard deduction for real
recovery rebate
estate taxes paid to state and local govern-
credit is provided on Economic stimulus payments and IRAs
ments, up to $500 ($1,000 if married filing
pages 62 and 63 of
If you had a 2008 economic stimulus payment jointly).
the instructions for
directly deposited into a tax-advantaged ac-
the IRS 2008 Form With the number of recent tax changes, it
count like an IRA, and subsequently withdrew
1040. could pay to take a little extra time to review
the funds, you may have received a Form
IRS instructions this year. And, as always, if
1099-R showing the amount you withdrew as
you have questions, talk to a tax professional.
a distribution. As long as you did not withdraw

3. THE LINK Newsletter Page 3
What You Don't Know Can Hurt You
you have plenty of other income or life insur-
You've probably heard the saying, quot;what you
ance to replace the pension for your surviving
don't know can't hurt you,quot; but when it comes
spouse.
to your finances, ignorance is not necessarily
bliss. It's easy to make bad financial decisions Owning assets jointly
when you lack sufficient information or you are
Owning assets jointly often can be a good
misinformed. By the time you realize your
strategy to avoid probate or minimize estate
mistake, it's usually too late to correct it. Here
taxes. However, this form of asset ownership
are several common mistakes that can be
also has disadvantages. The joint owner has
avoided with just a little bit of forethought.
equal rights to the jointly owned asset, mean-
Naming the wrong insurance beneficiary ing he or she can withdraw from a joint bank
or brokerage account or sell his or her interest
Life insurance has many
in the asset without your consent. In addition,
benefits. Among them is the fact that death
adding someone's name to
benefits are generally paid
an asset may be considered
directly to the beneficiary you You could make financial a gift, subject to possible gift
name in the policy without decisions that turn out to taxes. And, owning assets
passing through probate. But be wrong because you jointly exposes those assets
what happens if the benefici- lack sufficient to the creditors of your joint
ary you name is unable to information or you were owner. Finally, with respect to
accept the death benefit, be- misinformed altogether. long-term care planning and
cause he or she is a minor,
Medicaid qualification, adding
deceased, or incompetent? In
a joint owner can negatively
these circumstances, unless
you've named an alternate beneficiary, the life affect your Medicaid eligibility.
Other common
insurance proceeds will be subject to all of the What can you do before it's too late? Consider
mistakes
expenses and delays associated with settling the ramifications of joint ownership carefully
an estate through probate. •
before implementing this strategy. If your Failing to provide
intent is to leave the asset to the joint owner, for financial loss
What can you do before it's too late? Review
alternatives such as payable on death due to a non-work
your life insurance beneficiary designations at
accounts, trust designations, or life estates related disability
least annually to be sure the proceeds will
may accomplish your goal and protect your
pass to the proper beneficiary without the in- • Miscalculating how
interest in the asset at the same time.
volvement of probate. Also, consider adding much life insurance
at least one contingent or alternate beneficiary Underinsured homes you need
in case the primary beneficiary is unable to
• Owning too much
Imagine this scenario: you just suffered
receive the proceeds.
company stock in
through a terrible fire that destroyed your
your employer-
Selecting the wrong pension option home and most of its contents. You get an
sponsored
estimate on the cost to rebuild your home and
If you're lucky enough to have an employer- retirement plan
file a claim with your homeowners insurance
sponsored pension for your retirement, the
• Underestimating
carrier. To your shock, you find that they are
distribution choices you make usually can't be
how long your
not going to cover the entire cost to rebuild.
changed, regardless of whether your circum-
retirement may last
You thought your policy covered the full re-
stances change. Before making your choice,
placement cost of your home. However, the •
get all of your plan's options from the plan Overestimating the
policy actually provides extended replacement
administrator and review them with a financial annual rate of
cost, which offers up to 120% of the policy's
professional who can help you crunch the return you'll earn
face amount--not enough to cover all of the
numbers. Estimate your retirement income on your
costs to rebuild your home.
needs, then determine what the best strategy investments
is for you and your family. •
What can you do before it's too late? Review Trying to save for
your policy at least annually and make sure your children's
What can you do before it's too late? If you're
the face amount is enough to cover the cost to college education
married you're required to take a joint and
survivor option, unless your spouse waives his rebuild your home should the unthinkable at the expense of
occur. That means you need to know the ap- saving for your
or her rights to your pension. If you elect the
single life option, your payments will be larger, proximate cost to rebuild, including any addi- retirement
tions and improvements you made to the
but at the expense of a future spousal benefit.
home. Also, take into consideration increasing
If you choose the single life option, make sure
costs of materials and labor.

4. Ask the Experts
Can I convert my traditional IRA to a Roth in 2009?
convert in 2010, you're allowed to spread the
With recent market declines,
income tax hit over two years: you report half
many investors are taking a
the taxable income from the conversion in
new look at converting their
2011, and half in 2012. So, even if you're eligi-
traditional IRA to a Roth
ble to convert in 2009, you should discuss
IRA. For many, the tax cost of converting has
with your financial professional whether it
dropped significantly, making this a more at-
makes sense in your particular case to wait
tractive option.
Nexus Financial until 2010 to convert in order to take advan-
Management LLC You can convert your traditional IRA to a Roth tage of this special tax rule.
Bryan Dudones IRA in 2009 if your modified adjusted gross
4600 Touchton Road E. If you're eligible, converting is easy. Simply
income (MAGI) is $100,000 or less. If you file
Building 100, Suite 150 notify your IRA provider that you want to con-
a joint federal tax return with your spouse, the
Jacksonville, FL 32246
vert your existing IRA to a Roth IRA, and
$100,000 limit applies to your combined in-
Phone: 904-334-1376
they'll provide you with the necessary paper-
come. If you're married filing separately,
bryan@nexusfm.com
work to complete. You can also transfer or roll
www.nexusfm.com you're not allowed to convert at all in 2009.
your assets over to a new IRA provider.
You generally have to include the amount you
Nothing in this document should Remember that you can also convert SEP
convert in your gross income for the year of
be construed as specific
IRAs (and SIMPLE IRAs that are at least two
conversion, but any nondeductible contribu-
investment advice. For
years old) to Roth IRAs. And, if you're eligible
tions you've made to your traditional IRA won't
investment and tax concerns
for a distribution from your employer retire-
specific to your needs, please
be taxed.
request a personal consultation. ment plan (for example, a 401(k) or 403(b)
If you're not eligible to convert in 2009, there's plan), you may also be eligible to transfer or
always next year--literally, in this case. Start- roll over those distributions to a Roth IRA,
ing in 2010 anyone can convert, regardless of subject to these same conversion rules.
income level or marital status. Plus, if you
I converted my traditional IRA to a Roth in 2008--can I undo this?
In most cases, yes. If you converted your tra- the traditional IRA, if different) that you
ditional IRA to a Roth IRA in 2008, before the intend to recharacterize your Roth IRA to
recent market downturn, you may find that a traditional IRA. You must provide this
you now owe taxes on a conversion amount notice on or before the date the assets
that's significantly higher than what your in- are transferred back to the traditional
vestments are now worth. If that's the case, IRA.
you may find it advantageous to undo your
• Make sure the transfer is completed by
conversion. The IRS refers to this process as
the due date for filing your federal income
a quot;recharacterization.quot;
tax return for 2008, including extensions.
You may also want to recharacterize if you For most taxpayers, that can be as late
converted in 2008, and now find that you as October 15, 2009. (If you've already
weren't eligible because your 2008 income is filed a timely 2008 tax return, you can still
higher than you expected. recharacterize by making the transfer and
filing an amended return by October 15,
A recharacterization is essentially a do-over.
2009. Be sure to write: quot;Filed pursuant to
You're treated as if you never converted your
Section 301.9100-2quot; on your Form
traditional IRA to the Roth IRA. You accom-
1040-X.)
plish this by transferring the Roth IRA assets,
and any earnings, back to a traditional IRA (in • Report the recharacterization to the IRS
a trustee-to-trustee transfer if you're using a (see Form 8606 for more information).
new traditional IRA provider).
If you undo your 2008 conversion in 2009, you
Prepared by Forefield Inc,
To undo your 2008 conversion, you need to generally won't be able to convert back to a
Copyright 2009
carefully follow these steps: Roth IRA until 31 days after the
recharacterization.
• Inform your IRA providers (the one hold-
ing the Roth IRA and the one providing