Your palms are sweaty, your breathing is labored and you feel a little dizzy. That can only mean one of two things: you're in the front row of a Justin Bieber concert, or you just realized that you've got only hours to file your 2011 tax return. With Tuesday's deadline approaching, we asked members of the American Institute of Certified Public Accountants to answer questions from readers.
Q: I installed a high-efficiency air conditioning unit in June 2011. Am I eligible for a tax credit?
A: Maybe. Your first hurdle involves checking with the manufacturer to see if the equipment received the proper "tax credit certification." You may find this information included in the original packaging or on the manufacturer's website. If the product was certified, then you must complete Form 5695 and attach it to your tax return. The credit for 2011 is generally 10% of the cost, up to specific limits for each type of improvement. Your credit may be reduced if you have taken advantage of any energy-efficiency tax credits in the past. There is a good one-page summary by the IRS at irs.gov/pub/irs-pdf/p4845.pdf.
-- Jonathan Horn, CPA, New York City
Q: My wife co-signed a credit card for her son. He didn't pay the bill and the company is trying to collect from her. If the debt is settled or forgiven, will she owe tax on the forgiven debt?
A: The answer depends on whether she is on the hook because her son discharged the debt through bankruptcy or if it's just because he's not paying. If the former, she will receive a Form 1099-C for the forgiven debt, but she may be able to make a case that she did not receive the benefit of the debt incurred and therefore should not have to pay tax on the debt forgiven. If her son just isn't paying the debt and she settles it, the debt forgiven will be taxable income to him.
-- Kelley Long, KCL Financial Coaching, Chicago
Q: If I convert a traditional individual retirement account to a Roth this year, can I split the taxable income between two years?
A: No. The ability to split taxable income over a two-year period for individual retirement accounts converted to a Roth IRA was limited to 2010.
There used to be an income threshold to convert an IRA to a Roth IRA. This no longer applies. However, converting an IRA to a Roth IRA has important tax considerations. You can find more information at 360financialliteracy.org. Search under "Roth IRA."
-- Leonard Wright, AICPA Money Doctor, San Diego
Q: Will I get penalized by the IRS if I move all my money from my 401(k) into something safer and less volatile, such as a bond or money market account?
A: With only a couple of exceptions, all 401(k) withdrawals are taxable as ordinary income in the year you make the withdrawal. An additional 10% early distribution penalty tax will be assessed if you're not at least age 59 when you take your distribution. You may be able to escape the penalty if:
Your employment terminates and you are at least 55 years old.
You begin substantially equal periodic payments over time (at least five years) for income purposes.
You are in debt for medical expenses that exceed 7.5% of your adjusted gross income.
You're required by court order to give the money to your divorced spouse, a child, or a dependent.
You die and the account is paid to your beneficiary.
