What are the tax implications of owning stock that has become worthless and can I deduct it on my tax return?

The rules for deducting worthless stock can be complicated. In order for a stock to be considered worthless, it must have no market value. This usually occurs when a company ceases its operations or liquidates its assets. Keep in mind that bankruptcy is not necessarily an indicator of whether or not a stock is worthless because the company’s stock may still be trading or the company may still be operating while in bankruptcy.

For tax purposes, here are some of the main things to consider when dealing with worthless stock:

* Stocks that are considered worthless are deemed to have been sold on Dec 31 of the year in which it became worthless. This “sale” creates a short-term or long-term capital loss based on how long you have held the stock. The loss should be included in Schedule D of Form 1040 and treated like other capital gains and losses from the sale of securities in your portfolio for that year.

* A deduction for worthless stock needs to be taken in the year in which the stock becomes worthless. If the stock is deemed worthless in a year in which you already filed your tax return, you will need to amend your return for that year. Taxpayers have up to seven years to amend their tax returns to claim this deduction.

* If you take a loss deduction for worthless stock you need to prove to the IRS that the stock is really worthless. Obtaining documentation about when and if a stock is worthless can be difficult. However, the IRS generally accepts a 1099-DIV from the company or a letter from your broker that the company has been delisted and that the stock no longer has any value. If you do not receive any documentation from the company or your broker you may be able to hire a stock-tracing company to research the values for you and provide you with the necessary documentation.

Due to the complexity of these rules, it may make sense to consult with a tax professional if you have a substantial amount of holdings that you believe are worthless.

Generally speaking, if an investor takes a distribution from his or her Individual Retirement Account (IRA), the full amount of withdrawal is taxed at ordinary income tax rates. However, it is important to note that this rule-of-thumb is only true when all of the contributions made to the IRA were deductible. If some of the contributions made to the IRA were not deductible, then the investor has "basis" in the IRA and when the non-deductible amount is later withdrawn, it is not taxable.

If you have made both deductible and non-deductible contributions to an IRA, you may wonder if you can take out only the non-deductible contributions to avoid owing taxes. That is a nifty idea, but it's not possible. In what is often described as the "cream in the coffee rule", a part of each withdrawal is tax free until all of the non-deductible amount is withdrawn.

For more information on how IRA withdrawals are taxes, visit the IRS website and search for Publication 590. If you believe you have made non-deductible contributions to your IRA but are unsure of the amount that was not deductible, look through your tax records for a Form 8606, which tracks the non-deductible contributions.

Many people believe that Social Security benefits are tax free but depending on your income, up to 85 percent of the benefit received may be taxable. If your adjusted gross income (AGI) plus 50 percent of your Social Security benefit exceeds $25,000 for a single taxpayer or $32,000 for a married taxpayer, up to 50 percent of the benefit received will be taxable. If AGI plus 50 percent of the Social Security benefit received exceeds $34,000 for a single taxpayer or $44,000 for a married taxpayer, then up to 85 percent of the benefit received will be taxable.

If you are out of work and finding it difficult to pay for your health insurance, it might be helpful to know that you can take a penalty-free withdrawal from your 401(k) or your IRA to pay for the premium. This withdrawal is possible even if you are under age 59 and a half. The amount of the withdrawal would still be taxable but you can avoid the 10 percent penalty normally assessed on early withdrawals. To qualify, you have to unemployed and receiving unemployment checks for at least 12 consecutive weeks. You also need to be sure to pay the insurance premiums in the calendar year that you are unemployed or in the year following that year.

Can you explain the difference between a tax credit and a tax deduction and how they affect a person's tax return?

As most taxpayers prepare their 2011 tax returns this season, it is important to understand how tax credits and tax deductions work and how they differ from each other. A tax credit reduces your tax liability, dollar for dollar whereas a tax deduction reduces the amount of your taxable income, which is used to calculate your tax liability.

Generally, tax credits can be more valuable because they directly offset the actual taxes you pay (i.e., your tax liability), dollar for dollar. For example, if a taxpayer has $100,000 of taxable income (before tax credits and deductions) and a marginal tax rate of 25 percent. The taxpayer's tax liability would be $25,000 before any tax credits or deductions are applied. A $3,000 tax credit would reduce the $25,000 tax liability to $22,000, resulting in an effective tax rate of 22 percent. A $3,000 tax deduction would reduce the taxpayer's taxable income to $97,000 ($100,000 - $3,000). If the taxpayer's marginal tax rate is 25 percent, the taxpayer would have a tax liability of approximately $24,250 or an effective tax rate of 24.2 percent. The $3,000 tax credit yields a 2.25 percent higher savings on the taxpayer's tax liability.

Tax credits can be even more valuable if they are refundable. Tax credits can be refundable or non-refundable. If the tax credit were a refundable credit, you would receive a tax refund if the credit exceeds the amount of your tax liability. If the credit were not refundable, you would not be able to reduce their tax liability below zero (even if the amount of the credit exceeds your tax liability). For example, if your tax liability is $2,000 and you have a refundable tax credit of $2,500 you will receive a $500 refund. If the $2,500 tax credit is not refundable, it will reduce your tax liability to zero but will not receive the balance any refund beyond that.

(Note: Keep in mind that the above examples simplify the calculation of the taxpayer's tax liability to illustrate the effect of credits and deductions. These examples are not meant to suggest that a person will pay their full marginal tax rate on their entire tax liability.)

With rates at 4 percent or below for a 30 year mortgage, refinancing is on the mind of many, many homeowners. However, what is the best type of mortgage for you? Many people are tempted to refinance from a 30 year mortgage to a 15 year mortgage and while I would never discourage someone from trying to become "mortgage-free" as early as possible, sometimes committing to a 15 year mortgage is not the best move.

First, the difference in rates between a 30 year mortgage and a 15 year mortgage is now not that great and, second, committing to a 15 year mortgage will usually dramatically increase a homeowners monthly payment. The higher payment may seem manageable now but what about 5 or 10 years in the future when there might be college bills to consider and what would happen if there were an unexpected job loss at some point in the mortgage term?

Oftentimes, it makes more sense to take out the 30 year mortgage and simply commit to paying more than the required payment. You can even make the payment equal to the amount necessary to pay off the mortgage in 15 years, but with a 30 year mortgage, you have the flexibility to reduce the payments if you ever need to and that can be a lifesaver if you encounter any financial bumps in the road.

The downside, of course, is that you paid a slightly higher rate. Each person needs to decide for themselves if that cost is worth the peace of mind of knowing they have some payment flexibility. However, with rates around 4 percent, it is hard to imagine that opting for a 30 year mortgage will ever be deemed a bad financial decision -- rates haven't been this low in decades.

We are currently a single income family. I work outside the home and my spouse is a stay-at-home parent with our young children. Can we make retirement contributions for my spouse?

Yes, you can use start an IRA for your spouse even if he/she has no taxable income. This IRA is sometimes referred to as a "spousal IRA". A spousal IRA is not a special type of IRA account. Rather, it is a term used to describe how a person can make an IRA contribution to their spouse's IRA account even if that spouse has little or no taxable income. If you and your spouse meet the conditions outlined below, you are allowed to contribute to his or her traditional or Roth IRA account.

In order to make a spousal IRA contribution you must satisfy all of the following criteria for the year in which you are making the IRA contribution:
- You must be married to your spouse at the end of the tax year;
- You must file a joint federal income tax return for the tax year;
- You must have taxable compensation for the tax year; and
- Your taxable compensation (for the tax year) must exceed your spouse's taxable compensation for that year.

If you and your spouse satisfy the criteria above noted above and your spouse is younger that age 70.5, you can contribute to your spouse?s traditional IRA. In addition, some or all of those contributions may be tax deductible. If your spouse is over the age 70.5 you cannot contribute to a traditional IRA for your spouse because contributions to traditional IRAs are not allowed after the account owner reaches age 70.5.

If you and your spouse meet the spousal IRA criteria above as well as the criteria to contribute to a Roth IRA, you can make a non-deductible contribution to your spouse's Roth IRA.

The amount that you are allowed to contribute for your spouse is based on your tax filing status, and the taxable compensation each of you receive. For the 2012 tax year, if you and your spouse file a joint tax return and your taxable compensation higher than that of your spouse's, the contribution to your spouse's IRA is limited to the lesser of the following two amounts:

1) $5,000 ($6,000 if your spouse is age 50 or older), or
2) The total compensation includible in the gross income of both you and your spouse for the year, reduced by your spouse's IRA contribution for the year to a traditional IRA AND any contributions for the year to a Roth IRA on behalf of your spouse.

This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $10,000 ($11,000 if only one of you is age 50 or older or $12,000 if both of you are age 50 or older).

As you know, the volume of annual changes to the tax code is increasing. This trend looks like it will continue for the foreseeable future. As you start to receive your 1099’s, W-2’s K-1’s etc, and think about preparing your 2011 Form 1040, here are a few changes that you may want to keep in mind:

Reduced self-employment tax – For 2011 self employment tax relating to Social Security dropped from 12.4 percent to 10.4 percent. The ceiling on Social Security self-employment tax is $106,800 of self-employment income for 2011. The Medicare component remains at 2.9 percent with no ceiling. There is a corresponding effect to this change. Typically, self employed folks deduct half of their self-employment tax on page 1 of the 1040. The 2011 calculation will multiply your SE tax by 57.51 percent (up to a certain threshold). The effect of the calculation is such that your self-employment deduction should be the same deduction that you would received without the tax cut.

Health insurance – Self-employed folks are no longer able to deduct costs of health insurance on Schedule SE. While the self-employed will be paying self-employment tax on these expenses, they probably won’t be paying federal income tax on them. Health insurance is usually still deductible on the line 29 of the 1040.

Residential energy efficiency improvements – There has been a drastic reduction in tax credits available for qualified energy efficient home improvements. The federal tax credit now stands at a maximum lifetime credit of $500. In 2010 the maximum was $1,500. Any credits taken in earlier years are subtracted from the $500 limit.

Roth IRA conversion – If you converted an IRA to a Roth IRA in 2010, you had the option of deferring the income and reporting half of it in 2011 and half of it in 2012. For those of you who exercised this option, half of that income must now be reported on either line 15b or 16b your 1040.

Capital transactions – Capital gains and losses must now be reported on Form 8949 and the totals are reported on Schedule D. This schedule provides additional information to the IRS regarding the transaction.

Foreign financial assets – If you own foreign financial assets, you may need to disclose these assets to the IRS on Form 8938.

Can I make IRA contributions to more than one IRA for the same year?

Yes, you can generally contribute to multiple Traditional IRA and Roth IRA accounts for the same year. However, the total amount of your contributions to all of your Traditional and Roth IRAs cannot exceed your maximum contribution limit. For example, if your maximum IRA contribution limit for 2012 is $5,000, you can divide that maximum contribution between multiple Traditional and/or Roth IRA accounts.

This combined maximum limit does not apply to employer contributions to a SEP IRA or a SIMPLE IRA.