From homebuyer tax credits to IRA conversions, WalletPop experts tackle your questions

It's only the third week in 2010, but it's never too early to get your personal finances on the right track. Here are some answers from our WalletPop experts to your pressing questions:

Question:
My wife and I got married in January 2009. We have been renting a home the entire time we've been married. Prior to being married, I did not ever own a home, but my wife owned a home with her former husband that was sold less than three years ago.

We just purchased a home together, and anticipate closing next month. Is there any way we can qualify for at least a partial first-time homebuyer tax credit? For example, if we file separately, would I be eligible to claim half the credit? Neither of us have owned a home during the time we've been married, so basically I'm wondering whether her ownership of a home nearly two years prior to our getting married is somehow imputed to me?
--Jim, 40, Gurnee, IL


Answer from Alan Jablonski, a real estate consumer rights lawyer based in Los Angeles
The general answer is no, you are not eligible for the first time homebuyer tax credit. Since your spouse has owned a property within the last three years, this makes both of you ineligible, whether you purchase the home in your own name or jointly with your spouse. The way in which you file, separately or jointly, has no bearing on how the IRS views your status.

There are some exceptions to this general rule. For example, if you are purchasing a home as a replacement home, having just sold your prior property, and have occupied it for at least five years during the past eight years, you would be eligible for the tax credit.

A homeowner can also purchase a new home with another person, other than a spouse, and you would be eligible for a partial tax credit even if the other buyer is a current homeowner. The first-time buyer would be given a partial credit depending on his or her percentage of ownership in the new home.

First-time homebuyers are those who have not had an ownership interest in any other property for the past three years from the date of their new purchase -- make sure to actually count the days (3 x 365), totaling 1,095 days.

Unlike the 2008 tax deduction, the 2009-2010 tax credit is a direct credit. The credit is 10% of your purchase price up to $8,000. A person owing $8,000 in taxes would not have to pay any tax for the year in which you applied for the credit. You have a choice of applying it to your 2008 or 2009 tax filing.

The good news about the new program is that the credit will not have to be paid back, if you do not sell, refinance, or move out of your home during the following 36 months. The tax deduction that was offered earlier would have to be paid back within 15 years or when you sell or refinance your home.

Those who believe they may qualify for the tax credit must purchase their home by April 30, 2010, and close prior to July 1, 2010. For more information, you can visit the IRS Web site at www.irs.gov and search for Publication 17 -- you'll find the first-time homebuyer tax credit information on page 261.

Question:
We have never qualified for a Roth IRA. We have some traditional IRAs that were funded after taxes that we want to convert in 2010. Can we now put in after-tax dollars for 2009 ($6,000 each) and for 2010 ($6,000 each) and THEN convert it all to a Roth?
---Nancy Brownell, 67

Answer from Gary S. Lesser, coauthor of Quick References to IRAs, 2010 edition
Yes, assuming your contribution limit is $6,000 (with catch-up contributions) for 2009, and the traditional IRA contribution is made on time in 2010. Although the contributions were and continue to be made on an after-tax, nondeductible basis, any gain converted to a Roth IRA would be taxable. The taxable income (in this case, just the gain) is spread out over a two-year period in 2011 and 2012, or, if you elect, entirely in 2010.

All traditional IRAs are aggregated for purposes of determining how much of a distribution is treated as gain and as a return of principal. You will have to complete Part I of Form 8606 -- Nondeductible IRAs to compute the taxable and nontaxable portion of the IRA distribution. After that has been determined, any tax upon the conversion is computed in Part II of that form and entered on the taxpayer's federal income tax return (1040 series) according to the form's instructions.

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