Saver's Tax Credit: Incentive to Save for Retirement Now

The Saver's Tax Credit was permanently enacted by the Pension Protection Act of 2006, but has been available sense 2002 under the economic growth and tax relief reconciliation act of 2001 (EGTRRA). This tax credit is an excellent opportunity for moderate-income households to save for retirement while lowering the amount of taxes they pay.

The Saver's Tax Credit not only assists moderate-income households to begin saving for retirement, but it also gives an incentive for recent graduates who are entering the work force to do so as well. Formally known as the "Retirement Savings Contributions Credit," the credit applies to the following qualifying contribution plans:

• 401(k) employer plans
• SIMPLE and SEP plans
• Government 457 plans
• Traditional and Roth IRAs

Those who wish to participate in the credit must fulfill the following qualifications:

• Eighteen years of age
• Cannot be counted as a dependent on another person's return
• Cannot be a full-time student
• Cannot have been a full-time student for five or more months of the year

As of 2010, the following income limitations and corresponding filing statuses for are credit are:

• Married filing jointly: Up to $55,000 annually
• Head of Household: Up to $41,625 annually
• Single, married filing separately, or qualifying widow(ers): Up to $27,750 annually

The rate given on the credit will depend on income-level and filing status, but range from 10% up to 50% and have a maximum contribution amount that can be applied to the credit of $2,000. This tax credit helps moderate-income households to save money on their taxes while still planning for the future. As this credit helps numerous households, it can be very beneficial to young adults who otherwise would not be saving for retirement. The cost of living throughout history has consistently increased and the majority of individuals begin saving for retirement too late in their lives. Those who are able to should take advantage of this great opportunity.

- Sara Hoy

New Age Philanthropy

In the sector of charitable giving a new trend is emerging. This trend pools together the resources of the middle income class and has become for the second largest recipient of charitable funds in the United States behind only the Red Cross. Since the mid 1990's Donor Advised Funds have flourished into a dominant force in philanthropy and continue to grow as more money managers and investors become aware of their simplicity, flexibility, and low cost.

Donor Advised Funds (DAFs) are just that, individuals give money or assets to a charity or sponsorship organization who sets up a Donor Advised Fund account. That account is then invested in options offered by the specific organization that the donor has chosen. From this account, donors can make grants of $50 or more to specific organizations or causes that are important to them. While this seems basic, there are many choices to be made in creating, investing, and continuing this charitable account. But first, I will explain WHY you should consider setting up a DAF if you're looking to make charitable donations.

Simplicity

The first major advantage DAFs have over private foundations is the simplicity of setting up the fund. For donor advised funds, a simple agreement between the sponsoring organization and the donor is all that is needed to create the account. This method is much easier than applying for IRS tax-exempt status, filing all required tax reports, and maintaining compliance with all the rules that apply to charitable foundations.

Low Cost

Another positive aspect of the Donor Advised Fund is the low cost to create it. Needing as little as a $5,000 in initial contributions those who wish to donate even on a modest scale can get involved in charitable giving. Further, grants to individual charities can be made in increments of as little as $50.

Flexibility

Flexibility is the foundation of the Donor Advised Fund. When choosing a specific plan with a sponsorship organization there are many various investment options to select from. The plans range from broad investment choices, where donors are allowed to choose their own investment portfolios- to basic mutual fund choices offered by the sponsor, and finally to the option of pooling together mutual funds to invest. Only rarely are donors offered no investment choice at all but in these situations the sponsoring organization chooses and manages the investment options for the donor.

In the past most donors have contributed through private foundations often set up by the individuals themselves or through a third party. There are many benefits in doing so: up to 30% of cash contributions can be deducted and 20% of all other assets can be written off as well.

However, the up and coming DAF has joined the race and offers even more bang for your buck as well as less hassle than is involved in giving through private foundations. Offering a write off of 50% of initial cash contributions and a 30% write off of other assets contributed, the Donor Advised Fund trumps the private foundation in terms of tax breaks, as well as potentially reducing estate taxes since more of your assets are donated to the fund.

Still Time to Save on 2009 Taxes

Okay, it is well past the end of the year but here are a couple of ways you can still reduce that '09 tax bill.

• If you itemize you can deduct contributions made in January and February 2010 to the Haiti relief efforts on your 2009 return if you like.
• Deductible Traditional IRA contributions
• Self Employed still have time to establish and fund a SEP (Simplified Employee Pension)

Roth IRA Conversion Alert

If you converted all or a part of a Traditional IRA to a Roth IRA in 2008 you may have an opportunity to recoup the income taxes you paid when making that conversion. But you must act before October 15th of this year.

If you made a conversion to a Roth IRA in 2008, the value of the securities you converted have probably gone down. This means you paid taxes on money you no longer have. You should consider "recharacterizing" that Roth IRA conversion back to a Traditional IRA. Recharacterization is the IRS lingo for canceling the conversion and it helps you in a couple of ways. First, you can get a refund of the taxes you paid on the converted IRA funds and secondly, you can redo the conversion 31 days later, potentially producing even more tax free income.

To learn more see the entire article from Ed Slott in this months Financial Planning magazine.

2007 Tax Law Changes

The Consumerist has a good review of the tax law changes that will affect your current return.

Whether you do it yourself or hire a professional to complete your income tax return, you should keep up with these changes.

New LTC Deductibility Levels

The IRS has set new deductibility limits for long term healthcare policies in 2008. If you itemize deductions you can claim a deduction for LTC premiums up to the following limits.

Age 2008 Deductible Limit

40 or less $310
40-50 $580
50-60 $1,150
60-70 $3,080
70 or older $3,850

Year End Tax Planning

With the end of the year approaching now is the time to look for opportunities to save on income taxes. Here are some items you should look for.

• Determine whether bunching deductions into 2007 or 2008 will enable you to itemize deductions for at least one of the years.
• Maximize the $12,000 per donee annual gift tax exclusion if estate taxes are a concern.
• Maximize contributions to retirement plans.
• Look to offset any capital gains with any losses you might have, don't forget you can claim an extra $3,000 per year in losses over gains.
• Estimate income and deductions year to date. Consider if accelerating or delaying income can reduce your tax bill.
• If you are over 70 1/2 and have not taken you required minimum distribution from an IRA, consider making a direct contribution from your IRA to a qualified charity.
• Homeowners can claim a credit of up to $500 for energy improvements (limited to $200 for windows) but only if completed before 2008.
• The deduction for qualified higher education expenses is set to expire at the end of 2007, so consider making tuition payments early.
  

Tax Refunds For Long Distance Excise Tax

If you are a heavy user of long distance telephone services you have a chance to recoup the excise taxes you paid on long distance service from March of 2003 to July of 2006 when you file your income taxes this year.

The levy was originally imposed to pay for the Spanish-American War.

Businesses and Self employed individuals with incomes over $25,000 can request a refund based on actual charges (if you have the records) or a formula approved by the IRS. Regardless of the method used to calculate the request, businesses must complete new Form 8913, Credit for Federal Telephone Excise Tax Paid, and attach it to their returns to claim the refund.

For individuals there is a standard deduction of $30 to $60 or they can elect to fill out the form 8913. Either way it is something to be happy about on April 15.

To read more from the IRS and download the form 8913 you can go here.