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

Housing Bill Offers Help For Many

The housing bill recently signed by President Bush offers relief for many beyond those in danger of loosing heir homes to foreclosure. In addition to helping those hurt by falling real estate prices and adjustable rate mortgages Congress included breaks for first time homeowners, reverse mortgage borrowers, and jumbo loan mortgage holders.

First Time Homeowners - If you are buying a home for the first time you may be eligible for a federal tax credit of $7,500 or 10% of the purchase price whichever is lower. To qualify for the credit you must have modifies adjusted gross income of less than $75,000 for single filers, or $150,000 for married joint filers. For single filers the credit is reduced for modified adjusted gross income above $75,000 and disappears at $95,000, for joint filers the credit disappears for modified adjusted gross income above $170,000.

Reverse Mortgage Borrowers - The bill limits origination fees on reverse mortgages to 2% on loans up to $200,000 and then 1% on amounts beyond that up to a cap of $6,000. Congress also increased the maximum loan amounts for HUD issued loans.

Jumbo Mortgage Borrowers - Jumbo mortgages often cost more than conventional mortgages. By making permanent the increased lending limits for Fannie Mae and Freddie Mac you may be able to refinance a jumbo mortgage to a lower rate conventional mortgage for loans up to 115% of local median home price up to a $625,000 ceiling.

Giving Odd Lots To a Good Cause

This months edition of Registered Rep Magazine has an excellent idea for year end tax planning. If you have received odd lots of stock from corporate spin offs, calculating a cost basis can be a real nightmare. The author, Kevin McKinley, suggests gifting those odd lots held more than a year to a charity. You get a deduction for the current market value of the securities if you itemize your return, you eliminate the expense of selling the shares, you eliminate the head ache of calculating the cost basis, and you can help a good cause. Everyone wins. You can read the full article here.

Health Savings Accounts - New and Improved!

In the waning days of the republican controlled congress an update to the rules governing Health Savings Accounts passed with little fanfare, but the new legislation can make a big difference in the usefulness of HSAs.

As of January 1, annual HSA contributions of $2,850 for individuals and $5,650 for families are allowed regardless of health insurance policy deductibles (you still must use a high deductible plan), and you now have the ability to transfer assets from an IRA into a HSA.

Why is this such a big deal?

If you are a healthy high wage earner or young self employed individual you could find the savings of a high deductible health insurance policy coupled with tax deductible contributions to a HSA very attractive.

Look at the HSA as another IRA. You can reduce current taxes by making contributions to your HSA and when you do have a need to spend the accumulated balance on health care needs you can withdraw it tax free! This makes it like a blend between a regular IRA and a Roth IRA. Current deductions - future tax free withdrawals.

If you retire early, whether by choice or by corporate downsizing, health insurance expenses can be substantial. Often times it is the overlooked expense that throws a wrench in retirement plans.

The new option of transferring money from your IRA into your HSA can ease the burden of insuring yourself and your spouse in the gap between retirement and your eligibility for Medicare. You can lower the expense of health insurance by using a high deductible plan, and by transferring funds from your IRA to a HSA you convert taxable withdrawals into tax free withdrawals.

Health Savings Plans are not yet widespread but this legislation could help change that.

2007 Tax Information

Some important numbers from the IRS for the 2007 tax year.

Standard Deductions

• Single - $5,350
• Married Filing Joint - $10,700
• Head Of Household - $7,850
• Married Filing Separately - $5,350
• Additional amount if 65 or older - $1,050

Personal exemption - per taxpayer and dependant - $3,400

Tax Rates - Married Filing Jointly

• 10% on taxable income between $0 and $15,650
• 15% on taxable income between $15,650 and $63,700 plus $1,565
• 25% on taxable income between $63,700 and $128,500 plus $8,772.50
• 28% on taxable income between $128,500 and $198,850 plus $24,972.50
• 33% on taxable income between $198,850 and $349,700 plus $43,830.50
• 35% on taxable income over $349,700 plus $94,601

Tax Rates - Single

• 10% on taxable income between $0 and $7,825
• 15% on taxable income between $7,825 and $31,850 plus $782.50
• 25% on taxable income between $31,850 and $77,100 plus $4,386.25
• 28% on taxable income between $77,100 and $160,850 plus $15,698.75
• 33% on taxable income between $160,850 and 349,700 plus $39,148.75
• 35% on taxable income over $349,700 plus $101,469.25

technorati tags:Finance, Tax Rates, 2007 Information

Retirement Plan Limits for 2007

Here are updated contribution limits for 2007 :

401(k) & 403(b) - $15,500 plus $5,000 catch up if 50 or older.
SIMPLE IRA - $10,000 plus $2,500 catch up if 50 or older.
IRA & Roth IRA - $4,000 plus $1,000 catch up if 50 or older.

technorati tags:Finance, IRA , 401k SIMPLE IRA

Health Savings Accounts

We all know the cost of healthcare has been exploding over the years, far outpacing the rise in general inflation. The 2005 annual survey of employer health benefits conducted by the Kaiser Family Foundation and the Health Research Educational Trust found the average cost of health insurance for a family of four has grown to over $10,800 per year - nearly doubling since 1998. The survey also reported that in 2006 Starbucks will spend more on health insurance for its employees than it will spend on raw materials to brew coffee. An alternative that merits attention is Health Savings Accounts or HSA's.

Health Savings Accounts we created as a part of the Medicare Prescription Drug Improvement and Modernization Act signed into law by president Bush in 2003. HSA's are designed to help individuals save for qualified medical and retiree health expenses on a tax advantaged basis.

Any adult who is covered by a high deductible health plan (minimum deductible of $1,000), and has no other first dollar coverage may establish an HSA. Tax advantaged contributions can be made in three ways:

1. The individual or family can make tax deductible contributions to the HSA even if they do not itemize deductions.
2. The individuals employer can make contributions that are not taxed to either the business or the individual
3. Companies that offer cafeteria plans can allow employees to contribute untaxed salary through salary reduction.

Once an individual enrolls in Medicare they can no longer contribute to an HSA. Amounts contributed to an HSA are the property of the individual and are fully portable. Funds in the account grow tax deferred and are tax free when used for qualified medical expenses.

Using myself as an example I currently pay about $1,100 per month for a family of five. I have a deductible of $400 per individual, or $2,000 per year maximum out of pocket expense. The high deductible policy I am likely to buy will cost about $680 per month have a deductible of $3,000 with a $6,000 maximum out of pocket expense per calendar year.

Initially I expect to save about $420 per month in premium expense. With this savings I expect to contribute the $3,000 per year tax free in about 7 months. This means I expect to save about $2,100 net ( 5 months x $420). If I add in the tax benefit of the HSA, $3,000 x my tax rate 28%, I can expect to save another $840 each year in reduced tax liability. So my total saving works out to around $2,900 each year - sweet! This assumes I spend the entire $3,000 in deductibles each year - not likely. So maybe the HSA account will grow and leave me with some extra funds to cover expenses I will surely have when I reach Medicare eligibility age.

Resources:
US Treasury FAQ's
The Heritage Foundation

technorati tags:Finance, Health Savings Account, financial planning

The South Carolina 529 College Savings Plan

The state of South Carolina's 529 College Savings Plan- FutureScholar - is managed by Columbia Management a division of BankAmerica. For South Carolina residents it offers one very clear advantage to any other 529 plan a South Carolina Resident may be considering - a deduction from your South Carolina state income taxes. Note- Not a deduction on your federal return.

Contributions to the FutureScholar program work much like a traditional IRA deduction on your South Carolina income taxes, contributions reduce your taxable income. With the realatively flat income tax rates in South Carolina this means most residents will save 7% for any contribution made to their FutureScholar accounts. For example, if you are a South Carolina resident and contribut $10,000 to a FutureScholar account for your child or grand child you will recognize savings of $700 when you file your state income tax return (this will, unfortunately, also reduce your deduction for state income taxes paid on your federal return if you itemize deductions).

Like all 529 college savings accounts the investments in your account will grow tax deferred and currently can be withdrawn tax free to pay qualified education expenses. While there is a sunset provision for tax free withdrawals in 2010, 529 plans have become so popular that Congress may well extend this tax break, and even if they do not, the portion of the withdrawals representing investment gain would be taxed at the students income tax rate.

529 plans also have some features that make them useful in developing an estate plan. You and a spouse can both contribute, allowing contributions of up to $12,000 each without triggering a gift tax return and you can make up to a five year contribution in one year or up to $120,000 for a married couple if they make no other gifts to the student during that period of time, and if you die before the five year period has passed a prorated portion of the gift will be includable in your estate. Many worry about moving large sums of cash from their personnal assets, however the contributor retains control of the assets and can even reclaim (withdraw) the assets themselves subject to taxes and a 10% penalty on the earnings portion of the withdrawal.

South Carolina residents can also establish a 529 plan directly, without a financial intermediary, and invest in the mutual funds offered in the plan with no sales charge (commision). The forms needed are available on the website, FutureScholar.com.

With college costs rising at about twice the reported CPI, an early start is essential. If you are a South Carolina resident you should consider this college savings option. For more information visit FutureScholar.com.

Technorati Tag SC 529 College Savings Plan