Finance Tax Time

It is a well-known fact that Americans are miserable failures when it comes to saving for retirement. Well, the government is offering tax credits to change this for some of us.

Tax Credits for Retirement Savings

Social security is going to be under siege as baby boomers hit retirements. Fortunately, many baby boomers have put away piles of cash in 401ks and IRAs. Regardless, most people fail to do all they can in this regard. In an attempt to motivate us taxpayers to save as much as we can for retirement, Uncle Sam is dangling tax credits before us like the proverbial carrot.

The tax credit in question is the Retirement Savings Contributions Credit. Qualify for it and you may be eligible to take a credit of $1,000 for singles and $2,000 if you’re filing jointly. The credit is eligible for those that make contributions to 401ks and retirement vehicles. The amount of the credit is determined on a sliding scale based on how much you make and contribute.

You can claim the retirement savings tax credit:

1. Individual taxpayers with incomes of $25,000 or less.

2. Individual taxpayers that are head of households and make $37,500 or less.

3. Married couples filing jointly who make $50,000 or less cumulatively.

There are some very minor restrictions regarding who is eligible for the tax credit. First, you have to be older than 18. Second, you can’t be a full time student. Finally, another dependent can’t claim you as a dependent on their tax returns.

Importantly, this tax credit is in addition to other tax advantages you gain from piling money into a retirement account. With a 401k, for instance, you can pound in pre-tax earnings, which cuts down your adjusted gross income for the tax year. Once you figure out your taxes, you can then deduct another $1,000 or so for the tax credit. Put another way, saving for your retirement is a no brainer.

The federal government is practically begging you to put away money for retirement. With this tax credit, there is absolutely no reason to fail to comply.

Richard A. Chapo is with BusinessTaxRecovery.com - providing information on tax and taxes. Visit us to read more tax articles and our new tax credits page.

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Recent changes to the tax laws and the required minimum distribution rules have made reviewing beneficiary designations for Individual Retirement Arrangements (IRAs) and qualified retirement plans (e.g. 401(k)) a high priority on the list of retirement and estate planning activities. This is especially true today, when more of individuals than ever have recognized the tremendous life and death tax advantages these retirement savings vehicles offer and have begun to amass considerable wealth within them. Yet many individuals who so conscientiously set aside money for to fund their retirement are very often unthinking and hasty when making and reviewing elections for the ultimate distribution of these accounts. The effect poor elections or the failure to make elections has on future distributions is significant.

Perhaps the most important election anyone can make is the designation of primary and contingent beneficiaries. The failure to designate appropriate beneficiaries will result in accelerating the rate at which your money must be distributed from your IRA or qualified retirement plan. Thus, the primary benefit, the tax-deferred growth offered by these tax-advantaged vehicles, can be lost.

For example, many individuals designate their estate as their IRA beneficiary or fail to designate an IRA beneficiary, which will result in their estate becoming their IRA beneficiary by default. The new laws regulating the required minimum distributions make it clear that when the IRA beneficiary, either by designation or by default, is the estate, the deceased is considered to have had no designated beneficiary. Therefore, if an individual dies before the date they are to begin taking the required minimum distributions, their account must be distributed in full by the end of the fifth calendar year after the date of their death. Alternatively, if they die after the date they were to begin taking the required minimum distributions, the account may be distributed over their remaining life expectancy as of the date of their death.

Additionally, many individuals who are covered by a qualified retirement plan have previously designated a child or other person from a younger generation as their beneficiary in order to take advantage of the younger person’s longer life expectancy to reduce the amount of the required minimum distribution that must be taken each year. This decision may have been financially sound under the old law as it provided the advantage of deferral that permitted a larger account balance to continue compounding for a greater length of time and ultimately provided a greater benefit for the heirs. However, under the new law, the age of a non-spouse beneficiary will no longer be a factor in calculating the required minimum distribution amount. Also, distributions to a non-spouse qualified retirement plan beneficiary are includable in the beneficiary’s taxable income and are not an eligible rollover distribution whereas distributions to a surviving spouse avoid estate tax at transfer and are eligible for rollover to another IRA or qualified retirement plan.

Therefore, it is more important than ever to review current IRA and qualified retirement plan elections and make thoughtful elections for the future. Remember, IRA and qualified retirement plan elections should never be set in stone. Various changes in life, such as the makeup of family or wealth, or changes in the relevant tax laws, should trigger a review of these important elections.

IRA and qualified retirement plan accounts may be an individual’s largest asset. Therefore, it is more important than ever to weed through all the paperwork, make informed and thoughtful elections, and review elections regularly. Of course, this brief discussion raises only a few of the potential issues that should be addressed when reviewing an IRA or qualified retirement plan account. Please work with an experienced financial planner or tax advisor who can help you make the best elections for your individual situation.

Fearing the American worker is being left in the dark, Mr. Morris, a fee based Investment Advisor Representative with Raymond James Financial Services, Inc., helps 401k participants get the most out of their retirement plan.

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Strategic planning throughout the year results in a minimal tax balance. The objective of planning your tax payables is not to prevent paying taxes, it is to pay no more than your fair share of taxes, and keep your money where it earns you the most.

If you aren’t aware of it yet, Uncle Sam pays no interest. If he deducts your tax payment monthly or quarterly, and takes more than his fair share, he doesn’t give you anything back for the privilege of using your hard earned money. By the same token, if you don’t pay in enough, he charges you a penalty and interest.

As a W-2 wage earner, if you are over paying your tax debt, you may be considering it a ‘forced savings plan’, but you gain nothing, using that particular plan. By putting the same amount in savings every year, earning interest on the balance, and continuing to regularly invest in your savings fund, you may be able to utilize the retirement savings plan reducing your tax debt significantly. With the advice of a competent tax consultant, your savings can become an investment with a tax reduction at the end of the year.

As a business owner paying tax quarterly, over paying your taxes can cost you considerably more. Your tax debt may actually be borrowed money, on a line of credit from the bank where you pay interest for the use of the money. If tax planning were part of your business expenses, you get to deduct the amount paid to the tax consultant from your business, you don’t have to pay interest on more than you need to pay in (if using a line of credit to pay taxes), and any saved money can be placed in a retirement fund or savings plan to draw interest for you. Once again, a tax consultant can save you money.

These are just a couple of ways you can save money by hiring a tax consultant. So, who is your Tax Deity? Your tax consultant or Uncle Sam?

Copyright © 2005 - Jan Verhoeff

Tax planning is an important part of setting up your business, working your job, or living in a world where taxes are a fact of life. Consider saving money on your taxes this year, by planning well, and paying yourself first. Visit eBiz Brand Performance for more information.

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