Lower-Income Savers Catch a Break With Retirement Credit
Question: My local newspaper had a brief mention of a new IRS tax break that pays for half of an IRA contribution. The article did not say whether this credit applied only to traditional IRAs or to Roth IRAs as well. Apparently, this is a new item effective for the 2002 tax year.
This seems too good to be true. Most of the other additions to the tax code have been, in my opinion, a form of welfare, such as giving wage earners who owe no taxes sizable refunds for the earned income credit and the child tax credit. I’m wondering whether this is more of the same.
Answer: Well, that’s a little harsh. Tax breaks aimed at lower-income working families are designed to help people out of poverty and reward them for working, rather than being on welfare.
Unfortunately, these tax breaks can be mind-numbingly complicated. Even tax professionals have trouble explaining how the earned income credit works, for example.
Your question, however, was about the new retirement contribution credit. This credit is available when adjusted gross income is less than $25,000 for single people, $37,500 for heads of household or $50,000 for married couples. (If you’re not sure what your adjusted gross income is, take out your latest tax return. It’s on line 4 of the 1040EZ, line 19 of the 1040A and line 33 of the regular 1040.)
Those who make contributions to retirement plans, such as 401(k)s, 403(b)s, IRAs and Roth IRAs, are allowed to take a credit that varies from 10% to 50% of their contribution. The maximum contribution considered for the credit is $2,000, so taxpayers can get $200 to $1,000 knocked off their tax bill depending on their income.
This break comes on top of any deduction you already get from making these contributions. In other words, you can get the credit in addition to being able to deduct contributions to workplace retirement plans and traditional IRAs. Roth IRA contributions aren’t deductible, but you can claim the credit if you qualify.
This credit is available only to taxpayers 18 and older and is scheduled to be in effect for five years--from 2002 to 2006. Unlike the earned income credit, however, this credit is nonrefundable. That means that you can only use it to offset the taxes you owe, not to boost your refund if you don’t owe any tax.
Another hitch is that contributing to deductible retirement plans could interfere with some lower-income families’ ability to get the earned income credit.
The reasons are as complex as the tax code, but if you qualify for the earned income credit, you’ll probably want to consult with a tax pro before contributing to a tax-deductible retirement plan.
Social Security Number
Not an All-Purpose ID
Q: In a recent column, you said people should try to avoid giving out their Social Security numbers except when required for tax or credit purposes. For seniors on Medicare, however, Social Security numbers are printed in bold on their Medicare cards and are photocopied every time we visit a new doctor. Unfortunately, that cannot be avoided unless the government is encouraged to change the ID numbers on the cards.
A: Most people with health insurance have the same problem. We’re all told not to keep our Social Security cards in our wallets as a way to discourage identity theft. Yet health insurers blithely print these numbers on our ID cards, and most of us like to keep those cards with us in case of emergency.
It may be an uphill battle to change the government’s system, but other agencies have been forced to adapt to modern realities. Some states that printed Social Security numbers on drivers’ licenses have stopped because of identity theft concerns, as have many colleges and universities that once used the numbers on student ID cards.
California passed a law, which goes into effect July 1, that restricts how Social Security numbers can be used. The law eventually will force insurers to use a different number on consumers’ ID cards, and stop businesses from requiring a Social Security number to access their services, unless a password is used.
These changes happened because of public pressure. So if you don’t like what Medicare is doing, send them a letter to politely express your concerns, and contact your congressional representatives as well.
It’s also a good idea to check your credit report once a year to make sure you haven’t become a victim of identity theft. Look for unauthorized accounts or inquiries that could indicate you’ve been scammed.
Taxpayer, CPA Team Up on Preparing Return
Q: I thought you might be interested in a “middle ground” solution to the issue of whether to do your own taxes or use a professional.
For years I had an accountant complete my return, but the price increased each year. Meanwhile, the quality of the tax software kept improving. I talked with my CPA and we came to an agreement: I prepare my return with Turbo Tax, then fax or mail him the completed return. He checks the work for errors and missing items and makes fixes. His fee is about one-third the cost of doing the complete return. We both come out on the winning side.
A: Yours is an excellent suggestion--if the tax preparer is willing. Some tax pros prefer not to cut their fees, and others find they spend so much time correcting the do-it-yourselfer’s errors that they would rather not do the return if they can’t prepare it from scratch.
Still, if your return is relatively simple and you feel confident in your ability to do most of the work yourself, approach your tax preparer to see whether he or she is willing to meet you halfway.
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Liz Pulliam Weston is a contributor to The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at asklizweston@hotmail.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at www.latimes.com/moneytalk.
