Mistakes with your IRA - What Not To Do (Bankrate.com)

retirement

Avoid these 8 common IRA mistakes

By Sheyna Steiner • Bankrate.com

Retirement » Avoid These 8 Common IRA Mistakes

Mistake No. 1: Live only for today

IRAs, or individual retirement accounts, may be trickier than you think. And what you don't know can cost you money.
Many of the most common IRA mistakes occur simply because people don't know the rules governing these accounts -- of which there are many. Complex rules provide many opportunities for things to go awry, but the biggest mistake with IRAs may be not contributing to one at all.
"If you don't put anything in, you won't have anything at the end," says IRA expert Ed Slott, president of Ed Slott and Co., and author of "The Retirement Savings Time Bomb … and How to Defuse It."
Each year that you're eligible to make IRA contributions and don't is a chunk of retirement income lost. The most significant factor in the amount of money accumulated at retirement is the amount you save, not the rate of return on investments.
In general, "If you run the numbers, someone who doesn't skip contribution years versus someone who does, the person who doesn't skip years will end up with more money in retirement," says Ken Hevert, vice president of retirement products at Fidelity Investments.

Mistake No. 2: Missing tax-free growth

The most widely used types of IRAs are the Roth and the traditional IRA.
Both accounts allow annual contributions of $5,500 in 2013, but they receive different tax treatment. In a nutshell, Roth IRA contributions are made with after-tax money, while contributions to a traditional IRA may qualify for a tax deduction for the year the contribution was made.
With the Roth, taxes are paid on the front end so that in retirement all distributions, including interest and earnings, are tax-free. Conversely, the traditional IRA generally gets a tax advantage at the time the contribution is made, but distributions are taxed as ordinary income in retirement.
There is an exception to that rule. High earners who are covered by a retirement plan at work may not qualify for a tax deduction.
Big moneymakers are hemmed in on the Roth side as well.
Income limits prohibit high earners from contributing directly to a Roth. A married couple who files taxes jointly and earns more than $188,000 per year cannot contribute to a Roth, and single people earning more than $127,000 are also prohibited.
But all is not lost. Read on to see how to sidestep these apparent obstacles to IRA investing.

Mistake No. 3: Lost opportunity due to ignorance

Make too much money to contribute to an IRA? You can get around this problem.
High earners can still take advantage of the Roth IRA by contributing to a nondeductible IRA and then converting to a Roth. A nondeductible IRA is simply a traditional IRA for which there is no tax deduction, and it is available to almost everyone with wages or self-employment income.
"I do that myself. I make too much to contribute to a Roth, so I can contribute to a nondeductible IRA and convert it to a Roth," says Slott.
"It's really just moving money from a taxable pocket to a tax-free pocket. Why wouldn't everybody do it to shelter their money from future higher taxes at no cost?" he says.

Mistake No. 4: Messing up RMDs

IRS rules call for required minimum distributions, or RMDs, from traditional IRAs beginning at age 70½. Failing to take the entire amount required can lead to stiff penalties.
"The IRS can charge a tax penalty of up to 50 percent of the distribution. So it could be quite severe," says Evan Shorten, CFP, president of Paragon Financial Partners in Los Angeles.
With a Roth IRA, no minimum distributions are required during your lifetime. If you pass on and leave the Roth to a nonspouse beneficiary, that person will be required to take distributions based on their own life expectancy if they choose to stretch the tax advantage of the retirement account until the end of their own life.
Beneficiaries of traditional IRAs who choose the stretch option are subject to the required minimum distribution rules as well and face the same 50 percent penalty for neglecting to take the full distribution.

Mistake No. 5: Contributing too much

The IRS limits the amount that may be contributed to a Roth or traditional IRA in any one year. For 2013, the contribution limit is $5,500. For the 50 and older crowd, the limit is $6,500.
With contribution limits strictly controlled, putting in more than the allowed amount can trigger a penalty -- to the tune of 6 percent on the excess each year.
There are several ways to run afoul of this rule, not the least of which is simply forgetting you made a contribution earlier in the year.
Excess contributions can occur by funding an IRA after age 70½, contributing more than your taxable income for the year or contributing on behalf of a deceased individual.
"Some people may have gotten into the routine of contributing to a personal and spousal IRA, and for whatever reason, the spousal IRA continues after they're deceased," says Fidelity's Hevert.
Luckily this mistake is easily remedied as long as you catch it before taxes are filed.
"Get it out before you file and no harm, no foul," Hevert says.
"Another (option) is to essentially carry that contribution to another year, and have that count toward that tax year's contribution amount -- but you have to document that with the IRS," he says.

Mistake No. 6: IRA rollovers gone wrong

Unfortunately, paying someone to take care of your financial transactions is no guarantee of perfection.
"Advisers are generally not proactive, and they don't check things," Slott says.
Administrative transactions, such as transferring a retirement account, require attention to detail. Whether you're rolling over a 401(k) or transferring your IRA to a new custodian, not only do you need to pay meticulous attention to those little check-boxes; the customer service representative at the receiving institution also needs to be on alert.
"We see cases on this all the time. They find out the money never got to an IRA, the broker or bank moved the money and hit the wrong box, and it went to a regular account. That's a taxable distribution," says Slott.
Facing the prospect of losing the tax shelter of the IRA as well as paying the taxes owed on the entire account balance, an IRA owner has only one way of remedying rollover mistakes like these.
"You have to go to the IRS for relief, and that is going to be expensive and take six to nine months to get a decision," Slott says.

Mistake No. 7: Blowing the deadline

A trustee-to-trustee rollover isn't the only option for moving between retirement accounts. Individuals can take money out of their IRAs or take a distribution from their 401(k) when they leave an employer and put it back into a qualified retirement account without tax consequences -- as long as they do so within 60 days.
"That may seem like a long time, but a lot of people blow it. And another thing: You can only do that once every 365 days, not calendar year. Some people can lose their entire IRA because they did two rollovers in a year and didn't realize it," Slott says.
The safest bet is to do a direct transfer from one institution to another. When everything goes correctly, the money never comes out of a retirement account because the check is written to the receiving institution, not an individual. In the end, however, the burden is on the account owner to make sure their new account is set up correctly.

Mistake No. 8: Neglecting beneficiary forms

Properly filling out a beneficiary form is a pain. Personal information from the beneficiaries is needed, including birth dates and Social Security numbers. It's so easy to focus on just getting the account open and then taking care of the beneficiaries later, someday -- it's on your to-do list.
"When you open an account or transfer or convert, you need new beneficiary forms. Most don't check those things because they think someone else did or it's in their will," Slott says.
Not having a beneficiary form won't affect you after you die, obviously, but "your beneficiaries can lose valuable tax benefits, they won't be able to stretch (distributions) over their lifetime, so a lot of benefits can be lost -- or it can go to the wrong person," Slott says.
As with many aspects of these accounts, failure to properly check the details can come back to haunt you or your loved ones. When in doubt, consult a professional. But don't be afraid to double-check their work: it is your life savings, after all.

Last Minute Tax Tips (Fidelity)

Tax tips and opportunities for 2011 returns
Fidelity Viewpoints — 03/14/12
What to watch for and take advantage of before April 17.

Tax season is once again upon us, and knowing what you can and can’t deduct is probably top of mind for most Americans. On a positive note, Congress avoided a year-end flurry of tax-law changes in 2011, which may make filing returns this year somewhat less complicated. Still, taxpayers can expect a few challenges—as well as some opportunities—as the April 17 filing deadline approaches.

New forms and procedures are causing some confusion over the reporting of capital gains and self-employment deductions, while tax deferrals taken in previous years by some homebuyers and Roth IRA (individual retirement account) owners are now coming due.

However, many of the limits on tax-saving provisions have increased, and taxpayers might be able to capitalize on a number of deductions that are often overlooked. Plus, many investors may be able to contribute to an IRA and reduce their 2011 taxable income right up to the filing deadline, which has been extended by two days because of a holiday observed by the District of Columbia.

To help you sort through the clutter as you delve into your 2011 tax return, here’s a list of items that are likely to affect a wide array of taxpayers this season.

Last-minute moves to consider
Contributing to a qualified retirement plan remains one of the most effective ways to lower current-year income tax for many taxpayers. It’s too late to contribute 2011 dollars to a 401(k) plan or similar workplace savings plan, but other options are available until April 17, including:

Individual retirement accounts (IRAs).
For Roth IRAs, taxpayers who qualify can contribute up to $5,000 for 2011 if their modified adjusted gross income is below $107,000 (single) or $169,000 (married filing jointly). If you’re age 50 or older, you can contribute up to $6,000 for the year.

Keep in mind that contributions to a Roth IRA are not tax deductible. A Roth IRA’s primary advantage is that all qualifying retirement withdrawals are tax free.

Simplified employee pension plan (SEP-IRA).
A SEP-IRA is for self-employed people and small business owners. Contributions are made by the employer only and are generally tax deductible as a business expense. If you’re self-employed, you can contribute up to 20% of your 2011 income ($49,000 maximum) to a SEP-IRA.

Health savings account (HSA).
The 2011 limits for tax-deductible contributions to an HSA are $3,050 for individuals and $6,150 for families ($1,000 higher in each category for people age 55 and older). HSAs require participants to have high-deductible health insurance, and contributions must be used for qualified medical expenses.

Changes to make note of
A couple of reporting procedures and several increases in deductibility and eligibility limits are getting most of the attention this year. They include:

Cost-basis reporting.
If you invest in stocks or mutual funds, you’ve probably heard about the new IRS rules for reporting the cost basis on shares you sell. Cost basis is what you paid for your shares, including any required adjustments. It’s used to calculate your profit (or loss) when you sell. There are several methods for determining cost basis, and you can decide which one makes sense for you.

For tax purposes, it’s your responsibility to report to the IRS your capital gains or losses when you sell securities or mutual fund shares. The IRS has updated Schedule D and incorporated a new form (Form 8949) which requires you to list specific transactions in detail. To make it easier for the IRS to check the accuracy of your reporting, the agency is phasing in a requirement that financial services companies have to report cost-basis information directly to the IRS.

For 2011, the only cost-basis information reported to the IRS will be for the sale of stocks acquired in 2011. Cost basis for your mutual fund shares won't be reported to the IRS in 2011, but you’ll still have to report the cost basis for those shares on your tax return, and specify that those shares are "noncovered."


Self employment tax.
For 2011 only, self-employed taxpayers get a break on their Social Security tax. Instead of paying a rate of 12.4%, the Social Security component of their self-employment tax is 10.4% on the first $106,800 of income. The Medicare tax component stays at 2.9%. If you qualify for this tax break, you’ll have to follow a slightly different procedure for arriving at your self-employment tax deduction on the first page of your tax return.

Deduction and exemption increases.
The perennially troublesome alternative minimum tax(AMT) has gotten its perennial patch. The 2011 exemption increases to $48,450 for single filers, $74,450 for joint filers, and $37,225 for married taxpayers filing separately.

If you choose not to itemize your deductions, you can claim the standard deduction. The 2011 amounts for most taxpayers increased to $5,800 (up $100 from 2010) for single tax filers, to $11,600 for married filing jointly (up $200 from 2010), and to $8,500 for head of household (up $100 from 2010).

The 2011 mileage rate for business use of your car is 51 cents a mile before July 1, 2011, and 55½ cents after June 30. That compares to 50 cents in 2010. The rates for miles driven for moving and medical purposes also increased.

Important reminders
Sensitive to the weak economy, Congress gave taxpayers two opportunities in recent years to defer a potentially significant portion of their tax bill. The downside of those opportunities has now arrived.

2010 Roth IRA conversions.
Taxpayers who converted assets in a traditional IRA to a Roth IRA in 2010 had the option of a one-year deferral of the tax due on the conversion. If you took advantage of the opportunity, you must now, with your 2011 taxes, pay half of the tax owed on the conversion, and the remaining half in 2012.

First-time homebuyer credit.
Congress helped first-time homebuyers with a tax credit of up to $7,500 in 2008. The catch was that the credit was essentially a 15-year interest-free loan. The first of the 15 repayments was due with 2010 tax bills, and the second is due this year. If you’re having trouble raising the cash for the payment, consider increasing your paycheck withholding this year to avoid a similar crunch next year.

Don’t miss these often overlooked deductions
Sales tax option.
For several years, taxpayers who itemize deductions have been able to choose between deducting their state income tax payments or their state and local sales tax payments. In states without an income tax, the choice is easy. In most other states, the math has usually worked out in favor of deducting the income tax.

But many taxpayers overlook the impact of large purchases, such as a car, boat, or RV. To save you the hassle of collecting your receipts for thousands of small purchases, the IRS allows you to deduct a sales tax estimate based on your income and where you live. The tax on a vehicle purchase (and, in some cases, a major home improvement) is counted in addition to the estimated amount, which can tip the calculation in favor of the sales tax deduction.

Energy-efficiency credits.
These have been around for a few years, but they can still be effective at saving tax dollars. In general, making energy-saving improvements to your home by installing energy-efficient windows, doors, roof, heating system, and other items may allow you to claim a tax credit equal to 10% of the cost, up to $500 (lifetime), depending on the type of improvement made. The credit is even higher if you install an alternative energy system. Learn more about available credits on the government’s Energy Star website.

Unreimbursed work expenses.
Many people fail to deduct work-related expenses, perhaps because they can only deduct the amount that exceeds 2% of adjusted gross income. But the eligible items can add up. A few of the potential deductions are depreciation on a computer or mobile phone required for your job, professional society dues, employment-related education, and uniforms. For a complete list, see IRS Publication 529, Miscellaneous Deductions. Plus, there’s a special deduction of up to $250 for teachers who use their own money to buy school supplies.

Self Employed? Best Ways to Save for Retirement (Fidelity)

Saving for the self-employed
BY SARAH MAX,
— 03/24/11

Run your own business? Here’s help choosing the right retirement saving strategy for you.
Whether out of choice or necessity, the ranks of the self-employed are growing.

No matter what you call them—independent consultants, contract employees, entrepreneurs or just plain freelancers—self-employed people account for more than a quarter of those working in the U.S., according to a 2010 survey by Kelly Services, a human resources consulting firm, up from 19% three years earlier. While the trend was fueled by the recession, workplace experts say it's here to stay.

Working for yourself can mean more flexibility, greater job satisfaction and the potential for a bigger paycheck. What it doesn't offer is a neatly packaged bundle of benefits. That means the burden for saving for retirement falls solely on you.

There are plenty of options
The good news: There are ample opportunities for self-employed savers to sock away tax-deferred money. In fact, you have the potential to save even more on your own than you would working for someone else, says Brian Hogan, director of retirement product management for Fidelity Investments.


Before you dive headfirst into choosing a retirement account, though, make sure you've addressed such things as lining up health insurance and building your cash reserves. “You don't want to lock money in a retirement plan only to have to pull it out,” says Bill Losey, a certified financial planner in Wilton, N.Y.

Next, give some thought to your business. Do you have employees? Will you have some next year? And what sort of retirement benefits, if any, do you plan to offer? Some plans put the burden of saving for your employees’ retirement on you, the business owner, says Hogan.

The issue is complex, and can add a layer of administrative headaches. So it’s a good idea to talk with your tax adviser. The primer below outlines the key advantages and caveats of the various options for self-employed savers. Don't drag your feet though. Just because you don't punch in doesn't mean the retirement clock has stopped ticking.

SEP IRA
Available to self-employed workers and small businesses, the Simplified Employee Pension plan, or SEP, is essentially an IRA with bigger contribution limits. How big? For the 2010 and 2011 tax years, you can contribute up to 25% of your compensation up to a maximum of $49,000.

That limit is significantly higher than the $16,500 you could sock away in a company 401(k). “For ease of use, this is my favorite plan,” says Losey. “It's easy to open, there are no annual reporting requirements and you can adjust your contributions as you see fit.”

Advantage: You have until your tax-filing deadline to establish the account and make contributions, and you aren't obligated to make regular contributions to your account or your employees' accounts. For 2010, that means you can still set up a plan and make a deductible contribution by April 18; if you file an extension you may have until Oct. 15.

Caveat: If employees are in the picture, they can't make contributions to the plan, but you can contribute money on their behalf.

Solo 401(k)
A relative newcomer, the solo or self-employed 401(k) became available in 2002 and resembles the employer 401(k) plans most people know and love.

“Because of its familiarity, more people are leaning toward these plans,” says Cheryl Costa, a certified financial planner with AFW Advisors in Natick, Mass. You can contribute 100% of your compensation up to $16,500 ($22,000 if you're over 50) plus 25% of your compensation through profit-sharing for a maximum grand total of $49,000 a year.


Moreover, some plans allow participants to opt for Roth contributions, in which case they pay taxes now for the potential to save taxes later. Whether or not you go this route depends on many factors but it's worth a look. “Chances are you already have plenty of deductions as a self-employed person or business owner,” says Jerry Cannizzaro with Retirement Planning Services Inc. in Oakton, Va.

Advantage: The maximum allowed is the same as a SEP. But if your adjusted earned income is $82,500 or less, you'll be able to save more in a solo 401(k) than in a SEP, where contribution limits are tied to income and don't include profit-sharing. “If you have excess cash flow a solo 401(k) may be the way to go,” says Losey.

Caveat: If you have full-time employees you need not apply; plans are only available to self-employed individuals or companies with no employees other than spouses. Unlike the SEP, the plans do have annual reporting requirements.

Simple IRA
Available to self-employed workers and businesses with 100 employees or fewer, the plans are as easy to set up as the name suggests. The differences between a SEP and Simple IRA show up if you have employees. Unlike a SEP, where only employers can make contributions on behalf of their employees, these plans let employees save up to $11,500 ($14,000 if 50 and older) toward their retirement.

They also allow employers to make matching contributions of up to 3% of compensation or contribute up to 2% of each employee's salary, up to $4,900. If you are a self-employed individual or owner of the company you can effectively match your own savings. But if you match your own savings you'll be required to do the same for your employees. And once you start making contributions, says Costa, you may be required by law to continue with that match.

Advantage: If you have employees, a Simple IRA allows them to make their own contributions to the plan.

Caveat: Contribution limits are significantly lower than those for the SEP or the solo 401(k).

Keogh
Introduced in the 1960s as the original self-employed retirement plan, Keoghs went out of vogue with the introduction of the three plans mentioned earlier. These days the term Keogh generally is used to describe two other types of individual retirement plans, profit-sharing plans and defined-benefit plans. Both can be a hassle to set up and to maintain, requiring a plan document and annual report.

With profit-sharing plans, which are based on a percentage of income and capped at $49,000, it's probably not worth it. But if you're looking to play catch-up for retirement and have the cash to invest, a defined-benefit plan may be worth checking out, says Costa. The reason: You can put up to $195,000 a year in a defined-benefit plan — but your actual contribution is based on an annual actuarial calculation that takes into account things like your income, years to retirement and projected returns.

Advantage: Potentially huge — up to $195,000 — in contribution limits.

© 2008-2011 Fidelity Interactive Content Services LLC. All rights reserved.

How Business Owners Can Take Control of Taxes, their Own Retirement ( WSJ)

MAY 11, 2010, 4:12 P.M. ET Retirement-Plan Options for Business Owners By BARBARA WELTMAN

Many small-business owners believe that their businesses will furnish a comfortable retirement for them. As golden years approach, they anticipate selling their nest egg and living off the proceeds.

This may account for the fact that retirement plans are severely underutilized by business owners. The Small Business Administration's Office of Advocacy reported that fewer than 2% of business owners had a Keogh (self-employed profit-sharing) plan, only 18% participated in a 401(k) plan, and more than nine million self-employed individuals do not have any retirement plan coverage.
Business owners who rely on the sale of their businesses for retirement income may be disappointed. Unfortunately, not all businesses can be sold at a profit, as evidenced by the thousands of companies forced to close during the recent recession (including many that had been operating profitably for decades).

Here's a better strategy for ensuring that you'll have sufficient retirement income to supplement Social Security benefits: Make annual contributions to a qualified retirement plan. It's a tax-advantaged savings method: contributions go into a qualified retirement plan on a tax-deductible basis; annual earnings are tax-deferred; and benefits are taxed only when and to the extent that distributions are made.

Choosing a Plan
A number of retirement plans can be used by small businesses. Keep in mind, if you want to use plans other than traditional or ROTH IRAs, you'll have to include any employees in the plan (with some exceptions).

Here are the best retirement-plan options:

SIMPLE-IRAs. This type of plan is limited to employers with 100 or fewer employees. Much like 401(k) plans, employees make salary reduction contributions to the SIMPLE-IRA and employers make certain mandatory (but modest) matching contributions.

SEPs. This option is for self-employed individuals as well as companies of any size. The plan is funded entirely by employer contributions.

401(k) plans. As in the case of large corporations, small businesses can allow employees to make pre-tax contributions to the plan; the employer can make matching contributions (and must do so if employees are automatically enrolled in the plan so that the plan is not considered discriminatory in favor of owners). A 401(k) plan can even be used by a self-employed individual who has no employees; the individual makes an "employee" contribution as well as any "employer" contribution.

Profit-sharing plans. These plans (often called "Keoghs" when used by self-employed individuals) allow employers to contribute a percentage of employee compensation to the plan. The same percentage used by the owner must be used for employees, so if the owner wants to contribute 10% of his earnings to the plan, he/she must contribute 10% of each participant's salary to the plan as well. The employer invests the contributions on behalf of participants whose retirement income depends on plan performance.

Defined benefit plans. These are pension plans that promise to pay a fixed amount when participants retire, regardless of how well (or poorly) the plan has performed.

Db(k) plans. This is a type of hybrid plan that debuted in 2010. It combines a small pension (funded by the employer) with a 401(k)-type feature (funded by employees with certain employer matching contributions). Because the IRS has yet to issue guidance, these plans are not yet commercially available, but hopefully will be a viable option for 2011.

Deciding Your Goals
Which plan you choose depends on your situation and what you hope to accomplish. Some factors to consider:

Contribution limits. The tax law sets limits on how much can be added annually to a particular type of plan. Owners with little or no staff who are primarily concerned with savings for their own retirement and maximizing tax deductions for contributions might want to use a 401(k) or defined benefit plan. The latter is especially useful for older professionals because sizable contributions are usually needed to meet promised pension targets.

Contribution costs. If the business is profitable and wants to benefit not only its owner but also its staff, contribution costs can be high; contributions within the limits allowed by law are tax deductible. Businesses that want to provide a plan for staff but can't afford sizable contributions might opt for plans that shift most of the cost to employees, such as SIMPLE-IRAs and 401(k)s.

Administrative burdens. Generally, the business must file an annual return for a qualified retirement plan, which usually entails additional accounting fees. However, no annual filing is required for SIMPLE-IRAs and SEPs, so these plans are the least burdensome from an administrative point of view.

Other costs. Expect to pay consulting fees if working with a benefits expert to select or design a custom plan. For defined benefit plans, you typically need to pay an actuary to determine your annual contribution (generally, that's the amount needed to meet the promised pension, given the expected retirement date, earnings in the plan, and other factors). Also, annual premiums must be paid to the Pension Benefit Guaranty Corporation for defined benefit plans, and there are bonding requirements.

Other Considerations
In addition to the personal goals of the owner, there are other compelling reasons to offer a retirement plan for staff.

Recruitment tool. Offering a retirement plan is a way for small businesses to compete with large corporations for talent in the jobs market.

Tax savings. Making contributions to a retirement plan may help to save more taxes than merely the savings resulting from the contributions. The deduction for employer contributions reduces income, which may help owners to avoid higher tax brackets as well as the additional Medicare taxes scheduled to take effect in 2013.

Flexible borrowing. Certain retirement plans, such as profit-sharing plans and 401(k) plans, can allow participants, including owners, to borrow from their accounts as needs arise.

Business owners can find more information about retirement plans in IRS Publication 560. As always, discuss the use of qualified retirement plans with your tax or financial advisor to determine the best plan to select.


About the Author
Barbara Weltman is an attorney who has written several books, including "J.K. Lasser's Small Business Taxes" and "The Complete Idiot's Guide to Starting a Home-Based Business." She publishes "Idea of the Day" and monthly e-newsletter "Big Ideas for Small Business" at www.barbaraweltman.com, and hosts the "Build Your Business" radio show.

Tips on Reducing Your Tax Bill

10 Tips on How To Cut Your Income Tax Bill ( from NY Life )

Before you file your 2008 income tax return with the IRS, review these ten tax tips. Between some tax deductions here, and a tax credit or two there, you could shave thousands of dollars off your tax bill. So, do your homework, and be sure to talk to your accountant or other tax advisor to make sure you qualify.

Start With Tax Credits1

See if you qualify for any of these four tax credits. (A tax credit is powerful money. It lets you deduct the amount from your tax bill … not just from your taxable income!)



1. Earned Income Tax Credit: You may have not been eligible in the past. However, if your income decreased in 2008, this credit, worth a maximum of $4,824, is worth a second look. Even if it didn’t, the IRS says that a quarter of all eligible taxpayers fail to take this credit2.

2. Child Tax Credit & Personal Exemption: If you have minor children, you may be eligible for an additional $1,000 credit on top of the regular $3,500 exemption you can claim for each dependent. Adults can also claim $3,500 each as a personal exemption. There are income limits and other qualifying criteria3.

3. First-Time Homeowner Credit: This is really a no-interest loan from Uncle Sam. If you bought -- or will buy -- a home on or after April 9, 2008, and before December 1, 2009, and didn't own a home during the three years preceding the purchase, you may be eligible. For qualifying purchases made in 2008, the maximum amount of the credit equals either 10% of the home's price or $7,500 ($3,750 if you are married, but filing separately), whichever is less. One hitch: You must repay the “credit” over 15 years by either owing more in taxes or receiving a smaller refund.

4. Recovery Rebate Credit: If (A) you didn’t qualify for the full $600 or $1,200 from last year’s Economic Stimulus Act and (B) if your income changed substantially between 2007 and 2008, you may now be able to collect that money. Worth finding out.



Savings & Tax Deductions

The government also offers opportunities to reduce your taxable income by deductions. These include the following:



5. Your 2008 IRA Contribution: You have until April 15, 2009 to contribute up to $5,000 each for you and your spouse for 2008 (add another $1,000 for each person age 50 or older). If you contribute to a traditional IRA, you may be able to deduct all or a portion of that amount, depending on whether you participate in an employer-provided retirement plan and your adjusted gross income. If you contribute to a Roth IRA, however, you cannot deduct your contributions (though all your qualified distributions will be received tax-free). A “qualified distribution” is any distribution from a Roth IRA that meets the following two tests:
Five-Year Test: The five-year test is satisfied beginning on January 1 of the fifth year after the first year for which you made a contribution to a Roth IRA. If you made your first Roth IRA contribution for 2004, for example, any distribution from a Roth IRA will satisfy the five-year test if the distribution occurs on or after January 1, 2009.
Type of Distribution: Even after you meet the five-year test, only certain types of distributions are treated as qualified distributions. There are four types of qualified distributions:
Distributions made on or after the date you reach age 59½
Distributions made to your beneficiary after your death
If you become disabled, distributions attributable to your disability
"Qualified first-time homebuyer distributions"
6. Your 2009 IRA Contribution: You have until April 15, 2010, to make this contribution. You can make it in one lump payment then, or you can spread it over the next 12 months.

7. Kiddie-tax Limits: For 2008, a child under age 19 (or 24 if a full-time student) can earn up to $1,800 in investment income (up $100 from 2007). Above that amount, earnings are taxed at the parent’s rate.

8. Real Estate Tax Deduction: There is an additional standard deduction for those who don’t itemize their deductions, but pay real estate taxes. The additional deduction amount is equal to the amount of real estate taxes paid, up to $500 for single filers or $1,000 for joint filers. This deduction is available for the 2008 and 2009 tax years and increases your standard deduction.

9. Tuition and Fees Deduction: You may be able to deduct qualified tuition and required enrollment fees up to $4,000 that you pay for yourself, your spouse or a dependent. You do not have to itemize to take this deduction. However, you cannot take both the tuition and fees deduction and education credits (Hope & Lifetime Learning Credits) for the same student in the same year. Income limits and other special rules apply.

10. Taxpayers over age 65: Married taxpayers can add $1,050 to the regular standard deduction and singles will get an additional $1,3504.


Two More Things to Remember

First, the above contains general tax concepts only. Before doing anything, please talk to a qualified tax advisor.

Second, if you need info and ideas about IRAs,Individual 401ks, annuities, municipal bonds, and other tax-advantaged investments, please get in touch.

1Tax Credits Worth Pursuing This year, SmartMoney.com (January 2009)
2Ten Things You May not Know About the Earned Income Tax Credit, Internal Revenue Service (January 2009)
3A Sneak Peak at 2008 Tax Savings, MSNBC.com (9/27/07)
4IRS Reminder: Make Use of Recent Tax Law Changes for 2008…Internal Revenue Service, IRS.gov (December 2008)
*Issued by New York Life Insurance and Annuity Corporation (A Delaware Corporation)