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Big Don't-Miss Tax Breaks, and a Painful Roth Conversion Lesson

By Fox News
Published | Updated

This week, Gail has a few tax breaks in mind for lower-income earners — but can only confirm the bad news regarding Roth IRA conversions.

Gail,

Regarding your May, 2001 story about tax breaks (See: "New Tax Bill = Big Tax Breaks" http://foxnews.com/story/0,2933,26201,00.html), can you send me more information about this part? 

"Lower income workers ($25,000 single/$50,000 joint) age 18 and over who put up to $2,000 into their company retirement plan will be eligible for a tax credit (much more valuable than a deduction) of up to 50% of their contribution. The amount depends upon your Adjusted Gross Income and filing status (married or single). The result is some folks are going to be able to contribute $2,000 to their company plan and subtract $1,000 from their tax bill."

Thank you,
Matt


Dear Matt —
Yes! This "too good to be true" offer is available for a limited time only.  If you qualify, you can increase the amount you're saving for retirement AND get a double tax break!

Refer to the chart below to match up your Adjusted Gross Income(AGI) with your 2002 filing status (single or married, filing joint) to find out how much of a tax credit you qualify for:

Here's how it works: Suppose you are a single taxpayer and that after deductions, etc. your AGI is $16,000. Your federal tax bill will be $2,100.

However, if you contribute to either a retirement plan offered through your company or to an IRA, you can reduce your taxable income and thereby reduce your tax bill.

Granted, if you fall into this income range you probably can't afford to stash a lot in a retirement plan.  So let's say you put $1,000 in a traditional IRA.  Because of your income level, you qualify to deduct your contribution from your taxable income, reducing your AGI dollar-for-dollar.

As a result, your taxable income drops to $15,000. This alone lowers your income tax bill to $1,950 — a savings of $150. Now go to the chart and find your filing status and AGI. Then move to the "Credit %" column to find out how much of your contribution you get to subtract from your tax bill.  In your case (Single/AGI $15,000 or less), you get a 50% tax credit based on the amount of your IRA contribution. This means you get to subtract $500 (50%x $1,000) right off your income tax bill.

Instead of $1,950, you would owe $1,450 — $650 less than if you had made no contribution to a retirement plan. In essence, in this case the government is picking up 65% of the cost of that contribution!

There is a limit to how generous the government is going to be. The maximum tax credit you can get is $1,000. In the above example, if you had been able to afford a $2,000
contribution, you would qualify for the maximum tax credit of $1,000 (50% x $2,000). If you fall into the 20% credit category, however, the maximum credit you can qualify for is $400 (20% x $2000).

Contributions in excess of $2,000 are not eligible for the credit regardless of your income. In
any case, no matter how big a credit you qualify for, this is free money you should not walk away from.

Once you exceed an Adjusted Gross Income of $25,000 (single) or $50,000 (married, filing joint), you are no longer eligible for any tax credit. In addition, you cannot take the tax credit if you are under age 18, a full-time student, or claimed as a dependent on someone else's return, such as your parents.

This ability to "double dip" on tax breaks compliments of Uncle Sam begins with contributions made to a 2002 retirement plan and only lasts through 2006.

Not only will you significantly lower your income tax bill, you will be stashing money aside for use in your retirement years.

It's the government's way of helping those who have the toughest time finding the spare dollars to save for retirement.  If you qualify, don't miss this opportunity!

Gail

P.S. There are similar tax breaks for those who file as "Head of Household," so be sure to bring this to the attention of your tax preparer.

Hey Gail,

I converted $80,000 from a SEP-IRA into a Roth in 1998 and have been paying the up-front income taxes in $20,000 bites since then.

Here's the problem. The $80,000 is now worth squat since the tech collapse. If this were in a cash account as opposed to a retirement account I could have at least taken the write-off.

I think I'm screwed. I don't get the write-off and I have the priviledge of paying taxes on something that isn't there any more and will never be there. These net stocks aren't coming back. Your thoughts?

M.A.

Dear M.A.,

I believe you have accurately assessed your situation.

Sorry,
Gail

If you have a question for Gail Buckner and the Your $ Matters column, send them to moneymatters@foxnews.com along with your name and phone number.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.