Tuesday, February 3, 2009

Tax Hacks, Part 2: More Credits

Qualified Retirement Savings Contribution Credit aka "Saver's Credit" (nonrefundable, a percentage of up to $2,000 in eligible contributions). To qualify for this one, you have to have been at least 18 years old on 12/31/08 and have an AGI (adjusted gross income) of less than $26,500 (again, assuming you're single). You also cannot have been a full-time student for five or more months of 2008.

Qualified contributions include those to an IRA (traditional or Roth), a 401(k) or 403(b), a 501(c)(18)(D), or a governmental 457, SEP, or SIMPLE. You may not include in this amount any "rollover" contributions.

The amount of your credit is computed by multiplying your total contributions by the percentage corresponding to your AGI. You can find this percentage on Form 8880, which you will need to fill out in order to claim this credit.

Limitations on Nonrefundable Personal Credits
All three of the credits we've covered thus far are types of nonrefundable "personal credits." For 2008, the limit of nonrefundable personal credits is your regular tax liability plus your AMT. This is good. It means that your nonrefundable personal credits can offset both your regular tax liability and your AMT (alternative minimum tax).

Earned Income Credit (refundable, max: $438)
Assuming you are single and have no children, the qualifications necessary to claim this credit are as follows:
  1. You must be at least 25 years old.
  2. Your total investment income must be less than $2,950.
  3. Your AGI must be less than $12,880.
The EIC depends entirely on income. You can figure your EIC using the worksheet in the instructions for Forms 1040 or 1040A, whichever you are filing.

For more information about the EIC, see IRS publication 596.

Alternative Minimum Tax
What is this minimum tax business all about? Basically, the AMT laws exist so that high-income individuals don't get away with not paying their share of taxes even if they find a way to adjust their tax liability to next to nothing. Fortunately, AMT doesn't affect most of us because it only applies if your AMTI (see below) is above $42,500.

After you calculate your regular income tax liability, you should then calculate your tax liability under the AMT system; this amount is called your Tentative Minimum Tax (TMT). Your TMT is determined by a series of calculations (additions/subtractions of certain allowable exclusions, credits, etc.) upon your taxable income to find your Alternative Minimum Taxable Income (AMTI).

If you're concerned you may be subject to the AMT, the IRS has a handy AMT calculator that does all the calculations for you. (You need to have already filled out your 1040.)

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