Now that we’re in 2009, it’s not a bad idea to start thinking about 2008 taxes. I don’t expect anything to be drastically different this year, but there are a few things I’m going to be looking at this year.
Credit for Qualified Retirement Savings Contributions
Form 8880 – TurboTax filled this in for me last year and I didn’t even know about it until I read more about it this year. In 2008, if you are filing jointly and have an Adjusted Gross Income (AGI) of less than $53,000 then you can receive a tax credit on a portion of your contributions to an IRA or retirement plan. Last year we were low enough to get the 10% credit on up to $2,000 of our contributions. Lower incomes receive a higher percentage back. Remember, tax credits > deductions.
Doesn’t sound like a big deal, but it’s actually a pretty good deal for those with lower incomes since the credit is a straight up reduction of your total tax bill. If you contribute to a Traditional IRA, you get the deduction there that brings your AGI down and then on top of that you get anywhere from $200-$1,000 back. The income limit for the 50% credit is low ($16k single, $32k joint), but if your income is in that range then you’d definetely want to contribute $2,000 to a Traditional IRA before April 15, the deadline for making 2008 IRA contributions. If you were in that situation you’d be able to put $2,000 away for retirement, reduce your AGI by $2,000 and get $1,000 slashed off your tax bill. I could see people in that situation paying $0 in Federal taxes when combined with other deductions and credits.
IRA Rollovers
I never rolled my SIMPLE IRA (money market funds) from my old job over to Vanguard and now would be a great time to do it considering equity prices are down. If I rollover into a Roth IRA then I pay taxes on the whole thing. I’ll only do that if we’re over the $53,000 limit for the Savings Credit and I can’t get my AGI under that with contributions to Sarah’s Traditional IRA. If I roll into my Roth I’ll eat the taxes this year and then roll Sarah’s into a Roth next year and be done with Traditional IRA’s for the foreseable future.
Traditional IRA deduction limits
And the reason I’m moving away from Traditional IRAs is the fact that we’ll eventually both be participating in employer sponsored retirement plans. If we are both active in an employer plan, then the Traditional IRA deduction starts to phase out at a modified AGI of $83,000. Once that phase out hits it makes sense to put money into a Roth IRA because of tax advantages and the fact that non-deductible contributions in a Traditional IRA really complicates things. Remember, Roth IRA contributions > Non-deductible Traditional IRA contributions.
So that’s just some of the stuff I’m going to be dealing with this year. I’ve still got a lot to learn, but it is nice to finally learn the ropes and be more aware throughout the year of things that affect our taxes. This year I’m getting the wife involved and she will be sitting down in front of TurboTax and filling out our return with my help. What do you think, should I add tax geek to my list of geekdoms?