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Financial Advice

Saver the Feeling

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It is time to save money for yourself and have Uncle Sam help you with your savings account by giving you a credit for money you have "invested" in yourself. The Internal Revenue Service has come up with a good deal for those of us who can put some money into an IRA or an employer's savings plan at work, such as a 401(k) or other qualified savings plan. This is the Retirement Savings Contributions Credit, better known as The Saver's Credit. This was available last year, too, in case you have not yet filed your 2003 tax return.

For tax years up through 2006, the Saver's Credit will reward low- and middle-income taxpayers for contributing to a retirement savings plan. Taxpayers will receive a dollar-for-dollar reduction of their taxes, up to $1,000 per taxpayer.

The Saver's Credit provides a rare case of "double-dipping" under the tax law: Taxpayers can benefit from both the Saver's Credit and any additional tax benefits they receive from contributing to a retirement account. For example, contributions to an IRA may be tax deductible, while contributions to an employer's retirement savings plan may also be subtracted from their taxable income and considered pretax.

Who Benefits and How Much?

The Saver's Credit applies to taxpayers whose modified adjusted gross income (MAGI) is $50,000 or less for a married couple filing jointly; $37,500 or less for a head of household; and $25,000 or less for a single taxpayer. Generally, MAGI is adjusted gross income without regard for foreign earned income exclusions and certain other exclusions. How is that for a mouthful of IRS jargon? Basically the adjusted gross income is the bottom-line figure on your tax Form 1040. If you file a 1040A, it would be the income amount before taking a standard deduction or personal exemptions.

The Saver's Credit applies to retirement contributions up to $2,000. Therefore the maximum credit available to an individual is $1,000 ($2,000 multiplied by the 50 percent rate). For married taxpayers, the maximum credit available is $2,000, if both spouses make contributions to retirement plans.

Because the credit is a dollar-for-dollar reduction of taxes, you can see that Uncle Sam could be contributing about half of your contribution if you contributed $2,000 and would receive the maximum amount of credit available to you.

The following are some of the additional rules that apply to the Saver's Credit:

The Saver's Credit is available for traditional and Roth IRA contributions, as well as for employee contributions to most employer plans: 401(k)s, 403(b)s, 457s, SEPs, SIMPLEs, defined contribution, and defined benefit plans.

The credit is nonrefundable, meaning that taxpayers who owe nothing in taxes, or owe less than the amount of what their Saver's Credit would be, will not receive a refund of the excess credit.

The taxpayer must be age 18 or over by Dec. 31 of the tax year, must not be claimed as a dependent on another taxpayer's return, and must not be a full-time student (generally, a full-time student—by the school's standards—at an educational organization for at least five months during the tax year).

Always consult your tax professional before taking any action that may affect your tax liability. Don't rely on friends.

Patrick Connoly is a tax advisor with H&R Block. For more information, visit www.hrblock .com, or telephone (323) 851-1040.

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