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Tax Talk with George Saenz

Ask the tax adviser

Retirement and health insurance tax breaks

Dear Tax Talk:
I noticed that there is a retirement savings contribution credit that can be taken if you make less than $50,000 (married). We are over that limit for 2002 but will definitely be under for 2003. Is this still going to be in effect for 2003?

Also, I am paying a very high COBRA insurance premium this year and receiving unemployment. I was told by the employment agency that they might start issuing me vouchers to take as a tax credit in 2003 for my COBRA payments. Is this going to be a new tax credit for 2003 that I can take without having to itemize?
Tammy

Dear Tammy:
There are a few new tax breaks this year, including the retirement savings credit.

As you note, the credit for retirement savings is available to those taxpayers with income below a certain amount and who contribute either to an IRA or a retirement plan at work. Your tax credit is claimed on Form 8880. The income limits are based on filing status:

Income limits
Filing status
AGI less than
Single
$25,000
Head of household
$37,500
Married filing joint
$50,000

The credit is a percentage of the retirement contribution starting at 50 percent of the amount you save going down to 10 percent at higher income levels. The lower your income, the higher your credit as shown on the table under Line 9 of the form. Of course, the lower your income, the harder it is to save. Plus, your credit may be greater than your tax liability. The maximum amount of contributions qualifying for credit is $2,000 for each spouse.

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For example, as a married couple with one spouse contributing $3,000 to an employer's 401(k) plan and the other contributing $3,000 to an IRA, you can get a tax credit of 10 percent on $4,000 (the maximum of $2,000 per spouse) in contributions if your AGI is between $37,500 and $50,000. This $400 tax credit increases your refund dollar for dollar. Another way to look at it is that Uncle Sam gave you $400 to sock away for retirement.

If you qualify and it can save you tax money, you'll be able to take it on your 2003 taxes. The credit is scheduled to expire after 2006.

The health insurance credit is not as straightforward as the retirement tax credit, and it's available to very few people. Basically, starting in 2003 the government will give vouchers to a small group of targeted individuals that will help pay for the cost of continuing health coverage. It's my understanding that this won't be so much a credit as a direct payment to your insurer to pay the monthly premium. IRS Publication 502, Medical and Dental Expenses, at page 20 states:

Once the program is set up sometime in 2003, you will be able to present a certificate to your health insurance company showing you are eligible for this credit. The Treasury Department will then pay your insurer 65 percent of your health insurance premiums and you will pay the remaining 35 percent. The amount of the credit you can claim on your tax return will be reduced by the amount of the credit you receive in advance.

The credit will be available with or without itemizing deductions. It is only offered to people who get a pension benefit from the Pension Benefit Guaranty Corp. or who are eligible to receive a trade adjustment allowance.

-- Posted: April 17, 2003

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See Also
Unemployment compensation is taxable
Getting the most from itemized deductions

Tax breaks for non-itemizers

Tax glossary
More tax adviser stories
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