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?
There are a few new
tax breaks this year, including the retirement
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:
AGI less than
Head of household
Married filing joint
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.
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
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