Wednesday, April 01, 2009

Tax Tip for Military Families 
Alright, troops, listen up!

Been deployed to a hostile fire zone for part of the last year? Did you qualify for the combat zone income tax exclusion?

If so, then check out the W-2 you get from Uncle Sam. You can do that on MyPay. Chances are pretty good your adjusted gross income is artificially low. Yeah, you got paid for the duty. But your TAXABLE wages are artificially low for being in a combat zone.

That being the case, you may be able to qualify for the Saver's Credit.

That means the government will give you free money (in the form of a tax credit) for saving for retirement.

From the IRS's Web site:

The saver’s credit can be claimed by:

Married couples filing jointly with incomes up to $53,000 in 2008 or $55,500 in 2009;
Heads of Household with incomes up to $39,750 in 2008 or $41,625 in 2009; and
Married individuals filing separately and singles with incomes up to $26,500 in 2008 or $27,750 in 2009.


You gotta be 18.
You can't be a full-time student.
You can't be a dependent on someone else's tax return.

How do you claim it? Follow the instructions on IRS Form 8880

Yes, the Thrift Savings Program qualifies, as do Roth IRAs, IRAs, SIMPLEs, 401(k)s and 403(b)s.

Of these, I would usually steer troops toward the Roth IRA for this purpose. Why? Because the other plans are all tax-DEFERRED. But with the combat zone income tax exclusion, you're effectively contributing with pre-tax dollars anyway. But the Roth IRA grows tax-FREE, with TAX FREE distributions in retirement, and none of those pesky Required Minimum Distributions the government requires you to take when you get older. (Yeah, most of you aren't worried about those now, but trust me. You will be, and you will hate them.)

With a Roth IRA (or a Roth 401(k) if your employer offers one), you get the FULL benefit of the combat zone tax exclusion, thus contributing with tax-free dollars. Your money compounds tax free. Tax-free income in retirement. (The government thinks you paid taxes on money going in. But since you were in a combat zone, you didn't.)

Combat veterans thus have the opportunity to take advantage of the most tax-advantaged retirement program the tax code allows. And the Savers' Credit just sweetens the deal with some free money from Uncle Sam.

(Aww. the gang at Military.com hasn't picked up on the story yet. Kids, don't try this at home.)

(Caveat: If your employer matches your contribution in a SIMPLE or 401(k), you may want to contribute enough to snag the free matching money. Plans vary, so your mileage may vary as well.)

Now, to kick the whole thing into overdrive: Do you own a small business? Follow the instructions on IRS Form 8881. The Government will give you free money - in the form of a tax credit of up to $500 dollars, tp start up a qualified retirement plan (provided it also covers at least one non-highly compensated employee.

Splash, out


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