New tax laws could mean savings for many this year

By Megan R. Harrell
Star Staff
mharrell@starhq.com

With the tax filing deadline only two months away, words such as credit, deductibles, and earned income are making their way back into conversation. Those filing for tax returns may not be aware of some new provisions the Internal Revenue Service has adopted this year that may save them money immediately, as well as down the road.
   Tax law changes enacted last summer allow those who are involved in any kind of voluntary tax-deferred retirement plan to reduce the amount they pay in federal income taxes by increasing the amount of tax credit they are able to claim.
   In the past, the maximum annual credit on contributions individuals paying into tax-deferred retirement plans such as 401Ks, 407s, 403s, and IRAs could receive was $2,000. This year, the Retirement Savers Credit provision has increased the amount eligible for credit to $3,000, and $3,500 for those over the age of 55.
   Phyllis Campbell, office manager for H&R Block, located in the Betsytowne Shopping Center, stated that the change saves people money by lowering their taxable income, which in turn lowers the amount they owe in taxes.
   "It is the government's and the IRS's way of encouraging people to start saving for retirement," Campbell said. "It is a way for people to start saving for their futures at the same time they are letting the government help with the funding."
   Credit is awarded for 10 to 50 percent of the contribution amount depending on individual filing status and adjusted gross income. The public will be able to take advantage of the new tax law until 2006.
   First time homebuyers may dip into the retirement funds to help supplement the purchase of their first home. The funds may also be used for advanced education, or to help with severe financial hardships without any penalties. Otherwise, the legal age at which the retirement funds may begin being withdrawn is 59.5-years-old.
   Campbell has already seen some of her customers this year benefit from the Retirement Savers Credit. She said the entire notion of planning ahead for one's retirement is a must in this day and age. "I look at people who are living solely on social security today and they can hardly do it," Campbell said. "You need something else to make it today."
   In order to get the tax credit, individuals must be 18 or older; they cannot be students and cannot be claimed as a dependent by another individual. The Retirement Savers Credit requires that an 8880-form, which is available at the post office or any local tax office, be filled out and attached to tax returns.
   Another tax law implemented this year is the Tie Breaker Rule, a law that allows a parent to claim their child as a dependent even if he or she does not have the highest adjusted gross income in the household. This year, both the parent, and the individual in the household with the highest adjusted gross income, are able to claim the child.
   The situation is most beneficial in situations where grandchildren reside in the same home as a parent and grandparents. "It helps with earned income credit, and it benefits the whole household by bringing more income back into it," Campbell said.
   Educators are eligible for some tax breaks this year as well. Kindergarten through 12th grade teachers, counselors, principals, and teacher's aides are able to apply for up to $250 in adjustments on their tax returns. The law was developed in recognition of the fact that many educators purchase supplies for their classrooms due to a lack of sufficient funding for education. The law does not apply to home school instructors.
   Those who may not be effected by the new tax laws may heed some practical advice that could result in savings on their tax returns. Campbell stated that citizens can save themselves the most money by improving their record keeping skills.
   She said many people do not realize how many areas fall under the umbrella of itemized deductions. In addition to any personal or charitable contributions, interest on mortgages, property taxes, medical and dental payments, and mileage to and from the doctor's office may be considered itemized deductions.
   Mileage, as well as meals and lodging associated with work, may be deducted if they can be properly substantiated with receipts or reports. Required continuing education, or union dues at the workplace may also be included.
   In order to the receive tax savings, all itemized deductions must exceed the standard deduction for each filing status. Campbell said those who tithe at church regularly and have large mortgage payments usually satisfy the standard deduction requirement with just these two criteria. Although the potential savings could be substantial, Campbell stated that she does not see many people take advantage of itemized deduction.
   "We do not have a lot of people in this area that do it," Campbell said. "I do not know if it is because they just don't want to keep track of their records, or if it is because they do not think they will be able to meet the standard deduction."
   Campbell added that it may be too late to start keeping good records for 2002, but there are 11 months to work on organizing records and receipts for next year. For more information H & R Block may be contacted at 543-2305.