I have mentioned before that I have completed tax returns for Volunteer Income Tax Assistance (VITA). If your are wondering what it is all about, here’s more information about the program:
Summary from the IRS website:
The VITA Program offers free tax help to low- to moderate-income (generally, $40,000 and below) people who cannot prepare their own tax returns. Certified volunteers sponsored by various organizations receive training to help prepare basic tax returns in communities across the country. VITA sites are generally located at community and neighborhood centers, libraries, schools, shopping malls, and other convenient locations. Most locations also offer free electronic filing. To locate the nearest VITA site, call 1-800-829-1040.
Many sites partner with local organizations or revenue departments and maintain an online list of VITA sites. Here are some I found:
The IRS also sponsors a Tax Counseling for the Elderly (TCE) Program for people age 60 and older. The idea behind both programs is to help people navigate through the difficult tax law and get money back into the hands of those who need it the most. For example those who qualify for the earned income credit, homestead credit, or Elderly Tax Credit. Without these programs, many filers who are due to get money back simply would not file.
Our local site offers free efiling. We do not have an income limit at our site, but rather a requirement that the returns be straightforward. We target those who cannot afford paid assistance. However, we don’t want to keep volunteers idle either; often on slow days we will prepare other returns. When you call to find your local site, ask about the requirements.
If you have a basic knowledge of taxes, it is also a great organization to volunteer for:
- During training, you review the new tax law changes for the year.
- You learn about commonly missed items to watch for.
- Often you can efile your own return during downtime. (This is encouraged during our training session to give you a dry run).
- Tax returns are filed using Tax Wise software.
Many sites are beginning training sessions now and open in January and early February for filing. It’s a great organization to check out whether you want to use the service or volunteer!
Here’s the 2007 tax limits, credits, exemptions, deductions, phase-out and exclusion numbers all in one place! It is a good reference and will come in handy at tax time. Thanks to a reader, Sam, for the initial list.
|Married Filing Jointly||$ 10,700|
|Married Filing Separately||$ 5,350|
|Head of Household||$ 7,850|
|Exemption Phase-out (limited to 2/3)|
|Head of Household||$ 195,500|
|Married Filing Jointly||$ 234,600|
|Schedule A Phase-out (limited to 2/3)|
|All except Married Filing Separately||$ 156,400|
|Married Filing Separately||$ 78,200|
|Child Tax Credit||$ 1,000|
|Hope Credit||$ 1,650|
|Lifetime Learning Credit||$ 2,000|
|Elective Deferrals (401k, 403b, 457, Roth 401k)|
|Catch-up > 50 years old||$ 5,000|
|IRA Contributions (Traditional, Roth)|
|Catch-up 50 and over||$ 1,000|
|Simple IRA Contributions|
|Catch-up 50 and over||$ 2,500|
|Car Depreciation Maximums|
|Year 1||$ 3,060|
|Year 2||$ 4,900|
|Year 3||$ 2,850|
|Year 4||$ 1,775|
|Sale of Residence Exclusion|
|SE/FICA Maximum Wages for 12.4%||$ 97,500|
|SE/FICA Maximum Wages for 2.9%||No Limit|
|Health Insurance Deduction||100%|
|Earned Income Credit Maximums |
|No children||$ 12,590|
|1 child||$ 33,241|
|2 or more children||$ 37,783|
|Add if married filing jointly||$ 2,000|
|Estate Tax Exclusion ||$ 2,000,000|
|Annual Gift Tax Exclusion||$ 12,000|
|Long Term Capital Gain Holding Period||12 months|
|Social Security Benefits Tax Maximum||85%|
|IRC 179 Deduction||$ 125,000|
In Roth IRA Conversion Rules Highlighted Russ commented that his employer is starting a Roth 401k plan in 2008. The Roth 401k plans are relatively new and many people haven’t heard of them yet. Employers are slowly starting to offer them to employees. Let’s explore how the Roth 401k works, the benefits over the Roth IRA, and why it is taking time for employers to offer them!
What is a Roth 401k?
The Roth 401k is a great retirement savings vehicle with many of the same benefits as a Roth IRA including:
- Tax free growth.
- Ideal for investors currently in a low tax bracket, but anticipate being in a higher tax bracket in retirement. This is the case for many younger workers.
- Offers the ability to diversify accounts against tax treatment using a combination of regular 401k and Roth 401k. A great idea because of the uncertainty of taxes in the future.
In addition, for those who are interested but restricted from participating in a Roth IRA, the Roth 401k makes sense. Additional benefits over the IRA include:
As always, there are other points to consider including the investment options and expenses of the investments when deciding whether or not to participate in a Roth 401k.
Why Employers are Slow to Implement
The Roth 401k didn’t have a lot of employers that immediately put it into place because the original legislation made it only a temporary plan existing from 2006-2010. That changed in 2006 when the Pension Protection Act was signed making the Roth 401k permanent. Employers may still be reluctant because they have to account for the following:
- Keeping the highly paid employees contributions in line with the others to keep the plan qualified.
- Additional education needed to help employees make the right choice between the traditional pre-tax option and the new after-tax option.
- And of course the plan sponsor would charge additional fees.
Other Roth 401k Tidbits
- Employer matching funds will still be deposited into the pre-tax 401k account.
- Further advantages for proprietors of owner-only businesses are detailed in an old article from Investment Advisor.
I will keep encouraging my employer to offer the Roth 401k. It will benefit a great deal of the workforce. Until I get the plan offered to me, I’ll continue to get excited for readers, like Russ, who get to take advantage of it. It would be great to hear from others that are getting the chance to participate. And don’t forget, if you have both, you can contibute to a Roth 401k and a Roth IRA at the same time.
My employer decided to offer a plan for 2008! Read about it, including some reader questions about the Roth 401k.
As the end of the year approaches, it’s time to think about any last minute tax strategies. At the same time, I have a checklist of things to prepare for the upcoming year. It’s more efficient to do them at the same time as many of the strategies impact calculations for next year.
I just finished cleaning out my closet to make donations of clothing and wedding attire by year end for tax deductions. Here’s some other strategies that I work on at year end:
- Tax loss harvesting: I go through our taxable accounts and sell stock that I am carrying at a loss. See more on how to harvest tax losses.
- Maximizing any tax deferral options still available in 401k, 403b and 457 plans.
- Having any extra dental work done, prescriptions refilled, etc. to use remaining flexible spending account dollars.
- Conversion of IRAs to Roth IRAs to maximize the rest of our tax bracket.
- Moolanomy highlights some additional strategies in 22 Money Maximizing Moves You Can Do Today.
I also complete the following paperwork for the upcoming year:
- Enroll in dependent care and flex spending account.
- Determine correct amount of withholding based on projected income.
- Evaluate net worth and determine if additional umbrella insurance is needed.
- Rebalance our portfolios to match our selected asset allocation.
- Check for appropriate deductibles and limits of car, home and life insurance.
- Evaluate income phase outs for planned deductions; refigure taxes if needed.
- Update our list of assets in the house and financial papers and place in safe deposit box.
- Measure progress on our dollar plan.
- Look up value of cars and decide whether or not to carry comprehensive and collision coverage.
- Start a new tax folder to gather paperwork in throughout the year.
- Fireplace maintenance. (Not really a financial item, but it’s on my yearly list anyways).
Have you been to a wedding lately? Or better yet been in a wedding? If you itemize your deductions and have gotten married or been part of a wedding party this deduction is for you!
That’s it. Because of the latter condition, most women probably have a section of the closet devoted to a pile of dresses. Only worn once, and usually in such a color that they can’t really be worn again, the bridesmaid dresses will likely never see the outside of the closet again.
Get Rich Slowly recently had a guest post Beating the High Cost of Weddings: How We Did It, and How You Can Too. It made me think about one of the costs that is hard to beat: being an attendant in a wedding. It’s a great honor, and I have truly enjoyed being in lots of weddings, but it is a cost that you cannot really control once you accept. Bridesmaid dresses have the hefty pricetag of a formal gown, but not much use besides the wedding itself.
I wasn’t sure what to do with the dresses until I found Brides Against Breast Cancer. They accept donations of wedding gowns that they resell. The money raised is used to grant wishes for terminally ill breast cancer patients. The dresses (including shipping cost) are tax-deductible.
Last year I donated my wedding dress*. This year I’d like to box up the bridesmaid dresses and send those off too. In fact, I might just have all the women that attend our yearly holiday party bring their dresses and we’ll send them all off. Readers, I encourage you to send off your (or your wife’s) dresses too!
They currently accept the following:
- Contemporary wedding gowns (1995 to now)
- Bridesmaid, mother of the bride and flower girl dresses
- Wedding specific items such as veils, shoes, purses, slips, bras, etc….
Stop by when I raid the rest of my closet!
*Technically I kept the dress I wore on my wedding day as a keepsake. But I had two dresses due to a “bridezilla moment” two weeks before my wedding. I donated the one I didn’t wear.
One of my favorite retirement tools is a Roth IRA. Yearly contribution limits keep us from using it for all our retirement assets. However, a little known way to contribute additional funds is through the use of an after tax account with an employer who allows in service withdrawals. Fortunately my employer allows this.
Good directions from Roth IRA Advisor on how to contribute to an after-tax account, roll to tax-deferred account, then to a tax-free account are here.
For example, lets say my 401k plan at work allows 10% after-tax deferrals. I can take a regular withdrawal twice per calendar year. So my strategy is to ask my 401k for a withdrawal of only the after-tax portion (which for example at 50K salary would be $2500 each for a total of $5000). I will have it sent directly to my traditional IRA, then convert it to my Roth with no further tax due, since it was already after-tax when deposited into the 401k.
It is an easy way to get extra money into my Roth! This is on top of the regular Roth or nondeductible IRA contribution each year. I realize many probably wouldn’t be able to do this as the 401k provisions have to allow it, but check your summary plan documents just for fun – you might be surprised as I was. And yes, you can have a 401k and an IRA at the same time.
Don’t forget to file IRS Form 8606 at tax time and review the conversion rules. If you have pretax money in your IRA, this can also be coupled with strategies to roll over just enough each year to max out/stay in 15% tax bracket, minimizing taxes.
In addition, the provisions for the income limits to be removed in 2010 sweeten the deal. Read more about it here by Five Cent Nickel.