Avrum D. Lank

Credit makes retirement saving attractive for low-wage earners

By AVRUM D. LANK of the Journal Sentinel staff

Saturday, September 21, 2002

Q. Starting for tax year 2002, I have seen information regarding a non-refundable tax credit for 401(k), IRA or Roth IRA contributions. Persons with adjusted gross income levels up to $50,000 can take this credit with the percentage being 10% to 50% of the contribution. I'm sure there are limits. Can you help me determine just how this works or where to find the information on the IRS Web site?

P.N., via the Internet

A. You are referring to the so-called Saver's Credit, and it works as you outlined, although it is available for only the first $2,000 contributed. That means the credit is a maximum of $1,000 a person. On joint returns, it may be taken by each person, meaning as much as $2,000 is available.

The credit was part of the last tax-reform act and is intended to make retirement saving more attractive for lower- and middle-income taxpayers.

The $50,000 income limit is for a married couple filing jointly, at which point the credit is 10%, or a maximum of $200 a person. There are other limits for other filing statuses.

As you note, the credit is non-refundable. That means it can be used only against actual taxes due. If the tax bill is less than the credit, then taxes are reduced to zero, but no refund is sent to make up for the rest of the credit.

The credit is available through 2006.

Rules are outlined in Chapter 3 of IRS publication No. 553. It is free and can be obtained by writing to the IRS Central Area Distribution Center, P.O. Box 8903, Bloomington, Ill. 61702-8903. It is also available on the Internet through the IRS Web site: www.irs.gov.

Q. My wife and I are both 54 years old. We file a joint tax return and have a combined earned income of about $40,000, of which about $2,500 is hers.

Is there some provision that would allow us both to contribute the maximum of $3,500 to separate Roth IRAs, or is my wife's limited by her earned income?

H.K., West Allis

A. You can both have $3,500 contributed to Roths this year, for a total of $7,000.

Because you meet age and income requirements, you can set up a $3,500 Roth for yourself this year. You also can set up a so-called spousal Roth IRA for your wife this year and contribute $3,500 to it.

Any organization offering IRAs can help with the paperwork.

And if your total income is less than $50,000, remember to take your Saver's Credit.

Q. If I convert all of my several IRAs to Roths, and after the conversions the amounts of money that I gained are balanced by the amounts of money I lost, will I then have no income tax consequences? Or must I pay regular income tax on the ones that gained and take a miscellaneous itemized deduction for the ones in which I have losses?

A.W., via the Internet

A. All of your IRAs are considered to be one account in this situation. If the total amount you converted is more than the total of your non-deductible contributions, then you owe regular income taxes on the excess. If it is less than your non-deductible contributions, then you can claim a miscellaneous itemized deduction for the difference.

IRS Publication 590 is helpful explaining this. It is available at the addresses above.

Q. I have made a lot of money shorting stocks, and I own a lot of mutual funds. I have asked my fund managers, "Do you short stocks?" They always say "no."

If I can make money shorting stocks, why can't they do this?

D.Z., Wauwatosa

A. Most likely because the mutual fund agreements under which they operate prohibit shorting. Most mutual fund agreements contain such provisions.

If you want to invest in a fund that does allow shorting, ask the company managing the funds you now own if they have such an offering.

Q. How can I find out if some old stock certificates are worth anything? For example, is the company still in existence or were they ever bought out?

T.F., Milwaukee

A. The U.S. Securities and Exchange Commission Web site lists several resources for researching old certificates at www.sec.gov/ answers/oldcer.htm.

The SEC site is free, but most of the organizations it refers to charge a fee for their services.

Q. In reference to your answer in your column a few weeks ago on the fact that Wisconsin income tax is due on gambling winnings but that the winnings cannot be offset by losses, does that mean if I were playing blackjack at a casino, I would have to keep track of each hand I played and how much I won on each hand?

Does it mean that even if I ended up even after several hours of playing, I would owe taxes on the money I won playing individual hands?

It is hard to believe our legislators would pass a law like that.

C.L., via the Internet

A. Well, they did.

According to an e-mail I received from the Wisconsin Department of Revenue, the requirement is "to report all gambling winnings as taxable income. This includes the winnings from each play."

QUESTIONS?

If you have a question:

-- E-mail it to alank@journalsentinel.com -- Send it to Avrum D. Lank, Milwaukee Journal Sentinel, P.O. Box 371, Milwaukee, WI 53201- 0371. -- Call it in to (414) 223-5333.

Selected questions will be answered in future columns.

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