I received a state income tax refund last year because I had too much withheld in the previous year. The refund was returning my own money back to me.

A refund isn’t income. If I return something to a store, the store doesn’t issue a 1099 to me for the refund. Why does the state issue a 1099 to me for the tax refund? Am I going to be taxed on a return of my own money?

Not Automatically Taxed

Just because you get a 1099 doesn’t mean you will automatically pay tax on it. The instructions on the form say

"It may be taxable to you if you deducted the state or local income tax paid on Schedule A (Form 1040)."

When it says it "may be taxable" with a conditional "if" it means the tax refund dollars in box 2 on the 1099-G are NOT taxable if you didn’t deduct it on your federal income tax return. And even if you did deduct, it still may not be taxable.

Taxable If You Over-Deducted

When you deduct state income tax on your federal return, you are deducting the withheld amount, not the actual amount you end up paying. Therefore if you get a refund from the state, it means you deducted too much in the previous year. That’s why you may have to add back the refund as income in the following year, even though a tax refund isn’t really income. The 1099-G is compensating for the over-deduction in the previous year.

Re-Do Your Taxes

However, just because you over-deducted, it doesn’t mean you actually benefited from the over-deduction. If you didn’t deduct as much as you did, maybe you would’ve used the standard deduction. There are limits to itemized deductions at some income levels. AMT also excludes state income tax from the deductions.

You are supposed to re-do your previous year’s taxes with the actual amount of the state income tax you should’ve paid and see how much you really benefited from the over-deduction.

If your state income tax refund is $2,000 and you benefited from all of it, you include $2,000 as income in the following year. If you only benefited from $1,000 of it, you include $1,000 as income in the following year. If you didn’t benefit from the over-deduction at all because you were on AMT, you don’t include anything from the tax refund.

Re-doing the previous year’s taxes just because of a state income tax refund is a big headache if you do your taxes by pencil and paper. If you use software, you hope the software will take care of it. If you use a CPA, the CPA may charge you extra for the extra work. The best way would be slightly under-pay your state each year but still stay away from any underpayment penalty; that’s not so easy to manage.

Unemployment Income Is Taxable

1099-G is also used for reporting unemployment income from the state. That number is reported in Box 1 on the form. Unemployment income is taxable.

---
Software picked, likely related articles at The Finance Buff:

• 1099 Requirement in Health Care Law Repealed
• How To Report Backdoor Roth In TurboTax
• 1099 Filing Requirement in Health Care Reform Law

He was super-nice to let me send him a refer-a-friend email so I can earn a referral bonus from American Express. To his surprise, American Express denied his upgrade request. No it wasn’t about his credit. A customer service representative at American Express gave this as the reason:

"I would like to inform that consumer accounts that have been open less than 13 months are not eligible to be transferred to a new Consumer account if a change would result in a higher Annual Membership Fee."

That’s a bizarre policy. Here Tom wanted to pay a higher annual fee to American Express but they refused to take it only because Tom’s account has been open for less than 13 months. Why would a company refuse business from a customer? Is American Express insane?

Of course not. Blame it on the unintended consequences of laws.

Congress passed and the President signed the Credit Card Accountability, Responsibility, and Disclosure Act ("CARD Act") in 2009. Among other things, it added a new section 172 to the Truth in Lending Act. It says:

"(a) Limitation on Increases Within First Year – Except in the case of an increase described in paragraph (1), (2), (3), or (4) of section 171(b), no increase in any annual percentage rate, fee, or finance charge on any credit card account under an open end consumer credit plan shall be effective before the end of the 1-year period beginning on the date on which the account is opened."

I highlighted the applicable parts in red. Basically during the first year they can’t increase your annual fee even if you ask them to.

What are those exceptions in "paragraph (1), (2), (3), or (4) of section 171(b)"? They are:

• end of previously disclosed promotional APR
• variable APR going up with the underlying index
• end of a workout or temporary hardship arrangement
• late on minimum payment for more than 60 days

A voluntary request from the consumer is not included as an exception. That means if you want to switch your card to a different one with a higher APR or a higher annual fee, you can’t. The law doesn’t allow it even if the APR never matters to you because you always pay in full or if you are perfectly OK with the higher annual fee because it comes with better rewards. You will have to either wait until after the first year or apply for a new card.

I can understand why they didn’t include "voluntary request" as an exception. They were afraid if they allowed it as an exception, unscrupulous credit card companies would do a bait-and-switch and say the consumers asked for it. In protecting the innocent consumers, those who know what they are doing are inconvenienced.

What do you think about this? Too much nanny state or acceptable tradeoff for the greater good?

---
Software picked, likely related articles at The Finance Buff:

• Opt Out of Credit Card Convenience Checks
• Best Credit Card for Everything Except Grocery, Gas, and Drugstore Purchases
• My Flexible Spending Account Sent Me a Debit Card

People ask this question because either they worry their mutual funds will buy into a bubble and pay a price too high or they worry their mutual funds will miss out on Facebook for too long.

In actively managed funds, it’s completely up to the discretion of the fund manager(s). When you pay a higher management fee to actively managed funds, you are paying for such discretion. Whether the fund manager’s decision to buy or not buy or buy at what price determines whether your funds will do better or worse than the market.

What about index funds? Index funds follow an index. It depends on how soon the index provider will include Facebook in the index. If the index adds Facebook, all index funds following that index will add Facebook as well, not necessarily all on the same day but they will sooner or later.

Over at Crawling Road blog, Craig looked at the inclusion policies of a few different index providers. S&P requires an aging period of 6-12 months after the IPO. It also wants to see some consecutive quarters of positive earnings. Other index providers warm up to IPOs sooner. Russell looks at IPO stocks quarterly. Wilshire does it monthly.

It’s also helpful to look at the history and see when mutual funds added Google, to which Facebook’s IPO is often compared.

Google had its IPO in August 2004. The closing price on the first day of trading was about $100 a share. S&P 500 didn’t add Google until 20 months later in March 2006, when the price was already $360 a share. The early run-up was over. As I’m writing this, Google trades at about $600 a share. S&P’s slow action means investors in S&P 500 funds missed some gains.

A total stock market fund will add a new stock sooner. By the end of September 2004, merely one month after its IPO, Google already appeared in the holdings of Vanguard Total Stock Market Index Fund. The price at that time was about $130 a share. The fund probably bought Google at a price lower than that. By including Google sooner, a total stock market fund gave investors the early gains in Google.

History suggests that a total stock market fund will add Facebook sooner than a S&P 500 fund. Whether sooner this time means a boon or a curse depends on whether Facebook will be like Google. When Google came out, there were also a lot of party poopers saying how vastly overvalued it was. It turned out the best time to buy Google stock was when it first came out.

However, if you step back a little you will see all this doesn’t really matter. When Vanguard Total Stock Market Index Fund included Google as of September 2004, Google made up of only 0.24% of the fund’s assets. Even though Google tripled by the time a S&P 500 fund added it in March 2006, we are still talking about a stock that was less than 1% in the fund.

This time, whether an index fund pays too much or gets a bargain price for Facebook stock, it’s not going to materially affect the fund’s performance one way or the other. To really make money or lose money, a fund has to buy a lot of Facebook shares. It’s just not going to happen in a highly diversified total stock market or S&P 500 fund. As large as Facebook is, the market is much much larger.

---
Software picked, likely related articles at The Finance Buff:

• S&P 500 + Extended Market = Total US Stock Market
• Breaking The Buck Is Not a Big Deal
• Subscribe

That’s fantastic, isn’t it? Who would have thought a blog can be worth a few million dollars? I would be really happy if someday my blog would be worth 1/10th of that. Help me get there, will you?

*****

The Fed’s New Tax on Retirees by Rick Ferri at RickFerri.com

The Fed announced it will keep interest rate low until late 2014. Investment advisor said it’s a tax on retirees who draw income from their savings. I guess that’s what they mean by "shared sacrifices." I know many retirees who live comfortably because they benefited from the real estate boom. Even after the recent crash, their homes are still worth multiple times the price they paid. Retirees at least don’t have the unemployment problem. That’s why they are asked to pay this "new tax" by earning less from their savings and investments.

*****

Fed’s Late-2014 Interest Rate Pledge: What Can Savers Do? by Ken at DepositAccounts.com

Not just retirees are mad at the Fed’s "no rate increase until late 2014" announcement. All savers are. Over at DepositAccounts, Ken is thinking of organizing an online petition, to unite all savers harmed by this policy and show their grievance. Coming up with a realistic "ask" is the question. So far, one possible demand is to ask for increasing the limit on savings bonds purchase back to the pre-2008 level: $30,000 per person per year. I think it’s a realistic goal. I would sign it.

*****

Fed says no rate hike, but rates may still go higher by Allan Roth at CBS News

Investment advisor Allan Roth is still secretly hoping the market will defy the Fed and push the interest rates higher. I hope so too. It’s true that the Fed does not control medium and long term interest rates. Whether they will go up instead of down is the question. I don’t know the answer. My fixed income investment strategy is still the same: I Bonds, CDs, and muni bond funds.

*****

Rethinking CDs by Matthew Amster-Burton at MintLife

Speaking of CDs, Matthew looked at them and came to the conclusion they are too complicated for a possible gain of $1,000.

They would be too complicated if you try to put 100% of your fixed income portfolio in CDs and also buy CDs with each and every bit of new money allocated to fixed income. They are very simple if you buy a CD with an existing chunk, wake up in five to seven years when the CD matures, and buy another (larger) chunk with the existing money at that time. New money can still go to bond funds. Money needed for rebalancing still stay in bond funds.

To each his own, of course. I would be willing to do some paperwork once every five to seven years for a gain of $1,000. That makes me a more hands-on investor. Guilty as charged.

*****

Safe Retirement Income with TIPS and a deferred annuity by Wade Pfau at Pensions, Retirement Planning, and Economics Blog

Wade Pfau is an economics professor at a university in Japan. He has done a lot of research on retirement income security, basically how to manage the withdrawals after you retire. Since I’m not there yet, I haven’t paid much attention. If you are interested in this topic, Professor Pfau has very good stuff on his blog. That makes it my Blog of the Week.

Blog of the Week: Pensions, Retirement Planning, and Economics Blog by Wade Pfau

---
Software picked, likely related articles at The Finance Buff:

• Bought Nothing on Black Friday
• Mortgage Refinance: Closing Process Explained
• Recommended Reading List Moved

Fortunately there are two good choices in the market: American Express Blue Preferred and PenFed Platinum Rewards.

Which one is better?

AmEx Blue Cash Preferred

American Express Blue Cash Preferred card ("Blue Preferred") pays 6% rewards on purchases at supermarkets, 3% on gas and department stores, and 1% on everything else. Whenever you accumulate $25 worth of rebates, you can request a statement credit.

It has a $75 annual fee. There’s also a no-annual-fee version that pays only 3% rebate on purchases at supermarkets, 2% on gas and department stores, and 1% on everything else. If you spend more than $210 a month at supermarkets, you are better off with the Blue Preferred after the annual fee than the no-annual-fee version.

You get 6% only for purchases at supermarkets. If you buy groceries at Costco, Walmart Supercenter, or Super Target, they don’t count as 6%.

This chart shows the reward percentage after the annual fee if you use this card only at supermarkets.

PenFed Platinum Rewards

PenFed Platinum Rewards card pays 5% rewards on gas, 3% on supermarkets, and 1% on everything else. You redeem rewards in prepaid debit cards or gift cards.

The easiest way to use up the value on a prepaid debit card would be to make a one-time payment on a utility bill. My Internet service provider accepts one-off payments by credit card.

Get Both

If you don’t mind applying for and carrying an extra card, get both. You would get the highest rewards for both gas and groceries. Use the Blue Preferred card only at supermarkets and use the PenFed card only for gas.

Pick One

If you only want to use one card at both supermarkets and gas stations, which one you should get? It depends on whether you spend more on gas or at supermarkets.

I made this simple calculator. If you are reading this in RSS feed or email, you will have to come to the website to use it.

Because I spend more at supermarkets than at gas stations, I’m using AmEx Blue Cash Preferred. If you also want this card, leave a comment. I will send you a refer-a-friend email. You will get a sign-up bonus and I will get a referral bonus. That’ll be your gift to me courtesy of American Express. Win-win.

---
Software picked, likely related articles at The Finance Buff:

• Fidelity Cash Back Rewards Cards
• Why You Can’t Upgrade Your Credit Card In the First Year
• Chase Ending 5% Grocery and Gas Rewards Cards

Before the move was ever possible for those who earn "too much," I prepared for its arrival. I contributed to a non-deductible IRA for several years. I moved pre-tax money in my Traditional IRAs to a qualified plan in 2009. As soon as it was possible to convert the Traditional IRA to Roth in January 2010, I jumped on it. I took advantage of the same opportunity in 2011 and 2012.

Recently Michael Kitces at Pinnacle Advisory Group raised some concerns that the move could be ruled illegal under the step transaction doctrine.

The step transaction doctrine says if a series of transactions are parts of one transaction, they should be viewed as just one transaction. Michael Kitces theorizes that because the contribution and conversion end up putting money from your pocket into a Roth IRA, under the step transaction doctrine they could be viewed as just one move: a contribution to the Roth IRA. If your income is too high for contributing to a Roth IRA, doing so will make your contribution an excess contribution, which is subject to a 6% excise tax every year.

Are the concerns valid or just FUD? I have plenty of reasons to disagree with that theory. I Googled step transaction doctrine and I studied it carefully.

First there have to be transactions, which usually involve two or more parties. A single entity moving its own money around is not a transaction.

Next there are specific tests: binding commitment test, mutual interdependence test, and end result test. Backdoor Roth clearly fails the mutual interdependence test. Just contributing to a non-deductible IRA is meaningful by itself without converting it to Roth.

I’m not a lawyer. Neither is Michael Kitces. Without an outright announcement from the IRS or a tax court ruling saying one way or the other, I imagine even lawyers will have different opinions. So whom should you believe?

Although I disagree with Michael Kitces, my disagreement means nothing. Nor does his allegation. Only what the IRS and the tax courts say counts. We can argue till our faces turn blue and we still won’t get anywhere because nobody knows how the IRS or the tax courts will rule or whether they will ever rule on this.

However, there are things I can do today to reduce the risk. These things don’t cost that much. They don’t detract from the great value of Backdoor Roth either.

Here’s what I will do:

(1) I will recharacterize my 2011 and 2012 Roth IRA conversions. Recharacterizing them will move the money back to my Traditional IRA as if I never converted. I have until October 2012 to recharacterize my 2011 conversion. I’m well within the deadline.

My 2010 conversion is perfectly legal even under the step transaction doctrine. That conversion included money from 2010, 2009, 2008, and several years before.

(2) I’m allowed to reconvert my 2011 conversion after 30 days but I will wait. I’m allowed to reconvert my 2012 conversion after January 1, 2013. I will convert the entire account consisting of two years of contributions plus earnings to Roth in January 2013.

(3) Going forward, I will still contribute to my non-deductible Traditional IRA every year. Instead of immediately converting it to Roth, I will convert every two years. 2011 and 2012 contributions will be converted in 2013. 2013 and 2014 contributions will be converted in 2015, and so on.

Leaving the money in the Traditional IRA for a year or two is not a big deal. At the time of conversion, I only pay tax on the earnings, which won’t be much for a year or two. I won’t even bother moving the earnings to a qualified plan. After the conversion, the money will still enjoy tax free growth for many more years.

Converting two years worth of contributions plus earnings can’t possibly be argued as a step transaction to contribute to a Roth IRA. Otherwise all conversions to Roth would be.

Are these changes to the Backdoor Roth strategy necessary? Probably not, but they are easy to do. I just want to stay conservative and remove any doubt. The revised strategy will still maintain 99% of the value in Backdoor Roth. I’m willing to pay a small price for being conservative. Some experts quoted by Michael Kitces said waiting a few days, six months, or until the next year would be enough. Pick whatever you are comfortable with.

What if Congress changes the laws to make Backdoor Roth no longer available? It’s not a big deal either. I just convert what I have then. Even if in the worst case I have some money stuck in a non-deductible Traditional IRA, it’s still not the end of the world. When the tax on dividends and capital gains is seen as being too low, a non-deductible Traditional IRA can still beat a regular taxable account.

Converting to Roth on the very next day is not a core part of the Backdoor Roth strategy. Don’t let the uncertainty scare you away from doing the Backdoor Roth.

I also updated my previous post Backdoor Roth: A Complete How-To.

---
Software picked, likely related articles at The Finance Buff:

• How To Report Backdoor Roth In TurboTax
• Backdoor Roth: A Complete How-To
• Inherited IRA and Roth Conversion Pro-Rata Rule

Mr. Richard A. Rigg of San Francisco saved a typewritten copy of a 1963 Benjamin Graham speech. Jason Zweig posted it online for everyone to read.

*****

Another Credit Union Increases Early Withdrawal Penalty on Existing CDs from DepositAccounts.com

Some credit unions are really tarnishing the good reputation of credit unions. Of the two reported incidences of changing terms on existing CDs, both are done by a credit union. A complaint to the federal regulator NCUA was even ruled in the credit union’s favor. Let’s see how the state regulator rules on this one.

Don’t ever think credit unions are automatically good and banks are automatically bad. Even the "evil" Bank of America didn’t touch existing CDs when it changed its terms. I’m appalled at a credit union pulling this on its members.

*****

CFP Board Relaxes Its Position On Financial Planner Bankruptcies… Sort Of from Michael Kitces at Nerd’s Eye View

The governing body of the Certified Financial Planner (CFP) designation says it no longer disqualifies a CFP candidate for past bankruptcies. This I agree. We shouldn’t stop someone from becoming a CFP just because he or she had some problems with money in the past. Actually one’s own problems could have been the motivator for pursuing a career in financial planning.

However, the board also says it will not revoke the CFP designation from someone who files bankruptcy after he or she is already a CFP. If a Certified Financial Planner can’t even handle his or her own money well enough to stay away from bankruptcy after getting the training and passing the exams, it’s a clear indication he or she isn’t qualified to plan others’ money. Not that you should trust someone blindly just because he or she is a CFP, if a CFP can’t live up to this minimal standard, what’s a CFP worth?

*****

Talking about Money Offline from Leigh’s Financial Journey

I wish people are more open about money like Leigh’s co-workers. My theory is that people don’t talk about money among each other because they don’t want to be judged or find out they didn’t get the best deal.

*****

Pay Your Kids To Fund Their Own Roth IRA? from My Money Blog

Parents, especially those self-employed, often want to hire their own kids for jobs in the business. The kids will get a leg up in having a Roth IRA at an early age. The cost for doing so includes 15.3% payroll tax and potentially losing eligibility for financial aid.

*****

What Can We Learn from Past Performance? from Oblivious Investor

Past performance does not guarantee future performance. It still can be useful to some extent, more so for index funds, less for actively managed funds.

Blog of the Week: Leigh’s Financial Journey

---
Software picked, likely related articles at The Finance Buff:

• Bought Nothing on Black Friday
• A Different World
• Radio Programs On Demand with Podcasts

I waited until now because I wanted to earn a little more interest on the money in my checking account at Alliant Credit Union. I Bonds will still pay interest for the full month if you buy on any day during the month. Therefore if your own bank account pays interest, it’s better to buy near the end of the month. Money will stay in your own account longer earning more interest, although these days it isn’t much.

Actually you can schedule your purchases ahead of time. That way you don’t have to remember to log in near the end of the month. Here’s how:

Log In

You log in to TreasuryDirect with your account number.

Password

You enter your password on a virtual keyboard using your mouse. If you are wondering how to enter lower-case letters, note that the password is not case sensitive.

Not Purchase Express

You see a big Purchase Express box on the account page but that’s only for an immediate purchase (hence "Express"), not for scheduling a future purchase.

BuyDirect

Look for BuyDirect in the navigation menu on the top.

Select Type

Select Series I Savings Bonds on the next page.

Schedule Purchase(s)

You can schedule a single purchase, recurring purchases in fixed intervals, or multiple purchases on custom dates. Bonds will be issued on the next business day after your purchase date. So don’t pick the very last day of the month. Pick the second last business day at the latest. I would leave a few more days of cushion.

Now that I’m done with the purchases through TreasuryDirect, I’m just waiting to get taxes done for the additional $5,000 in paper I Bonds through the backdoor.

---
Software picked, likely related articles at The Finance Buff:

• I Bonds Purchase Limit Restored to $10,000, Backdoor Still Open
• May 2011 I-Bonds As a Good 11-Month CD Paying 2.5% Or More
• November 2011 I Bonds Rates

It was a road trip. We flew into Arizona and then drove around. We didn’t have a fixed itinerary except for the arriving and returning flights. Every night, we would figure out the the place to go for the next day. This also involves finding a hotel for the next night.

Over the course of about two weeks, we stayed at more than 10 hotels of different brands: Days Inn, Comfort Inn, Quality Inn, Holiday Inn, La Quinta, Best Western, and Hampton Inn. They were really a hit-or-miss. A Comfort Inn in one town was good but the Comfort Inn in the next town was really bad. We looked up reviews on Trip Advisor before we booked. Even that didn’t help.

I realize most of these hotels are operated by local franchisees. The franchisees make the hotels either good or bad. However, chain restaurants don’t seem to have this problem even though they are also owned and operated by franchisees. I can’t tell the difference between a meal at a chain restaurant in one town and another meal at the same chain restaurant in a different town. Somehow the restaurant chain is able to instill consistency among the franchisees.

What I really want are consistently dependable hotels for my vacation travel. They don’t have to be fancy but I want them to be consistent enough above my minimum standard. If there’s a cheap Sheraton, I’d go for it. Some Sheratons are better than others but so far I haven’t stayed at a Sheraton that’s below my standard. Too bad there aren’t as many Sheratons, especially not in small towns.

What hotels do you stay at when you travel on vacation? Is there a chain that’s more consistent than others? After a grand tour of different hotel chains, I’m leaning toward Hampton Inn. It seems to be a cut above the other leisure chains in terms of quality and consistency. It’s also more expensive than the others, somewhat above what I’d like to pay. That’s why I’m looking for inputs from all of you.

---
Software picked, likely related articles at The Finance Buff:

• Disputed Credit Card Charge Against Priceline
• Burning Through Severance, Turning Down Job Offers
• How to Shop for Furniture?

I mentioned Saver’s Credit in one of my Friday roundups. I said it’s one of the most elusive tax credits.

I call it the "feel-good credit" because Congress created it to make itself feel good about helping low-income people save when in reality very few get it. When they get it, they get far less than what the credit first appears to offer.

What Is Saver’s Credit

Saver’s Credit is a tax credit for saving for retirement. If you save at least $2,000, you can reduce your federal income tax by up to $1,000. It effectively works out to be a 100% match from other taxpayers ($1,000 out of pocket, $2,000 in your account). That’s on top of any match from your employer. It’s also on top of the normal benefits from a retirement account, for instance tax-free growth in a Roth account.

Who Qualify for Saver’s Credit

Because it’s free money from other taxpayers, Congress limited it to only people with low income. They need extra help because their low income makes it difficult for them to save for retirement on their own.

Depending on your income, there are three levels for this credit: 50%, 20%, and 10%. If your income is higher than the limit for the 10% level, you get nothing.

For a single person or a two-earner family, the income limit is set below the typical salaries of college graduates. A married, one-earner household will have an easier time to qualify for this credit. The table below lists the maximum Adjusted Gross Income (AGI) in 2011 for different tax filing statuses:

In order to make sure rich people’s kids don’t take advantage of this generosity, Congress also put in rules to say you must be at least 18 and you can’t be a full-time student during any part of 5 calendar months in the year. Congress also added another rule saying anybody claimed as a dependent on another taxpayer’s tax return can’t qualify. If parents want the tax deduction, their child can’t claim Saver’s Credit.

With these additional rules, Congress intended to make Saver’s Credit available only to low-income people working full-time.

Watch Out for the Cliff

You should note how fast the credit drops off. If a single person has a AGI of $17,000, for a $2,000 contribution to a retirement account, this person qualifies for a Saver’s Credit at the 50% level. That’s $1,000. If she earns $100 more, she only qualifies at the 20% level, or $400. That extra $100 income reduces the credit by $600. It’s so not worth it. She’s much better off not earning the extra $100.

Because the credit drops off so fast, it’s very difficult to qualify at the 50% or 20% level. If people get this credit at all, most end up getting it at the 10% level. Save $2,000, get $200. It’s better than nothing but not as good as it sounds at the first glance.

Non-Refundable

Finally, because it’s a tax credit, not just a gift from other taxpayers, Congress made Saver’s Credit non-refundable, which means the credit can reduce your federal income tax to zero but that’s it.

You have to pay federal income tax before the Saver’s Credit in order to benefit from it. However, at the income limit set for the Saver’s Credit, sometimes the tax before the credit is less than the credit. You end up not getting the full credit as you think you would.

For instance, a single person earning $17,000 a year with just standard deductions will pay $753 in taxes. With Saver’s Credit, if she saves $2,000 for her retirement, she gets only a $753 credit, not the full $1,000.

Unintended Recipients

Is it realistic to expect a single person working full time earning $17,000 or less a year to save $2,000 for retirement? Not unless that person has other income that doesn’t show up on the tax return or the low income is only temporary.

A semi-retiree living on his savings and working part-time at a non-profit organization can qualify for the Saver’s Credit. His savings provides him income but that income isn’t income for tax purposes. In other words the income is low only on paper. His living standard isn’t low.

Someone taking a break from full time work in the middle of the year can qualify for Saver’s Credit. The low income is only temporary.

New college graduate in the first year of a full time job can qualify for Saver’s Credit (must graduate by April 30). Income from a partial year looks low even though the annual salary isn’t.

Claiming the Saver’s Credit

If all stars are aligned and you qualify for the Saver’s Credit, you claim it on Form 8880. If you use tax software, be sure to answer the questions about retirement savings even though you know your normally don’t have to report contribution to a Roth IRA.

---
Software picked, likely related articles at The Finance Buff:

• Living with Negative Real Interest Rates
• Tax and Inflation Penalize Savers
• Moral Hazard: Deposit Insurance and Subprime Bailout