Being an engineer, I tried to estimate the optimal balance of income and tax liability for a family of three with a young child. There are three tax credits, the education credit, the child tax credit and the saver's credit, for which we could qualify in 2008, depending on income level. In addition, below certain income levels, one can qualify for a 0% long term capital gains tax rate, or conversions to Roth IRAs. This tax benefits and income limits are summarize below.
|2008 Limit For Maximum Benefit by Filing Status*|
|Credits or Benefits||MFJ||QW||HOH||Single||MFS|
|Child Tax Credit||$110,000||$75,000||$75,000||$55,000||$55,000|
|0% Long Term Capital Gains Tax||$65,100**||$65,100**||$43,650**||$32,550**||$32,550**|
|Conversion to Roth IRA***||$100,000||$100,000||$100,000||$100,000||$0|
*MFJ-Married Filing Joint QW-Qualifying Widow(er) HOH-Head of Household MFS-Married Filing Separate
**Taxable income after deductions and exemptions
***Special add backs to calculate MAGI, but does not include Roth conversion amount
Using an Excel spreadsheet, I identified a scenario that allowed us to qualify for all the tax benefits except the Saver's Credit. However, it is likely we won't have any qualified 2008 education expenses for the Education Credit. Therefore, in 2008, we will get the Child Tax Credit of $1000 and have tax free long term capital gains. Finally, we will be able make conversions to a Roth IRA in a 15% tax bracket. Net, estimating 2008 income and taxes in advance has been very helpful to maximize the tax savings we may get:-)
For more on Reaping the Rewards, check back every Friday for a new segment.
This is not financial or tax advice. Please consult a professional advisor.
Copyright © 2008 Achievement Catalyst, LLC