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3 ways to cut taxes while saving for retirement


Dan Ritter, Wall St. Cheat Sheet 6:46 p.m. EST January 1, 2014
The start of a new calendar year is a busy time in the world of personal finance. For the most part, as far as the Internal Revenue Service is concerned, what happened in 2013 will stay in 2013 — 2014 is a new year, and households often take the time to balance holiday-stretched budgets and plan for the new year.

Unless you are already comfortably retired (and if so, congratulations!), it is probably worth your while to plan your finances, in particular your contributions toward retirement. If you don't have a clear strategy, perhaps now is the time to develop one. If you do, it is always wise to make sure that it is effective and efficient and that you are executing it well.

A top consideration when you sit down to do all this strategizing is how severely Uncle Sam is going to hit you with the tax bat. First, stay up to date on your tax bracket so you know what to expect come year's end. Second, make sure you are taking deductions where you earn them. Believe it or not, the government wants to incentivize smart financial behavior, and the more savvy you are with your retirement savings, the more tax advantages you can receive.

Here are a few things to get you started.

1. 401k — if you have it, use it

A 401k has several valuable benefits, and one of the best is that it can be funded with pre-tax earnings. That is, when you elect to have part of your paycheck deducted and contributed directly to a 401k, this part of your salary isn't counted toward your taxable income at the end of the year.

What this means is that your contributions to the plan aren't subject to most federal or state taxes (there's little escape from earned income taxes such as payroll and Social Security, which you will still be pinged for), effectively lowering your total taxable income. Keep in mind that you receive this tax benefit each time a 401k contribution is deducted from your paycheck, so you don't take a formal deduction on your tax return for the sum of your contributions.

401k contributions can have an effect on your take-home pay, as well. If your employer withholds money from your paycheck for federal income taxes, that withholding is based on your expected taxable income. Since your expected taxable income is reduced to below your actual salary when you contribute to a 401k, the withholding will be smaller.

There are online calculators available if you want to get an idea of how a contribution to a 401k could affect your paycheck.

Remember that contributing to a traditional 401k is only a temporary tax windfall, and that taxes will be levied on funds withdrawn from the account. 401k contributions will be limited at $17,500 per year for people younger than 50, while those older than 50 may contribute up to $23,000.

2. If you don't have a 401k, open an IRA

If you don't have access to a 401k account, you should definitely consider an IRA — an individual retirement account. There are some important conditions that apply in order to be eligible to contribute to an IRA, but for the most part, if you are under the age of 70.5 years old and you earn a reported income from your employer, you can open an IRA with any number of financial institutions.

An IRA works like a 401k in that your contributions will, pending certain conditions, lower your taxable income (you will still be subject to earned income taxes like payroll and Social Security regardless of IRA contributions). The annual limit on contributions to an IRA for those younger than 50 is $5,500 and $6,500 for those older than 50.

The amount you will be able to deduct depends on a number of factors. For example, in 2014, you will not get an IRA contribution deduction if you are a single adult or a head of household who has a workplace retirement plan and has an adjusted annual gross income of between $60,000 and $70,000.

There are a number of conditions that apply to the eligibility of IRA contributions for deduction, but there's a good chance that if you don't have access to a retirement plan through work, opening an IRA could make your financial life much easier.

For the record, you can often still contribute to an IRA even if you have a work-sponsored retirement savings plan, but your contributions may not count toward a tax deduction. The IRS has tons of literature on the limits.

3. The saver's credit

When it comes to saving for retirement, one of the biggest problems facing most Americans is that they simply don't have enough money to put away. Millions of Americans live paycheck to paycheck, and the idea of setting aside 10 or even 5 percent of their income for retirement is simply not feasible.

The IRS has afforded additional tax credits for those with lower income. If you are single filer with income up to $30,000 and you make eligible contributions to a qualified retirement savings account, you can earn a tax credit worth a percentage of your contribution. The percentage depends on your income — the less you make, the greater it is.

For households, the income limit is $60,000 per year, and for heads of households, the income limit is $45,000 per year. The compelling thing about this tax credit is that it stacks with the tax advantages offered by traditional savings vehicles.


2014 Tax Penalties For Not Having Health Insurance Under ObamaCare

Now that the Supreme court has upheld key provisions of President Obama’s health care reform plan, also known as ObamaCare or the Affordable Care Act, all Americans with an income above a certain threshold will have to purchase health insurance. The provision referred to as the individual mandate is what will legally require most US citizens and legal residents to obtain private, employer sponsored or public health insurance (through state run exchanges) starting in 2014. Based on the most recent data available it is estimated that more than half of the US population gets health insurance directly through their employers, while 50 million people are uninsured. The remaining consumers either buy their own private insurance or are covered by federal/state government programs, such as Medicaid and Medicare.

Due to the website issues with the Obama administration has announced that it will give Americans who buy health insurance through the new online marketplaces an extra six weeks – till the end of Open enrollment on March 31st, 2014, to purchase coverage before they incur the penalties discussed below. And given all the issues still plaguing the federal health care exchange website ( the requirement for everyone to have health insurance under the individual mandate may be delayed even further.

In a further extension announced just before Christmas, the administration has announced Americans who had their health plans cancelled by insurance companies will be exempt (known as the “hardship exemption”) from the individual mandate and associated penalties that go into effect on January 1st. The insurance plans were cancelled because they did not meet the minimum plan requirements defined under the affordable care act and the available plans are too expensive. To claim the exemption you would have to provide proof of a canceled policy.

Here is a brief summary of the standard penalties for not having health insurance who do not meet the exemptions outline above:

Individuals: From 2014 (reported in 2015), individuals who did not have insurance would owe $95, or 1 percent of income, whichever is greater. In 2015 it rises to the greater of $325 or 2 percent of income. But the penalty would subsequently rise in 2016, reaching $695, or 2.5 percent of income, whichever is greater. From 2017, the minimum tax penalty per person will rise each year with inflation.  And for children 18 and under, the minimum per-person tax is half of that for adults.  The tax penalty is pro-rated, so that a person who is not covered for only a single month would pay 1/12th of the tax that would be due for the full year.

Families: For families the 2014 health insurance non-compliance penalty is capped at $285 per family, or 1% of income, whichever is greater. In 2015 it rises to the greater of $975 or 2 percent of income. And by 2016, it will jump sharply to $2,085 per family, or 2.5% of income, whichever is greater. From 2017, the penalty/tax will rise in line with inflation. The minimum amount per family is capped at triple the per-person tax, no matter how many individuals are in the taxpayer’s household. So, for example, a couple with one child over 18 (or two children age 18 or under), and no coverage, would pay a minimum of $285 in 2014, $975 in 2015 and $2,085 in 2016. And that would be the minimum no matter how many uninsured dependents a taxpayer has.

Individuals or families who fall below income-tax filing thresholds would not owe anything or get subsides to offset health insurance costs. People who are unemployed or cannot find a policy that costs less than 8% of their modified adjusted gross income would also be exempt from penalties under the individual mandate. On the other hand, to offset the cost of providing insurance to low income households, individuals making more than $200,000 a year and couples earning above $250,000 will get additional health care taxes deducted as payroll taxes. These people are also hit with a 3.8 percent tax on investment income.

Obamacare Penalties - 2014, 2015 and 2016

Obamacare Penalties – 2014, 2015 and 2016

Employers: Also from 2015 (originally 2014, but was delayed by the administration), employers with 50 or more workers could face federal fines for not providing insurance coverage. Several of the other changes would take effect much sooner. For the current and future impacts of health insurance on employers see this article.

How Individual Health Care Coverage Will be Monitored

Since 2011, employers have had to state the value of the health care benefits provided to each employee on their W-2 at the end of each year. Insurers (including employers who self-insure) that provide minimum essential coverage to any individual during a calendar year will also have to report certain health insurance coverage information to both the covered individual and the IRS. Thus, the IRS will ultimately be responsible for reporting an individuals and business’ non-compliance with purchasing health insurance.


IRS Kicks Off 2014 Tax Season


WASHINGTON — The Internal Revenue Service today opened the 2014 filing season by highlighting a growing array of online services and encouraging taxpayers to check out a variety of tax benefits, such as the often-overlooked Earned Income Tax Credit.

Taxpayers have until Tuesday, April 15, 2014, to file their 2013 tax returns and pay any tax due. The IRS expects to receive more than 148 million individual tax returns this year, and more than four out of five returns are now filed electronically.

About three out of four filers typically get refunds, and the IRS issues more than nine in ten of these refunds in less than 21 days. Last year, taxpayers received an average refund of $2,755. E-file, when combined with direct deposit, is the fastest way to get a refund. More than three out of four refund recipients now choose direct deposit.

“Tens of millions of people will file their taxes in the next few weeks, and we encourage taxpayers to visit as the best place to get quick help,” said IRS Commissioner John Koskinen. “We continue to add features and make it more user-friendly to help taxpayers. People can get everything from answers to tax questions about preparing their tax return to checking the status of their refund after they file.”

The IRS began accepting and processing individual tax returns today after updating tax forms and completing programming and testing of its systems. The IRS also has updated and strengthened its systems to help protect against refund fraud and identity theft. This annual updating process saw delays in October following the 16-day federal government closure.

EITC Awareness Day Highlighted

Today also marks the annual Earned Income Tax Credit Awareness Day. Koskinen and other IRS officials are joining local leaders and community organizations across the country at news conferences and outreach events highlighting the benefits of EITC, which helps working families with low and moderate incomes. Koskinen attended an EITC event today at Baltimore CASH with a variety of local, state and federal officials.

Although an estimated four out of five eligible workers and families get this key work incentive, one in five miss out on EITC. That’s because either they don’t claim it when filing or they don’t file a tax return at all because their income is below the filing threshold. One-third of the population eligible for EITC shifts each year as their personal circumstances, such as work status or family situation, change and can affect eligibility. “We urge people to look into EITC. Many people don’t realize they are eligible and simply overlook this credit,” Koskinen said. “There are easy ways to find out more about this credit, either by visiting, or using Free File or a software package. The IRS is working hard to educate people about EITC while also putting in place processes that identify and prevent improper payments.”

Online Tools at Available to Help

Aimed at individuals and families who made $51,567 or less last year, the EITC varies by income, family size and filing status. People can see if they qualify by visiting and answering a few questions using the EITC Assistant, a special online tool. Eligible taxpayers can also use another helpful online resource, the VITA Site Locator tool to locate one of nearly 13,000 community-based volunteer tax sites consisting of over 90,000 volunteers that can help them file their return for free.

The EITC Assistant and VITA Site Locator are just two of a growing array of online and automated IRS services that can help taxpayers get the information they need to file their returns and get their refunds quickly.

Tele-Tax, for example, helps taxpayers see if they qualify for various tax benefits, such as the Child Tax Credit and Additional Child Tax Credit for eligible families, the American Opportunity Tax Credit for parents and college students, the saver’s credit for low-and moderate-income workers saving for retirement and energy credits for homeowners making qualifying energy-saving home improvements. The automated IRS services can also help home-based businesses check out the new simplified option for claiming the home office deduction, a straightforward computation that allows eligible taxpayers to claim $5 per square foot, up to a maximum of $1,500, instead of filling out a 43-line form (Form 8829) with often complex calculations.

When taxpayers are ready to fill out and file their returns, another online option, available exclusively on, enables anyone to e-file their returns for free. Free File offers two free electronic filing options: brand-name tax software or online Fillable Forms. Taxpayers who make $58,000 or less can choose free options from 14 commercial software providers. There’s no income limit for the second option, Free File Fillable Forms, the electronic version of IRS paper forms, which is best suited to people who are comfortable preparing their own tax return.

Even after taxpayers file, there are more online tools that can provide them with valuable assistance long after tax season ends. One of the most popular is Where’s My Refund?, a tool available on that enables taxpayers to track the status of their refund. Initial information will normally be available within 24 hours after the IRS receives the taxpayer’s e-filed return or four weeks after the taxpayer mails a paper return to the IRS. The system updates every 24 hours, usually overnight, so there’s no need to check more often.

For taxpayers whose concern isn’t a refund, but rather, a tax bill they can’t pay, the Online Payment Agreement tool can help them determine whether they qualify for an installment agreement with the IRS. And those whose tax obligation is even more serious, the Offer in Compromise Pre-Qualifier can help them determine if they qualify for an offer in compromise, an agreement with the IRS that settles their tax liability for less than the full amount owed.    

Another useful year-round tool, the IRS Withholding Calculator, helps employees make sure the amount of income tax taken out of their pay is neither too high nor too low. This tool can be particularly useful to taxpayers who, after filling out their tax returns, find that the refund or balance due was higher than expected.



Tips for Taxpayers, Victims about Identity Theft and Tax Returns

Identity theft remains a top priority for the Internal Revenue Service in 2014. Identity theft is one of the fastest growing crimes nationwide, and refund fraud caused by identity theft is one of the biggest challenges facing the IRS. This year, the IRS continues to take new steps and strong actions to protect taxpayers and help victims of identity theft and refund fraud.

Stopping refund fraud related to identity theft is a top priority for the tax agency. The IRS is focused on preventing, detecting and resolving identity theft cases as soon as possible. The IRS has more than 3,000 employees working on identity theft cases. We have trained more than 35,000 employees who work with taxpayers to recognize and provide assistance when identity theft occurs.

Taxpayers can encounter identity theft involving their tax returns in several ways. One instance is where identity thieves try filing fraudulent refund claims using another person’s identifying information, which has been stolen. Innocent taxpayers are victimized because their refunds are delayed.

Here are some tips to protect you from becoming a victim, and steps to take if you think someone may have filed a tax return using your name:

Tips to protect you from becoming a victim of identity theft

  • Don’t carry your Social Security card or any documents that include your Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN).
  • Don’t give a business your SSN or ITIN just because they ask. Give it only when required.
  • Protect your financial information.
  • Check your credit report every 12 months.
  • Secure personal information in your home.
  • Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.
  • Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know who you are dealing with.

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost or stolen purse or wallet, questionable credit card activity or credit report, contact the IRS Identity Protection Specialized Unit at 800-908-4490, extension 245 (Monday - Friday, 7 a.m. - 7 p.m. local time; Alaska and Hawaii follow Pacific time).

If you believe you’re a victim of identity theft

Be alert to possible identity theft if you receive a notice from the IRS or learn from your tax professional that:

  • More than one tax return for you was filed;
  • You have a balance due, refund offset or have had collection actions taken against you for a year you did not file a tax return;
  • IRS records indicate you received more wages than you actually earned or
  • Your state or federal benefits were reduced or cancelled because the agency received information reporting an income change.

If you receive a notice from the IRS and you suspect your identity has been used fraudulently, respond immediately by calling the number on the notice.

If you did not receive an IRS notice but believe you’ve been the victim of identity theft, contact the IRS Identity Protection Specialized Unit at 800-908-4490, extension 245 right away so we can take steps to secure your tax account and match your SSN or ITIN.

Also, fill out the IRS Identity Theft Affidavit, Form 14039. Please write legibly and follow the directions on the back of the form that relate to your specific circumstances.

In addition, we recommend you take additional steps with agencies outside the IRS:

  • Report incidents of identity theft to the Federal Trade Commission at or the FTC Identity Theft hotline at 877-438-4338 or TTY 866-653-4261.
  • File a report with the local police.
  • Contact the fraud departments of the three major credit bureaus:
    • Equifax –, 800-525-6285
    • Experian –, 888-397-3742
    • TransUnion –, 800-680-7289
  • Close any accounts that have been tampered with or opened fraudulently.

More information is available at

Help if you have reported an identity theft case to the IRS and are waiting for your federal tax refund

The IRS is working to speed up and further streamline identity theft case resolution to help innocent taxpayers.

The IRS more than doubled the level of employees dedicated to working identity theft cases between 2011 and 2012.  As the IRS enters the 2014 filing season, we now have more than 3,000 employees working identity theft issues.

These are extremely complex cases to resolve, frequently touching on multiple issues and multiple tax years. Cases of resolving identity can be complicated by the thieves themselves contacting the IRS. Due to the complexity of the situation, this is a time-consuming process. Taxpayers are likely to see their refunds delayed for an extended period of time while we take the necessary actions to resolve the matter. A typical case can take about 180 days to resolve, and the IRS is working to reduce that time period.

If you have an open identity theft case that is being worked by the IRS, you need to continue to file your tax returns during this period.

For victims of identity theft who have previously been in contact with the IRS and have not achieved a resolution to their case, you may contact the IRS Identity Protection Specialized Unit, toll-free, at 800-908-4490. If you are unable to get your issue resolved and are experiencing financial difficulties, contact the Taxpayer Advocate Service toll-free at 877-777-4778.

More Information

It is a top priority for the IRS to help victims and reduce the time it takes to resolve cases. In addition, the IRS continues to aggressively expand its efforts to protect and prevent refund fraud involving identity theft before it occurs as well as work with federal, state and local officials to pursue the perpetrators of this fraud.

For more information, see the special identity theft section on and IRS Fact Sheet 2014-1, IRS Combats Identity Theft and Refund Fraud on Many Fronts.


2014 Tax Season to Open Jan. 31

IR-2013-100, Dec. 18, 2013

WASHINGTON — The Internal Revenue Service today announced plans to open the 2014 filing season on Jan. 31 and encouraged taxpayers to use e-file or Free File as the fastest way to receive refunds.

The new opening date for individuals to file their 2013 tax returns will allow the IRS adequate time to program and test its tax processing systems. The annual process for updating IRS systems saw significant delays in October following the 16-day federal government closure.

“Our teams have been working hard throughout the fall to prepare for the upcoming tax season,” IRS Acting Commissioner Danny Werfel said. “The late January opening gives us enough time to get things right with our programming, testing and systems validation. It’s a complex process, and our bottom-line goal is to provide a smooth filing and refund process for the nation’s taxpayers.”

The government closure meant the IRS had to change the original opening date from Jan. 21 to Jan. 31, 2014. The 2014 date is one day later than the 2013 filing season opening, which started on Jan. 30, 2013, following January tax law changes made by Congress on Jan. 1 under the American Taxpayer Relief Act (ATRA). The extensive set of ATRA tax changes affected many 2012 tax returns, which led to the late January opening.

The IRS noted that several options are available to help taxpayers prepare for the 2014 tax season and get their refunds as easily as possible. New year-end tax planning information has been added to this week.

In addition, many software companies are expected to begin accepting tax returns in January and hold those returns until the IRS systems open on Jan. 31. More details will be available in January.

The IRS cautioned that it will not process any tax returns before Jan. 31, so there is no advantage to filing on paper before the opening date. Taxpayers will receive their tax refunds much faster by using e-file or Free File with the direct deposit option.

The April 15 tax deadline is set by statute and will remain in place. However, the IRS reminds taxpayers that anyone can request an automatic six-month extension to file their tax return. The request is easily done with Form 4868, which can be filed electronically or on paper.

IRS systems, applications and databases must be updated annually to reflect tax law updates, business process changes and programming updates in time for the start of the filing season.

The October closure came during the peak period for preparing IRS systems for the 2014 filing season. Programming, testing and deployment of more than 50 IRS systems is needed to handle processing of nearly 150 million tax returns. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year.

About 90 percent of IRS operations were closed during the shutdown, with some major work streams closed entirely during this period, putting the IRS nearly three weeks behind its tight timetable for being ready to start the 2014 filing season. There are additional training, programming and testing demands on IRS systems this year in order to provide additional refund fraud and identity theft detection and prevention.

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