Military Officer - November 2008 - (Page 60)

M M AN Y TA X C H A NGES Take advantage of the HERO Act. Passed in 2006, the Heroes Earned Retirement Opportunities (HERO) Act allows servicemembers who did not contribute to IRAs or Roth IRAs in 2004 and 2005 to retroactively fund IRAs with tax-free combat-zone pay. You can ﬁle Form 1040X to contribute to an IRA for 2004, 2005, or both if you have not already done so. The chart below summarizes the limits for IRA or Roth IRA contributions. (Be aware that your total IRA contributions are noted below, but you could split your contributions between a Roth and a regular IRA.) Year 2004 2005 have been made in 2008, providing opportunities large and small for both currently serving and retired servicemembers. Let’s look at some of the smart tax moves you can make today to improve your ﬁnancial outlook before the year ends. put money in a special pretax account to cover out-of-pocket child-care or health-related costs. The dependentcare FSA is limited to $5,000 a year and covers child-care costs for children under age 13 or children of any age who are disabled. Health care FSAs cover deductibles, drug and ofﬁce visit copayments, dental and eye care expenses, nontraditional therapies such as acupuncture, and OTC medicine. IRS rules allow health care FSAs of up to $10,000, but some employers impose a lower cap ($3,000$5,000 a year). If your employer operates on a calendar-year basis, you only have another two to three months to use your FSA money or you lose it, though most employers have taken advantage of an IRS rule that allows an additional two and a half months to use FSA money, for a total of 14½ months. If you have money left in your account, consider scheduling dental checkups or eye exams or stocking up on OTC medications for the cold and ﬂu season. Can you or your family take advantage of the 0-percent capital gains tax rate for 2008? For tax year 2008, the capital gains tax rate for the lowest two tax brackets is 0 percent. To qualify, your taxable income — including capital gains and dividends — must not exceed $65,100 (married, ﬁling jointly) or $32,550 (single). If you don’t qualify because of income levels, your children, grandchildren, or other family members might beneﬁt. With the current historically low tax rates due to expire in 2008, shifting appreciated investments to family members in a lower tax bracket can be a smart move, especially if you were planning on giving them money anyway. They “inherit” your tax basis in the investment, and the amount you give counts against your $12,000 per donor/per donee gift tax exemption. For example: Let’s say your 34-year-old daughter recently went through a divorce and needs help getting back on her feet. Her income for the year will be about $12,000 from a part-time job, and you and your spouse want to give her a total of $24,000 ($12,000 each) to assist her. You could give her cash or you could give her $24,000 of XYZ stock purchased for $5,000 in 1990. Assuming she has no other income, she could sell up to $20,550 of the stock and pay no capital gains taxes. If you and your Under 50 $3,000 $3,500 50 or Older $4,000 $4,500 Don’t procrastinate, because this retroactive opportunity expires May 28, 2009. Check the balance in your flexible spending account (FSA). Many second-career military retirees and currently serving ofﬁcers with spouses employed by the federal government or the private sector have access to FSAs, which allow you to 60 MILITARY OFFICER NOVEMBER 2008

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Military Officer - November 2008 Contents From the Editor From the President Your Views MOAA Directory Rapid Fire Washington Scene Chapters in Action Financial Forum Ask the Doctor Financial Guidebook Out of the Red 7 Year-End Tax Strategies Cover Story: Memory Survives Something to Say MOAA Scholarship Recipients Pages of History Faces of MOAA Information Exchange Member Books Advertising Index MOAA Member Services MOAA Calendar Sounding Taps Encore

Military Officer - November 2008

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