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The Upside of a Lower Income

Kimberly Lankford

If you lost your job this year, you may now qualify for several tax breaks you couldn't get when you earned more money.



I usually earn too much money to contribute to a Roth IRA. But I lost my job a few months ago, so my 2008 income will be a lot lower than it has been in previous years. Can I contribute to a Roth this year?

That's one of the upsides of a lower income: You may be able to contribute to a Roth IRA and take advantage of other tax benefits this year.

You can contribute up to $5,000 to a Roth IRA if your income falls below $101,000 if you're single, or $159,000 if you're married filing a joint tax return. (You can contribute $6,000 if you're 50 or older.) The contribution limit gradually phases out until your income reaches $116,000 if single, or $169,000 if married filing jointly.

Even if you get a new job and earn more next year, you still can keep your 2008 contributions in a Roth, where they can grow tax-free for retirement. See Why You Need a Roth IRA for more information.

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You need to have some earned income to qualify for a Roth. However, someone who was unemployed for the full year might be able to make Roth contributions if his or her spouse had earned income. See Contribute to an IRA for Your Spouse for the rules.

A lower income may also let you qualify for other benefits that you don't usually get, such as the retirement savers' tax credit, which can help you afford to keep contributing to your retirement accounts in a tough year. You can receive a credit of up to $1,000 if you contribute to an IRA, Roth IRA, 401(k) or other retirement plan if your adjusted gross income in 2008 is less than $26,500 if single, or $53,000 if married.

You might also qualify to convert a traditional IRA to a Roth if your income is below $100,000 (whether married or single). That income limit will disappear in 2010. It's only worthwhile to convert to a Roth, however, if you can afford to pay the tax bill without having to tap the account, which could be tough in a year when you've lost your job.

You could also get a second chance to receive an economic-stimulus rebate check if you're income was too high the first time around. The payment was actually an advance on a credit that was created for 2008 tax returns. But to get the money into people's hands quickly to stimulate the economy, Congress had the IRS make a prepayment of the credit, which meant that the rebate was figured based on information from your 2007 return.

The rebate amount started to phase out if your 2007 adjusted gross income was more than $75,000 for single filers, or more than $150,000 for married couples filing jointly. If you earned less in 2008, then you'll be able to claim the rebate when you file your 2008 taxes.

For help calculating whether you'll get a rebate, use the Kiplinger Tax Rebate Calculator.

You could also qualify for the Hope and Lifetime Learning credits this year if your 2008 income is less than $58,000 if you're single, or $116,000 if you file a joint return. If you earned more than that, you could still qualify for the tuition-and-fees deduction, which was extended for 2008 and 2009 as part of the financial-rescue bill. See Tax Breaks for College Costs for more details.

And don't forget that your job-search expenses will be tax-deductible, as long as you're looking in the same line of work—even if your job search is unsuccessful. See Tax Write-Offs for Job-Hunting Expenses for details. And if you get a job in a new town, you may be able to write off your moving expenses. The new job must be at least 50 miles farther from your home than your old job was. For more information see Tax Deductions and Expenses of Changing Jobs. You do not need to itemize to qualify.

Got a question? Ask Kim at askkim@kiplinger.com.



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