Many taxpayers don’t realize they can reduce their tax burden for the previous year in the first few months of the year. Two of the ways to do that is to make contributions to traditional Individual Retirement Account (IRA) and, if qualified, take advantage of the Saver’s Tax Credit. Both options are permitted by the Internal Revenue Service up until the tax filing deadline, April 15.

Contributions to a traditional IRA are tax deductible, which lowers your taxable income. For the 2008 tax year the IRS allows contributions up to $5,000 or $6,000 if your over age 50.   Let’s say you contributed $1,000 to your IRA, it would lower your taxable income by $250 if you were in the 25 percent tax bracket.

When making a contribution in the first few months be sure to indicate the tax year on your IRA contributions. If you don’t, the contribution will be posted to the wrong year. To prevent this error, indicate the tax year directly on the face of the check or indicate the year in your fund transaction instructions when moving them from a non-IRA account.

Another overlooked federal tax credit is the Saver’s Tax Credit. Established in 2002, it was formulated to help low-to-moderate income employees contribute to IRAs.  The Saver’s Tax Credit allows a credit of up to $1,000 ($2,000 for filing jointly) to reduce federal income tax.

Unlike a tax deduction, the Saver’s Tax Credit will directly lower your tax bill. So a $1,000 tax credit lowers your tax bill by a full $1,000.  To file the Saver’s Tax Credit use IRS Form 8800.

Here are some other things to know about making IRA contributions:

• Traditional IRAs are not taxed until you receive distributions from that IRA.
• You cannot deduct an IRA contribution or take advantage of the Saver’s Tax Credit on Form 1040EZ; you must use either Form 1040A or Form 1040.
• To contribute to a traditional IRA, you must be under age 70 1/2 at the end of the tax year.
• You must have taxable compensation, such as wages, salaries, commissions and tips. If you file a joint return, only one of you needs to have compensation.

It’s important to understand and take advantage of the options available to reduce your tax liability - especially those that are often overlooked.

Are U.S. States unfairly burdening smokers by taxing cigarettes to cut budget deficits?  Historically, states have used part of the revenues from cigarette sales to help smokers quit or to pay for their health care. But now, many states are proposing an additional cigarette tax to bail them out of the fiscal crisis without earmarks to help people stop smoking.

Sure, smokers are an easy target. There is little political opposition and health advocacy groups consider it a bane to society.  But does it make it right? Are they being singled out?

In more than 20 states, budget shortfalls are pushing more to look to tobacco for revenue. Even the tobacco-producing states are considering it.

According to the New York Times, “in the South, where such taxes have been lower than in the rest of the country, Arkansas has nearly doubled its tax, to $1.15 a pack, and Kentucky’s will double, to 60 cents, on April 1.

Increases are also under consideration in other tobacco-growing states like North Carolina, South Carolina and Georgia. With estimated state budget shortfalls nearing $50 billion, opponents of smoking see an opportunity to make headway with the most reluctant lawmakers.

A 10 percent increase in the price of cigarettes reduces consumption by 3 percent to 5 percent, according to the Centers for Disease Control and Prevention, and deters young people from picking up the smoking habit.

Tobacco industry representatives have argued that tobacco taxes unfairly burden smokers, who are mostly working class or poor, and jeopardizes jobs at retailers like convenience stores, where more than 30 percent of total sales can come from cigarettes.

“Many of these states are asking the very definition of Main Street to bail out state capitals,” said Frank Lester, a spokesman for Reynolds American, which makes Camel and other major brands. “It’s just another bailout.”

States whose cigarette taxes are already high are also considering increases. In Oregon, now at $1.18 a pack, Gov. Theodore R. Kulongoski has proposed a 60-cent increase. In New Jersey, Gov. Jon Corzine is asking the Legislature for a 12.5-cent increase over the current $2.58. New York has the highest state tax on cigarettes, $2.75 a pack.

In Mississippi, cigarette tax increases in surrounding states have helped dampen fears that people would cross state lines to buy cigarettes. After a tax study commission appointed by Governor Barbour recommended an increase, he reversed his opposition but warned that the tax should be viewed as a matter of health policy, not a generator of revenue.

Bill Phelps, a spokesman for the Altria Group, the parent company of Philip Morris, argued that states often overestimated revenues from cigarette tax increases. From 2003 to 2007, there were 57 state tax increases, Mr. Phelps said, and in 41 cases they fell short of projections.

“We don’t think it makes a lot of sense to fund what are often important government programs with a revenue source that is in decline,” he said. “Just in the last 10 years, sales have declined an average 3 percent a year.”

But Frank J. Chaloupka, an economist and director of the Health Policy Center at the University of Illinois, Chicago, said cigarette taxes had not reached the threshold of diminishing returns. “We haven’t yet seen a case where if you raise taxes you don’t raise revenues,” Mr. Chaloupka said.

New Jersey did see a decline in revenue after its last tax increase, he said, but other factors, like a comprehensive smoke-free-air law that went into effect before the increase, drove down consumption.”

On top of all this, a 62-cent increase in the federal cigarette tax will go into effect in April.  The tobacco industry believes this will overburden smokers and drive down state collections. But the federal increase does not seem to have derailed state efforts, in part because smokers cannot avoid it by crossing state lines.

The debate will continue but the bottom line is that states will come down to the last day of the session, when they realize they have to get the budgets down and they need X dollars.”

What vice will be taxed next?  Beer, Wine, Liquor?

source: NY Times