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.

Losing your job is always a traumatic experience and certainly brings on some fiscal difficulties.  However, losing your job may open new opportunities for you in the future.

But when you lose your job you could be for some tax surprises - some are good and are downright nasty. 

With a loss of a job, situations such as unemployment benefits, severance pay, cash in a retirement account or having a big change in income could increase or decrease your tax liability. Here are a few tips to avoid any surprises.

Unemployment checks
Unemployment benefits are subject to federal income tax, but not Social Security or Medicare taxes. Some states tax unemployment benefits so find out the implications in your state.

Retirement plans
If you can, avoid taking money out of a 401(k) plan or individual retirement account. You could lose a big chunk of it to taxes and penalties and the amount you withdraw will be added to your income, which could push you into a higher tax bracket.

Specifically, you will owe federal and state income tax on the amount withdrawn.

One exception: If you are withdrawing from a 401(k) or other workplace plan, you can avoid the 10 percent penalty if you are 55 or older when you leave that employer. In general, taxes and penalties might take as much as 50 percent of your distribution right of the top - this percentage varies from state to state but expect to pay at least forty percent.

Severance pay
Severance pay is subject to federal and state income taxes, plus Social Security and Medicare taxes.

The standard withholding rate on severance is 25 percent for federal income tax. States set their own rates; again, that might be more or less than you need to cover your actual tax liability.

If you received a big severance check in late 2008 on top of your regular income, it could push you into a higher tax bracket and jeopardize some tax breaks.

Possible silver lining
If severance pushes your annual pay over the Social Security wage base ($102,000 in 2008 and $106,800 in 2009), the amount over the wage base won’t be subject to Social Security tax.

If your income grows: A big severance package or retirement-plan withdrawal could push you into a higher tax bracket. You also could lose some of the tax breaks that phase out as your income grows. The phase out range is different for each tax break, so it’s hard to generalize.

But you could lose a portion of your itemized deductions and the personal exemption you get for each member of your family.

Medical expenses and miscellaneous expenses
Expenses such as investment and tax-preparation fees, unreimbursed business expenses and job-hunting costs are not deductible until they exceed a certain percentage of your adjusted gross income, so if your income jumps, they become harder to get.

You also could lose deductions for an IRA contribution, college tuition and the Hope and Lifetime Learning credits.

If your income shrinks: On the flip side, if your income shrinks after a layoff, your tax rate could fall and you could become eligible for more tax breaks.

For example, out-of-pocket medical expenses are deductible after they exceed 7.5 percent of adjusted gross income.

If your income is $60,000, any medical expenses over $4,500 would be deductible.

But if your income shrinks to $20,000, you could write off any medical expenses over $1,500.

If you have to start paying for your own health insurance, you could easily exceed the threshold because premiums count toward your medical expenses.

To claim medical expenses, you must itemize your deductions. If you haven’t been keeping receipts, start doing so.

Job-search expenses
You might be able to deduct job-search expenses if you are looking for a job in the same occupation, even if you don’t get one.

Qualified expenses
Expense including printing and mailing resumes, job counseling and employment agency fees, phone charges related to your job search, and unreimbursed travel to and from interviews are deductible.

Add these to your other miscellaneous expenses. If the total exceeds 2 percent of your adjusted gross income, you can deduct the portion over 2 percent as an itemized deduction.

You cannot deduct expenses if this is your first real job  or you’ve been out of work for a long time.

Stimulus Checks
Some people didn’t get a stimulus check last year because their 2007 income was too high. If your income dropped last year because you lost your job, you might be able to claim the amount when you file your 2008 taxes.

The economic times continue to raise the unemployment rate throughout the United States.  The best advice is to prepare for the worse and expect the best.  So try to put some cash on the side to hold you over if the inevitable happens to you.

soruce: sfgate.com