by Bruce Fenton

Originally published in The Fenton Report on March 29, 2004

In 2003, the federal government treated nearly 24 million families to a tax credit check. The U.S. Treasury mailed checks to many people who claimed the Child Tax Credit last year as an advance payment for the credit’s increase (tax law changes in 2003 increased the credit from $600 to $1,000 for qualifying families). The IRS used 2002 returns to determine qualified households. Qualifying children must have been born after 1986 in order to be eligible for the advanced payment.

However, to ensure that you do not believe in free lunches, the IRS is reminding taxpayers who plan to claim the credit on their 2003 federal income tax returns that they cannot claim the full $1,000 per child if they received an advance payment last year. Rather, the $400 advance must be subtracted from the credit amount computed for this year.

In the category of other news you can use from our tax authorities, the IRS recently issued new, relaxed guidelines for requesting a waiver of the 60-day deadline for IRA rollovers.

IRA owners may take a distribution from their IRA one time each calendar year without penalty or tax—as long as they get it back into the account within 60 days. Unlike Cinderella, whose coach turns into a pumpkin at midnight, your coach will be hit with tax and possibly a penalty if you are under age 59 ½ when you make this withdrawal and you don’t hit the deadline.

As we all know, sometimes even the best of intentions don’t allow us to make deadlines. For example, if you sent a check to a financial institution and they failed to get the money into your account in a timely manner, it’s too bad for you!

The new kinder, gentler IRS guidelines allow the IRS to consider “all relevant facts and circumstances,” such as whether financial institutions were late getting your check applied to the account, whether health reasons precluded you from acting in a timely manner, or whether “the dog ate the mail” and your payment disappeared. In any case, where there was once an “iron-clad” rule about being late, the IRS is now willing to consider good excuses.

While we are on the subject of IRAs, let’s review the rules for Roth IRA contributions. A Roth IRA accepts deposits of after-tax money that then may grow without taxation of dividends, interest or capital gains inside the account. When the money is paid out, it comes out tax-free, unlike normal IRA distributions, which are taxable.

An individual can contribute $3,000 to a Roth in 2004. This limit goes up to $4,000 for 2005-07 and $5,000 in ’08. The maximum contribution limits are phased out for individuals with adjusted gross incomes between $95,000 and $110,000 and for married couples filing a joint return with AGI between $150,000 and $160,000.

Finally, I have noticed a number of revised brokerage 1099 statements being sent out. A primary reason for revised statements is the reclassification of certain mutual fund dividends from non-qualified to qualified. Qualified dividends are taxed at the lower 15% rate, while ordinary dividends are taxed as ordinary income. The bad news is that you may have to file an amended tax return to properly account for the changes. The good news is that in most cases, this should result in lower taxes.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.