HERO ACT - Increased IRA Deductions for Armed Forces

HERO ACT - Increased IRA Deductions for Armed Forces

Appropriately enough, President Bush signed the Heroes Earned Retirement Opportunities Act of 2006 — the HERO Act, for short — into law on Memorial Day of this year. This new federal law expands retirement planning benefits for members of our armed forces currently serving in combat zones.
Briefly stated, an individual is permitted to contribute to a traditional IRA or Roth IRA only if he or she has compensation (such as salary from a job) during the year. For the 2006 tax year, the limit on contributions is the lesser of $4,000 or the annual compensation. A taxpayer who is age 50 or older can make an extra $1,000 "catch-up" contribution.
The contributions to the traditional IRA may be fully or partially deductible depending on the taxpayer’s income and whether he or she actively participates in an employer-sponsored retirement plan. Roth IRA contributions are never tax deductible.
Under prior tax law, combat pay did not count as "compensation" for this purpose. As a result, soldiers were often unable to make IRA contributions. Now the HERO Act has come to the rescue.
The new law includes combat pay under the definition of compensation for IRA contribution purposes. This change is retroactive to tax years beginning after 2003. Thus, certain individuals have a unique opportunity to make retirement contributions for tax years that are closed.
Of course, the money earned as combat pay in prior years may have already been spent. This opens up a potential tax strategy for parents and grandparents of service men and women. A parent can “gift” the taxpayer the contribution amount. Currently, the annual gift tax exclusion is $12,000 ($24,000 for gift by a married couple). The gift can be used to fund the IRA contribution — even though the dollars aren’t the same as the compensation dollars earned in a combat zone.

Popular posts from this blog

Trump's tax plan

New Jersey Division of Taxation Closes Restaurant - leaving employees and customers stuck

115th Congress - Will we get Tax Reform and Simplification?