income tax credit

[Guest tanessi]

I am a married graduate student. Using Taxcut software,

I determined the maximum tax benefit for the tax credit

available to offest my taxes. The software actaully calculated

a refund for 2002. I have two questions:

If the tax credit is "nonrefundable", why did the software

show that I would get a refund?

AND more importantly, since almost half my initial contribution

was offset by the tax credit (I put in $1000, but saved $500

in taxes), can I just take the money out of the Roth IRA

without penalty, as is the standard case for initial contributions.

This would seem a bit absurd, since I could keep putting

money in a Roth for a year, then take it out and redeposit it

later for a 50% tax credit. If the law would not allow me to take a

credit if I withdraw the same year (say, by calculating the

"net" increase in the Roth for the credit), then can't I still withdraw

all my contrib.s after 2006, when the credit ends (I'll

probably still be in grad. school), thereby "earning"

roughly 50% on my contrib.s due to tax credit, while

facing no penalties for withdrawal?

I have been lucky and earned nearly 400% on my Roth in

one year, so the idea of taking some out early is a bit tempting.

[Mary Kay Foss]

A nonrefundable credit is one that is not paid to you in cash. The nonrefundable credit can reduce your tax to such an extent that it creates a refund of the withholding or other prepayments of tax.

If you owed no tax before the credit, they would not send you a check for the credit. Look at your return again, the refund is actually withheld taxes, isn't it?

I'm not sure what provisions there are for this credit if the funds used to create the credit are withdrawn. Other federal tax credits provide for "recapture" when you undo whatever thing the tax law was encouraging you to do.

In your case, I'd defer as much as possible and not take anything out.

[JAMES PATRICK]

Money you withdraw in 2003 will be deducted from IRA(retirement etc) contributions that you make in 2003, 2004 and 2005. So if you take $500 out this year it will be "deducted" from contributions eligible for the credit that you AND your spouse make

over the next 3 years. Purpose was to stop what you are proposing as well as to limit retirees(my supposition).

Look at the 8880 form to see what I mean.