- 1 what is the savers tax credit
- 2 10 tax loopholes that could save you thousands
- 3 Everything You Need to Know About the Saver’s Tax Credit
- 4 Retirement Planning: The Tax Credit Savers Don’t Know About
what is the savers tax credit
Everyone wants to get more money in their tax return check, or to reduce the amount owed to Uncle Sam in taxes as much as possible, but finding all of the eligible tax credits can be overwhelming. The Internal Revenue Service's website is loaded with information on tax credits, but without knowing where to start looking, it can be hard to find even common tax credits and determine eligibility to save money. At MyBankTracker, we can't list all of the potential tax credits, but here, we take an in-depth look at one designed to provide a tax credit to some people who are saving for retirement.
The Retirement Savings Contribution Credit, also known as the saver's credit, provides some tax incentives for people with lower incomes to save for retirement. The credit reduces the total amount of taxable income, which can lower the amount owed in taxes. Income limits for eligibility increased slightly for 2014 income tax returns, possibly making more people eligible this year.
Who is eligible?
This tax credit is available to anyone who has made contributions to a retirement savings plan who is over the age of 18, not a full-time student, and is not claimed as a dependent on another person's income tax return form. Filers cannot use form 1040EZ and claim the credit.
How much is the credit?
The retirement saver's tax credit can range from 10 percent to as much as 50 percent of the amount of earnings put into a retirement plan or IRA up to $2,000 for single filers, or up to $4,000 for married couples filing jointly. The credit is based on the filer's adjusted gross income, or AGI. Fifty percent of the contribution is eligible for the saver's tax credit for married filers making no more than $36,600, or for head of household filers making no more than $27,000, and for all other filers making no more than $18,000. A retirement saver's tax credit of 20 percent of the annual retirement contribution is available to married filers who make between $36,601 and $39,000, to head of household filers making between $27,001 and $29,250, and to other filers making between $18,001 and $19,500 as their AGI. A 10 percent credit is offered to married, joint filers who made between $39,001 and $60,000, to head of household filers who made between $29,251 and $45,000, and to other filers with an AGI between $19,501 and $30,000. The retirement saver's tax credit is not available to married filers filing jointly with an AGI over $60,000, or to head of household filers who made over $45,000, or to other filers with AGI over $30,000. Because the credit is based on AGI, it is important to first calculate that amount before taking the credit. According to the IRS, this amount is typically found on line 38 of form 1040 or line 22 on form 1040A, although any foreign earned income, foreign housing costs, income for bona fide residents of American Samoa, and income from Puerto Rico must also be included.
According to the IRS website, contributions to a traditional or Roth IRA, 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan, and voluntary after-tax employee contributions to your qualified retirement and 403(b) plans are all eligible for the credit.
What isn't included?
Funds that have been rolled over from one retirement plan into another one aren't eligible for the retirement saver's credit. The maximum credit which can be claimed is $2,000 per person.
How to claim the credit
Anyone interested in learning more, and especially those who are preparing their own tax return forms, or who wish to do some calculations with a worksheet can take a look at IRS form 8880 at the IRS website. Many more details can be read in publication 571, which has information for both the 2013 and 2014 tax years.
10 tax loopholes that could save you thousands
© WAYHOME studio / Shutterstock.com young couple studying paperwork
Tax loopholes are simply legal ways to use the tax code to save yourself money. Using tax avoidance strategies isn't solely for rich people -- there are plenty of tax credits and deductions available for middle- and low-income taxpayers, too.
Here are 10 tax loopholes you might be able to take advantage of to lower your tax bill. Ensure you're not losing money by overlooking any of these opportunities when you're filing your taxes.
Some tax loopholes come in the form of tax credits designed specifically for lower-income taxpayers. There are two types of credits: refundable credits, which enable taxpayers to receive refunds even when they have zero tax liability; and nonrefundable credits, which enable taxpayers to reduce their tax amounts but don't increase a refund. Low-income earners are eligible for both types, including the following three credits.
1. American Opportunity Tax Credit
The American opportunity tax credit is an educational tax benefit that replaces and expands on the Hope credit and can be claimed through tax year 2017. It applies to the first four years of college educational expenses and provides a tax break for expenses including tuition, books and other supplies. The credit is worth up to $2,500 per eligible student, and its most attractive feature might be the fact that up to $1,000 of the credit is refundable if you don't owe any taxes. In other words, if your tax bill is $750 but you earn $1,000 in refundable tax credits, you're entitled to a refund of $250.
Calculating the credit can be complicated, but the IRS provides instructions both online and on the forms you'll use to file your taxes. Essentially, you can claim 100 percent of the first $2,000 and 25 percent of the next $2,000 you spend for each eligible student as a credit, which adds up to the maximum credit of $2,500.
To claim the full amount of the credit, you must have a modified adjusted gross income of $80,000 or less, or $160,000 or less if you're married and filing jointly. The allowable amount of the credit falls as your MAGI rises. Once you top $90,000 -- or $180,000 if you're married and filing jointly -- you're no longer eligible for the credit.
The savers tax credit -- formally known as the retirement savings contributions credit -- was designed to help lower-income families contribute to retirement plans. If you qualify, this credit essentially pays you to put money in your retirement account. You can write off the first $2,000 of contributions you make to a qualified retirement plan -- and a wide range of retirement accounts will qualify, from a 401k to a traditional or Roth IRA.
Whether you can claim the credit depends on your income and filing status. To qualify, you must not be a full-time student or be claimed as a dependent on someone else's tax return. You must also be 18 years of age or older.
The adjusted gross income limits for claiming the saver's credit are as follows:
- Filing as single: $30,750 in 2016 and $31,000 in 2017
- Filing as head of household: $46,125 in 2016 and $46,500 in 2017
- Married and filing jointly: $61,500 in 2016 and $62,000 in 2017
The amount of your credit will be 10, 20 or 50 percent of your contribution, depending on your AGI. For example, for tax year 2017, if you're married and filing jointly you can claim the 50 percent credit if your AGI is below $37,001. An AGI of $37,001 to $40,000 entitles you to a 20 percent credit and an AGI $40,001 to $62,000 nets you a 10 percent credit.
The earned income tax credit was designed specifically to assist low- to moderate-income families. However, even single taxpayers can benefit from the credit.
Income and the number of children in your household determine the amount of the credit. For tax year 2016, the income limit ranges from $14,880 if you're single and have no children to $53,505 if you're married and filing jointly with three or more children.
For 2016, the maximum amount of earned income tax credit is:
- $6,269 for three or more qualifying children
- $5,572 for two qualifying children
- $3,373 for one qualifying child
- $506 for no qualifying children
You must qualify for the credit by having business income or income from a job. If you're claiming a qualifying child, he must be younger than 19 unless he's enrolled as a full-time student, in which case the age limit rises to 24.
In general, tax loopholes for the middle-income taxpayers are harder to come by, as phase-out rules make them ineligible for a number of credits and deductions. Many credits are designed to help out lower-income taxpayers or pertain specifically to high earners. However, there are some credits and deductions available to middle-income earners when it comes time to face the taxman. Check out these four tax breaks that might help if you fall into this category.
If you're a middle-income taxpayer, your best chance of scoring a big tax break is if you buy a home and claim the mortgage interest deduction. You can't write off your entire monthly payment, but with a qualifying mortgage you can deduct the interest payments you've made all year.
The home mortgage interest deduction allows you to deduct the interest portion of your mortgage payment, but not the principal. The deduction can be a big tax saver, but it makes sense only for those who itemize deductions. If the amount of your mortgage interest deduction exceeds your standard deduction, you'll save more money if you itemize.
For tax year 2016, the standard deduction amounts are:
- $6,300 for single filing status
- $6,300 for married filing separately
- $9,300 for head of household
- $12,600 for married filing jointly or qualifying widower
The IRS publishes extensive information on what a qualifying home is and who can claim the mortgage interest deduction. However, most standard home mortgage loans qualify, as long as the loan is for your primary residence and you are the homeowner.
The Lifetime Learning Credit is an educational tax credit that's similar to the American opportunity credit. However, if you claim one of these two credits, you cannot claim the other. Unlike the refundable American opportunity credit, the Lifetime Learning Credit is nonrefundable. You can claim the LLC for an unlimited number of tax years but the AOC has a four-year maximum.
The Lifetime Learning Credit lets you claim up to $2,000 to help offset the educational costs of a qualifying student. The credit comes with relatively high modified adjusted gross income caps: $130,000 if you're married and filing jointly and $65,000 if you're filing as single, head of household or qualifying widower. However, you can't claim the credit if you're married and filing separately.
The tax credit is available regardless of your age as long as it goes toward a qualified educational expense. Acceptable expenses include tuition, student activity fees and course-related books, supplies and equipment.
The child tax credit is for taxpayers with qualifying children -- and they can claim this on top of the earned income credit and credit for child and dependent care expenses. The child tax credit could be worth up to $1,000 per child living in your household.
To qualify, you must claim the child as a dependent on your taxes, and the child must be a U.S. citizen and have lived with you for at least half of the year. Additionally, the child must not provide more than half of his own support.
You might qualify for this credit if your MAGI is less than the following amounts:
- $75,000 for single filing status
- $55,000 for married filing separately, head of household or widower
- $110,000 for married filing jointly
The child tax credit is nonrefundable, but if the amount of your credit exceeds the amount of income tax you owe, you might qualify for the additional child tax credit, which is refundable. You're not eligible for the additional child tax credit if you already receive the full amount of the standard child tax credit.
Although taxpayers of all income levels are eligible to contribute to retirement savings accounts, tax benefits are typically available to middle-income earners. Low-income taxpayers often can't afford to contribute the maximum amount to retirement accounts and high earners are ineligible for tax breaks for certain accounts.
For those who can afford to contribute to retirement savings accounts, however, the benefits can be huge. Contributions to employer-provided 401k accounts and individual retirement accounts are eligible for tax deductions that can reduce your total taxable income.
For example, if you contribute $5,000 to your company 401k plan, the amount of your taxable income drops by $5,000. If you're in the 25 percent tax bracket, that amounts to a savings of $1,250 in federal tax.
Retirement accounts offer more than an immediate tax benefit: As long as you keep the money in the account, it grows tax-deferred. If you have a regular brokerage account you'd owe taxes annually on dividends and capital gains payouts, but if you have a retirement account you pay taxes only when you make a withdrawal from the account.
Contributions to a Roth IRA don't qualify for a tax deduction at the time you make the deposit -- instead, you withdraw your earnings and contributions tax-free once you're 59.5 years old. Roth IRA contributions come from post-tax income -- you pay taxes on your income today, but not in the future. You don't get the tax break for Roth IRAs like you do for pretax accounts like traditional IRAs and 401k plans. Pretax retirement accounts are funded with income that hasn't been taxed, which means you don't pay taxes upon depositing funds -- you pay when you withdraw from the account during retirement.
High-income taxpayers face both challenges and benefits when it comes to tax loopholes. On one hand, having a high income makes a taxpayer ineligible for a lot of tax breaks, or at least reduces their benefits. On the other hand, many tax breaks are more beneficial for the wealthy because they pay a high tax rate, thereby making savings more valuable. Examine these four benefits that might apply to you if you're a high earner.
Although the capital gains tax loophole is available for all income levels, it benefits high-income earners -- or filers in the 25-percent or higher tax bracket -- the most. The reason comes down to the progressive structure of the tax system.
The special tax rate on capital gains is beneficial to high-income earners because the tax on long-term capital gains and dividend income for most taxpayers is 15 to 20 percent, depending on their income level. Exceptions include the higher, 25-percent tax rate on unrecaptured Section 1250 gains, which is a type of depreciation-recapture income realized on the sale of depreciable real estate; and the 28-percent rate on the sale of collectibles or small business stock.
Meanwhile, the tax rate on a high earner's ordinary income can be as high as 39.6 percent for the 2016 tax year. This disparity in rates can translate to great tax savings.
For example, say you're in the highest tax bracket and are about to receive a $100,000 windfall. If this money is taxed as ordinary income, you'll owe as much as $39,600 in federal income tax, or $100,000 times the highest rate of 39.6 percent. If, however, this income comes in the form of a capital gain, you'd pay only $23,800 in federal income tax, or $100,000 times the 20 percent capital gains tax rate plus the 3.8 percent net investment income tax for high earners. This amounts to a savings of $15,800.
9. High Income Mortgage Interest Deduction
The mortgage interest deduction for middle-income earners can benefit high-income earners even more at tax time. Statistically, higher-income earners are more likely to itemize deductions rather than take the standard deduction, making them more likely to be eligible for the mortgage interest deduction. Additionally, higher-income filers tend to have larger mortgage payments, which increases the amount of their potential mortgage interest deductions.
For example, you generally need a high income to get a mortgage for $1 million, but if you're paying interest on a mortgage that large, you'll have more interest to deduct than a taxpayer who pays interest on a $350,000 mortgage.
However, there's a limit to this loophole. The IRS only allows mortgage deductions on up to $1 million in loans to buy or repair a home. Therefore, the super wealthy with multi-million dollar mortgages won't benefit any more than high-income taxpayers with a mortgage of $1 million or less.
In addition to the mortgage interest deduction, you can deduct up to $100,000 of interest you pay on a home equity loan. And there's more good news: You can deduct the amount of your property taxes.
The carried interest loophole basically applies to high-income taxpayers only. Venture capitalists, hedge fund managers and partners in private equity firms are eligible for special tax treatment based solely on their occupations.
The carried interest loophole is a variation on the capital gains tax benefit. Paid compensation in these professions is considered a distribution of investment fund profits, which is called carried interest. Because this income is regarded as an investment profit rather than a salary or wage, it's taxed at the long-term capital gains rate instead of the regular income tax rate, which can be significant for those in high-income tax brackets.
For example, a $1 million salary would be subject to the 39.6 percent plus a 3.8 percent net investment income tax, which would come to $434,000. However, if that salary is considered carried interest, that same $1 million would be subject to only the top 20 percent capital gains rate plus a 3.8 percent net investment income tax, which would come to $238,000.
Regardless of your income level, there are plenty of tax loopholes you can use. From educational credits to savings on retirement contributions, there's likely deductions or savings that are relevant to you. Use this list as a starting point and see how much you can save.
Everything You Need to Know About the Saver’s Tax Credit
Taxpayers who are funding a retirement savings vehicle have a couple of ways to benefit from those contributions. They can claim the deductions that are applicable.
They can also take an additional credit called the Qualified Retirement Savings Contributions Credit (also known as The Saver’s Credit). It was designed and implemented for lower and middle-income Americans. It was created to offer the needed financial assistance with saving money for retirement.
It is not a method to rely on as to how to build credit. This credit is a way for taxpayers who may be struggling with their finances. It assists them to defray some of the costs on contributions they are making to one of the many qualified savings plans, such as a 401(k), an IRA, a Roth IRA and others. The credit became a component of the tax code in 2006.
However, this credit proves to be of great value for taxpayers each year. It is still not a tax benefit that has gained widespread, mainstream appeal. Additionally, far too many people are failing to claim the credit which is rightfully available to them.
Qualifying for the credit does come with some specific requirements for eligibility. The amount you can earn from the credit also varies. That is based on how much money you have contributed over the course of the year and the percentage of those contributions that qualify.
Your adjusted gross income and filing status determine how much you may receive from the credit. You can receive 10%, 20%, or 50% of the money you contributed for the duration of the tax year, the maximum amount being $2,000 for single filers or $4,000 for married filing jointly. The credit is then applied to your income tax, and it lowers it dollar-for-dollar. Thus, it reduces the amount of money you owe Uncle Sam.
It is important also to keep in mind that the credit is non-refundable. Therefore, it may only be given to you for the purpose of lowering tax debt. If you do not owe anything for the year, the credit no longer applies and the money will not be given to you as part of a tax refund.
Qualifying for the Saver’s Tax Credit
The following are the necessary qualifications that must be met in order to claim the Saver’s Tax Credit:
- You must be 18 years of age or older.
- You may not be claimed as a dependent on another taxpayer’s return.
- You may not be considered a full-time student or have been a student for five or more months of the current tax year.
- You must deduct all retirement plan or annuity distributions that were received over the course of the tax year as well as the previous two years from the contributions that were made to your particular retirement account in order to properly calculate the amount of your credit.
- You must meet specific thresholds for income and filing status.
The threshold for income by filing status for years 2014-2017 are as follows:
- 2017 – Single Filer and Married Filing Separately: up to $31,000
Married Filing Jointly: up to $62,000
Head of Household Filers: up to $46,500
Married Filing Jointly: up to $61,500
Head of Household Filers: up to $46,125
Married Filing Jointly: up to $61,000
Head of Household Filers: up to $45,750
Married Filing Jointly: up to $60,000
Head of Household Filers: up to $45,000
If you meet the above requirements for eligibility, then you need to consider if your contributions also qualify. This can be determined based upon the type of retirement plan you are using to save for your future. Most taxpayers opt for a standard 401(k) plan. These plans are usually offered by their employer.
However, there are many other options such as individual retirement accounts (IRAs), myRAs and others that may qualify to receive money through the Saver’s Tax Credit. The best part about the credit is that you can take it alongside any other deductions you are eligible to claim through your contributions.
Here are the types of qualifying accounts that could earn you money from the Saver’s Tax Credit:
- 401(k) plan
- 403(b) annuity (including voluntary after-tax contributions)
- 501(c)(18) plan
- 457 (Governmental) plan
- SIMPLE IRA
- SIMPLE 401(k) plan
- Traditional IRA
- Roth IRA
- Thrift Savings Plan
Some of these may be familiar already. You might even contribute to one or more of these types of savings accounts. A few of these accounts may be new to you. However, all of them will allow you to claim the Saver’s Tax Credit.
There are employer retirement accounts like the 401(k), 403(b), 501(c)(18) and the 457 Plan. They are provided to employees who work in public schools, churches, and government offices, just to name a few. SEP and SIMPLE plans are offered by small businesses. The Thrift Savings Plan is given out by the federal government. The private plans like IRAs and the myRAs offered by the Treasury Department are also considered eligible for the tax credit.
Understanding the Most Common Retirement Accounts
The qualifying accounts listed above include some of the more widely used by Americans who are planning for their retirement. As we have mentioned, many of them are offered by employers. The type of employer you work for will dictate the kind of retirement account that you are able to fund.
Most workers are given a 401(k). This is a plan for saving money. It takes a portion of each payroll check, before taxes, and deposits that money directly into the savings account. The “before taxes” delineation is what is critical. That is because it lowers the amount of your taxable income. Thus, it reduces how much money you could end up paying in taxes.
However, there is a catch. When you take the money out of that account you could face penalties and taxes if you withdraw the money too early. What exactly does “too early” mean? It relates to certain restrictions on these types of retirement accounts. They are in place to discourage you from touching the money you have saved for retirement before you actually retire. That way the funds will be there when you are ready to call it a day and you need that money to live on.
One of the more vital components to funding a 401(k) through work is that many employers offer to match your contributions. It is often up to a certain limit on an annual basis. This means that your boss is willing to contribute what is basically free money into your retirement fund. He does this by matching whatever you contribute from each check, up to whatever maximum amount has been previously established.
If you put $100 into your retirement account, your employer will also put in $100. This is obviously a fantastic arrangement. Of course, you should seek out any opportunity to take full advantage of this generosity. This is not standard operating procedure for every company. Therefore, if you happen to work for an employer who does provide this perk you can really clean up.
About Investment Retirement Accounts
When you do your research into finding the right retirement strategy, you have many choices in front of you. The 401(k) is the option that many savers go with when planning for the future. Another popular alternative is an IRA. This retirement account is different from the 401(k). With it, you have the ability to exert more power over how your contributions are invested.
When you fund a 401(k), you do not have much control over how that money is invested. If it is employer sponsored then they decide what investments are incorporated into the plan. Consequently, saving with an IRA lets you make all of those decisions instead.
Thus, you can put that money into stocks, bonds, securities, funds, and cash — you name it. It is important to understand that with that control comes responsibility. You need to ensure that you are properly and effectively diversified, and that is because you are the sole manager of your investment portfolio. You can have an adviser help you to make those financial choices. However, in the end, they are your decisions.
The traditional IRA has certain limits and restrictions that you will not have to face with a Roth IRA. This is another form of investment retirement account that some investors may prefer. That is especially since it does not matter how old you are to invest your money in one. Consequently, with a traditional IRA, you can only make contributions if you are under 70 years of age.
That is because the rules of investing in one stipulate that you must begin to take required minimum distributions (RMDs) at the age of 70 and six months. This is not the case with a Roth IRA. You can leave your money in one of those retirement accounts for as long as you please. Take it out or do not. Leave it to anyone you wish so they can inherit the entire amount after you pass away. The choice is yours.
Why are we explaining all of this? It comes down to taxes, of course. These savings accounts have certain tax implications and consequences. You or your beneficiaries may not owe any income tax on the money that is withdrawn from the account.
With respect to a Roth IRA, in particular, withdrawals are tax-free. That is because the money is taxed when it goes into the retirement account. A traditional IRA works the other way around. The money goes into the account before taxes, much like the 401(k). However, it gets taxed when it is taken from the account as it is considered taxable income.
Taking Deductions for Contributions
Deductions are a great way to reduce your taxes. The law provides taxpayers with a full range of opportunities to lower their taxable income. There are tax deductions for landlords, for the self-employed, the unemployed, and individuals and couples who are saving their money for retirement. The trick is to get as many as you can.
As we have mentioned, the Saver’s Tax Credit can mean a sizable chunk of change removed from your tax liability in real dollars. That is how the Saver’s Tax Credit works. You can take that money and put it toward your final tax bill.
That is even after you count all of the useful tax benefits that may come with taking the deductions that you are eligible for on your taxable income. These deductions are offered for money put toward qualifying retirement account contributions.
Taking these deductions count above the line so you do not need to itemize them in order to claim them Additionally, you are typically allowed to deduct all of your qualified contributions in full, up to their limits for the tax year.
The Roth IRA is beneficial to investors due to the lack of restrictions on age and withdrawals. Additionally, in the way you can claim deductions on the money you contributed to the retirement account. Since this money is taxable when it gets contributed the amount can count toward the Saver’s Credit. Best of all, the Roth IRA retirement account provides tax-free capital gains earnings and your withdrawals are not taxed either.
You are allowed to make contributions to a Roth IRA retirement account. It requires a modified adjusted gross income that is under $132,000 if you are filing as single. It is $194,000 if married and filing a joint income tax return.
Consequently, let us say your modified adjusted gross income falls between $10,000 and $132,000 for filing single and $184,000 to $194,000 if married and filing jointly. Then, the maximum on your contributions into your Roth IRA retirement account will be decreased.
Contributions made to any of the qualifying retirement accounts listed previously can equal up to $2,000 or $4,000 applicable in Saver’s Tax Credit. However, you need to remember that contributions can help you become eligible for reductions in your income taxes. Any monetary distributions taken from the account during that same period of time may ultimately reduce the amount of money you receive when calculating the size of your credit.
The Saver’s Tax Credit can be taken in addition to the deductions you are allowed to claim from the contributions to a 401(k) plan or traditional IRA. Thus, you are getting multiple tax breaks from the arrangement.
You are already saving for retirement with money that is tax-deferred. The deductions and the credit bring down your tax liability. Additionally, the money earns compounding interest on the investments that are being funded through those types of accounts.
Earning the credit is designed to help you save for your retirement. The amount of money you put away will help you get as much as possible from the tax credit. By taking withdrawals and distributions from the retirement account while still making contributions, you are going to minimize or effectively negate the credit entirely.
Many of these retirement accounts come with penalties for early withdrawals. That is to dissuade investors from tapping into this money before it is necessary. The credit and how much it is worth will follow suit by ultimately costing you in the end.
Calculating the amount you can receive when claiming the tax credit can become quite complicated. Also, it is very costly when you figure all of the contributions and distributions simultaneously over time. The more money you put in, the more your credit could potentially be worth to you at tax time.
Be Aware of Deadlines
In order to claim as much as possible through the Saver’s Tax Credit on your contributions, make sure that you meet the deadlines in place for each type of retirement savings account. Since many of them differ from one another in a number of aspects, the deadlines and expectations will often vary.
Contributions made to 401(k) plans and other retirement accounts are offered through an employer. These must be made by the end of the calendar year in order to help you qualify for the Saver’s Credit. This is different for contributions made to an IRA retirement account.
That is because any such deposits that were made on or before the April due date of your tax return will be eligible. For the coming year, that due date is April 18, 2017. Therefore, any deposits made to any IRA or myRA retirement accounts will be counted on a tax return for 2016.
Determining the Amount of the Credit
The Saver’s Tax Credit is worth either 10%, 20%, or 50% of the contributions made to a retirement account. Taxpayers with lower reported incomes will be the recipients of the highest rate. Calculate how much you might get. Do so by taking take a look at the thresholds that have been established for receiving the tax credit.
Contributions made to a qualified retirement account with a reported adjusted gross income of $18,500 or less filing single and $37,000 for married filers for 2017 are entitled to claim the tax credit. Though, it is at equal to half of the amount they contributed to their retirement accounts.
If you are making more than that, but still fall well below $20,000 if filing single or below $40,000 filing as married, then you can claim 20% on your funding through the tax credit. Anyone making in the range of $20,001 to $31,000 single, $40,001 to $62,000 married, can get a 10% tax credit. Remember, this is in addition to any applicable tax deductions you are entitled to claim.
Even though you qualify for the tax credit does not necessarily mean you will always benefit financially from it. These numbers are all best case scenarios. They do not fully reflect any specific tax scenario. In fact, a single filer can make up to $2,000 and married couples can make up to $4,000 in tax credits. It is the “up to” part of the equation that plays the biggest role.
There could be other deductions and credits that impact how much you ultimately receive from the Saver’s Tax Credit. It is true that the credit can potentially make quite a dent on your tax bill. However, your tax situation may vary from someone else. The amount they receive could be very different than what you earn through this tax benefit.
In order to claim the Saver’s Tax Credit on your contributions for the tax year, you will need to fill out the proper forms. Luckily this does not require a litany of any additional paperwork. You can still submit a Form 1040, 1040A, or 1040NR to file your income tax return.
You will need to submit a Form 8880 with one of those forms. It allows you to calculate exactly how much you can receive from the credit. Simply complete that form. Then, attach it to your income tax return. Send both of them to the IRS, together. That way you can declare the amount you should receive toward your tax bill in dollar-for-dollar credit.
The Saver’s Tax Credit is a beneficial tax break that could potentially bring taxpayers some much-needed relief as a reward for putting money away for their future. Millions of Americans claimed the tax credit on their income tax returns last year. Therefore, Uncle Sam handed out over a billion dollars to those qualifying taxpayers.
Nonetheless, despite so many taking advantage of this generous benefit, there are still millions more who are not. They may not even be aware that such a tax credit exists. Thus, they are missing out on much-needed financial assistance that they are already entitled to take.
According to recent surveys, only a third of workers who are making contributions to a workplace retirement account were apprised of the Saver’s Tax Credit. The rest are oblivious. They will continue to remain uninformed of this beneficial income tax break.
That is not you, now that you have reviewed all of this important information. You are much better informed of the requirements for eligibility. You know the necessary steps to take in order to claim the tax credit. Do not miss out on money that could be (and should be) yours. Fill out your Form 8880 and send it in this April!
Retirement Planning: The Tax Credit Savers Don’t Know About
2015 Saver’s Tax Credit Table | Source: IRS
Benjamin Franklin offered one of the best pieces of investment advice that has stood the test of time: “An investment in knowledge pays the best interest.” It’s not enough to simply save money for retirement. You need to learn the various strategies that help you get the most bang for your buck.
Taxpayers looking to heed Franklin’s wisdom should learn about the Internal Revenue Service’s Retirement Savings Contributions Credit, also known as the Saver’s Credit. This overlooked benefit is available to low- and moderate-income workers saving for retirement. The credit reduces a taxpayer’s federal income tax and may be applied to the first $2,000 ($4,000 if married and filing jointly) of voluntary contributions an eligible worker makes to a 401(k), 403(b) or similar employer-sponsored retirement plan, or an individual retirement account (IRA).
In order to qualify, you must be age 18 or older, not a full-time student, and not be claimed as a dependent on another person’s return. As the chart above shows, the Saver’s Credit is worth a percentage of your contribution, and adjusted gross income limits do apply — the less you make, the greater the percentage. The credit is also a benefit in addition to other advantages, such as tax deductions on retirement accounts. Since IRAs allow savers to make contributions for the prior year up until tax day, you have until April 18, 2016 to make a contribution for the 2015 tax year.
“The Saver’s Credit is a tax credit above and beyond the advantage of tax-deferred savings when contributing to a 401(k), 403(b), or IRA. Because this double benefit sounds too good to be true, many eligible savers may be actually confusing the two incentives,” says Catherine Collinson, president of nonprofit Transamerica Center for Retirement Studies (TCRS).
2016 Saver’s Tax Credit Table | Source: IRS
Income limits for the Saver’s Credit change over time, so it’s important to check for updated figures on an annual basis. The income limit will increase from $61,000 in 2015 to $61,500 in 2016, for married couples. The income limits for heads of households and individuals will rise to $46,125 and $30,750, respectively.
The IRS provides the following example of the 2015 Saver’s Credit: “Jill, who works at a retail store, is married and earned $35,000 in 2015. Jill’s husband was unemployed in 2015 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2015. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $34,000. Jill may claim a 50% credit, $500, for her $1,000 IRA contribution.”
In tax year 2012, the most recent year for which complete figures are available, Saver’s Credits totaling $1.2 billion were claimed on more than 6.9 million individual income tax returns, according to the IRS. The TCRS finds only 25% of American workers with annual household incomes of less than $50,000 are aware of the tax credit. Though households eligible for the tax credit may find it difficult or nearly impossible to save for retirement, the responsibility ultimately falls on individuals. Nobody cares about your money and future as much as you do.