The recent IRS Tip below covers one of my favorite tax credits. The Saver’s Credit provides a nice tax credit for people with low- and moderate-incomes who contribute to qualifying retirement accounts.
I don’t think this credit gets the attention it deserves because there’s a common sentiment that, as one preparer I know put it, “If your income is low enough to qualify for this credit you can’t afford to save for retirement!” I don’t buy that. Median household income is currently about $50,000 a year, and you can qualify for this credit with an AGI of $56,500 (if you’re filing a joint return), which means around half of US taxpayers could qualify for this credit.
In particular, I think this credit is great for young people just starting out in their careers…they likely have income low enough to qualify for the credit but without a lot of major expenses. Also, even though the accounts are officially dubbed “retirement” accounts, they can actually be used for a variety of purposes. If you decide to go back to school (or you have kids that you’ll be putting through college one day), if you face major medical expenses, or encounter several other situations, you can access these “retirement” funds without penalty as long as you follow certain rules.
The main thing to realize about this credit is that you can qualify for it retro-actively. If you find while you’re doing your tax return that your income was in the qualifying range, or close to the qualifying range, you can contribute to an IRA up until the April tax filing deadline. The contribution will be counted for the previous tax year. This reduces your income for the previous year — which helps you reach the qualifying income level — and allows you to receive the credit even though your contribution was made after year end.
Issue Number: IR-2011-121
Inside This Issue
Plan Now to Get Full Benefit of Saver’s Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement
WASHINGTON — Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2011 and the years ahead, according to the Internal Revenue Service.
The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.
Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2011 tax return. People have until April 17, 2012, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2011. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2012 contributions soon so their employer can begin withholding them in January.
The saver’s credit can be claimed by:
- Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012;
- Heads of Household with incomes up to $42,375 in 2011 or $43,125 in 2012; and
- Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012.
Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.
A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.
In tax-year 2009, the most recent year for which complete figures are available, saver’s credits totaling just over $1 billion were claimed on just over 6.25 million individual income tax returns. Saver’s credits claimed on these returns averaged $202 for joint filers, $159 for heads of household and $121 for single filers.
The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.
Other special rules that apply to the saver’s credit include the following:
- Eligible taxpayers must be at least 18 years of age.
- Anyone claimed as a dependent on someone else’s return cannot take the credit.
- A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.
- Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2011, this rule applies to distributions received after 2008 and before the due date, including extensions, of the 2011 return. Form 8880 and its instructions have details on making this computation.
- Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. More information about the credit is on IRS.gov.
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