If you’ve completed your tax return, but haven’t filed it yet because you aren’t liking the bottom line, you might be able to take advantage of the Saver’s Credit.
The income limits on this credit are relatively low…not quite half of all taxpayers have income below the limits to qualify. But if you do qualify, you might be able to take action after year-end to make yourself eligible for this credit. The credit is based on contributions to qualifying retirement accounts, like 401(k)s and IRAs. Since IRA contributions can be made up until April 15 of the following year, and still apply retro-actively, you might be able to make an IRA contribution right now, get a deduction for the money you put into the account, and get a credit on top of that based on how much you put in the account. This is one of my favorite credits to suggest to young people who’ve recently entered the working world and aren’t making big salaries yet. It can be a good tax move, and it starts people in the early habit of putting something aside.
If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be eligible for a tax credit, depending on your age and income.
Here are six things the IRS wants you to know about the Savers Credit:
1. Income limits The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and 2011 income of:
- Single, married filing separately, or qualifying widow(er), with income up to $28,250
- Head of Household with income up to $42,375
- Married Filing Jointly, with incomes up to $56,500
2. Eligibility requirements To be eligible for the credit you must be at least 18 years of age, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.
3. Credit amount If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 ($2,000 if filing jointly). The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.
4. Distributions When figuring this credit, you generally must subtract distributions you received from your retirement plans from the contributions you made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date – including extensions – for filing the return for the credit year.
5. Other tax benefits The Retirement Savings Contributions Credit is in addition to other tax benefits you may receive for retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.
6. Forms to use To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.
For more information, review IRS Publication 590, Individual Retirement Arrangements (IRAs), Publication 4703, Retirement Savings Contributions Credit, and Form 8880. Publications and forms can be downloaded at http://www.irs.gov or ordered by calling 800-TAX-FORM (800-829-3676).