According to a survey conducted by Transamerica Center for Retirement Studies, less than 12% of Americans are aware of what is called The Savers Credit — a way to save up to $1,000 on their income tax. Yes, believe it or not, the government will credit low- and moderate-income taxpayers who save for their retirement. So if you currently do not have a retirement savings plan in place, this information might encourage you to do so. This is how it works.
To qualify for the Savers Credit, you must make regular contributions to an employer sponsored 401k, 403(b), 457 plan, a Simple IRA, a SEP IRA, a traditional IRA, or a Roth IRA. Keep in mind that while you can claim your contributions to these accounts, you may not claim any contributions made by your employer.
How to Be Eligible
Eligibility for the Savers Credit requires the following three things:
- In 2012, the maximum adjusted gross income to qualify for the Savers Credit is $57,500 for a married couple filing jointly, $32,125 for a head of household, and $28,750 for others. The maximum credit you can claim diminishes as your income increases.
- The filer must be 18 years of age or older by the end of the filing year, not a full-time student during the year taking the credit, and not claimed as a dependent on another person’s return.
- The contributions made to your retirement account must have been made during the tax year for which you are filing.
How Much You Can Save
Of course, before you put the ball in motion, you will want to know how much you can actually save by claiming the Savers Credit. Depending on your income and filing status, you can claim the credit for 50, 20, or 10 percent of the first $2,000 you contribute to a retirement account in that tax year. That makes the maximum credit amounts $1,000, $400, or $200.
A married couple, filing jointly, can claim $2,000. However, if you took a taxable distribution from your account any time during the two years prior to filing your return, that distribution reduces the credit you can claim. Also, the Savers Credit is a credit, not a refund. Claiming it can reduce the tax you owe to zero, but you will not get a refund from it.
How to Claim the Credit
To claim the Savers Credit, you must file a form 1040A, 1040 or 1040NR. You cannot take this claim if you file a 1040EZ. You must also attach Form 8880, “Credit for Qualified Retirement Savings Contributions.”
If you use an online tax preparer like TurboTax (find out how to file your state income tax for free), and you answer all the applicable questions, they automatically apply any credits for which you qualify. However, if you do your own taxes, or pay a human tax preparer, you may want to ask about the credit. Remember, if you are not currently enrolled in a retirement savings plan through your employer then you will want to enroll now to be able to claim the credit for 2013.
Also, according to the IRS website, “many of the pension plan limitations will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment.” But don’t let that stop you from checking into it. Any amount of a tax credit is better than no credit at all.
Do you think you can take advantage of the Savers Credit? Leave a comment!