Using the Saver’s Tax Credit

Submitted by Jim Blankenship on Friday, January 24, 2014 - 12:00pm
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A tax credit greatly benefits your contributions to retirement plans. Here’s how to take advantage.

According to the Internal Revenue Service, low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit for 2013 and the years ahead.

The saver’s credit helps offset part of the first $2,000 you voluntarily contribute to individual retirement accounts and to 401(k) plans and similar workplace retirement programs. If eligible, you can set up a new IRA or add money to an existing one for 2013 until April 15, 2014.

The credit supplements other tax benefits available if you set money aside for retirement. For example, most workers may deduct contributions to a traditional IRA. You can’t deduct contributions to your Roth IRA but your qualifying withdrawals, usually after retirement, are tax-free.

If you didn’t contribute to a 401(k) or similar workplace program – such as a 403(b) for employees of public schools and certain tax-exempt organizations, a 457 plan for state or local government employees or the Thrift Savings Plan for federal employees – by the end of 2013, schedule your 2014 contributions soon so your employer starts withholding your contributions as soon as possible.

Many taxpayers use the credit. In a recent tax year, saver’s credits totaled more than $1.1 billion claimed on nearly 6.4 million individual income tax returns. Saver’s credits claimed on these returns averaged $215 for joint filers, $166 for those filing as heads of household and $128 for single filers.

You claim the saver’s credit if you are:

  • Part of a married couple filing jointly with income up to $59,000 in 2013 or $60,000 in 2014;
  • Filing as a head of household with income up to $44,250 in 2013 or $45,000 in 2014; or
  • A married individual filing separately or a single with incomes up to $29,500 in 2013 or $30,000 in 2014.

Like other tax credits, the saver’s credit can increase your refund or reduce the tax you owe. Though the maximum saver’s credit is $1,000 ($2,000 for married couples), the IRS cautions that the credit often comes in at much less and that partially because of your other deductions and credits you may get no saver’s credit.

Your filing status determines your credit amount as does your adjusted gross income (AGI, or your gross income minus deductions and other breaks), your tax liability and whatever you contributed to qualifying retirement programs.

You use form 8880 to claim the credit; the form’s instructions detail how to figure the credit.

Other rules apply to the saver’s credit:

  • You must be at least 18.
  • You can’t claim the credit if you’re claimed as a dependent on someone else’s return.
  • You can’t take the credit if you’re a student (enrolled as a full-time student during any part of five calendar months during the year).

Certain retirement plan distributions reduce the contribution amount you use to figure the credit. For 2013, this rule applies to distributions received after 2010 and before the due date, including extensions, of your 2013 return.

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Jim Blankenship, CFP, EA, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author of An IRA Owner’s Manual and A Social Security Owner’s Manual. His blog is Getting Your Financial Ducks In A Row, where he writes regularly about taxes, retirement savings and Social Security.

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