There are significant tax benefits to moderate and low-income families who choose to prioritize these long term savings since saving for retirement doesn’t always come easy. Individual filers can receive up to $1,000 as tax credit while married couples can receive up to $2,000-- that’s a tax credit which is called the Retirement Savings Contribution Credit (known also as Saver’s Credit) designed to encourage retirement savings.
Aside from the incentives you already benefit from, Saver’s Credit works with any other retirement based tax incentives as well. You may still be able to use the Saver’s Credit, reducing your tax liability further even if, for instance, you can already deduct your 401k contributions from your taxes.
Since Saver’s Credit is designed to encourage low- to moderate income families to start saving for retirement then it means that not everyone is eligible for this Tax Credit. Therefore there are age limits, level on income and filing status.
Those under 18 year’s old, full-time students, and those who can be claimed as a dependent for anyone else’s tax return are ineligible for the credit. But, you did not fall to one of the three, then you may be eligible for a 10%, 20% or 50% tax credit on your retirement contributions up to a total contribution of $2,000 for an individual and for a married couple filing jointly, it’s up to $4,000. If an individual contributes $2,000 to a retirement account, then this means an individual can receive a credit of up to $1,000. While if a couple each contribute $2,000 to their individual retirement accounts (50% of a $4,000 retirement contribution) then they can receive a credit of up to $2,000.
Your filing status and income level are the basis of your eligibility for the percentage credit.
Married Filing Jointly: You may qualify for a credit if your adjusted gross income is $60,000 or less and if you’re married filing jointly for the tax year 2014. Married couples making less than $36,000 may have the full 50% tax credit; for those making between $36,001 and $39,000 may have the 20% credit, and for those making between $39,001 and $60,000 may have the 10% credit.
Head of Household: You may qualify for a credit if your adjusted gross income is $45,000 or less and you’re filing as Head of Household for the tax year 2014. If you’re making less than $27,000 then you may have the full 50% credit; if you’re making between $27,001 and $29,250 then you may have the 20% credit but if you’re making between $29,251 and $45, 000 then you may have the 10% credit.
Single, Married Filing Separately, Widow(er): You may qualify for a credit if your adjusted gross income is $30,000 or less and you’re filing for any of these statuses for the 2014 tax year. Individuals making less than $18,000 may have the full 50% credit; those making between $18,001 and $19,500 may have the 20% credit while those making between $19,501 and $30,000 may have the 10% credit.
Remember that credits are limited to a percentage of your retirement contribution. For example, a married couple filing jointly would qualify for a 20% tax credit on a total contribution of $1,000 as long as they have a gross income of $37,000 and each contributes $500 to his or her retirement accounts. They would qualify for a $200 tax credit (20% of $1,000 is $200) in other words.
The average Saver’s Credit was $204 for joint filers, $165 for heads of household, and $122 for single filers for the tax year 2010 according to the IRS.
Almost all retirement plan contributions qualify for the Saver’s Credit, including those who contributed 401k, 403b, 457b, Traditional or Roth IRA, SIMPLE IRA, SARSEP, and 501(c)(18).
Monies invested by your employer are ineligible for the credit, while those you contribute are eligible if you participate in an employer-match retirement fund. For instance, to your 401k you contributed $500, and your employer did so too, then only the $500 you contributed will be eligible for Saver’s Credit.
Your eligibility could be reduced if you recently took distributions from a retirement account. In other words, if you took a distribution of $1,000 from your $2,000 contribution then your total saver’s credit eligibility would be reduced to $1,000-- the difference between the amount you received as a distribution and the amount you contributed.
LLOYD J CAZES CPA