The Crucial Tax Credit Retirement Savers Don’t Know About-Eric McWhinnie

Source: IRS

Benjamin Franklin offered one of the best pieces of investment advice that has stood the test of time: “An investment in knowledge pays the best interest.” It’s not enough to simply place aside money for retirement. You need to learn the various strategies that help you get the most bang for your buck.
Taxpayers looking to heed Franklin’s wisdom should learn about the Internal Revenue Service’s Retirement Savings Contributions Credit, also known as the Saver’s Credit. This overlooked benefit is available to low- and moderate-income workers saving for retirement. The credit reduces a taxpayer’s federal income tax and may be applied to the first $2,000 ($4,000 if married and filing jointly) of voluntary contributions an eligible worker makes to a 401(k), 403(b), or similar employer-sponsored retirement plan, or an individual retirement account.
In order to qualify, you must be age 18 or older, not a full-time student, and not be claimed as a dependent on another person’s return. As the chart above shows, the Saver’s Credit is worth a percentage of your contribution, and adjusted gross income limits do apply — the less you make, the greater the percentage. The credit is also a benefit in addition to other advantages, such as tax deductions on retirement accounts. Savers have until April 15, 2015 to make a contribution for the 2014 tax year.
Income limits for the Saver’s Credit change over time, so it’s important to check for updated figures on an annual basis. The IRS recently reminded taxpayers about the credit and noted that the income limit will increase to $61,000 in 2015 for married couples, while the limits for heads of households and individuals will rise to $45,750 and $30,500, respectively.

Source: IRS

The IRS provides the following example of the Saver’s Credit: “Jill, who works at a retail store, is married and earned $30,000 in 2014. Jill’s husband was unemployed in 2014 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2014. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $29,000. Jill may claim a 50% credit, $500, for her $1,000 IRA contribution.” That’s a 50% return for just making the contribution. Workers need to use Form 1040, 1040A, or 1040NR to file their taxes with the credit, which is detailed on Form 8880.
In tax year 2012, the most recent year for which complete figures are available, Saver’s Credits totaling $1.2 billion were claimed on more than 6.9 million individual income tax returns, according to the IRS. While households eligible for the tax credit may find it difficult or nearly impossible to save for retirement, the responsibility ultimately falls on individuals. Nobody cares about your money and future as much as you do.

Culled from wall streetcheatsheet