What if I told you you could get two tax breaks for the price of one?
It’s hard to believe that the IRS would be so giving, but, at least in this case, it’s true.
The tax break is informally called the Saver’s Credit, and it was created to encourage low- and moderate-income workers to save for retirement. As with most tax credits, this one can increase your refund or reduce your tax liability. The big question may be: Can your budget manage it? To be eligible for the credit, you must contribute to an IRA or 401(k). If you put that contribution in a traditional IRA or 401(k), and you may also be able to claim another deduction, lower your taxable income, and get twice the tax credit benefit.
The Saver’s Credit is available for individuals 18 or older who are not full-time students or claimed as dependents on another person’s taxes. Your annual income can’t be more than $30,000 for single filers; $45,000 for heads of household, and $60,000 for married couples. You can claim the tax credit benefit when you contribute up to $2,000 ($4,000, if filing jointly) to an IRA or 401(k).
How do I calculate my credit?
As with most tax calculations, the amount of your credit depends on your income. The lower your income, the greater your tax credit benefit. Let’s just focus on single filers. If your adjusted gross income (AGI) for the year is no more than $18,000, you can claim 50 percent of your contribution. If you gave $1,000, that means you can claim a $500 credit. For an AGI of $18,001 to $19,500, you can claim 20 percent of your contribution. From $19,501 to $30,000, you can claim 10 percent. For other filing categories, check out the IRS table and see how to get more on your tax return.
What about my IRA deduction?
Along with the Saver’s Credit, you can also take the regular tax deduction for contributing to a traditional IRA or 401(k). So, that single filer who makes no more than $18,000 and who contributed $1,000 to a traditional IRA can lower his or her taxable income to $17,000 by taking the IRA deduction. Together, that’s a $1,000 IRA deduction and a $500 Saver’s Credit, for $1,500 in tax savings.
Are there other benefits?
Ask any tax adviser, and he or she will tell you that 401(k)s and IRAs are great tax-deferred ways to save for your retirement. You don’t pay taxes on that money until you withdraw it, which ideally will happen after you have retired.
Claiming the credit
You will need IRS Form 8880 to claim the Saver’s Credit, and you will need to itemize your deductions. Rollover contributions aren’t eligible for the tax credit benefit. You have until April 15, 2015 to contribute to an IRA and claim the credit for the 2014 Tax Year. For your 401(k), you must make a contribution by the end of the year.
Disclaimer: Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.