Q: I’ve heard I might be able to get a special tax credit because I contributed to my retirement account in 2013. Is that true?
A: It’s true, if you qualify. Workers with low to moderate income can earn a special federal “saver’s” tax credit, which helps promote retirement savings. Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation.
Q: How does the saver’s credit work?
A: The saver’s credit, also known as the retirement savings contribution credit, helps offset part of the first $2,000 that you voluntarily contribute to an IRA, a 401(k) plan or a similar workplace retirement program. You can get this tax credit in addition to any other tax savings that may apply to you.
Q: Can I make retirement contributions and get the saver’s credit to use for my 2014 tax return?
A: Yes. You should schedule your 2014 contributions now so your employer can begin withholding your contributions as soon as possible. To qualify for the saver’s credit on your 2014 tax return, you must contribute by Dec. 31, 2014 to a qualified retirement plan. Qualified plans include a 401(k) plan or similar workplace program such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees.
Q: Who qualifies for the saver’s credit?
A: The saver’s credit can be claimed by:
• married couples filing jointly with incomes up to $59,000 in 2013 or $60,000 in 2014;
• heads of household with incomes up to $44,250 in 2013 or $45,000 in 2014; and
• married individuals filing separately and singles with incomes up to $29,500 in 2013 or $30,000 in 2014.
You cannot take the credit if you are under 18 years of age, if you are claimed as a dependent on someone else’s return, or if you were a full-time student during any part of five calendar months during the tax year.
Q: If I qualify for the saver’s credit, does that mean I get a bigger refund at tax time?
A: Not necessarily. Like other tax credits, the saver’s credit can reduce your overall tax liability. It could either increase your refund, or reduce the additional tax you owe. The maximum saver’s credit is $1,000 for an individual and $2,000 for married couples, but any other deductions and credits you claim may reduce the saver’s credit amount quite a bit. In fact, taxpayers who have already reduced their tax bill substantially with other deductions and credits may not benefit from the saver’s credit.
Q: How does the IRS determine the amount of my saver’s tax credit?
A: Your credit amount is based on your filing status, your adjusted gross income, your tax liability and the amount you contributed to qualifying retirement programs. You should use Form 8880 to claim the saver’s credit. The form’s instructions will help you figure your credit.
Q: If I take the saver’s credit, can I still deduct my IRA contributions?
A: Generally, yes. The saver’s credit supplements other tax benefits available to people who set money aside for retirement. Most workers may deduct their contributions to a traditional IRA. Although you cannot deduct your Roth IRA contributions, qualifying withdrawals from your Roth IRA, usually after retirement, are tax-free. Normally, contributions to a 401(k) or similar workplace plan are not taxed until you withdraw them.
Q: Where can I get more information about the saver’s credit?
For more information about the credit, visit IRS.gov
The information for this “Law You Can Use” column was provided by the Internal Revenue Service. It was prepared by the Ohio State Bar Association.