When it comes to income taxes, there's nothing better than a tax credit. This is because a tax credit is a dollar-for-dollar reduction in your taxes. If you receive a $1,000 credit, you pay $1,000 less in tax.
There are lots of different types of tax credits. Many are for businesses, but there are several credits for individuals that can save you substantial money. One of these is the retirement tax credit, also called the Saver's Credit. It's designed to benefit people with modest incomes who save for their retirement. You qualify for the credit if:
- you are age 18 or oder
- you’re not a full-time student
- no one else (such as your parents) claims an exemption for you on their tax return, and
- your adjusted gross income (in 2014) is not more than: $60,000 if your filing status is married filing jointly, $45,000 if your filing status is head of household, or $30,000 if your filing status is single, married filing separately, or qualifying widow(er).
To get the credit, you must invest in a traditional or Roth IRA, 401(k) plan, SIMPLE IRA, employee SEP, 403(b) annuity, or governmental 457 plan. Check the IRS website for the annually adjusted income limits.
Rollover contributions aren’t eligible for the Saver’s Credit. Also, your eligible contributions may be reduced by any recent distributions you received from a retirement plan or IRA.
The actual amount of the credit depends on the retirement contributions you make and your credit rate. Your credit rate can be as low as 10% or as high as 50%. Your credit rate depends on your income and your filing status. To determine your credit rate, see IRS Form 8880, Credit for Qualified Retirement Savings Contributions. The most a single person can get is $1,000. The most a married couple filing jointly can receive is $2,000 per spouse.
Example: Jill, who works at a retail store, is married and earned $30,000. Her husband was unemployed and did not have any earnings that year. Jill contributed $1,000 to her IRA. 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.
This is a nonrefundable credit. This means that the amount of the credit in any year cannot be more than the amount of tax that you would otherwise pay (not counting any refundable credits) for the year. If your tax liability is reduced to zero because of other nonrefundable credits, such as the tax credit for child and dependent care expenses, then you will not be entitled to this credit.
You can file your tax return claiming a traditional IRA contribution before the contribution has actually been made. Generally, the contribution must be made by the due date of your return, not including extensions. For most people, this means that contribtutions must be made April 15th. Additionally, you can make a contribution to your IRA by having your income tax refund (or a portion of your refund), if any, paid directly to your traditional IRA or Roth IRA.