Most people have some sort of savings for retirement. While we know it’s beneficial to save, sometimes the additional money we lose from our wages to save for retirement can be a burden. The US Government implemented the savers credit back in 2002 as a way to encourage Americans to start saving more money for retirement. Since then the program has become permanent, and as of 2006 has remained available for those who qualify to claim on their income tax returns. Unlike tax deductions, tax credits can do more then just reduce the tax you owe, they can increase your refund. It is worth trying to see if you are eligible to claim this credit.

Who Qualifies

Not everyone is eligible to claim the savers credit. However, if you contribute to a retirement account like a Roth IRA and meet the other requirements you may be eligible to claim the savers credit. Students can not claim the credit, nor can someone who is claimed as a dependent on another persons tax return. You must also be 18 years old or older in order to apply for the credit.

Being eligible for the credit is dependent on your adjusted gross income (AIG). Your AGI must be below the set limits in order to apply. Here are the limits for each filing status:

• Single $27,750
• Head of Household $41,625
• Married filing jointly $55,500

What is the Credit

The savers credit is determined based on a percent of your total contribution to a retirement account. The maximum amount one is allowed to contribute to a Roth IRA is $5000 annually. The savers credit is figured on the first $2000 of that money or as much as you have contributed up to $2000. So for example, if you had contributed the full $5000 for the year, then you could claim credit on $2000. If you were eligible for a 50% credit, then you could subtract $1000 off your income on your tax return.

Because the savers credit is based on the person’s adjusted gross income in conjunction with their filing status, the amount of the credit will vary for all filers.

Exceptions

Contributions made to military retirement accounts do not qualify for the credit. Also, you can not claim the credit on rollover distributions, nor can you claim the credit on contributions made to repay a previous distribution.

How to Claim

In order to claim the savers credit for Roth IRA savings you must complete form 8880. You must file form 1040 or 1040A in order to use form 8880. It can not be use with form 1040ez. This form is filed with your regular tax return and supports your deduction. Even if you did not make any contributions in the previous year, you can still claim the credit up to the April 15th tax deadline.

photo credit: Stargazer95050

If you make contributions to your employer’s plan or an IRA,* you may be eligible for a tax credit of up to $1,000. Known as the “Saver’s Credit,” this could reduce the income tax you pay dollar for dollar.

How the Saver’s Credit Works

The credit rate can be from 10–50 percent of your annual contribution, depending on your adjusted gross income. The lower your income, the higher the credit rate. The credit rate also depends on your filing status. See the table below to determine your credit rate.

The maximum contribution taken into account for an individual’s credit is $2,000. If you are married filing jointly, the maximum contribution taken into account is $2,000 each for you and your spouse.

Who Is Eligible For the Tax Credit?

The credit is available to those who:

· are 18 or older

· are not a full-time student

· are not claimed as a dependent on someone else’s return, and

· have an adjusted gross income (shown on your tax return for the year of the credit) that does not exceed the limits shown in the table below.

Distributions May Affect Credit Amount

The annual contribution eligible for the credit may be reduced by any taxable distributions from a retirement plan or IRA that you or your spouse may receive:

· during the year you claim the credit,

· during the two preceding years, or

· during the period after the end of the year for which you claim the credit before your tax return filing due date.

A distribution from a Roth IRA that is not rolled over is taken into account for this reduction, even if the distribution is not taxable. After these reductions, the maximum annual contribution eligible for the credit per person is $2,000.

Other Tax Considerations

The amount of your Saver’s Credit will not change the amount of your refundable tax credits. A refundable tax credit, such as the earned income credit or the refundable amount of your child tax credit, is an amount that you would receive as a refund even if you did not otherwise owe any taxes.

The amount of your Saver’s Credit in any year cannot exceed the amount of tax that you would otherwise pay (not counting any refundable credits or the adoption credit) in any year. If your tax liability is reduced to zero because of other nonrefundable credits, such as the Hope Scholarship Credit, then you will not be entitled to the Saver’s Credit.

* Includes employer-sponsored 401(k), 403(b), or governmental 457 plans; small business SEP and SIMPLE IRAs; and Traditional and Roth IRAs.

** The Adjusted Gross Income limits were indexed for inflation in 2007 pursuant to the Pension Protection Act of 2006.

The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.