A Tax Credit for Savers: Do You Qualify?
Feb 4th 2011 11:00AM
Updated Feb 4th 2011 4:49AM
If you make qualifying contributions to an IRA, 401(k) and certain other retirement plans, you may be able to take a tax credit of up to $1,000 for individual taxpayers or up to $2,000 for married taxpayers filing jointly. Qualifying contributions include those, other than rollover contributions, made to a traditional or Roth IRA; elective deferrals to a 401(k) plan (including a SIMPLE 401(k)); a section 403(b) annuity; an eligible deferred compensation plan of a state or local government (a governmental 457 plan); a SIMPLE IRA plan; a SEP; or contributions to a 501(c)(18)(D) plan. In other words, almost every kind of mainstream retirement plan qualifies.To be eligible for the credit, you have to be at least 18-years-old (the IRS specifically requires you to be born before Jan. 2, 1993) and not a full-time student during the calendar year. You may also not be claimed as a dependent on any other taxpayer's income tax return.
The credit is clearly aimed at low- to middle-income taxpayers, so income phase-outs apply. Individual taxpayers, married taxpayers filing separately or qualifying widow(er)s may only qualify if adjusted gross income, or AGI (found on line 38 of the form 1040; line 22 of the form 1040A; or line 37 of the form 1040NR), is $27,750 or less. Taxpayers filing as head of household may only qualify if AGI is $41,625 or less. Married taxpayers filing jointly may not have AGI of more than $55,000.
All savers credits are not the same. The credit is actually a percentage of your qualifying contribution amount -- the rates for the credit range from 10% to 50% of that amount. Since the rates decrease as income increases, taxpayers at the bottom of the scale have a greater benefit from saving.
To claim the credit, file a form 8880, Credit for Qualified Retirement Savings Contributions. You'll figure your credit by subtracting the amount of any retirement distributions you've received from your retirement plans during the "testing period" from the contributions you've made. For purposes of determining contributions, any distributions your spouse receives are also treated as received by you if you file jointly both for the year of the distribution and for the year in which you claim the credit. The "testing period" is considered to be the year you claim the credit through the due date for filing your return, including extensions, and the two tax years prior.
The best part of the credit? You don't have to choose between tax breaks. The Savers Credit is in addition to other tax breaks you earn from contributing to a retirement account. Your tax deferrals, tax deductions and other perks remain in place, making the credit the biggest incentive to save this year.