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Is the Saver's Tax Credit Right for You?

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Shutterstock/Gunnar Pippel
One of the most overlooked ways for Americans to save money is in the area of tax planning. The key is to understand how to leverage tax laws based on your individual circumstances.

For example, money you contribute to a 401(k), 403(b) or SIMPLE IRA is taken out pre-tax. This means you get an up-front tax deduction just for contributing to your work retirement plan. In addition to your employer-sponsored retirement plan, you might also qualify for a tax-deductible IRA. (If you don't have a company retirement plan at work, then you should definitely check out a tax-deductible IRA because the income limits are higher, and this might be one of the few ways to lower your tax bill.)

However, most people don't know that they might qualify for an additional reward, just for being financially responsible and saving for the future. This credit is known as the Saver's Credit.

What Is the Saver's Credit?

The Saver's Credit is a tax break designed to help low- and moderate-income individuals and families. It's designed to reward your efforts as you save for retirement. While it can't actually provide you with a refund check, this tax break can reduce your tax bill and reduce what you might owe to the IRS.

How Does It Work?

The Saver's Credit will allow you to claim 10, 20, or 50 percent of the $2,000 you contributed to a qualified retirement account (this includes Roth IRAs and Roth 401ks) if you're an individual. For couples, you can claim a percentage of up to $4,000. How much you'll be allowed to claim when you file will depend on your modified adjusted gross income, or AGI.

Which Retirement Accounts Qualify for the Credit?

Contributions to traditional IRAs, Roth IRAs or employer-sponsored plans will count toward the Saver's Credit. Employer-sponsored plans are retirement accounts provided by your employer and could be a 401(k), 403(b), SARSEP or SIMPLE IRA.

Do I Qualify for the Credit?

Remember, the Saver's Credit is designed to help lower-income individuals and families who make saving a priority. You might not qualify if your income exceeds a certain point, and the percentage of your contribution that you can claim (10 percent, 20 percent or 50 percent) will also depend on your income. It's always best to check with your accountant regarding your specific situation, but here's a handy chart from the IRS to see if you qualify for the 2013 tax year:

Credit Rate Married Filing Jointly Head of Household Single, married filing separately, or qualifying widow(er)
50% of your contribution AGI not more than $35,500 AGI not more than $26,625 AGI not more than $17,750
20% of your contribution $35,501 - $38,500 $26,626 - $28,875 $17,751 - $19,250
10% of your contribution $38,501-$59,000 $28,876 - $44,250 $19,251 - $29,500

What this means is that if you're married filing jointly, your modified AGI must be less than $59,000 to qualify. If you file as head of household, your modified AGI has to be $44,250 or less, and if you're single, your modified AGI must be under $29,500.

The important thing to keep in mind here is that these numbers reflect your modified adjusted gross income. Money that you save into an employer-sponsored plan,
such as a 401(k) or a tax-deductible traditional IRA, can help you lower your modified AGI, which can help you qualify for the Saver's Tax Credit. If you're close to qualifying for a larger credit, you might want to see if you qualify for a tax-deductible IRA and make a prior year contribution before April 15.

For example, if you're single and have a gross income of $19,500, but saved $1,000 for retirement in a 401(k) for 2013, your adjusted gross income would be reduced by $1,000, to $18,500, allowing you to claim a credit of 20 percent instead of 10 percent, for a total of $200.

Here's another example: John and Mary are married and file their taxes jointly. They make $65,000 a year before taxes. They contribute 10 percent toward their 401(k) plans each year, which reduces their income by $6,500. Their modified AGI is now $58,500. (Notice how their large 401(k) contributions lowered their modified AGI, and they now qualify for the Saver's Credit). Because they're a couple, they can each claim $2,000 in contributions up to $4,000 (of the $6,500 in contributions that they made). Ten percent of their $4,000 contribution would qualify for a total credit of $400.

See why this is my favorite tax credit? You're rewarded financially just for saving for retirement. What's your favorite tax credit?

Sophia Bera is a certified financial planner and the founder of Gen Y Planning. Follow her on Twitter @sophiabera.

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Interest payments quack exactly the same as taxes !! no difference!! I feel that our governments can and should compete with our private credit card companies and our government can earn interest payments and help balance their budgets. Credit card companies can be left with most credit worthy customers for themselves at lower interest rates.. people using government run credit cards can be required to pay back what they owes at a faster clip on higher interest rates. Credit card companies can sell troublesome cardholders to our government and be rid of them. The troublesome cardholders will feel no difference., wont they?

February 24 2014 at 2:40 PM Report abuse rate up rate down Reply

Many people have financial plans to go bankrupt anyway because they expect to lose jobs someday so why pay on time or just pay minimum payment dues as shown in the bold lined boxes in statements . They just go skating until the next time the bad times return , they just let everything get repossessed and then go see a lawyer to wipe the slate clean.. They dont care about the money lost in interest charges which is usually responsible for their bankruptcies.. Our economy really depends on those people who charge their brains off and never showing any intentions of ever paying back in full at all never mind the interest payments . Because of them, businesses are more likely to raise prices on goods and services they provide on the backs of honest credit card users who keep their balalnces in check. Spenders should be required to pay back a sizable portion of their purchases in reasonable periods of time to keep balances down and interest payments down. Borrowings are good for our economy unless they are abused by irresponsible spenders who are hell bent to get bankrupted one way or another , whatever!

February 24 2014 at 2:36 PM Report abuse rate up rate down Reply

The best financial advice I have in mind especially for those in very low income brackets is NOT to pay interest charges on credit cards if you can avoid that. Dont charge your credit cards if you have no plan of paying in full before the next statement due. At least, plan to pay off more than half or three quarter of what you bought in previous month if possible.. Example, if you buy a nice dress or a bicycle for $500 or $150 whatever this month, pay at least $250 or $75 in next statement instead of what is due in the bold lined box which is not a full payment but just a minimum payment due usually 2% of what you owe in total. Then next month try pay off or pay more than what is due in the bold lined box (minimum payment due) You can pay more than what is due to save on high interest charges . High interest charges are like taxes!!!! if you dont realize that!! it is a capitalistic tax!!!

February 24 2014 at 2:29 PM Report abuse rate up rate down Reply

Who can save that much in those low income brackets? maybe hermits..

February 24 2014 at 2:24 PM Report abuse rate up rate down Reply

There is something to designing the tax code to reward certain behaviors...Saving for retirement is definitely something all of should be doing.

February 24 2014 at 2:22 PM Report abuse rate up rate down Reply
This Might work

Why do you people allow your website to just become an ad site for working from home ads - don't you look at the postings? These aren't related to the article at all.

February 24 2014 at 11:51 AM Report abuse rate up rate down Reply

when you have a tax system that NEEDS an expert to figure out what your taxes are, YOU NEED TO DUMP IT !! there is an old saying "KEEP IT SIMPLE, STUPID"

February 24 2014 at 8:42 AM Report abuse rate up rate down Reply
1 reply to njenel's comment

Like the spelling of your name?

February 24 2014 at 8:49 AM Report abuse -1 rate up rate down Reply

Something is wrong with the concept of the "saver's tax credit".Not only is tax avoided for a number of years on the amount that goes into the 401 k program, but taxpayers get an additional credit for making the contribution..hat's wrong with this picture???

February 24 2014 at 8:40 AM Report abuse rate up rate down Reply