Like it or not, tax season is here. You may be gathering all of your documents in one place in preparation for filing your own taxes or visiting your accountant.
However, make sure not to forget the paperwork necessary to receive the Retirement Savings Contribution Credit, now known as the Savers’ Credit. This credit can save you money on your taxes while encouraging you to set money aside for retirement, which can be a pretty sweet deal, as long as you meet the requirements.
There are a number of criteria you must meet to be able to take the Savers Credit.
The Savers Credit is meant to help motivate low and middle income individuals to save for their retirement, so the following income caps are in place:
- Single, married filing separately, or qualifying widow(er) – $27,750 income limit
- Head of household – $41,625 income limit
- Married filing jointly – $55,500 income limit
To receive this credit, you must have been born after January 2, 1993. You cannot be a full-time student, and no one else can claim you as a dependent on their tax return.
Determining Your Available Credit
To get this credit, not only must you meet income and birth eligibility, but you must contribute to a qualifying IRA, 401k or other retirement plan.
The maximum credit amount you can qualify for is $1,000 if you are single or married filing separately or $2,000 if you are married filing jointly.
Determining the actual credit can be quite complicated, so you may want to hire an accountant or tax preparer or use tax preparation software.
Generally, the credit is a percentage of the qualifying retirement contribution amount, not the full retirement contribution amount. Those who earn less income generally receive a greater credit than those at the higher end of the income limit.
Another factor determining your available credit is the distribution amount you may have received. If you received any distributions from your retirement account, you must subtract that amount of distributions from the amount that you contributed to your qualified retirement account. You must subtract any distribution amount received as early as two years before the year the credit is claimed as well as the year the credit is claimed.
Form to Use
To take advantage of the Retirement Savings Contribution Credit or The Savers Credit, as it is now called, you must file Form 8880, Credit for Qualified Retirement Savings Contributions.
Remember to check back frequently with the IRS as maximum income levels may change for this year’s tax returns.
If you qualify, The Savers Credit is a good one to take advantage of. Unlike a tax deduction where you only receive a percentage of the deduction, with a tax credit, you receive a dollar for dollar reduction in taxes. If you qualify for a $1,000 credit using The Savers Credit, you reduce your tax bill by $1,000, not just a percentage of that amount.
Unfortunately, many people don’t know about this credit and don’t take advantage of it, which is a shame since it can save people so much money on their taxes.