One of the issues acknowledged when it comes to low- and moderate-income workers are the fact that it can be difficult to set aside money for the future. In order to help encourage workers to set aside money for retirement, the government offers a saver's tax credit. If you qualify for this credit, this can be a way to help you offset the first $2,000 that you contribute to certain tax-advantaged retirement accounts.
Who is Eligible for the Saver’s Tax Credit?
The saver’s tax credit is a refundable tax credit that can be used in conjunction with your retirement contributions. This can increase the tax efficiency of your retirement contributions since you can receive a tax deduction for the contributions made to a Traditional IRA or 401(k). Since the saver’s tax credit is refundable, this allows you the chance to increase your refund if you are due one.
Those with low and moderate incomes are eligible for the saver’s tax credit. The IRS income requirements for this credit are:
- $30,000 or less for single taxpayers, or those married filing separately.
- This amount is increased to $30,500 for tax year 2015.
- $60,000 or less for married filing jointly, with an increase to $61,000 in tax year 2015.
- $45,000 or less for those who file as Heads of Household in 2014, with an increase to $45,750 in tax year 2015.
As you can see, this tax credit is aimed at encouraging those who might not save for retirement to take the plunge. If you contribute voluntarily to an IRA or a 401(k), you can take some of the money you contribute, and receive a tax credit.
In order to claim the saver’s tax credit, you need to fill out Form 8880. This Form can help you figure out how much of a credit you are actually eligible for, and help you figure out how to claim the credit. While you can earn up to $2,000 in credit as a married couple, the reality is that credit often amounts to less.
How the Saver’s Tax Credit Can Help Your Finances
According to the IRS, the average credit amounts for filers in tax year 2012 were $127 for single filers, $215 for joint filers, and $165 for Heads of Household. Even though this might seem a little bit low, the reality is that the saver’s tax credit can help your finances. If you are someone with a low to moderate-income, even an extra $100 can make a difference.
First of all, the saver’s tax credit encourages you to set aside more money for retirement. This is a good financial move for the future. Your money grows tax-deferred in Traditional IRAs and 401(k)s for decades, which means that more of it is growing at a faster pace. Plus, you get a tax deduction for these contributions, which lowers your taxable income, and reduces what you owe.
The saver’s tax credit can then add to financial good news. You receive the credit and it directly reduces what you owe in taxes, just like a gift card applied to a purchase. If you don’t owe tax, your credit is refundable, so it is added to make a bigger refund, which you can then use to improve your finances.
If you have a low to moderate-income, it makes sense to check into the saver’s tax credit and see if it makes sense for you.