Now a tax credit will let some savers reap the rewards of their retirement thrift early!
The retirement savings contributions credit, also referred to as the “saver's credit”, appears on Form 1040 and Form 1040A tax returns as a way to reward lower-wage earners who sock away retirement money.
Because the tax break is a credit instead of a deduction, it's a better deal. Tax deductions reduce taxable income, but credits come into play after you calculate how much tax you owe, and they reduce your Internal Revenue Service bill dollar for dollar. For example, if you owe $500 and you are eligible for a $250 credit, the check you have to write to Uncle Sam is cut in half.
Income limits
A filer eligible for the saver's credit could shave as much as $1,000 off his or her tax bill. The actual credit amount depends on income, filing status and just how much is put into retirement plans. Basically, the lower the income, the bigger the credit. The income limits that determine how large a credit one can claim are adjusted annually to keep pace with inflation. The precise credit percentages for 2014 filings are found in the table below.
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Retirement savings credit guidelines; earnings are adjusted gross income |
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Credit rate |
Single, widow(er) or married separate filer income limits |
Married, joint filer income limits |
Head of household filer income limits |
|
50% |
Up to $18,000 |
Up to $36,000 |
Up to $27,000 |
|
20% |
$18,001 to $19,500 |
$36,001 to $39,000 |
$27,001 to $29,250 |
|
10% |
$19,501 to $30,000 |
$39,001 to $60,000 |
$29,251 to $45,000 |
|
No credit |
$30,000 or more |
$60,000 or more |
$45,000 or more |
As the table shows, the maximum available credit is 50 percent of contributions for filers in the lower-end of their earnings ranges. There is, however, a limit on the retirement plan contribution amount you can use to figure the tax break.
Which contributions count?
Contributions to an employer-sponsored 401(k) plan count toward computing the credit. So does money put into a savings incentive match plan for employees, or SIMPLE, plan; a 403(b) program; a governmental 457 plan; or a salary reduction simplified employee pension, or SEP. You can only count the money you put in to a workplace account. Matching contributions are excluded.
The credit is based on total contributions to all eligible retirement accounts, not for contributions to each. So if $2,000 was placed into an IRA and another $2,000 into a 401(k) at work, the calculation for the credit on the allowable maximum is $2,000.
To apply the credit, enter the allowable limits of the total of retirement saving amounts on Form 8880, Credit for Qualified Retirement Savings Contributions, and complete the form to arrive at the exact credit rate and amount. Once the dollar amount is determined, transfer it to line 50 of on the 1040 form or line 32 if filing the 1040A form. The credit isn't available for 1040EZ filers, so one might consider changing their choice of returns.
A pervious retirement blog post on How to Not Outlive Your Money can be read here.
Caldwell Trust Company
Caldwell Trust Company is an independent trust company with offices in Venice and Sarasota, Florida. Established in 1993, the firm currently manages over $800 million in assets for clients throughout the United States. The company offers a full range of fiduciary services to individuals, including services as trustee, custodian, investment adviser, financial manager and personal representative. Additionally, Caldwell manages 401(k) and 403(b) qualified retirement plans for employers.