Little-Known Tax Perk Could Get Your Household Up to $2,000 from the IRS!

Little-Known Tax Perk Could Get Your Household Up to $2,000 from the IRS!

One of the fiscal perks of the U.S. Tax Code is the Retirement Savings Contributions Credit, or simply “Savers Credit,” which basically pays a dollar-for-dollar non-recourse credit of up to $1,000 (or $2,000 for married filing jointly) to certain taxpayers for retirement savings. 

Obviously, this could be a pretty sweet deal for those who are eligible because it’s a direct dollar-for-dollar reduction in taxes which could wipe out any tax owed – down to zero. But most of those who qualify aren’t even aware that any such thing exists – not that I’m blaming them, though. In fact, a recent study by the TransAmerica Center for Retirement Studies found that only 12 percent of those households earning less than $50,000 a year were aware of this valuable perk.

Interestingly enough, whenever this comes up during one of the Continuing Professional Education courses we offer, you’d be lucky to find more than a couple – literally speaking, here – in a roomful of retirement/financial professionals who knows about the Savers Credit. Seems fair to unload some responsibility for the lack of awareness here, doesn’t it?

* You must be at least 18 years old.

* You must not be a full-time student.

* No one else may claim a dependent exemption for you on their tax return.

* Your AGI may not exceed certain limits, depending on your filing status.

 

Depending on your AGI and filing status, the credit is calculated as one of three percentages (10 percent, 20 percent, or 50 percent) of the first $2,000 that you contribute to your 401(k), 403(b), 457, SEP, traditional IRA, or even Roth IRA. Thing to note here is that you receive this credit only on “your own” contributions, not any portion of your employer’s contribution.

Like most tax stuff, the AGI thresholds change frequently. For the 2012 tax year, you’d get:

Amount of Tax Credit	Single, Married Filing Separately, or Qualified Widow/er	Head of Household	Married Filing Jointly
50 %	AIG up to $17,250	AIG up to $25,875	AIG up to $34,500
20 %	AIG between $17,251 and $18,750	AIG between $25,876 and $28,125	AIG between $34,501 and $37,500
10 %	AIG between $18,751 and $28,750	AIG between $28,126 and $43,125	AIG between $37,501 and $57,500

As you can tell, the lower the income, the higher the credit because it is intended to help low- to moderate-income taxpayers who save for retirement.

Here are a couple final key points. Even if you’re already retired, collecting a pension, and saving money in, say, a Roth IRA, you can still claim this credit, insofar as you meet the income and dependent requirements. Also, it is extremely critical to note that this credit is not available to folks who use Form 1040-EZ to file. To claim the Savers Credit, you must use the 1040, 1040-A, or 1040-NR form.

 

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