2/12/2014 9:30 PM ET|
Will Uncle Sam match your 401k?
Here's how low- and middle-income earners can take advantage of the retirement saver's tax credit.
Low- and moderate-income workers who save for retirement in 401k's and individual retirement accounts may be eligible for a valuable tax credit that could be worth as much as $1,000 for individuals and $2,000 for couples. Here's how to claim the saver's credit on your 2013 or 2014 tax return:
Contribute to a retirement account
The saver's credit can be claimed on up to $2,000 ($4,000 for couples) that is contributed to IRAs, 401k plans or similar types of workplace retirement accounts. Workers have until April 15, 2014, to make an IRA contribution that can count toward tax-year 2013.
"Don't give up on your deductions and credits for 2013. You have up until your tax filing deadline to make this move," says Lisa Greene-Lewis, a certified public accountant with TurboTax and a contributor to the U.S. News My Money blog. "It's a winning situation because you are saving for your retirement, and that money is going to grow and you are also saving on your taxes."
However, contributions to workplace retirement plans generally need to be made by the end of the calendar year to qualify for the credit. "Employees who are unable to set aside money for (2013) may want to schedule their 2014 contributions soon so their employer can begin withholding them in January," according to a statement from the Internal Revenue Service.
Adhere to the income limits
The saver's credit can be claimed by individuals with incomes up to $29,500 in 2013 or $30,000 in 2014. For heads of household, the income limits are $44,250 in 2013 or $45,000 in 2014. Married couples can earn as much as $59,000 in 2013 or $60,000 in 2014 and still claim the saver's credit. These income limits are adjusted annually to keep pace with inflation.
Calculate your credit
The amount of the credit will be 50 percent, 20 percent or 10 percent of your 401k or IRA contributions up to $2,000 ($4,000 for couples), with the biggest credit going to savers with the lowest adjusted gross incomes. To get the 50 percent credit, savers need to have an income below $18,000 for individuals, $27,000 for heads of household and $36,000 for couples in 2014. The 20 percent credit rate applies to individuals earning between $18,001 and $19,500 ($36,001 and $39,000 for couples). And individuals with an adjusted gross income between $19,501 and $30,000 ($39,001 and $60,000 for couples) in 2014 are eligible for a 10 percent credit on their retirement savings.
Twice the tax breaks
The saver's credit can be claimed in addition to the tax deduction you get for contributing to a traditional 401k or IRA. The saver's credit can also be claimed on Roth IRA contributions, but in this case, you would only get the credit and not a tax deduction.
For example, consider a married couple in which one spouse works and earns $30,000. If they contribute $1,000 to an IRA, their adjusted gross income will be reduced to $29,000 on their tax return. The couple may also claim a 50 percent credit, which is worth $500, for their $1,000 IRA contribution.
"Most are well aware of the tax-deferred nature of saving in a 401k or similar plan or the opportunity to save in a Roth IRA, and the fact that there could be a full-on tax credit in the form of the saver's credit above and beyond that saving advantage is almost too good to be true," says Catherine Collinson, president of the Transamerica Center for Retirement Studies. "Whether someone contributes $20 or $50 or $200, it's important to take advantage of that benefit."
You might not get $1,000
Saver's credits worth just over $1.1 billion were claimed on nearly 6.4 million individual income tax returns in 2011. But most retirement savers received small credits, averaging $128 for individuals, $166 for heads of household and $215 for couples.
The saver's credit is nonrefundable, so you won't be able to claim it if other credits have already eliminated your tax liability. "You would need to contribute $2,000 as an individual, and the couple would each need to contribute $2,000, so $4,000 in total, to get $1,000 or $2,000 as a credit," says Jackie Perlman, a principal tax research analyst for The Tax Institute at H&R Block.
And you would need to be below the income cutoffs to get the full 50 percent match. For most people, "You might get a few hundred dollars back on your tax return," Perlman says.
Find out if you're ineligible
You won't be able to claim the saver's credit if you are under 18 years old or were claimed as a dependent on someone else's tax return. Individuals who were enrolled as full-time students during any part of five calendar months during the year are also unable to get the credit. Rollover contributions aren't eligible for the saver's credit, and eligible contributions could be reduced if you have recently taken distributions from a retirement account.
Get the right forms
You'll need IRS Form 8880 to claim this credit, and to attach it to your 1040, 1040A or 1040N when you file your tax return. "Don't use the 1040EZ Form," Collinson cautions. "If you use tax-preparation software, be on the lookout for it so you can be sure to claim it."
Only 23 percent of people with household incomes of less than $50,000 per year, the group most likely to qualify, say they are aware of the saver's credit, according to a 2013 Transamerica Center for Retirement Studies survey. If you're close to the income cutoffs, consider calculating whether or not you could get a tax deduction and credit by putting even a small amount of cash in a retirement account.
"Do some modeling with tax-preparation software and see what your tax would look like if you fund the IRA and took the credit or if you did not," Collinson says. "For those that meet the income eligibility requirement, it's really important to take advantage of that."
More from U.S. News & World Report
VIDEO ON MSN MONEY
Another form of rewarding the under achiever while picking the pocket of the over achiever.
What's next ............
A couple of facts to clarify my background before people start delving into my inexperience as a taxpayer due to my student status: I am a 25 year old Marine Corp. Veteran taking advantage of my GI Bill that I EARNED (not a welfare system) regardless of whether the way in which the government used my services are popular or not. I work full time while going to school, and I pay into social security that frankly I will never see in my lifetime.
Personally I feel this is a great way to give incentive to young people so that they are more apt. to save. I have saved on my own since my first deployment, but the bulk of young people do not save enough especially considering we will not have S.S. as a crutch. Furthermore the young people are not the problem, social security is a system handed to us by past generations and quite frankly a majority of older people do not save either as we are finding many unable to get by even with their welfare checks.
Maybe if FDR never enacted social security ponzi scheme our society wouldn't have to try to instil a savers mindset. In a decade or two we are going to be faced with a choice to come up with a new welfare system, or maybe we face reality and realize that it is our own responsibility to make sure we save enough money for when we are old.
In summary the way I look at this program as a guy who won't ever see social security: recouping money that I have been paying into a program since I was 15 and will never see a payoff for down the road. Most people eligible are likely in the "never see social security" category.
(Again, I am not eligible for this program but I fully support anyone mid-40's and younger to take full advantage you've paid for it).
Uncle Sam is BROKE,,,,,,,,,,,,,,,he has no money. Obama has added $7,000,000,000,000.00 dollars to the national debt in five years. For every two dollars he spends,,he borrows one more. 33% of govt funding is debt.
Grow some brain cells idiots,,,,,,,,,,,,,,,,,,,,,,,,,,,Barry ain't got no money to give you, period.
I don't understand some of the negative comments on this blog regarding this issue. Why wouldn't anyone want to reduce their tax liability. Hey, it is your own money remember. Moreover, this is a good way to add to your 401k retirement nest egg. This is NOT welfare, it is YOUR OWN money. You paid into the IRS, now they are providing for a little additional back. Take it while you can. What I don't agree with is the "earned income credit" The EIC is nothing more than welfare for low income people who are like;y already receiving Section 8 housing, aid to dependent children & food stamps. The 401k savers credit that they are talking about here is not the same as the afore mentioned welfare programs.
Beware what the government giveth they can also taketh away. There is already talk by government officials that they want to do a one time tax on your entire retirement portfolio. Say you have worked for 35 years, lived frugally and managed to amass a retirement balance of $1,000,000 because you did not want to be a burden on the government or your children in retirement. The government can''t borrow anymore money from China so they will simply pass a law or Obama will simply issue an executive order to tax every 401k plan 5% or $50,000. Think it can't happen. You would be very wise to think again.
I don't understand why so many people are hostile when it comes to a tax credit or tax deduction. Why do you think this is some form of welfare. The income amounts for this credit/deduction disqualifies the person earning that amount for welfare in many states. My family's annual income after taxes is less than the $29K stated for an individual. I still contribute 3% of my income to a 401K, 1% to life insurance and another 2% into short/long term disability. For the most part I live within my means (except for rent, but that is because I sacrificed expense for safety).
A person with an income of 29k has a before tax income of 550+ a week. At this income level a smart single person can contribute $100 a month to a 401k and not be adversely affected by it. It can be done. You just have to be willing to do it. As another poster said "Pay yourself first".
My grandmother always says if you've been living off of one income level and begin making more, save the more and continue to live off of the first income level. She's 80 and saved enough money to travel the world and go on luxury cruises.
Seems to me, you'd want to know what the flat tax RATE (or any other replacement tax) is before you decide. But then again, people want all kinds of things before they know what the consequences are.
I keep reading a flat tax or NST rate would be 17%-20%. My current effective income tax rate is 10%. With those rates a flat tax would double my income tax.
The highest effective income tax rate right now is about 40%. A 17%-20% flat tax or NST rate would cut that in half. Hmmmm, no wonder the rich love a flat tax.
What is YOUR effective tax rate right now? Do you even know how to calculate it?
It isn't only about the criminals paying taxes or the post card you'll fill out. It's also about the size of the check YOU will write to go along with the post card.
Copyright © 2014 Microsoft. All rights reserved.