One of the lesser known tax credits out there is the Saver’s Credit. A credit is a dollar amount that reduces your taxes. It is better than a deduction, that reduces your taxable income. The Saver’s Credit allows lower to middle income taxpayers to take a credit based on the amount the taxpayer has contributed to a retirement plan. This is in addition to any other benefits you may get from contributing to your IRA or employer’s 401(k) plan. The credit can be as high as 50% of your retirement contribution. So say you Contribute $2,000 to your IRA account during the year. You will get to deduct $2,000 from your income, and that will save you at least $200 on your taxes. In addition, you may qualify for up to a $1,000 Saver’s credit. That is another $1,000 off your taxes. So the $2,000 IRA contribution really only cost you $800. The other $1,200 you would have paid in taxes if you hadn’t put it in your IRA. This is a really sweet deal. Anyone who’s income is under $26,000 if single, or $52,000 if married should look into this credit. And remember, you can make a 2007 IRA contribution as late as April 15, 2008.
Here is more on the Saver’s credit from the IRS.
If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be able to take a tax credit.
The Savers Credit formally known as the Retirement Savings Contributions Credit applies to individuals with a filing status and income of:
- Single with income up to $26,000
- Head of Household with income up to $39,000
- Married Filing Jointly, with incomes up to $52,000
To be eligible for the credit you must be at least age 18, not a full-time student, and cannot be claimed as a dependent on another person’s return.
You may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly) if you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans.
The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.
When figuring this credit, you generally must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies for distributions starting two years before the year the credit is claimed and ending with the filing deadline for that tax return.
The Retirement Savings Contributions Credit is in addition to other tax benefits which may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.
For more information, review IRS Publication 590, Individual Retirement Arrangements and Form 8880, Credit for Qualified Retirement Savings Contributions. The publication and form can be downloaded at IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).
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