Saver's Credit
The Saver's Credit provides a nonrefundable tax credit for retirement plan contributions made by eligible, low-income taxpayers to IRAs and qualified elective income deferral arrangements. The credit provides incentives for lower income individuals to save for their retirement through available qualified plans. To qualify, the taxpayer must have reached the age of 18 by the close of the year and cannot be a full-time student or a dependent of another.
The credit ranges from 10% to 50% of the first $2,000 contributed by each taxpayer to a qualified plan during the year. The credit gradually phases out as a taxpayer’s modified AGI increases. This phase out is inflation adjusted from year to year, and the phase-outs for 2014 are illustrated below:
Modified AGI - Adjusted gross income is determined without regard to foreign and protectorate income exclusions or foreign housing exclusions.
The credit is nonrefundable and offsets alternative minimum tax liability as well as regular tax liability.
Example – Eric and Heather are married and file a joint return. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for the year was $30,000. The credit is computed as follows:
Eric's 401(k) contribution was $3,000, but only the first $2,000 can be used…..$2,000
Heather's IRA contribution was $500, so it can all be used……………………….........500
Total Qualifying contributions………………………………………………………...............$2,500
Credit percentage for a Joint AGI of $30,000 from the table……...……………... X .50
Saver's credit…………………………………………………………………………..................$1,250
Eric and Heather file a joint return using the standard deduction for a married couple and their tax for the year is computed as follows:
AGI……………………………………………………………………...................……………….$30,000
Standard Deduction…………………………………………..............………………………
Two Personal Exemptions ($3,950 each)………………......……………….……......< 7,900>
Taxable Income…………………………………………………….................…..…………… 9,700
Tax rate………………………………………………………………….….............……..........x 10%
Tax…………………………………………………………………………....................………....$ 970
Credit ($1,250 but limited to the amount of the tax)……...……………………...
Eric and Heather's tax for the year………………………………..........……………….. – 0 –
Caution – To prevent taxpayers from withdrawing contributions from existing plans, and subsequently recontributing the funds in order to qualify for the credit, Congress built-in a testing period – withdrawals during this period reduce the contributions eligible for the credit. The testing period consists of the year for which the credit is claimed, the period after the end of that year up through the extended due date of the credit-year return, and the two years prior to the credit-year.
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