It sounds too good to be true: some workers can get a double tax benefit by saving for retirement. But the federal Saver’s Credit does just that by providing a second layer of tax incentives for lower-income households beyond the benefit of tax deferral for contributing to a 401(k) or IRA.
The Saver’s Credit can be worth up to half of what you contribute to a traditional individual retirement account (IRA), Roth or workplace retirement plan
The Saver’s Credit provides a credit up to $1,000 ($2,000 for joint filers) for contributions to an IRA or workplace plan. For the 2015 tax year, it is available to joint filers with adjusted gross income up to $61,000. Single filers get the credit with income up to $30,500. Even if you did not contribute to a workplace plan last year, you can make a 2015 IRA contribution before April 18 to claim the credit.
Unlike a deduction, which reduces the amount of taxable income you claim, a credit is a dollar-for-dollar reduction of federal income tax liability. The amount of your Saver’s Credit can range from 10 percent to 50 percent, based on the amount you save, your income and your filing status. See IRS Form 8880 for details.
The credit can be claimed only on tax returns using forms 1040, 1040A or 1040NR. There is no opportunity to claim the credit on the 1040EZ.
Another barrier: in order to take advantage of the credit, you need to have an income tax liability in the first place. According to the Tax Policy Center, 70 percent of households with incomes below $47,353 had no federal tax liability in 2014, using a broad definition of pretax income.
Many legislators and policy experts have urged strengthening the credit by making it refundable — in other words, available no matter what your tax liability. A bill introduced this month by U.S. Senator Ron Wyden, an Oregon Democrat, would create a refundable credit that would be deposited directly into a taxpayer’s IRA or myRA account.
If you have not made a contribution to an IRA or myRA for 2015, you have until April 18 to do so (the usual April 15 deadline for tax returns has been pushed back by three days this year due to various state holidays on the 15th).
Most workers eligible for the Saver’s Credit also can take advantage of the IRS Free File program, which makes tax preparation programs from 13 software companies available free of charge. This is available to taxpayers with adjusted gross income of $62,000 or less.
Mark Miller is a Reuters columnist.