US Savers Advised To Plan Now To Gain Tax Credit

Mike Godfrey for Tax-News.com writes: The US Internal Revenue Service (IRS) has reminded low- and moderate-income workers that they can take steps now to save for retirement and earn a special tax credit in 2014 and in future years.

The IRS noted that the saver's credit helps offset part of the first USD2,000 workers voluntarily contribute to individual retirement arrangements (IRAs), 401(k) plans, or similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver's credit is available in addition to any other tax savings that may apply.

The agency pointed out that eligible workers still have time to make qualifying retirement contributions and obtain the saver's credit on their 2014 tax return. The credit can increase a taxpayer's refund or reduce the tax owed.

Workers have until April 15, 2015, to set up a new individual retirement arrangement or add money to an existing IRA for 2014, but elective deferrals (contributions) must be made by the end of the year to a 401(k) plan or similar workplace program.

The saver's credit can be claimed by married couples filing jointly with incomes up to USD60,000 in 2014, or USD61,000 in 2015; heads of household with incomes up to USD45,000 in 2014, or USD45,750 in 2015; and married individuals filing separately and singles with incomes up to USD30,000 in 2014 or USD30,500 in 2015.

However, a taxpayer's actual credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.

In tax year 2012, the most recent year for which complete figures are available, saver's credits totaling USD1.2bn were claimed on more than 6.9 million individual income tax returns. Saver's credits claimed on these returns averaged USD215 for joint filers, USD165 for heads of household, and USD127 for single filers.

The saver's credit also supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.