Is the Saver's Tax Credit Right for You?

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Shutterstock/Gunnar Pippel One of the most overlooked ways for Americans to save money is in the area of tax planning. The key is to understand how to leverage tax laws based on your individual circumstances. For example, money you contribute to a 401(k), 403(b) or SIMPLE IRA is taken out pre-tax. This means you get an up-front tax deduction just for contributing to your work retirement plan. In addition to your employer-sponsored retirement plan, you might also qualify for a tax-deductible IRA. (If you don't have a company retirement plan at work, then you should definitely check out a tax-deductible IRA because the income limits are higher, and this might be one of the few ways to lower your tax bill.) However, most people don't know that they might qualify for an additional reward, just for being financially responsible and saving for the future. This credit is known as the Saver's Credit. What Is the Saver's Credit? The Saver's Credit is a tax break designed to help low- and moderate-income individuals and families. It's designed to reward your efforts as you save for retirement. While it can't actually provide you with a refund check, this tax break can reduce your tax bill and reduce what you might owe to the IRS. How Does It Work? The Saver's Credit will allow you to claim 10, 20, or 50 percent of the $2,000 you contributed to a qualified retirement account (this includes Roth IRAs and Roth 401ks) if you're an individual. For couples, you can claim a percentage of up to $4,000. How much you'll be allowed to claim when you file will depend on your modified adjusted gross income, or AGI. Which Retirement Accounts Qualify for the Credit? Contributions to traditional IRAs, Roth IRAs or employer-sponsored plans will count toward the Saver's Credit. Employer-sponsored plans are retirement accounts provided by your employer and could be a 401(k), 403(b), SARSEP or SIMPLE IRA. Do I Qualify for the Credit? Remember, the Saver's Credit is designed to help lower-income individuals and families who make saving a priority. You might not qualify if your income exceeds a certain point, and the percentage of your contribution that you can claim (10 percent, 20 percent or 50 percent) will also depend on your income. It's always best to check with your accountant regarding your specific situation, but here's a handy chart from the IRS to see if you qualify for the 2013 tax year:

Credit Rate	Married Filing Jointly	Head of Household	Single, married filing separately, or qualifying widow(er)
50% of your contribution	AGI not more than $35,500	AGI not more than $26,625	AGI not more than $17,750
20% of your contribution	$35,501 - $38,500	$26,626 - $28,875	$17,751 - $19,250
10% of your contribution	$38,501-$59,000	$28,876 - $44,250	$19,251 - $29,500

What this means is that if you're married filing jointly, your modified AGI must be less than $59,000 to qualify. If you file as head of household, your modified AGI has to be $44,250 or less, and if you're single, your modified AGI must be under $29,500. The important thing to keep in mind here is that these numbers reflect your modified adjusted gross income. Money that you save into an employer-sponsored plan, such as a 401(k) or a tax-deductible traditional IRA, can help you lower your modified AGI, which can help you qualify for the Saver's Tax Credit. If you're close to qualifying for a larger credit, you might want to see if you qualify for a tax-deductible IRA and make a prior year contribution before April 15. For example, if you're single and have a gross income of $19,500, but saved $1,000 for retirement in a 401(k) for 2013, your adjusted gross income would be reduced by $1,000, to $18,500, allowing you to claim a credit of 20 percent instead of 10 percent, for a total of $200. Here's another example: John and Mary are married and file their taxes jointly. They make $65,000 a year before taxes. They contribute 10 percent toward their 401(k) plans each year, which reduces their income by $6,500. Their modified AGI is now $58,500. (Notice how their large 401(k) contributions lowered their modified AGI, and they now qualify for the Saver's Credit). Because they're a couple, they can each claim $2,000 in contributions up to $4,000 (of the $6,500 in contributions that they made). Ten percent of their $4,000 contribution would qualify for a total credit of $400. See why this is my favorite tax credit? You're rewarded financially just for saving for retirement. What's favorite tax credit?