Saver’s Credit for Low-Income Households

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August 28th, 2009 | cashrunner | Posted in Finance

The Retirement Savings Contributions Credit, more commonly known as the Saver’s Credit, allows low-income households to claim a tax credit of up to $1000 (single) or $2000 (married). You can reduce the amount of federal income tax you owe by the amount of the tax credit. Here’s how you can get it.

Requirements

You can take this credit if:

You made contributions to a qualified retirement plan such as an employer-sponsored 401k plan, a Traditional IRA, or a Roth IRA.
Your adjusted gross income is equal to or less than $26,500 (single), $39,750 (head of household), or $53,000 (married filing jointly). [Figures for 2008.]
You are 18 or older.
You were not a full-time student during any part of 5 calendar months.
You cannot be claimed as a dependent on someone else’s tax return.

Maximum Credit

The amount of the credit you can claim is calculated as a percentage of your adjusted gross income.

For your 2008 tax return, use the following guidelines.

Single or Married Filing Separately

$0-$16,000 => Credit amount is 50% of contribution.
$16,001-$17,250 => Credit amount is 20% of contribution.
$17,251-$26,500 => Credit amount is 10% of contribution.

Married Filing Jointly

$0-$32,000 => Credit amount is 50% of contribution.
$32,001-$34,500 => Credit amount is 20% of contribution.
$34,501-$53,000 => Credit amount is 10% of contribution.

Head of Household

$0-$24,000 => Credit amount is 50% of contribution.
$24,001-$25,875 => Credit amount is 20% of contribution.
$25,876-$39,750 => Credit amount is 10% of contribution.

Choice of IRA

You may choose between a Traditional IRA and Roth IRA. (If you cannot contribute to an employer-sponsored retirement plan, these may be your only choices.) For many low-income households, contributing to a Roth IRA is going to be more valuable than a traditional IRA. That’s because a large part of the savings from a Traditional IRA are due to the tax deduction you can take each year on the amount of your annual contribution. However, if your taxable income is not that much and you are in a low tax bracket, the tax savings from those deductions are going to be relatively little. A Roth IRA would make more sense. Although it does not give you annual tax deductions, it allows you to keep the earnings from your investments from ever being taxed, which a Traditional IRA doesn’t. For a low-income household, tax-free withdrawals of your earnings in the future will be more important. Note that you have until the day your taxes are due (April 15) to contribute to an IRA to claim the Saver’s Credit for the previous year.

Photo Credit: Komunews

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