Get a Tax Credit for Contributing to Your Traditional & Roth IRA and/or 401k in Your Federal Tax Returns!

I came across this tax credit a couple years ago while completing my tax returns. I was pretty surprised that most of my friends never heard of it even though many of them contribute to retirement accounts.

Many of us have been told to save for our “nest egg” aka retirement via a Traditional or Roth IRA. Contributions to traditional IRAs receive a tax break since the monies are not counted as taxable income for that year. By contrast, contributions made to roth IRAs are taxed, but future withdrawals are tax free.

Did you know, however, that there is an annual tax credit that offers low to moderate income earners save for retirement?

Since 2006, the U.S. federal government made it a permanent part of the federal tax code. The “saver’s credit” helps low/moderate income earners save for retirement by giving them a tax break (on top of the tax benefits already received by contributing to a retirement account) when they make voluntary contributions to their traditional or roth IRAs, 401ks (or similar plans such as 403b for individuals who work for public schools and non profits or the Thrift Savings Plan for federal employees). See IRS Bulletin for details on “eligible contributions“. This “saver’s credit” is adjusted annually for inflation and it offsets the first $1,000 ($2000 for those that are married and filing jointly) that income earners contribute to their IRAs and 401(k) plans (or similar).

Below are my answers to common questions regarding this tax credit and information on how to file for it on your next federal tax return!

QUESTIONS & ANSWERS

Who is considered a “low/moderate” income earner?

According to the IRS (See Bulletin), an individual or household (if filing jointly) can claim the “saver’s credit” if their modified adjusted gross income is not more than the following (for 2009 filings):

• $55,500 for those whose filing status is “married” and filing together
• $41,625 for those that are filing as “head of household”
• $27,750 for those that are filing as “single” (including those that are married but filing separate tax returns), or a “widow(er)”

What if my income is higher than the above numbers? Is it possible for me to receive this tax credit?

Note that the income limits are based on modified adjusted gross income. This means that if you make more (at times quite a bit more), there’s still a chance for you to reap the benefits of the “saver’s credit”.

For instance, you can try to lower your modified adjusted gross income by:

• Increase contributions to a traditional IRA, (2009 Limit: $5,000 for ages 49 and below, $6,000 for ages 50+)
• Increase contributions to a work based retirement savings account (e.g. 401k, 403b, Thrift Savings Plan/TSP), 2009 Limit: $16,500 for ages 49 and below, $22,000 for ages 50+)
• Contribute to a Health Savings Account (if you qualify), 2009 Limit: $3,000 for individuals, $5,950 for families, $1000 for individuals 55 and up for “catch up”)
• Contribute to pre-tax accounts through your employer such as: flexible spending accounts for health needs and public transportation/commuter check accounts, Limits: Varies
• Sell investments (e.g. stocks, bonds) that are losing money and claim capital losses up to $3,000. See IRS Bulletin regarding the treatment of capital losses.

For additional tips, read Kiplinger’s article “How to Lower Your Adjusted Gross Income“.

Who qualifies for the “saver’s credit”?

In addition to meeting the adjusted modified gross income limits, you must be:

• At least 18 years old and an “eligible taxpayer”
• You cannot be claimed as a dependent on anyone’s tax return
• A student CANNOT claim this credit. According to the IRS, an individual is considered a “student” if they are “enrolled as a full-time student during any part of 5 calendar months during the year”.

For more information and tips, see Kiplinger’s article “Qualifying for the Retirement Saver’s Tax Credit“.

I qualify for this “saver’s credit”. How do I claim it on my 2009 federal income tax filings?

Congrats if you qualify for the “saver’s credit”. To claim it on your next federal income tax filings, enter the credit amount on Line 51 (Form 1040), Line 32 (Form 1040A). In addition, complete and attach Form 8880 to your federal income tax filings. Note: If you intend on claiming this tax credit, you cannot file with a Form 1040EZ (no section for “credits”).

For more information, see the following IRS Publications:

• IRS Tax Form 1040 (Line 51)
• IRS Tax Form 1040A (Line 32)
• Form 8880 (Must be attached with tax filings for credit)
• Individual Retirement Arrangements (IRAs),
  Skip to Page 81 where it talks about the “Saver’s Credit”