Editor’s note: This article offers information relevant to the 2012 tax year.
If you’re looking for ways to save on your 2012 taxes, you might want to consider the benefit of the Saver’s Credit, which is also known as the Retirement Savings Contributions Credit.
This is a tax credit that helps low‑ and moderate‑income workers save for retirement.
And if you’re smart about it, and you take some special steps to carefully plan ahead, this tax credit can save you money as you file your federal income taxes for the 2012 tax year and many years to come.
How it Works
The IRS recently offered some tips about how you can use the Saver’s tax credit to reduce your taxes.
Essentially, the Saver’s credit helps you reduce or offset the first $2,000 worth of contributions that you make to an IRA, a 401(k) plan, or any kind of similar qualified retirement program.
This is particularly good for people who might be looking for end-of-year ways to save on their 2012 taxes. The idea is to sock away a few extra bucks for your Golden years – and then get a tax break for doing so.
You actually have up until April 15th, 2013 to make a contribution to your retirement plan and still get a Saver’s tax credit for the 2012 tax year.
Again, this applies to those who have 401(k) plans, or 403(b) plans, 457 plans, as well as those with Thrift Savings Plans if you’re a federal employee or a government worker.
As a bonus, your Saver’s tax credit is supplemental, or in addition to, other tax benefits you may get for setting aside money aside for retirement.
How to Know If You Qualify
Only those who meet certain income thresholds, however, can claim the Saver’s tax credit.
Married couples with incomes up to $57,500 in 2012 are eligible for this tax credit. For 2013, that income limit for joint filers goes up to $59,000.
If you’re a head of a household and you have an income of up to $43,125 in 2012, you qualify for the Saver’s tax credit. Or if you have $44,250 in income in 2013 as a head of household, you can claim the Saver’s credit.
Lastly, for married individuals who file separately or people who are single, the income limit in 2012 is $28,750 if you want to claim the Saver’s credit. That income limit for singles and married people filing separate returns jumps to $29,500 in 2013.
In addition to these income restrictions, there are a few other criteria for qualifying for the Saver’s credit. You must:
- not be under 18 years of age (Only taxpayers 18 and older qualify)
- not be claimed as a dependent on someone else’s tax return
- not be a student (Anyone enrolled as a full-time student during any part of five calendar months during the year is considered a student)
Bottom line: if you meet all of the criteria mentioned above, the maximum Saver’s credit that you can get is $1,000 for individuals or $2,000 for married couples.
Now, realistically, the actual amount of the Saver’s credit you get could turn out to be much less than that $1,000 or $2,000 figure. The IRS says that’s due to other factors, like the impact of deductions and other credits you may claim.
It depends on your individual circumstances, but it’s certainly worth checking into this taxpayer’s credit and investigating whether you do qualify for it.
Using IRS Form 8880
Should you qualify, you’ll need to use IRS Form 8880 to claim the Saver’s credit. That 8880 Form, called the Credit for Qualified Retirement Savings Contributions, also has the instructions on how you can figure out the Saver’s credit correctly.
And don’t worry: the IRS Form 8880 is very basic. It’s just two pages total – one page to calculate the Saver’s credit and one page of instructions.
Once you figure your exact Saver’s credit, you’ll enter that amount onto line 50 of your Form 1040. (If you’re filling out a Form 1040A, put your Saver’s tax credit on line 32; or if you’re using Form 1040NR, enter your Saver’s credit on line 47).
Those of you who won’t do your own taxes can certainly get help from other taxpayer assistance programs to figure out your exact Saver’s credit.
Every Bit of Saved Money Helps
For some perspective on this valuable tax credit, consider that in the tax year 2010, which is the most recent year for which full figures were available, Saver’s credits of more than $1 billion dollars were claimed by more than 6.1 million individual income tax returns.
On average, those taxpayers got $204 in credits for joint filers, $165 for those who were heads of household, and $122 for single filers.
And remember a tax credit is far more valuable that a tax deduction, because a tax credit is a dollar for dollar reduction of your tax liability. A tax deduction merely lowers your taxable income, which is used to calculate your tax liability.
Again, every little bit of money counts – especially when you’re trying to save money owed to the tax man.
So I’d encourage you to make a retirement contribution soon, if you haven’t already. And then, if you qualify, be sure to claim your Saver’s tax credit when you prepare your 2012 income tax return.