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Don’t forget the saver’s credit

By Jennie L. Phipps · Bankrate.com
Wednesday, November 5, 2014
Posted: 1 pm ET

The saver's credit is one of the best deals going for people without fat-cat incomes. In short, you save $2,000 for retirement, and Uncle Sam will reward you by reducing your tax bill by as much as $1,000. You don't even have to max out your retirement savings plan.

It is easy money -- something in short supply these days.

The IRS stepped up this week to remind retirement savers about the credit and raise the levels of income at which savers can qualify. Here are the basics you need to know to take advantage of the 2014 -- and 2015 -- saver's credit.

The saver’s credit offsets up to 50 percent of the first $2,000 workers contribute to an IRA and 401(k) -- both Roth and classic  -- as well as other workplace retirement plans, including a savings incentive match plan for employees, or SIMPLE, plan; a 403(b) program, a governmental 457 plan or a salary reduction simplified employee pension, or SEP.  Contributions to the federal government employees' thrift savings plan also qualify.

In the chart below, you can see how much the credit will be worth to you based on your adjusted gross income -- this year and next:

2014 saver's credit

Credit rate Married filing jointly Head of household All other filers*
50% of your contribution AGI not more than $36,000 AGI not more than $27,000 AGI not more than $18,000
20% of your contribution $36,001 - $39,000 $27,001 - $29,250 $18,001 - $19,500
10% of your contribution $39,001 - $60,000 $29,251 - $45,000 $19,501 - $30,000
0% of your contribution more than $60,000 more than $45,000 more than $30,000

2015 saver's credit

Credit rate Married filing jointly Head of household All other filers*
50% of your contribution AGI not more than $36,500 AGI not more than $27,375 AGI not more than $18,250
20% of your contribution $36,501 - $39,500 $27,376 - $29,625 $18,251 - $19,750
10% of your contribution $39,501 - $61,000 $29,626 - $45,750 $19,751 - $30,500
0% of your contribution more than $61,000 more than $45,750 more than $30,500

*Single, married filing separately, or qualifying widow(er)

No check from Uncle Sam

The credit is a good deal, but it has its limits. It is a credit -- a dollar-for-dollar reduction of tax liability. If your standard or itemized deductions or personal exemptions eliminate your tax liability, you won't be able to claim the saver's credit. You can't carry it forward to next year or get a tax refund based only on your saver's credit.

The maximum saver’s credit is $1,000 for singles or married couples filing separately, or $2,000 for married couples filing jointly, but the IRS warned that in 2012 -- the last year for which it has complete figures -- the saver’s credit averaged a modest $215 for joint filers, $165 for heads of households, and $127 for single filers.

If you took a distribution from your retirement plan in the last couple of years, the IRS will reduce the credit for which you qualify. In 2014, the look-back period runs from Jan. 1, 2012, through the due date, including extensions, of your 2014 tax return.

Eligible taxpayers must be at least 18 years of age:

  • Anyone claimed as a dependent on someone else's return cannot take the credit.
  • A student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during 2014 is considered a student.

Workers have until April 15, 2015 to set up a new IRA or add money to an existing IRA for 2014. Contributions to a 401(k) or similar workplace program must be made by the end of the year to count on their 2014 tax return.

Help your kids earn a tax break

Don't let all these rules discourage you from claiming this credit. Even if your credit isn't huge, some money off your tax bill is better than no money. People with too much income to take advantage of the saver's credit might consider gifting their grown children with enough money to take advantage of it, and they'll also get money back when they file their taxes. A great holiday present.

Here are six off-beat ways to invest your IRA.

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