Take advantage of the savers tax credit
I take my hat off to anyone who has earned the savers tax credit
The savers tax credit is a tax credit is a tax incentive for those with low income jobs to invest. In the tough economy more people can take advantage of this credit. According to the IRS “The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Formally known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.”
The truth is when you are not making a lot of money saving money can be difficult. The savers tax credit give additional incentive for those in low income jobs to save.
To qualify for the credit you must be over the age of 18.
You must not be claimed as a dependent on anyone else’s return.
You cannot be a full time student for five months or more during the calendar year.
Your income limits must be below $27,751 single or $55,501 married for 2009. These limits are indexed for inflation.
The IRS regulations are quite complex but if you single and are going to earn $32,000 don’t write this credit off just yet. Some of the deductions you may be able to take include:
Student loan interest
Tuition and fees
Your Ira deduction
In cases where you are contributing to a traditional 401K or IRA plan (not a Roth) you will be reducing your adjusted gross income. Just as an example if you contribute $2000 to your traditional IRA were making $29,500 your adjusted gross income would then drop to $27,500 and bingo you would qualify for the tax credit!
You have until you file your taxes or April 15th of the following year to take advantage of the savers tax credit.
The savers tax credit can be worth a lot
The savers tax credit can be worth a lot
To get the full 50 percent tax credit your adjusted gross income must be below 16,500 single or 33,000 married. Assuming you are contributing $2000 to your 401K plan at work and your employer is matching 100 percent your actual cost to invest this money is minimal!
In the case above let us assume the employee contributes $1000 of his wages to the company 401K. The company matches and contributes another $1000. The employee is in the 10 percent federal tax bracket and the 5 percent state. The employee’s cost of investing the money is $850 dollars. Now when the person files their taxes they get a $500 dollar tax credit, bringing the total cost of investment to the employee down to $350. Think about that for a $350 dollar investment you can get $2000 in your 401K!
Not everyone will qualify for the full 50 percent credit as it is phased out as one approaches $27,500. The savers tax credit is still a very good deal for those who can take advantage of it.
If you do not have a 401K at work you may still take advantage of this plan by starting an IRA. As stated earlier you have until the April 15th to take advantage of this tax credit. With either a 401K or an IRA you can invest in fixed income or mutual funds. With an IRA (Roth or Traditional) your investment choices will be better. Always choose the best mutual funds for your investment portfolio.
The IRS regulations are quite complex therefore some investigation will be required based on your circumstances.
Are you the grand parent of a struggling young adult? Were you looking for an effective way do some gifting? Contributing to the persons IRA can be a very cost effective way to gift the money.
