Don't Ignore This Tax Credit for Retirement Savings
by Terri Eyden on
By Ken Berry, Correspondent
Do you have to preach the virtue of retirement savings to your moderate-to-low income clients? Perhaps an extra tax incentive can help convince procrastinators to take the plunge. Due to an underpublicized break for retirement contributions, certain taxpayers may cut their current tax bill while stockpiling funds for the future. The IRS recently reminded taxpayers about this little nugget (IR-2013-93, December 4, 2013).
Here's the scoop: The "retirement saver's credit" is applied to the first $2,000 of voluntary contributions made to a qualified retirement plan, such as an IRA or a 401(k), although taxpayers are allowed to contribute up to the allowable annual limits. For taxpayers in the lowest income bracket, the credit is equal to 50 percent of the qualified contribution, reduced to 20 percent for taxpayers in the next income bracket, and finally 10 percent for the next group. Use Form 8880 and accompanying instructions to figure out the credit.
On 2013 federal income returns that clients will be filing in 2014, the credit is available to:
- Married couples filing jointly with incomes up to $59,000;
- Heads of household with incomes up to $44,250; and
- Married individuals filing separately and singles with incomes up to $29,500.
The retirement saver's credit seems to fly under the radar. For the 2011 tax year, the latest year for which figures are available, the IRS says the total credits amounted to just slightly more than $1.1 billion on nearly 6.4 million income tax returns. The average credit was $215 for joint filers, $166 for heads of household, and $128 for single filers.
Yet the credit can be valuable to clients who might otherwise neglect saving for their retirement. It may also benefit children of more affluent clients who graduated from school this year and have landed their first job. It's not too early to teach these offspring about the power of tax-deferred compounding. There are, however, three key restrictions:
- The taxpayer claiming the credit must be at least eighteen years old.
- Anyone who is claimed as a dependent on someone else's return can't take the credit.
- A full-time student (i.e., someone enrolled in school during any part of five calendar months during the year) isn't eligible for the credit.
Assuming an individual qualifies, the deadline for claiming the retirement saver's credit for IRA contributions is the tax return due date for the year of the contribution, Thus, clients generally have until April 15, 2014, to set up a new IRA for this purpose or to contribute to an existing one. However, elective deferrals to a 401(k) or similar employer-sponsored plan must be made by December 31, 2013.
Finally, if a client can't manage to contribute for the 2013 tax year, it's not too soon to start thinking about 2014. This is especially true for those who want to arrange deferrals through a salary reduction plan.
Wait, there's more!
There's always more at AccountingWEB. We're an active community of financial professionals and journalists who strive to bring you valuable content every day. If you'd like, let us know your interests and we'll send you a few articles every week either in taxation, practice excellence, or just our most popular stories from that week. It's free to sign up and to be a part of our community.
Premium content is currently locked
2 weeks 5 days ago by mucar1990