For most tax-related issues, the IRS functions on a calendar-year basis. For example, all of your income made between January 1 and December 31 is taxable. If you have a child on January 1 of next year… that child tax credit isn’t available until next year. However, there are a few cases in which the IRS gives you a little wiggle room – and retirement savings is one of them.
Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2007 and the years ahead, with the use of a “saver’s credit.” Begun in 2002 as a temporary provision, the saverâ€™s credit was made a permanent part of the tax code in legislation enacted last year. But now, to help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation.
The saverâ€™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 saverâ€™s credit is available in addition to any other tax savings that apply.
Now that a growing number of employers are automatically enrolling their employees in 401(k) plans, the saverâ€™s credit offers many people who save for retirement an added bonus.
But the best part? Eligible workers still have time to make qualifying retirement contributions and get the saverâ€™s credit on their 2007 tax return. People have until April 15, 2008, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2007. However, elective deferrals (those automatic withdrawals from your paycheck) must be made by the end of the year to a 401(k) plan or similar workplace program. If you’re unable to set aside money for this year, you should schedule your 2008 contributions soon so your employer can begin withholding them in January.
The following people can claim the saver’s credit:
- Married couples filing jointly with incomes up to $52,000 in 2007 or $53,000 in 2008;
- Heads of Household with incomes up to $39,000 in 2007 or $39,750 in 2008; and
- Married individuals filing separately and singles with incomes up to $26,000 in 2007 or $26,500 in 2008.
Like other tax credits, the saverâ€™s credit can increase a taxpayerâ€™s refund or reduce the tax owed. Though the maximum saverâ€™s credit is $1,000, or $2,000 for married couples, you should know that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.
A taxpayerâ€™s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saverâ€™s credit, and its instructions have details on figuring the credit correctly.
So be sure and set up a retirement account if you haven’t done so already! There’s nothing like saving for retirement to keep money away form Uncle Sam.