This is the seventh in a series of reminders to help taxpayers prepare
for the upcoming tax filing season.
WASHINGTON — As the tax filing season approaches, the Internal Revenue
Service reminds low- and moderate-income workers that they can take steps now
to save for retirement and earn a special tax credit in 2016 and years ahead.
The saver’s credit helps offset part of the first $2,000 workers voluntarily
contribute to IRAs and 401(k) plans and similar workplace retirement programs.
Also known as the retirement savings contributions credit, the saver’s credit
is available in addition to any other tax savings that apply.
Eligible workers still have time to make qualifying retirement contributions
and get the saver’s credit on their 2016 tax returns. People have until the due
date for filing their 2016 return (April 18, 2017), to set up a new individual
retirement arrangement or add money to an existing IRA for 2016. This includes
the Treasury Department’s myRA.
However, elective deferrals (contributions) must be made by the end of the year
to a 401(k) plan or similar workplace program, such as a 403(b) plan for
employees of public schools and certain tax-exempt organizations, a
governmental 457 plan for state or local government employees, or the Thrift Savings
Plan for federal employees.
Employees who are unable to set aside money for this year may want to
schedule their 2017 contributions soon so their employer can begin withholding
them in January.
The saver’s credit can be claimed by:
- Married couples filing jointly with incomes up to
$61,500 in 2016 or $62,000 in 2017;
- Heads of Household with incomes up to $46,125 in 2016
or $46,500 in 2017; and
- Married individuals filing separately and singles with
incomes up to $30,750 in 2016 or $31,000 in 2017.
Like other tax credits, the saver’s credit can increase a taxpayer’s refund
or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for
married couples), the IRS cautioned 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 taxpayer’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 saver’s credit, and its instructions have details
on figuring the credit correctly.
In tax year 2014, the most recent year for which complete figures are
available, saver’s credits totaling nearly $1.4 billion were claimed on more
than 7.9 million individual income tax returns.
The saver’s credit supplements other tax benefits available to people who
set money aside for retirement. For example, most workers may deduct their
contributions to a traditional IRA. Though Roth IRA contributions are not
deductible, qualifying withdrawals, usually after retirement, are tax-free.
Normally, contributions to 401(k) and similar workplace plans are not taxed
until withdrawn.
Other special rules that apply to the saver’s credit include the following:
- 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 5 calendar months during the year
is considered a student.
- Certain retirement plan distributions reduce the
contribution amount used to figure the credit. For 2016, this rule applies
to distributions received after 2013 and before the due date, including
extensions, of the 2016 return. Form 8880 and its instructions have
details on making this computation.
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