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
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 taxpayers 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
1. The taxpayer claiming the credit must be at least eighteen years old.
2. Anyone who is claimed as a dependent on someone else's return can't
take the credit.
3. 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, taxpayers 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