Dear Savvy Senior,
A coworker was recently telling me about a tax credit she got last year for simply contributing to our company's 401(k) plan. What can you tell me about this, and who's eligible?
It's called the "retirement saver's tax credit," and it's a frequently overlooked credit that's available to low and moderate-income individuals and families who make saving for retirement a priority. Here's how it works.
If your contribute to a traditional or Roth IRA, or an employer sponsored plan like a 401(k), 457, 403(b), SEP plan, SIMPLE IRA or other retirement-savings plan, the retirement saver's tax credit will allow you to claim 10, 20 or 50 percent of your contribution, depending on your income, up to a maximum of $1,000 per person or $2,000 per couple.
To qualify, you must also be at least 18 years old and not a full-time student, and were not claimed as a dependent on someone else's tax return. And your adjusted gross income in 2015 must be $61,000 or less as a married couple filing jointly, $45,750 or less if filing as head of household, or $30,500 or less if you're a single filer. These income limits are adjusted annually to keep pace with inflation.
To get the 50 percent credit, you'll need to have an income below $18,250 if you're single, $27,375 if you're filing as head of household, and $36,500 for couples in 2015.
The 20 percent credit rate applies to individuals earning between $18,251 and $19,750; for head of household filers it's $27,376 to $29,625; and for couples it's $36,501 to $39,500.
And the 10 percent rate is for individuals with an adjusted gross income between $19,751 and $30,500; for head of household filers 29,626 to $45,750; and couples it's between $39,501 and $60,100.
Double Tax Break
You also need to know that the retirement saver's tax credit can be claimed in addition to the tax deduction you get for contributing to your employer's retirement plan or a traditional IRA. Here's an example of how this works.
Let's say you're married and have an income of $37,000, and your spouse is not working. If you contribute $1,000 to your company's 401(k) plan, your adjusted gross income would be reduced to $36,000 on your tax return. You would also be able to claim a 50 percent retirement saver's credit, which is worth $500, for your $1,000 401(k) contribution.
Keep in mind though that this is a tax credit, not a deduction, so it lowers your income tax dollar for dollar. It is, however, a nonrefundable tax credit, which means it cannot reduce the amount of tax owed to less than zero.
How to Claim
To claim the credit, you will need to fill out Form 8880 and attach it to your 1040, 1040A or 1040NR when you file your tax return. Don't use the 1040EZ Form.
If you think that you would have qualified for the credit in previous years but didn't claim it, you can file an amended return as far back as 2011 and still get the credits. A 2011 amended return is due by April 15, 2015. See IRS Form 1040X for instructions on how to file an amended return.
And for more information on the retirement saver's tax credit, see IRS Publication 590 "Individual Retirement Arrangements."
If you don't have Internet access to see or download these forms, call the IRS at 800-829-3676 and ask them to mail them to you.
Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org. Jim Miller is a contributor to the NBC Today show and author of "The Savvy Senior" book.