Retirement Tax Credit for Low Earners
The IRS effectively gives money away to low-income Americans who save for retirement.
Workers meeting the agency’s income requirements can receive a Saver’s Tax Credit equal to as much as half of their total deposits into a 401(k) or IRA. The lower one’s income, the bigger the credit.
The program, which was made permanent in 2006, gives a nice boost to the nation’s lowest-paid workers, who are also most vulnerable in retirement. And not taking advantage of the credit, said Jim Blankenship, a financial planner in New Berlin, Illinois, “is a lot like giving up an employer match for a 401(k).”
Low-income workers do just that, a previous study found: 40 percent decline to participate when their employer offers a 401(k). But the Savers Tax Credit may provide another avenue to this under-covered population.
The annual income requirements for the credits, shown in the following table, apply to calendar year 2013 tax filings due April 15.
Since it’s a credit, taxpayers receive either an outright refund or a reduction in their taxes owed. The credits are capped at $1,000 for individuals and heads of households and $2,000 for married couples. But they are in addition to deductions for 401(k) contributions, which lower the taxable incomes of any worker who saves.
Blankenship said he’s encountered people unfamiliar with the credit. He amended several year’s tax returns for one low-income client – a single mother – who was unaware she was entitled to a credit equal to half of her contributions in prior years.
About $1 billion in credits were provided to more than 6 million Americans in the 2010 tax year, the latest year for which data are available, the IRS said. Single taxpayers claimed an average $122 in credits, and the credits averaged $204 for couples and $165 for heads of household.
To read the IRS information and find the form to apply for the credit, click here.
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