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How to claim the saver's credit

how to claim a tax credit

The saver's credit can be worth as much as $1,000 for individuals and $2,000 for couples who save in 401(k)s and individual retirement accounts. And this tax credit can be claimed in addition to the tax deduction for traditional retirement account contributions. Here's how to take advantage of this tax credit for retirement savers.

Save in a 401(k) or IRA. The saver's credit can be claimed on up to $2,000 for individuals and $4,000 for couples for funds contributed to IRAs. 401(k) plans and similar workplace retirement accounts. But awareness of this valuable tax credit remains low, with just 28 percent of Americans saying they know about the saver's credit, according to a survey of 4,143 workers by Harris Poll for the Transamerica Center for Retirement Studies.

Meet the income requirements. The saver's credit is meant to help low- and middle-income workers save for retirement. The income limits for 2014 are $30,000 for individuals, $45,000 for heads of household and $60,000 for couples. These income limits are adjusted annually to keep up with inflation and will increase to $30,500 for individuals, $45,750 for heads of household and $61,000 for couples in 2015.

Watch out for other restrictions. The saver's credit cannot be claimed by people under age 18, full-time students or those who are claimed as a dependent on someone else's tax return. Distributions from retirement accounts can also reduce the credit amount.

Calculate your credit. The amount of the credit ranges from 10 percent to 50 percent of the amount contributed to a retirement account up to $2,000 ($4,000 for couples), depending on your income. "The less income you have, the more of the credit you get," says Robert Reed, a certified financial planner for Partnership Financial in Columbus, Ohio. "It's specifically targeting middle-income working folks." To get a 50 percent credit in 2014, retirement savers need to earn $18,000 or less ($36,000 or less for couples). Those earning between $18,001 and $19,500 ($36,001 to $39,000 for couples) get a 20 percent credit. And savers earning between $19,501 and $30,000 ($39,001 and $60,000 for couples) get a 10 percent credit. So a couple earning $30,000 who puts $1,000 in an

IRA could earn a $500 credit, in addition to the tax deduction for the same contribution. A couple earning $58,000 who saves the same amount in an IRA would get a $100 credit.

Stack your tax benefits. The saver's credit can be claimed in addition to the tax deduction you get for contributing to a traditional 401(k) or traditional IRA. "It has a triple benefit because you can save for retirement on a tax-deferred basis, the amount of the credit reduces your tax bill and you get to enjoy the benefits of the long-term compounding of investments that you make in the retirement account," says Catherine Collinson, president of the Transamerica Center for Retirement Studies. The saver's credit can also be claimed for contributions to Roth 401(k)s and Roth IRAs.

Meet the deadlines. To qualify for the saver's credit, contributions must be made to 401(k)s, 403(b)s, 457s or the federal government's Thrift Savings Plan by the end of the calendar year. However, retirement savers have until April 15, 2015, to make an IRA contribution that could qualify them for the saver's credit for tax year 2014. "If you are using a 401(k) or an employer plan, you are kind of out of luck after the end of the year. But if you contribute to a traditional or a Roth IRA, you have until April 15 to make that contribution and make it count for the 2014 year," says Lindsey Buchholz, principal tax research analyst for H&R Block. "It's one of the few things that lets you make a decision after the close of the tax year and still reap the benefit."

Don't expect a large credit. The maximum possible saver's credit is $1,000 for individuals and $2,000 for married couples, but most people don't get that much. "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," according to a statement from the IRS. In tax year 2012, saver's credits worth $1.2 billion were claimed on over 6.9 million income tax returns. The credits averaged $127 for individuals, $165 for heads of household and $215 for couples.

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