Sometimes it pays to save. One might find that statement hard to believe in today’s climate, given that banks are paying a paltry 2 percent interest rate on deposits. The big money today is in CDs, where you get paid a whopping .25 percent. I kid you not. Better that any of these, is directing a portion of your pay into your employer’s retirement account or into an Individual Retirement Account.
In addition to putting money away before taxes, which lowers the tax due to IRS, increasing the net amount to you, the best part is that you may also qualify for a tax credit, further lowering the amount due and giving you a bigger refund to boot. The amount of the credit to you can be as low as 10 percent to as much as 50 percent of the amount paid into the employer’s retirement plan minus any plan or account distributions that you are required to include.
What’s more, even if you take an IRA deduction, either Traditional or Roth, you can still qualify for this credit. Awesome! Even better, non residents can claim the credit on their tax form series1040NR. Of course, as with all good things, there are limitations, such as income and filing status. Here are the qualifications for the credit:
1. Your Adjusted Gross Income cannot exceed 28,250 if your filing status is single, 42,375 if your filing status is head of household, or 56,500 if married filing jointly.
2. You must be at least age 18 (born before January 1, 1994).
3. You cannot be claimed as a dependent on another person’s return.
4. You must not have been a full time student. A full time student for tax purposes is defined as enrollment as a full time student for at least 5 out of the 12 months of the tax period. These five months need not be consecutive.
5. Made contributions to the following:
a. Traditional or Roth IRA (Do not include rollover contributions)
b. Contributions to 401Ks, 403bs, governmental 457s, SEPS, or SIMPLE plans
c. Contributions to plans that qualify under section 4974(c), for example the federal Thrift Savings Plan. (Do not include contributions under section 414(h)(2))
d. Contributions to 501(c)(18)(D) plans
If unknown, you may check your form W2 box 12 for your contribution amount. The letters in the box (D, E, F, S, AA, and BB indicate the type of contribution. Box 13 should have the box marked “Retirement Plan” checked. The lower the Adjusted Gross Income, the higher the credit will be and vice versa.
For more information, consult Form 8880, Retirement Savings Credit, available at www.irs.gov or by phone at 1-800-829-3676.