Tax credit for low- and middle-income taxpayers

You may be eligible for a tax credit (called the “saver’s credit”) if you’re a low- or middle-income taxpayer saving for retirement through an IRA, 403(b) or 401(k) plan.

The amount of the credit you can get is based on the contributions you make and your credit rate. The credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income — the lower your income, the higher the credit rate. The credit rate also depends on your filing status.

The maximum credit is $1,000 per person. If you are married and file a joint tax return, you could receive a total credit of up to $2,000 ($1,000 for you and $1,000 for your spouse).

The credit is available to you if you:

• are 18 or older,
• are not a full-time student,
• are not claimed as a dependent on someone else’s return, and
• are within the adjusted gross income levels in the chart below.

                     * Based on percentage of contribution.

Example: Susan and John are married and file their federal income tax return jointly. For 2012, their adjusted gross income would have been $34,000 if they had not made any retirement contributions. During 2012, Susan elected to have $2,000 contributed to her employer’s 403(b) plan. John made a deductible contribution of $2,000 to an IRA for 2012. As a result of these contributions, their 2012 adjusted gross income is $30,000. If their federal income tax would have been $3,000 (after applying any other credits to which they are entitled) without having made any retirement contributions, then their federal income tax as a result of making the $4,000 retirement contributions will only be about $400 after application of the saver’s credit and other tax benefits for the retirement contributions. Thus, by saving $4,000 for their retirement, Susan and John have also reduced their taxes by $2,600.

The annual contribution eligible for the credit may have to be reduced by any taxable distributions from a retirement plan or IRA that you or your spouse receive during the year you claim the credit, during the two preceding years, or during the period after the end of the year for which you claim the credit and before the due date for filing your return for that year. A distribution from a Roth IRA that is not rolled over is taken into account for this reduction, even if the distribution is not taxable. After these reductions, the maximum annual contribution eligible for the credit per person is $2,000.

Example: Mark’s adjusted gross income for 2012 is low enough for him to be eligible for the credit that year and he defers $3,000 of his pay to his employer’s 403(b) plan during 2012. During 2012, Mark took a $400 hardship withdrawal from his employer’s plan and during 2012 he took an $800 IRA withdrawal. Mark’s 2012 saver’s credit will be based on contributions of $1,800 ($3,000 - $400 - $800).

The amount of your saver’s credit will not change the amount of your refundable tax credits. A refundable tax credit, such as the earned income credit or the refundable amount of your child tax credit, is an amount that you would receive as a refund even if you did not otherwise owe any taxes.

The amount of your saver’s credit in any year cannot exceed the amount of tax that you would otherwise pay (not counting any refundable credits or the adoption credit) in any year. If your tax liability is reduced to zero because of other nonrefundable credits, such as the Hope Scholarship Credit, then you will not be entitled to the saver’s credit.

Special note for ministers — Ministers taking advantage of the minister’s housing allowance may find they are eligible for the saver’s credit since minister’s housing allowance is not included in their adjusted gross income.