The United States Tax Code is a bloated 500-pound Gorilla. Oh sure, decades ago it started innocently enough. But as the winds of change blow through Congress, the balance of power shifts like the sands of the Sahara. From Democrat to Republican and back, the tax laws twist and turn in a manner that would make Lombard Street blush.
A new tax here and a new credit there add layers of complexity far more difficult to comprehend than why my preteen son won’t put on a clean pair of underwear. Complexities aside, the Federal Government tries to steer our behavior with tax policy.
One nudge, implemented 16 years ago, is too good to pass up: free money. Buried several reams deep in the tax law is a little known and far less utilized tax credit for low and middle-income savers. I introduce to you, the Tax Savers Credit.
Implemented in 2002 and made permanent in 2006 by the Pension Protection Act of 2006, this credit aims to refund a portion of contributions made to a qualifying retirement account for adjusted gross incomes below $63,000 (married filing jointly).
The amount of the credit is 50%, 20%, or 10% of your retirement plan contributions. Your adjusted gross income determines the amount of the credit, up to a limit of $4,000 for married filing jointly. The credit is non-refundable. In tax language, this means that if you have a zero tax liability, you will not receive the credit.
What Retirement Plans Qualify?
The tax savers credit can be utilized for contributions to an: IRA, Roth IRA, 401(k), 403(b), SIMPLE IRA, SEP, 457, and 501(c). That was a mouth full, but that should about cover any retirement plan that you contributed to.
For 2018, this is the breakdown.
Example: Jill, who works at a retail store, is married and earned $37,000 in 2017. Jill’s husband was unemployed in 2017 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2017. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $36,000. Jill may claim a 50% credit, $500, for her $1,000 IRA contribution.~IRS.GOV
Who Cares, I Don’t Qualify
Maybe you have read this far and are thinking, who cares I don’t qualify for this credit. Pump the brakes for one second, because, I bet you know or love someone who qualifies. They might not have any idea that this little-known tax credit even exists.
Moreover, in the world of finance, big scary monsters lurk around every corner, waiting to take your money. When you help someone establish an investment account with a low-cost provider like Vanguard or Charles Schwab, you have crossed over the threshold to sainthood, in my book.
What! You don’t have a Roth IRA? The 4 Reasons You Need A Roth IRA?
In medicine, especially for resident doctors, there is a motto: See one, do one, teach one. This is how those newly minted, green around the collar, doctors learn to practice medicine. The same motto can hold true for personal finance. If you have benefitted from someone teaching you how to improve your financial future, you should take the time, pay it forward and help a friend or loved one create a strong financial future.
Don’t forget the TAX SAVERS CREDIT.
Who Does Not Qualify
You cannot take the credit if:
- You are under 18.
- You are claimed on someone else’s tax return.
- You are a student.
The Time I Almost Got The Tax Savers Credit
Of all my working years there would have been only one year where I would have qualified for this tax credit. That year was 2002, coincidentally the first year the credit was available from the newly created Economic Growth and Tax Relief Reconciliation Act of 2001.
It was my first year of work out of college. Most 20-year-olds don’t know squat about taxes and I certainly fell into that camp. But even if I had a firm grasp of the intricacies of the US tax code, I doubt I would have known about this new tax credit. I did not take advantage of the Tax Savers Credit and missed out on free money from Uncle Sam. Don’t let yourself or someone you know miss out on free money.
The takeaway here is, free money is hard to pass up. Whether it is your 401(k) employer match or a tax credit from the federal government, don’t pass up free money. In this case of the Tax Savers Credit, it is a guaranteed 50%, 20%, or 10% return on investment, depending on your income. That sure beats putting your money into a savings account earning point zero nothing.
Don’t Take Tax Advice From A Nurse
Disclaimer: I am not a tax professional. I am a nurse. Please seek tax advice from a tax professional. This blog post was created for entertainment purposes and does not constitute tax advice.