Low- and moderate-income workers who save for retirement in 401(k)s and IRAs are eligible to claim the saver's credit, a tax credit worth up to $1,000 for individuals and $2,000 for married couples. Workers can claim this credit in addition to the tax deduction they also get for their retirement account contributions.
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The saver's credit can be claimed by individuals age 18 and older earning up to $28,750, heads of household earning $43,125 or less, and couples with incomes of up to $57,500 in 2012. In 2013, the income limits will increase to $29,500 for singles, $44,250 for heads of household, and $59,000 for couples. The income limits for the credit are adjusted annually to keep pace with inflation. The credit cannot be claimed by full-time students or people claimed as dependents on someone else's tax return.
The saver's credit is calculated based on the contributions you make up to $2,000 per person and your credit rate. The credit rate, which ranges between 10 percent and 50 percent of the amount contributed, is highest for retirement savers with the lowest incomes. For example, a married couple that earned $30,000 in 2012 and contributed $1,000 to a traditional IRA would get a $500 credit. Rollovers into retirement accounts don't count toward the credit, and eligibility may be reduced if you recently took a distribution from a retirement account.
Saver's credits worth just over $1 billion were claimed on more than 6.1 million income tax returns in 2010, but most people received small benefits. Although the saver's credit can be worth up to $2,000 for couples, very few taxpayers 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. Saver's credits averaged $204 for couples, $165 for heads of household, and $122 for individuals in 2010. The saver's credit can increase your refund or reduce the tax owed.
The saver's credit began as a temporary provision in 2002 that was made permanent in 2006. But only a quarter of workers have heard of the saver's credit, ranging from 35 percent of people in their 30s to just 17 percent of those in their 40s, according to a 2012 Harris Interactive online survey of 3,609 full-time and part-time workers commissioned by the Transamerica Center for Retirement Studies. However, awareness of the credit among people earning less than $50,000 per year is up from 21 percent in 2011 and just 12 percent in 2010. In contrast, the majority (53 percent) of workers are aware that people age 50 and older are allowed to make catch-up contributions to their retirement accounts, including over 65 percent of those in their 50s and 60s.
There's still time to claim the saver's credit on your 2012 tax return. To qualify for the 2012 tax credit, 401(k), 403(b), 457, and Thrift Savings Plan contributions must be made by December 31. However, workers have until April 15, 2013, to add money to an IRA or Roth IRA that will qualify them for the credit in tax year 2012.