Stick it to the Man! Know the Tax Code!
The Saver’s Credit is a non-refundable tax credit that is meant to encourage low income individuals to save money for their retirement. In fact, for certain individuals with incomes under $17,000, they are eligible for a tax credit of 50% of contributions made during the year; however making retirement contributions on $17,000 is a feat in itself.
In this case, the value of your accountant comes where your income is $35,000-$45,000. With a complex string of transactions, you can get $500 off your tax bill. Let’s examine each step.
First, get your Adjusted Gross Income under $28,250. For an individual making $40,000 a year, subtract $5,700 for your standard deduction and $3,700 for your personal exemption, leaving $2,350 in deductions to come up with. This can be made up with contributions to a company 401(k), student loan interest, or a traditional IRA.
Once you are under $28,500, you are eligible to receive the Saver’s Credit of 10%. If you would only have contributed the $2,350 to a company 401(k), you would receive $235 off your tax bill. Hurray!
Open a Roth IRA, and max out the contribution for 2011, which is $5000. Show the contribution on your tax return as an eligible contribution on Form 8880 and receive the additional $500 credit. Once you tax return is processed and refund is returned. Close out the Roth IRA and take a non-taxable return of basis. The additional $500 tax credit is yours to keep!
Notes some of the caveats:
-You can perform this transaction once every four years
-If you are a student, you are ineligible for the saver’s tax credit
-If you were in school for any part of 5 months, you are ineligible
-This transaction is for Single tax payers. For Married File Jointly, the income ceiling is $56,500