Low- and moderate-income workers who save for retirement in a 401(k) plan, individual retirement account or myRA could qualify for the saver's credit. This valuable tax credit can be claimed in addition to any tax deduction you earn by contributing to a traditional retirement account. Here's how to qualify for the saver's credit on your 2016 or 2017 tax return.
Check the income requirements. Individuals with an adjusted gross income of up to $30,750 in 2016 or $31,000 in 2017 could qualify for the saver's credit if they contribute to a retirement account. "If you're single and earning $20,000, people in that income level have a hard time saving for retirement," says Gil Charney, director of The Tax Institute at H&R Block. "It's difficult pragmatically to be able to make these kinds of savings decisions, but if you can, it is a very good deal." Heads of household have a higher saver's credit income threshold of $46,125 in 2016 and $46,500 in 2017. Married couples can earn as much as $61,500 in 2016 and $62,000 in 2017 and remain eligible for the saver's credit.
Save in a qualifying account. There are several types of retirement accounts that might qualify you for the saver's credit. Contributing to a 401(k) plan will often allow you to claim the saver's credit. Other types of eligible workplace retirement accounts include 403(b) plans for employees of public schools, 457 plans for state or local government employees, SEP or SIMPLE plans sometimes used by smaller employers and the federal government's Thrift Savings Plan. But you don't necessarily need a workplace retirement account to qualify for the credit. Contributions to a traditional IRA, Roth IRA or the Treasury Department's new myRA could also make you eligible for the saver's credit.
Contribute enough for the full credit. The saver's credit can be claimed on retirement account contributions of up to $2,000 for individuals and $4,000 for couples. However, distributions from your retirement account might reduce the amount that is used to calculate the credit.
Meet the contribution deadline. Contributions to 401(k) plans and similar types of workplace retirement accounts that might qualify for the saver's credit are typically due by the end of the calendar year. However, you have until the due date of your tax return in April to make an IRA contribution that counts toward the saver's credit. So retirement savers have until April 18, 2017, to make a traditional IRA, Roth IRA or myRA contribution that makes them eligible for the saver's credit on their 2016 tax return.
26 tips for enjoying retirement on a reduced income:
26 tips for enjoying retirement on a reduced income
26 tips for enjoying retirement on a reduced income
What can you reduce or eliminate?
Cable TV. Consider an internet streaming service such as Hulu, Netflix or Amazon Prime, which can cost as little as a few dollar per month.
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Landline phone service. Consider ditching your landline and using only your cell phone. These days, many landline calls are unwanted robo-calls. In the current era of email, texting and Facebook messaging, people don't talk on the phone nearly as much as they used to.
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Expensive cell phone plans. While modern cell phones offer many capabilities such as maps, internet access and texting, consider what you actually use and what you could do without
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Gym memberships. If you use the gym regularly, then your membership fee provides good value. But if your road to the gym is paved with good intentions, yet you rarely go, cancel it. Some health insurance plans offer free or reduced gym memberships through the Silver Sneakers program.
Cars. After you retire, you can probably get by with just one car or perhaps no car at all. The cost of Uber, Lync, taxis or bus passes may seem like a lot of money trickling out of your pocket, but when you consider the money you're not spending on gas, maintenance, license fees and insurance, it's probably much less expensive. You can rent a car when you want to take a weekend trip or have a special need.
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Subscriptions. If you find that you don't regularly read the magazines or newspapers you subscribe to, don't renew them next time they come due. Most of their content is available online. If you subscribe to anything else that arrives at a regular interval, such as books, music or wine, consider whether you would be better off buying these items only when you need them. Subscription deals always work in favor of the seller.
Shop online. It's easier to compare prices, which could help you snag better deals. While you can't see and touch the item in person, you gain the benefit of reading other people's reviews and comparing prices and features from multiple sources side-by-side. If you see a box for a promotion code during the checkout process, search for a coupon code.
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Use coupons. While it can be a hassle to cut out, collect and carry coupons, they really do help you save money. Be careful not to buy stuff just because it seems cheaper. Buy only those items you regularly use or have a current need for.
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Stock up on things when they are on sale. But don't stockpile things that may expire before you get a chance to use them.
Own a stand-alone freezer. This allows you to take advantage of sales, and you can buy the larger quantities that are sold at wholesale clubs such as Costco and Sam's Club.
Check out grocery store loyalty programs. Many stores offer special deals to customers who belong to their loyalty program. You can load coupons onto your account, eliminating the need for paper coupons. In some markets, stores offer discounts at local gas stations or they will contribute money to a non-profit of your choice based on the amount of your purchases.
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Senior discounts. Don't be bashful or self-conscious about asking for discounts. In many markets, the major grocery chains offer a 10 percent discount to people over 55 on a certain day every month. Find out what's available in your area.
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Check your receipt. Watch the monitor screen at the cashier station and check your receipt before you leave the store. You might be surprised how often sale prices and loyalty card discounts are not applied properly.
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Visit dollar stores and discount outlets. Maybe it's not elegant, but dollar stores and discount outlets such as Big Lots, T.J. Maxx, Marshall's and Home Goods offer fantastic values. However, resist the temptation to buy things just because they are cheap.
Avoid shopping malls. Mall stores rarely offer good prices. They thrive on price-insensitive shoppers who browse the stores for recreational shopping.
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Look for the best value. The best value is often not the cheapest option. If the item wears out or breaks quickly, you haven't really saved money. Conversely, the most expensive options are usually loaded with features you don't need. The sweet spot is usually somewhere in the middle, where you will find the ideal combination of price and quality. Consumer Reports (the magazine or the website) is an excellent resource for finding the best value for many items that you purchase.
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Get insurance quotes at least every two years. Insurance companies know that once you sign on with them, you will probably automatically renew each year. While it's easy to get quotes online, it may help to speak to an agent and ask if there is anything they can do to lower your rates.
Buy ebooks rather than physical books. Ebooks are cheaper, they don't take up space, they are easier to travel with and you save on shipping. If you don't have a Kindle device, Amazon offers a free Kindle reader app for most modern computers, tablets and smartphones.
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Why pay for what you can get for free?
Libraries. Use your local library for books, music and movies.
Free wi-fi. If you are a light internet user, you may be able to get by without internet service to your home unless you are using an internet streaming TV service. Starbucks and other coffee shops offer free wi-fi, and some restaurant chains are following suit. Your local library may also offer free wi-fi.
Discounted or free tickets. Goldstar.com offers substantial discounts to local productions and some national touring acts in many major cities. Fillaseat.com offers free surplus seating, and check out VetTix.org if you're a veteran.
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Colleges.Local colleges offer many types of performances that are sometimes free to the public. They are usually of good quality, and the students will appreciate having an audience to perform for.
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Museums. Many museums have free days or evenings on a weekly or monthly basis.
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Theaters. Theaters may offer discounted admissions to pre-opening night dress rehearsals or abbreviated lunchtime performances.
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Eat out less expensively. Avoid appetizers, alcohol and desserts. These are the higher mark-up items. You can enjoy these at home before or after you go. Eat out at lunch rather than at dinner, because many restaurants have cheaper lunch menus. Look for coupons, senior discounts and deals through sites such as Groupon and Living Social. Sign up for the email list of the restaurants you dine in most often.
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Don't expect a large credit. The saver's credit could reduce the income tax you owe or boost your refund. "The saver's credit is better than a deduction," says Mark Steber, the chief tax officer for Jackson Hewitt Tax Service. "It's reduced tax liability or money back on your tax return." The maximum possible credit is $1,000 for an individual or $2,000 for a married couple. However, most people receive smaller credits. "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.
The saver's credit was claimed on 7.9 million income tax returns in 2014, and the government paid out nearly $1.4 billion for this retirement savings incentive. However, most workers don't know about the tax savings they could be eligible for by claiming the saver's credit. Only a third of workers say they are aware of the saver's credit, but that's up from a quarter in 2012, according to a 2016 Transamerica Center for Retirement Studies online survey of 4,161 workers at for-profit companies with 10 or more employees. Millennials (38 percent) are more likely to know about the saver's credit than members of Generation X (30 percent) or baby boomers (29 percent), the survey found.
Dependents and students are not eligible. People who are under age 18 or claimed as a dependent on someone else's tax return are not eligible for the saver's credit. Those who are enrolled as a full-time student for five or more months during the calendar year cannot take the credit either, including students at technical, trade and mechanical schools. However, taking online courses or participating in on-the-job training will not prevent you from claiming the saver's credit.
Calculate your credit. The saver's credit is worth 10, 20 or 50 percent of your retirement account contributions, with employees with the lowest income getting the biggest credit. Retirement savers with an adjusted gross income of $18,500 or less ($37,000 for couples) in 2017 are eligible for a saver's credit equivalent to half of their retirement account contributions. Workers earning slightly more than those income cutoffs are eligible for a 20 percent saver's credit. And investors earning between $20,001 and $31,000 ($40,001 to $62,000 for couples) could get a saver's credit worth 10 percent of their 401(k) or IRA deposit. The saver's credit can be claimed in addition to the tax deduction for saving in a traditional retirement account. "There are only a limited number of instances in the tax law that let you double time," says Barbara Weltman, an attorney and author of "J.K. Lasser's 1001 Deductions and Tax Breaks 2017." "You are getting the deduction for the IRA contribution, and you may get a tax credit as well."
Emily Brandon is the author of "Pensionless: The 10-Step Solution for a Stress-Free Retirement."