Free money!!!

[pb4uski]

Congrats, I had a very similar experience this year. By only working 2 months I actually qualified for the savers credit which seems really wrong.. but oh well. I'll take it. ....

Well.... almost free!

Karen's post in another thread reminded me of this retirement savings contributions credit that I am helping DS take full advantage of and wanted to bring to people's attention.

DS is working... can provide for himself but doesn't make a lot...and I do his taxes for him. He has some taxable account money with Vanguard as well as a tIRA and Roth IRA.

For a single the credit is 50% of what you save in a retirement account if your AGI is $18,250 or less and 20% from $18,250 to $19,750 and 10% from $19,750 to $30,500.

What I found is if I put a portion of his retirement savings for 2015 in the tIRA I could get him down into the 50% credit bracket and then put the rest of the savings needed to maximize his credit in his Roth and by doing this his net tax after credits was zero and he gets a refund for 100% of what was withheld in 2015.

Pretty sweet, especially in his case since it is just shifting money from taxable accounts to tIRA and Roth. TT makes it easy to play with different savings amount to see where the sweet spots are.

 

[photoguy]

I learned about the savers credit from this board and thought, oh boy, I can get this as we had a little w2 income which we put in IRA/401k. However, it turns out that our tax burden was basically 0 anyway and the credit is non refundable so we didn't benefit from it.

I suppose if I had been more thorough in our tax planning, I could have used the credit to offset some roth ira conversions or stepping up capital gains etc. Maybe next year.

 

[RetireAge50]

My son only made $10,000 last year but cannot get this credit because I still claim him on my return. Oh well had my hopes up for a second.

 

[Fedup]

My daughter doesnt earn much, not according to me, but she only managed to get $200 last year.


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[karen1972]

Yeh, I wrote on this when I saw one of those 52 week money challenges where you start week 1 saving $1, week 2 $2, etc so you end up with $1378... however if your the average family making $50k, if they put 3% away in their 401k and their company matched 3% and they got the savers credit.. it would only cost them net roughly $1050(less than $25/week) and they would end up with $3k put away for their retirement. (ie. $1500 employer, employee $1500-$300 (tax savings) - $150 (savers credit)).

Its just painful when surrounded by people who just wont' take advantage of "free" money... even if your afraid of the stock market and put it in the lowest risk thing out there.. where else are you investing $1050 and getting $3k (basically guaranteed) back almost instantaneously.

 

[aaronc879]

I've been trying to find this info online all week, maybe someone here can help. I'm self employed and my AGI will be around $13K. That means my Federal tax is just $300. However my self employment tax will be nearly $2K. If I contribute $2000 or more I should get a $1000 Saver's Credit. Does that just reduce my Federal tax from $300 to $0 or can I also reduce my SE tax with the remaining $700 of Saver's credit?

 

[Sue J]

I've been trying to find this info online all week, maybe someone here can help. I'm self employed and my AGI will be around $13K. That means my Federal tax is just $300. However my self employment tax will be nearly $2K. If I contribute $2000 or more I should get a $1000 Saver's Credit. Does that just reduce my Federal tax from $300 to $0 or can I also reduce my SE tax with the remaining $700 of Saver's credit?

The Saver's Credit is limited to your total personal tax of $300. It doesn't help at all for your self employment tax.

My 29 year old son is self employed and contributes to a Roth IRA all year. He has his self employment tax and then if his taxable income is low enough he's been getting the Saver's Credit to offset his personal tax. He's right on the edge for this for 2015 so if he's close he could put $1000 or so in a Traditional IRA to get his income low enough for the 50% level or maybe the 20% level. He's been doing well in his business so 2015 may be the last year where he could even look at the Saver's Credit.

Be aware that both a Traditional IRA and/or a Roth IRA count toward the credit but Traditional IRA lowers your AGI that is used to compute the credit.

 

[aaronc879]

The Saver's Credit is limited to your total personal tax of $300. It doesn't help at all for your self employment tax.

My 29 year old son is self employed and contributes to a Roth IRA all year. He has his self employment tax and then if his income is low enough he's been getting the Saver's Credit to offset his personal tax. He's right on the edge for this for 2015 so if he's close he could put $1000 or so in a Traditional IRA to get his income low enough for the 50% level or maybe the 20% level. He's been doing well in his business so 2015 may be the last year where could even look at the Saver's Credit.

Be aware that both a Traditional IRA and/or a Roth IRA count toward the credit but Traditional IRA lowers your AGI that is used to compute the credit.

Not what I wanted to hear but thanks for the info. SE tax is a killer for low income self-employed people. I was hoping I might be able to get some relief but I guess not.

 

[Sue J]

Yes, that's exactly how he feels about it. For him, his biggest deduction is usually the vehicle expenses. He takes the standard mileage rate and it works out to be a much bigger deduction than his actual expenses so that's the only place that works out in his favor.

But he loves being self employed, he enjoys what he's doing and he loves the independence of it all. He recently told me he never thinks of it as "work" because it's what he loves to do.

 

[pb4uski]

.... if his taxable income is low enough he's been getting the Saver's Credit to offset his personal tax. He's right on the edge for this for 2015 so if he's close he could put $1000 or so in a Traditional IRA to get his income low enough for the 50% level or maybe the 20% level. He's been doing well in his business so 2015 may be the last year where he could even look at the Saver's Credit. ...

Similar situation with DS. He has to contribute $800 to a tIRA to reduce his AGI so he can qualify for the 50% level and then add contributions to his Roth so that the total savers credit is equal to his tax (which is less than $1000). This works because he was laid off for six weeks or so in 2015 but in 2016 his income may be high enough that even a big tIRA contribution may not bring him down into the 50% level.

 

[Fedup]

I helped my kid contribute $12,000 into tIRA in order for my kid to have savers credit. I'm sure she would have to pay more tax otherwise.


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[pb4uski]

How does that work? The IRA contribution limit for people under 50 is $5,500/year. How did they contribute $12k? Also, the savers credit caps at $2,000 of retirement savings per person per year.

 

[RunningBum]

Awesome! I missed this for my son in the past, though his taxes were low so we only missed on $328 in credits over the last 2 years. Not too late to make a Roth contribution for 2015 though, and he's started a 401K in 2016.

 

[Fedup]

She is a business owner, so we contributed to SEP IRA. It lowered her income overall. I was thinking if her income was too high, she might not get any subsidy for ACA this coming year. Also for 2014, she was too busy to convert to S-Corp hence she ended up paying very high tax rate, IIRC it was somewhere near 40%, lots of self-employment tax. Her CPA finally changed her company to a corporation in 2015.
Plus the savers credit max is $2000, but the max income to get this credit is about $30k for single.


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[RunningBum]

Quick question though: If his spouse is a full time student, can they still do this for him? Form 8880 has a column for each, so I'm assuming he can do his column for up to $2000, but they can't do her column. The instructions say:

However, you cannot take the credit if either of the following applies:


...
The person(s) who made the qualified contribution or elective deferral (a) was born after January 1, 1998, (b) is claimed as a dependent on someone else’s 2015 tax return, or (c) was a student.
...

He would be the person making the qualified contribution, and was not a student at all in 2015.

 

[Senator]

I almost forgot about this credit, although I may have discovered it again in 2017 when I did taxes...

My DGFs income will be low enough to qualify. Healthcare in Minnesota will be nearly free for her ($20 a month), and with this credit it will be a profit...

You just can't beat this type of living. It's a wonder anyone works. I guess some people like to.

https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit

 

[pb4uski]

Quick question though: If his spouse is a full time student, can they still do this for him? Form 8880 has a column for each, so I'm assuming he can do his column for up to $2000, but they can't do her column. The instructions say:


He would be the person making the qualified contribution, and was not a student at all in 2015.

Yes for him even if she is a full time student. I read it the same as you do... yes for him and no for her. They probably drew the line there so college students with wealthy parents wouldn't be stuffing their Roths with money for them and costing the government.

Below is the definition of student. So if she was just not a full-time student then she would qualify.

You were a student if during any part of 5 calendar months of
2015 you:

• Were enrolled as a full-time student at a school, or
• Took a full-time, on-farm training course given by a school or a
state, county, or local government agency.
​

A school includes technical, trade, and mechanical schools. It
does not include on-the-job training courses, correspondence
schools, or schools offering courses only through the Internet.

 

[pb4uski]

Awesome! I missed this for my son in the past, though his taxes were low so we only missed on $328 in credits over the last 2 years. Not too late to make a Roth contribution for 2015 though, and he's started a 401K in 2016.

For now, I have steered DS away from a 401k other than what is needed to get the employer match because of his low tax bracket and steered him to the Roth instead. At his low tax bracket tax-deferred saving other than to lower his income to get the 50% savers credit rather than the 20% or 10% savers credit doesn't seem to make sense.

 

[RunningBum]

For now, I have steered DS away from a 401k other than what is needed to get the employer match because of his low tax bracket and steered him to the Roth instead. At his low tax bracket tax-deferred saving other than to lower his income to get the 50% savers credit rather than the 20% or 10% savers credit doesn;t seem to make sense.

Right, he is only deferring up to the employer match. I agree that in the 15% bracket, and also needing as much income as he can get to live on, it doesn't make sense to defer anything unmatched. I was glad when he talked to me about signing up for the 401K when he became eligible, because I know they are struggling. To get the rest of the credit, I'll help him with a Roth.

And thanks for the other post in response to my question. His wife is definitely a full-time student, and in fact just signed up for 3 more years of grad school, which is pretty much a must for her degree. The good news is that she got accepted to the same school so they are staying close by.

 

[pb4uski]

The only things that cross my mind is that you and I can steer or DS' to this opportunity, but what about the rest of the population who qualify? I don't hear much about this and I think it is a great opportunity... sort of like a government version of a 401k match to incentivize retirement savings that would help with our country's poor retirement savings rate.

 

[Fedup]

This is well known for me because of other website and magazines I've read. Nothing new.


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