Problem with Savers Credit

[ivinsfan]

I had an odd experience with my 2019 Fed taxes and wanted some feedback.

When checking our taxable income I noticed we came in at a hair( around 2K) under the Savers Credit for Retirements Accounts.

I had my tax guy do a 6K Spousal Roth payment for me. I expected to hit the 10% credit so 600 bucks. The credit did not process ...I double checked with my tax guy and he did enter my Roth on the appropriate line, so that was correct. He wasn't certain why this happened with the software. In previous year the credit worked perfectly.

I'm going to do some reading but I think this happened because my DH took his first MRD and it was over 6K so the withdrawal and the contribution cancelled each other out. Anybody have experience with this particular problem ...lesson learned I guess I'm OK with money in my Roth but the main driver was the tax credit.

 

[SevenUp]

...I think this happened because my DH took his first MRD and it was over 6K so the withdrawal and the contribution cancelled each other out.

You think correctly.

See line 4 of https://www.irs.gov/pub/irs-pdf/f8880.pdf.

 

[ivinsfan]

You think correctly.

See line 4 of https://www.irs.gov/pub/irs-pdf/f8880.pdf.

Just started looking at that so thank you, this will help for 2020 planning when my spouse doesn't have to take an MRD....so I'll have to do some advance planning there..

And I understand they have also changed the rules about contributing to your own IRA after you hit the RMD age..have to do some reading here...

 

[pb4uski]

Agreed, but assuming that the tax guy knew that you were making the $6k Roth contribution in anticipation of getting the Saver's credit he should have figured it out before you did. All he had to do was to review the Form 8880.

 

[SecondCor521]

Also, note that you are limited to the deduction on $2000 per person, even if you contributed more. See line 6 of Form 8880. So if your spouse had not taken the MRD in 2019, you'd still have only gotten $200, not $600.

Finally, a trick - if you're close to one of the breakpoints for your filing status in the table further down that form, it can be very worth it to make a traditional IRA contribution to get a higher savers' credit.

For example, if you made a $2000 Roth contribution and you're MFJ and your AGI turns out to be $38,501, then you'd get a $200 Saver's credit. If you recharacterize $2 of that contribution to a traditional IRA contribution, then your AGI would drop to $38,499 and you'd get a $1,000 Saver's credit. (An HSA contribution or anything else that qualifies as an adjustment that reduces AGI would work as well.)

The Saver's credit is non-refundable, and in that income range it's impossible or nearly so to get a tax liability high enough to use it all, but in some cases it can be a good trick to know.

 

[pb4uski]

.... Finally, a trick - if you're close to one of the breakpoints for your filing status in the table further down that form, it can be very worth it to make a traditional IRA contribution to get a higher savers' credit.

For example, if you made a $2000 Roth contribution and you're MFJ and your AGI turns out to be $38,501, then you'd get a $200 Saver's credit. If you recharacterize $2 of that contribution to a traditional IRA contribution, then your AGI would drop to $38,499 and you'd get a $1,000 Saver's credit. (An HSA contribution or anything else that qualifies as an adjustment that reduces AGI would work as well.). ..

We've done that for DS a couple years... a deductible IRA contribution to get into the highest credit tier and then Roth for the remainder necessary to maximize the credit.

Unfortunately, his income has risen so even with the maximum deductible IRA contribution he would not get into the 50% tier so he only did a $2k contribution this year.

 

[ivinsfan]

Also, note that you are limited to the deduction on $2000 per person, even if you contributed more. See line 6 of Form 8880. So if your spouse had not taken the MRD in 2019, you'd still have only gotten $200, not $600.

Finally, a trick - if you're close to one of the breakpoints for your filing status in the table further down that form, it can be very worth it to make a traditional IRA contribution to get a higher savers' credit.

For example, if you made a $2000 Roth contribution and you're MFJ and your AGI turns out to be $38,501, then you'd get a $200 Saver's credit. If you recharacterize $2 of that contribution to a traditional IRA contribution, then your AGI would drop to $38,499 and you'd get a $1,000 Saver's credit. (An HSA contribution or anything else that qualifies as an adjustment that reduces AGI would work as well.)

The Saver's credit is non-refundable, and in that income range it's impossible or nearly so to get a tax liability high enough to use it all, but in some cases it can be a good trick to know.

Yes and until this year since we vary wildly in taxable income due to farming I would sit down with my tax guy and we would play with these numbers until we hit the sweet spot. How much per person, IRA or Roth, actual tax liability.

IOW I let the computer do the thinking for me instead of reading all the T and C's. So I have to fess up, this one's on me for not reading more before my tax appointment.

No harm done really and at 67 not too eager to fund a trad IRA as our tax brackets will be rising.

 

[SevenUp]

Just started looking at that so thank you, this will help for 2020 planning when my spouse doesn't have to take an MRD....so I'll have to do some advance planning there..

Unfortunately the lookback period is "3 years plus current" (see (d)(2)(b) in 26 U.S. Code § 25B - Elective deferrals and IRA contributions by certain individuals) so the 2019 RMD will linger on your form 8880 until you reach the 2022 return filed in 2023.

 

[ivinsfan]

Agreed, but assuming that the tax guy knew that you were making the $6k Roth contribution in anticipation of getting the Saver's credit he should have figured it out before you did. All he had to do was to review the Form 8880.

Well it was an odd appointment and I sat outside of his office in the hallway with a mask on. To be fair I expected to get the credit and didn't tell him it was a deal breaker..when I asked why I didn't he said he wasn't sure. But in an email after I posted here he gave the reason why it didn't apply.

 

[ivinsfan]

Unfortunately the lookback period is "3 years plus current" (see (d)(2)(b) in 26 U.S. Code § 25B - Elective deferrals and IRA contributions by certain individuals) so the 2019 RMD will linger on your form 8880 until you reach the 2022 return filed in 2023.

Well you are worth you weight in gold today...