Taking advantage of tax tips can save money (copy) (copy)

The federal Saver's Credit is a tax credit for people with modest incomes who put money in a retirement account. File

This is the story of a federal tax credit that's an incentive, or reward, for people with lower incomes who manage to set some money aside for retirement.

Meet the simple requirements, and if you put money in a retirement account — a 401k or an IRA, for example — you can get up to $1,000 back through your federal tax return.

Remember that up to $10,000 of individual retirement account funds can be used for a first-time home purchase without tax penalties, so this is potentially a way to get a bankable credit for saving money for a home purchase. As long as the money was put in an IRA, it counts as retirement savings.

Young adults, single parents and married couples with one-wage earner are among those most likely to qualify for the "Saver's Credit." It's been around for years, and I claimed that credit a few times when I was younger, but it's still not widely known. 

People who have uncomplicated finances and file their own returns could easily have overlooked this tax credit in the past. Anyone who used the basic 1040EZ federal income tax form, for the simplest returns, was unable to claim the Saver's Credit.

For 2018 the federal tax forms have changed, the 1040EZ is no longer used, and hopefully that will make more people aware of the Saver's Credit. 

Here's how it works. First, you must have taxable income and:

  • Be at least 18 years old at the end of 2018
  • Not have been a full-time student in 2018. If you were enrolled as a student for any portion of five months of the year, you were a student.
  • Not be claimed as a dependent on another person’s return.

Next, the only remaining questions are your total income and the amount of money you set aside for retirement during the tax year. Remember, IRA contributions for 2018 can still be made this year until April 15, the end of the filing season. 

The maximum income allowed to claim this tax credit depends on whether you're filing as a single person, head of household (such as a single parent) or married and filing jointly with a spouse. Here's the maximum you could earn, and still claim the Saver's Credit for 2018:

  • Single: $31,500
  • Head of household: $47,250
  • Married filing jointly: $63,000

At the top of those income limits, the tax credit is worth 10 percent of up to $2,000 in retirement contributions. Married couples filing a joint return can claim the credit twice, once for each spouse.

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For example, a husband and wife earning $63,000 each put $2,000 in a retirement plan in 2018. They could get $400 back as a credit against their income tax.

Pro tip: If you're just above the income threshold, a tax-deductible contribution to a traditional IRA could be the key to qualifying. If that couple claimed income of $63,500, they would not qualify for the Saver's Credit, but a $500 deductible IRA contribution would bring them under the threshold.

The Saver's Credit rises as income falls, too. The credit can be 10, 20, or 50 percent of up to $2,000 in retirement contributions. 

Of course, it's pretty tough to set aside money for retirement if you're a single person earning no more than $19,000, which is the threshold for a 50 percent credit. But getting a 50 percent bonus on your money is a nice incentive.

For a married couple, the cap for the 50 percent credit is $38,000 in annual income.

For the 20 percent credit, the cap is $41,000 for a married couple, $30,750 for a head of household, or $20,500 for a single person.

Reach David Slade at 843-937-5552. Follow him on Twitter @DSladeNews.

David Slade is a senior Post and Courier reporter. His work has been honored nationally by Society of Professional Journalists, American Society of Newspaper Editors, Scripps foundation and others. Reach him at 843-937-5552 or dslade@postandcourier.com