What's the largest Retirement Savers credit on Form 8880?

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What's the largest Retirement Savers credit on Form 8880?

Postby SobeCane » Mon Jan 30, 2012 10:46 am

It seems to be that the maximum credit of $1,000 is virtually impossible because the tax is non-refundable and those qualifying for the 50% part of the credit would not owe that much in taxes. The largest I've seen is a single person who had AGI of $16,750 was able to get a credit of $743. I wonder how this credit was designed and if any scenario makes it possible to receive the full credit.
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Re: What's the largest Retirement Savers credit on Form 8880

Postby tfb » Mon Jan 30, 2012 6:47 pm

SobeCane wrote:I wonder how this credit was designed and if any scenario makes it possible to receive the full credit.

Married filing jointly with no child having an AGI under $34k can get the full $1,000 credit.
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Re: What's the largest Retirement Savers credit on Form 8880

Postby SobeCane » Mon Jan 30, 2012 9:22 pm

Thanks--

I also checked out your blog and noticed you had a post about this exact topic.
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Re: What's the largest Retirement Savers credit on Form 8880

Postby awval999 » Mon Jan 30, 2012 9:32 pm

What's stopping someone (with the required AGI) from opening a Roth IRA with aftertax money, putting in $2000, claming the 50% credit and then just withdrawing the after tax Roth IRA money?

Will this will net the person +$1000 (or maximum allowable) with no tax penalties?
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Re: What's the largest Retirement Savers credit on Form 8880

Postby jasonv » Mon Jan 30, 2012 10:01 pm

tfb wrote:
SobeCane wrote:I wonder how this credit was designed and if any scenario makes it possible to receive the full credit.

Married filing jointly with no child having an AGI under $34k can get the full $1,000 credit.


The stated maximum Saver's Credit when filing jointly is actually $2,000. Tax owed on an income of $33,999 would be $1,498, or $749 per person. This is short of the statutory maximum and also nearly identical to the $748 in tax owed on an income of $16,999 for someone filing single.
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Re: What's the largest Retirement Savers credit on Form 8880

Postby Alan S. » Mon Jan 30, 2012 11:24 pm

It is easy to use the credit to eliminate your tax bill, but since the credit is not refundable, your tax bill is eliminated before the credits are maxed out if both married taxpayers make contributions of 2k. Hard to say why this was structured like this because the credit was introduced with EGTRRA in 2001, but that same tax bill introduced the 10% rate. It is the 10% rate that results in the tax bill not being high enough to fully utilize the max credit.

Most low earners to do not have the cash available, but an early retiree can use this credit when incomes are low but there is some earned income to justify the contribution. And if the income is still under the max for the 50% tier, the taxpayer can convert to a Roth IRA just enough to squeeze under the top of the 50% savers tier. You still wipe out your federal tax, but you don't use the max credit to do that.
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Re: What's the largest Retirement Savers credit on Form 8880

Postby Alan S. » Mon Jan 30, 2012 11:34 pm

awval999 wrote:What's stopping someone (with the required AGI) from opening a Roth IRA with aftertax money, putting in $2000, claming the 50% credit and then just withdrawing the after tax Roth IRA money?

Will this will net the person +$1000 (or maximum allowable) with no tax penalties?


It's a different scenario whether you withdraw the contribution as a specific return of contribution, or you just make an early withdrawal. If you ask for a return of the specific contribution, for Savers Credit purposes it is treated as if you never made the contribution, so you get no credit. But neither does this action carry over to future years.

On the other hand, if you just withdraw an amount other than a return of contribution (typical early or normal distribution and coded as such), then you are facing a "reduction of contributions" amount on line 4 of the 8880. This reduces the amount of your contributions for the balance of the 3 year testing period. The reduction means that you must contribute 2,000 more than the amount you withdrew for each of those years in order to get the full credit.

Example: Suppose you make a 2011 IRA contribution at this time and then file your 2011 return and claim the credit. Then after April 17th, 2012 you withdraw the amount you contributed as a normal distribution. This withdrawal will have to show as a reduction on any 8880 you would file for 2012, 2013, and 2014, and that would likely eliminate the credit for those 3 years. However, you DO get to keep your 2011 Savers credit as long as the distribution is taken after 4/17/2012.
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Re: What's the largest Retirement Savers credit on Form 8880

Postby awval999 » Tue Jan 31, 2012 12:15 am

Alan S. wrote:
awval999 wrote:What's stopping someone (with the required AGI) from opening a Roth IRA with aftertax money, putting in $2000, claming the 50% credit and then just withdrawing the after tax Roth IRA money?

Will this will net the person +$1000 (or maximum allowable) with no tax penalties?


It's a different scenario whether you withdraw the contribution as a specific return of contribution, or you just make an early withdrawal. If you ask for a return of the specific contribution, for Savers Credit purposes it is treated as if you never made the contribution, so you get no credit. But neither does this action carry over to future years.

On the other hand, if you just withdraw an amount other than a return of contribution (typical early or normal distribution and coded as such), then you are facing a "reduction of contributions" amount on line 4 of the 8880. This reduces the amount of your contributions for the balance of the 3 year testing period. The reduction means that you must contribute 2,000 more than the amount you withdrew for each of those years in order to get the full credit.

Example: Suppose you make a 2011 IRA contribution at this time and then file your 2011 return and claim the credit. Then after April 17th, 2012 you withdraw the amount you contributed as a normal distribution. This withdrawal will have to show as a reduction on any 8880 you would file for 2012, 2013, and 2014, and that would likely eliminate the credit for those 3 years. However, you DO get to keep your 2011 Savers credit as long as the distribution is taken after 4/17/2012.


So you're saying you will be paying back the credit over tax years 2012, 2013 and 2014? (ie: a smaller refund or larger tax bill)
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Re: What's the largest Retirement Savers credit on Form 8880

Postby Epsilon Delta » Tue Jan 31, 2012 1:20 am

awval999 wrote:
Alan S. wrote:
awval999 wrote:What's stopping someone (with the required AGI) from opening a Roth IRA with aftertax money, putting in $2000, claming the 50% credit and then just withdrawing the after tax Roth IRA money?

Will this will net the person +$1000 (or maximum allowable) with no tax penalties?


It's a different scenario whether you withdraw the contribution as a specific return of contribution, or you just make an early withdrawal. If you ask for a return of the specific contribution, for Savers Credit purposes it is treated as if you never made the contribution, so you get no credit. But neither does this action carry over to future years.

On the other hand, if you just withdraw an amount other than a return of contribution (typical early or normal distribution and coded as such), then you are facing a "reduction of contributions" amount on line 4 of the 8880. This reduces the amount of your contributions for the balance of the 3 year testing period. The reduction means that you must contribute 2,000 more than the amount you withdrew for each of those years in order to get the full credit.

Example: Suppose you make a 2011 IRA contribution at this time and then file your 2011 return and claim the credit. Then after April 17th, 2012 you withdraw the amount you contributed as a normal distribution. This withdrawal will have to show as a reduction on any 8880 you would file for 2012, 2013, and 2014, and that would likely eliminate the credit for those 3 years. However, you DO get to keep your 2011 Savers credit as long as the distribution is taken after 4/17/2012.


So you're saying you will be paying back the credit over tax years 2012, 2013 and 2014? (ie: a smaller refund or larger tax bill)

You don't pay back the credit from 2011 in later years, it's just harder to claim the credit again in 2012-2014. In theory you could contribute and withdraw $1500 in 2011, $3000 in 2012 and $6000 in 2013 and get $750 credit three years in a row followed by three years of no credit for 2014-2016.
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Re: What's the largest Retirement Savers credit on Form 8880

Postby SobeCane » Tue Jan 31, 2012 2:51 pm

Did anyone test out 'The Finance Buff's" Example. Married with no kids and under $34,000 AGI?
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Re: What's the largest Retirement Savers credit on Form 8880

Postby Alan S. » Tue Jan 31, 2012 4:14 pm

Yes, the taxable income would be 15,000, all in the 10% bracket for a tax liability of $1500.

With only one spouse making a 2k contribution, the credit of 1k would reduce the tax to $500, ie the full credit would be used, but would still leave tax of $500.
If the other spouse did the same, there would be another credit of 1k and the tax liability would be eliminated, but $500 of potential credit would remain unused. The second spouse then would only need to contribute 1k to generate enough credit to eliminate the taxes.

This still results in no known example where the max credits for a single taxpayer (1k) or for joint taxpayers (2k) could be applied. If the 10% bracket goes away, the max credits could be used since the max tax for joint filers would increase to $2250.

The fullest use of this credit often arises from being able to engineer your AGI to the highest amount for which the 50% credit applies, ie 17k for singles or 34k for joint filers. As soon as those AGI figures are exceeded the credit drops to 20%, ie a reduction in the credit of 60%.
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Re: What's the largest Retirement Savers credit on Form 8880

Postby SobeCane » Tue Jan 31, 2012 6:04 pm

Alan,

Like you have alluded to, I 'massage' the contribution of my low income friends when doing their tax returns in February to make them just eligible for the 50% or 20% credit. The contribution to the Trad-IRA is then made with their tax refund money.
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