Savers Credit preparation for 2015

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Julieta
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Savers Credit preparation for 2015

Post by Julieta » Mon Apr 27, 2015 9:16 am

I'd like to maximize the credit for 2015. Help me with this example:

A single taxpayer has an AGI of $18,250. She takes standard and personal exemptions of $6500 and $4000. Her tax is $800.

She has contributed $2000 to savings for the year. Therefore, the net tax results in a refund of $200.

$18250
(6500)
(4000)
$800 tax 10%
($1000 savers credit)

$200 refund
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NightFall
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Re: Savers Credit preparation for 2015

Post by NightFall » Mon Apr 27, 2015 9:35 am

I don't see what's wrong with your example except that the $2000 can't just be contributed to savings. It must be contributed to a retirement account.

http://www.irs.gov/Retirement-Plans/Pla ... 9s-Credit)

"The Saver’s Credit can be taken for your contributions to a traditional or Roth IRA; your 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans."

Also, I come up with a total tax of $775.

terran
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Re: Savers Credit preparation for 2015

Post by terran » Mon Apr 27, 2015 9:48 am

Also, the savers tax credit is non-refundable, so a $2000 IRA contribution giving a $1000 credit and an $800 tax liability would result in a $0 tax bill, but not a refund (except to the extent of refunding what you had paid for the year through withholding).

red5
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Re: Savers Credit preparation for 2015

Post by red5 » Mon Apr 27, 2015 9:50 am

I don't believe the Saver's Credit is refundable, is it? Meaning it would only reduce your tax liability to $0.00. You would not get the extra $200 in the form of a refund.

http://www.irs.gov/uac/Get-Credit-for-Y ... tributions
http://www.investopedia.com/articles/re ... 031704.asp

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Julieta
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Re: Savers Credit preparation for 2015

Post by Julieta » Mon Apr 27, 2015 9:54 am

I was not sure if the full credit would be allowed to net a refund. I thought there might be a cap of the total credit of $800.

Then how does a single filer utilize the full savers credit of $1000 if the tax is less than the credit?
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JDDS
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Re: Savers Credit preparation for 2015

Post by JDDS » Mon Apr 27, 2015 10:04 am

2015 single standard deduction is 6300, not 6500.

http://www.obliviousinvestor.com/2015-tax-brackets/

terran
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Re: Savers Credit preparation for 2015

Post by terran » Mon Apr 27, 2015 10:26 am

Julieta wrote: Then how does a single filer utilize the full savers credit of $1000 if the tax is less than the credit?
Neither married nor single can really use the whole credit on a full contribution since the the tax liability on the income that qualifies for the credit is $1590 or $795 respectively and the credit for 50% of a $2000 IRA contribution per person are $2000 and $1000 respectively. I would say just be glad you're not paying taxes.

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Julieta
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Re: Savers Credit preparation for 2015

Post by Julieta » Mon Apr 27, 2015 10:33 am

JDDS wrote:2015 single standard deduction is 6300, not 6500.

http://www.obliviousinvestor.com/2015-tax-brackets/
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Julieta
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Re: Savers Credit preparation for 2015

Post by Julieta » Mon Apr 27, 2015 10:36 am

terran wrote:
Julieta wrote: Then how does a single filer utilize the full savers credit of $1000 if the tax is less than the credit?
Neither married nor single can really use the whole credit on a full contribution since the the tax liability on the income that qualifies for the credit is $1590 or $795 respectively and the credit for 50% of a $2000 IRA contribution per person are $2000 and $1000 respectively. I would say just be glad you're not paying taxes.
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Re: Savers Credit preparation for 2015

Post by Epsilon Delta » Mon Apr 27, 2015 10:38 am

Julieta wrote:I was not sure if the full credit would be allowed to net a refund. I thought there might be a cap of the total credit of $800.

Then how does a single filer utilize the full savers credit of $1000 if the tax is less than the credit?
Normally you can't. There may be some corner cases where somebody could. Perhaps somebody who could be claimed as an exemption on somebody else's return but is not (for whatever reason) could get the full $1000 credit.

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Re: Savers Credit preparation for 2015

Post by Alan S. » Mon Apr 27, 2015 1:18 pm

There is no doubt plenty of people making pre tax retirement plan contributions, when they could have made Roth contributions and still paid no tax because their tax liability would be closer, but still not equal to the max savers credit for their tier.

And even if they realized this when their returns were being prepared, how many would have actually taken the action to recharacterize their IRA contributions as Roth contributions?

This ability to do recharacterizations only applies to IRA accounts, so lower income taxpayers would benefit by using an IRA as opposed to a 401k when there is no employer match or when they switch jobs so often their employer match is never vested.

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Re: Savers Credit preparation for 2015

Post by Julieta » Mon Apr 27, 2015 3:08 pm

Alan S. wrote:There is no doubt plenty of people making pre tax retirement plan contributions, when they could have made Roth contributions and still paid no tax because their tax liability would be closer, but still not equal to the max savers credit for their tier.

And even if they realized this when their returns were being prepared, how many would have actually taken the action to recharacterize their IRA contributions as Roth contributions?

This ability to do recharacterizations only applies to IRA accounts, so lower income taxpayers would benefit by using an IRA as opposed to a 401k when there is no employer match or when they switch jobs so often their employer match is never vested.
Alan, please explain in a detailed example if you would.
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Alan S.
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Re: Savers Credit preparation for 2015

Post by Alan S. » Mon Apr 27, 2015 7:12 pm

Attached is Form 8880: http://www.irs.gov/pub/irs-pdf/f8880.pdf

On the table you will note where the savers credit factor goes from 20% (.2) to 50% (.5). If you made a TIRA contribution for which the deduction dropped your AGI to the top of the next lower tier, perhaps to get the 50% credit, that is a wise use of the TIRA deduction. But once you qualify for the 50% credit you will have more credit than you can use because the credit is not refundable.

Therefore, once your AGI drops into the 50% tier, additional TIRA deductions are wasted. For example, if your contribution dropped your AGI 3k below the top of the 50% tier, you would recharacterize 3k of the contribution as a Roth contribution. You still will pay no taxes this year, but your Roth contribution will also generate tax free earnings for retirement.

Conversely, if you made a Roth contribution and your AGI was 2,000 ABOVE the 50% tier, then you are leaving savers credit dollars on the table and your credit will not cover your tax bill in most cases. You need to further reduce your AGI by 2,000 and can do that by recharacterizing 2,000 of your contribution from a Roth contribution to a TIRA contribution.

For many people this will leave them with a contribution to two different IRA types. The first priority is to get AGI down into the 50% tier, but once you get even a dollar into that tier, then the rest of your deduction is wasted. While all this takes micromanagement, even if you cannot know your AGI when you are making the contributions, you can recharacterize after your tax return is prepared and then prepare your return accordingly to get the most out of the savers credit. Remember, only 2,000 of contributions is eligible for the credit, but you can still contribute more if you can afford to. You might need to contribute more to get a larger deduction in order to drop into the 50% savers tier.

The 8880 form above is for 2014. If you are planning for 2015, the 8880 is not yet released but the following indicates the 2015 savers tier numbers:
The adjusted gross income limitation under § 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing a joint return is increased from $36,000 to $36,500; the limitation under § 25B(b)(1)(B) is increased from $39,000 to $39,500; and the limitation under §§ 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $60,000 to $61,000.

The adjusted gross income limitation under § 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $27,000 to $27,375; the limitation under § 25B(b)(1)(B) is increased from $29,250 to $29,625; and the limitation under §§ 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $45,000 to $45,750.

The adjusted gross income limitation under § 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $18,000 to $18,250; the limitation under § 25B(b)(1)(B) is increased from $19,500 to $19,750; and the limitation under §§ 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $30,000 to $30,500.
Last edited by Alan S. on Mon Apr 27, 2015 7:16 pm, edited 1 time in total.

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Re: Savers Credit preparation for 2015

Post by Wagnerjb » Mon Apr 27, 2015 7:15 pm

Alan S. wrote:There is no doubt plenty of people making pre tax retirement plan contributions, when they could have made Roth contributions and still paid no tax because their tax liability would be closer, but still not equal to the max savers credit for their tier.

And even if they realized this when their returns were being prepared, how many would have actually taken the action to recharacterize their IRA contributions as Roth contributions?

This ability to do recharacterizations only applies to IRA accounts, so lower income taxpayers would benefit by using an IRA as opposed to a 401k when there is no employer match or when they switch jobs so often their employer match is never vested.
Alan: my son was in an opposite situation. His AGI was (for example) $19,000 and his saver's credit was limited to 10 or 20%. By making a tradional IRA contribution in early 2015 (for 2014), we got his AGI down to the range where the saver's credit is 50%, thus saving him quite a bit and offsetting his entire tax liability.

Best wishes.
Andy

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Re: Savers Credit preparation for 2015

Post by Alan S. » Mon Apr 27, 2015 7:18 pm

Andy, you are correct. See my post above for explaining how to REDUCE AGI to get into the 50% tier.

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Re: Savers Credit preparation for 2015

Post by Julieta » Tue Apr 28, 2015 11:27 am

Good explanation, Alan.
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Epsilon Delta
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Re: Savers Credit preparation for 2015

Post by Epsilon Delta » Tue Apr 28, 2015 12:35 pm

Alan S. wrote:While all this takes micromanagement, even if you cannot know your AGI when you are making the contributions, you can recharacterize after your tax return is prepared and then prepare your return accordingly to get the most out of the savers credit.
You can avoid the recharacterization by preparing the return and making the contributions after doing the return and before April 15th.

This is often the practical solution for these tax payers and their advisors. This is not always absolutely optimum, but it's better than making random contributions and figuring the tax afterward, and it requires less paper work and hand holding than a recharacterization.

I know Alan knows this, but some of the readers might not.

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Re: Savers Credit preparation for 2015

Post by Julieta » Thu Apr 30, 2015 3:40 pm

...another good strategy... Worth consideration for keeping life simple. In my case, I'd like to invest the cash at beginning of the year for potential gains in the market. I did recharacterizations last few years and it is somewhat more complicated, agreed. However, with the TSM up all year, that TIRA did better than sitting in a low interest account.
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