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Most Qualifying Taxpayers Fail to Take Retirement Saver’s Credit

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As Americans file their income taxes, many are probably failing to take a tax credit they are entitled to for saving for their own retirement. But the good news is that those filers have until April 15 to take advantage of the program.

The Saver’s Credit is available to individuals or couples who contributed to a company-sponsored retirement plan or IRA in the past year and who meet adjusted gross income (AGI) requirements. 

The Saver’s Credit can be applied to the first $2,000 of voluntary contributions to a 401(k) plan, 403(b) plan, IRA, or similar employer-sponsored retirement plan. For those who qualify, the credit can be as high as $1,000 for an individual and $2,000 for a married couple.

Those who qualify include the following:

     • Single filers with an adjusted income of up to $30,000 in 2014 or $30,500 in 2015.

     • For the head of household, the adjusted income limit is $45,000 in 2014 or $45,750 in 2015.

     • Those taking the credit must be at least 18 years of age.

     • The filer cannot be a full-time student of be claimed as a dependent on someone else’s return.

Only 1 in 4 Eligible Take the Saver’s Credit

But, alas, only one in four of those who are estimated to qualify for the Saver’s Credit in fact take it, according to a recent study by the Transamerica Center for Retirement Studies.

“The Saver’s Credit is a tax credit that reduces an eligible taxpayer’s federal income tax, making it a meaningful incentive for low to moderate-income individuals and households to save for retirement,” according to Catherine Collinson, president of the nonprofit Transamerica Center. “Unfortunately, many eligible workers may be missing out on the Saver’s Credit because they are unaware of it.”

Collinson said that many workers may have missed the Saver’s Credit when they filed returns in the past, or they filed the wrong return for – preventing them from being able to take advantage. Still others might have saved had they known about the credit. But she stressed that it not too late to rectify the situation.

“For them, the good news is that it’s not too late to contribute to an IRA and claim the Saver’s Credit. You still have until April 15, 2015 to do so,” Collinson said.

Lack of Promotion Behind the Low Participation

That’s the good news. The bad news is that despite the Saver’s Credit being around since 2001, just 24 percent of American workers that are potentially eligible to take it do so, according to the 15th Annual Transamerica Retirement Survey.

The survey looks at a variety of retirement preparedness issues, but it has asked about the Saver’s Credit for several years now. In past years the participation rate of those estimated to be eligible has been as low as 15 percent.

Why such a low participation rate? Collinson says there is plenty of blame to go around, but it basically boiled down to lack of continual promotion, and then the impact of the recession.

“Everyone involved—the financial services industry, policy makers, the IRS, tax preparers—can do a much better job of promoting it then they are,” Collinson said.

“When it first came out and it was legislated in 2001 there was a lot of fanfare around it, and then the media cycle moved on to the next big thing,” Collinson said. “And then with the Pension Protection Act, which was legislated in 2006, there was a lot of fanfare and promotion was reinvigorated. Then the economy fell into the recession and employers and workers both were very focused on making ends meet.”

But there is another factor that boils down to which tax return form a taxpayer uses when they submit their taxes. Choose the wrong form, and the Saver’s Credit doesn’t appear as an option.

“The Saver’s Credit is not available on Form 1040EZ,” Collinson said. If you are eligible to claim the Saver’s Credit, you should use the Form 1040, Form 1040A or Form 1040NR.”

Retirement Planners Can Increase Public Awareness

Retirement planners and financial advisors should all be aware of the Saver’s Credit, Collinson explains, and they should promote its use. And even if an individual client may not quality, a couple might.

“Often tax preparers and retirement planners may work with individuals who have means being greater than low to moderate income. However, if you look at a married couple filing jointly, it’s conceivable that they may be eligible,” Collinson said. “It is also important that, even if their client isn’t eligible they may have family, friends or loved ones who might be, and they can play an invaluable role in spreading the word to increase awareness.”

So how much is the typical qualifying taxpayer losing out by not taking the Saver’s Credit. It various according to two primary criteria: income and amount saved toward retirement that year.

“The credit calculation is based on how much you saved and relative to where you fall within the income eligibility requirements,” Collinson said. “So it’s not just a straight 50 percent of the first $2,000 that you saved will be applied to the credit. It also takes into account where you fall within the income eligibility requirements. For the top people who will benefit the most it could be as much as $1,000 or as much as $2,000 for married couples. For many it will typically be much less than that but it still could mean $100 or $200, and why leave that on the table?”

What To Do About Past Credits Lost?

If a taxpayer hasn’t taken advantage of the Saver’s Credit in the past should they file an amended return to do so?

“That depends on the individual, as well as how they go about preparing their taxes,” Collinson said. “It may or may not be worth the time and the expense to file an amended return. That is up to the individual to do their homework and make that judgment call.”

Most importantly, “as people are thinking about their tax preparation and whether or not they are eligible for the Saver’s Credit, if they did not save in a 401(k) or a similar plan in 2014, and they’ve done their homework and they believe they are otherwise eligible, they can still fund an IRA up to April 15 to do that,” Collinson said.

Finally, Collinson says taxpayers should not confuse the Saver’s Credit with the ability to save on a tax-deferred basis in a 401(k) or similar plan or IRA.

“Many workers may be confusing these two retirement savings incentives,” Collinson said. “It sounds almost too good to be true that you could get a double benefit of one, being paid to save for retirement, and two, saving on a tax deferred basis. However, it this case, it’s true.”