Saver's credit: A tax break nobody knows about

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For low- to middle-income workers, the Retirement Savings Contribution Credit — the saver's credit — is one way to get a little help during tax season.

Of course, most who qualify for the credit have never heard of it.

Just 23% of American workers with annual household incomes of less than $50,000 — those most likely to qualify — are aware of the credit, according to the 2014 Annual Transamerica Retirement Survey from the nonprofit Transamerica Center for Retirement Studies.

That's around 5 million of an estimated 25 million people who may be eligible to claim and receive this credit.

Why isn't this catching on?

It's not like it's a bad idea.

Like other credits, this one can increase your refund or reduce your tax owed.

It'll offset part of the first $2,000 of workers' voluntary contributions to IRAs and 401(k) plans and similar workplace retirement programs.

The qualifications are somewhat stringent but not horrible.

How much is the saver's credit worth?

Type of filer Average credit
Single filer $128
Head of household $166
Joint filer $215

Source: Internal Revenue Service, 2011 tax year figures

In order to claim it for the 2013 tax year, you could have earned no more than $29,500 if you're single, $44,250 or less if you're the head of the household and $59,000 or less if you're a married couple filing jointly.

For 2014, that increases to $30,000 if you're single, $45,000 or less as head of household and $60,000 or less if married and filing jointly.

You must be 18 or older. Full-time students and filers claimed as a dependent on another person's return are not eligible.

The amount credited is based on filing status, adjusted gross income, tax liability and the amount contributed to a qualifying retirement plan.

Theoretically, you could get a $1,000 break on your taxes if you're single and a $2,000 break if you're married, which is a nice chunk of change.

But don't expect that much.

Saver’s credits claimed on returns in 2011 averaged just $215 for joint filers, $166 for heads of household and $128 for single filers, according to the IRS.

Still, every little bit helps.

So why is it that out of the vast number of people who qualify, only one-fifth is even aware that this credit exists?

"That is a fantastic question," says Catherine Collinson, president of Transamerica Center for Retirement Studies, a Los Angeles-based foundation funded by the Transamerica Life Insurance Co.

Collinson says one of the reasons so few have heard of it is that people who are most likely to claim the credit are also more likely to use the 1040EZ form when filing their taxes, which can be a problem.

To claim the saver's credit, you'll need to use 1040A or 1040. The 1040EZ instructs filers looking to take advantage to use one of the other forms, but it's difficult to find this warning.

"A lot of the people using the 1040EZ just fill it out and don't read the instructions," Collinson says.

In addition, "There are lots of human impediments to this filing," says Nevin Adams, director of the American Savings Education Council in Washington, D.C.

Employers sponsoring a 401(k) plan are in the best position to promote the credit, but they might not feel comfortable doing so, notes Collinson.

"You can perhaps appreciate why that communication might sound a little odd coming from the employer that is paying you that 'low income' …," says Adams.

Still, it seems like this could work better with just a few tweaks.

For starters, the Internal Revenue Service could add it to the 1040EZ form.

change spilling out of a jar10 secrets to saving for retirementBuilding wealth can be easier than you think if you make a few savvy decisions and avoid a few stupid mistakes. Ideally, you'll retire with enough savings to replace at least 60%, and preferably 80%, of your pre-retirement income. That number is going to shock you. That's why the first step is to never get discouraged by the task ahead of you. Saving something is better than saving nothing.

There are also a couple of proposals that could improve the credit down the line.

Right now, the saver's credit won't benefit you unless you have federal income tax liability. (That doesn't mean you owe additional taxes on April 15; it means you had enough income to pay taxes at all.)

This restriction makes the credit pretty much useless for many low-income households who typically owe no tax for the year.

Making it available to people who have paid no federal income taxes would be a boon for low-income filers.

"Even if the tax filer has no tax liability," says Collinson," they could get the saver's credit in the form of a refund."

It'd be even better if there were an electronic means to deposit the credit straight into the individual's 401(k) or IRA account, advises Collinson.

That way, "the credit that's designed for people to save for retirement actually goes to their retirement account," she says.

In the meantime, keep an eye out for this credit if you're using electronic software to file — apparently it can be tricky.

And if you're claiming it manually, carve out some extra time — you'll have to figure out if you qualify and then fill out the 1040A or 1040 and fill out a separate Form 8880.

Sheesh, no wonder everyone loathes tax season.

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