Saver's Tax Credit - University of Wisconsin System
If you make contributions to an IRA or employer-sponsored retirement plan like the UW Tax-Sheltered Annuity 403(b) Program, you may be eligible for a tax credit, called the "saver's credit." This credit reduces the federal income tax you pay dollar-for-dollar.
The Saver's Credit is one of the provisions established in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that have been made permanent in the Pension Protection Act of 2006.
Depending on your adjusted gross income (AGI) and your filing status, you could receive a tax credit equal to 10%, 20%, or 50% of the first $2,000 in retirement-account contributions you make each year.
The 2012 credit is available to you if you:
The 2012 limits are:
The 2013 limits are:
What exactly is Adjusted Gross Income? It is your gross income minus your pre-tax deductions and plus any interest income and profit or loss from self-employment. Here's an example:
Let's say youíre divorced with one dependent (a head of household) and you make $33,000 a year. You're a classified employee and you are paid biweekly.
In this case, your adjusted gross income is less than $25,875, and you qualify for a 50% tax-credit. You made a $1,950 contribution to your TSA for which you receive a 50% or $975 credit on your federal tax bill. But not only that! By making the tax-deferred contributions you paid approximately $292 less in taxes to begin with. By saving $1,950 for retirement you reduced your taxes by $1,267.
The maximum contribution for the credit for an individual is $2,000. If you are married filing jointly, the maximum contribution for the credit is $2,000 each for you and your spouse. The credit is claimed as a direct reduction in taxes you owe and is non-refundable, that is, if you donít make enough to pay any taxes, you donít get the credit.
As you can see from the example above, the credit is in addition to whatever other tax benefits may result from eligible taxpayers' retirement contributions.
Caution: If you have children you should consult with a tax advisor to determine how saving in a retirement plan may affect other valuable tax breaks, including the child tax credit and the earned-income tax credit.
Contact your benefits staff now to get set up so that you can spread your contributions throughout the year.
You can go to www.uwsa.edu/hr/benefits/retsav/tsa.htm for additional information and links to our investment companies.
The IRS has published a series of questions and answers providing guidance regarding the Saver's Credit. It is IRS Announcement 2001-106 available on the Benefitslink website. The IRS's website is at www.irs.gov.
This document was last revised on October 24, 2012