If you had the chance to make a $1,000 IRA contribution that would save you $650 on your tax return, would you do it? You have this chance if you are a low-income family child care provider and make a contribution to any Individual Retirement Account (IRA) by April 15th. This federal rule is called the Saver's Credit. The lower your adjusted gross income the more you can save on your taxes. Here's a chart that will show you if you are eligible.
If you are eligible you can claim this credit by making a contribution to any IRA: 401(k) or 403(b) plan, Traditional IRA, Roth IRA, SIMPLE IRA, or SEP IRA. To contribute to a SIMPLE IRA you must have set one up before October 1st.The tax credit is worth 10%, 20%, or 50% of your IRA contribution, up to a maximum $2,000 contribution. Let's look at an example of how this works. Jayne Provider has an adjusted gross income of $19,000. (Adjusted gross income is your business profit plus any adjustments on the front of Form 1040.) She contributes $1,000 into her Traditional IRA account in March. In doing she is entitled to a 50% tax credit on her contribution which will reduce her taxes by $500. Also, her contribution is tax deductible and since she is in the 12% tax bracket she will receive an additional $120 tax deduction. In the end, Jayne contributed $1,000 into her IRA and reduced her taxes by $650. Yes, she gets a double tax benefit from her contribution!
To claim your Saver's Credit fill out Form 8880 Credit for Qualified Retirement Savings Contributions and carry the credit forward to Form 1040, line 51. If you made an IRA contribution in the past three years and were income-eligible for the Saver's Credit you can amend your taxes (IRS Form 1040X) and get a refund. To set up an IRA contact your local bank, credit union, mutual fund or financial planner. For more information visit the IRS website.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.flickr.com/photos/ajc1/
For more information on the Saver's Credit, see my book Family Child Care Money Management and Retirement Guide.
