Have your children recently entered the workforce? It’s not too soon to encourage them to save for retirement.
Strategy: Introduce your offspring to the retirement saver’s credit. This underpublicized tax break can provide a big boost for lower-income wage-earners.
The amount of the available credit depends on the individual’s AGI, his or her tax filing status and the amount contributed toward retirement.
Here’s the whole story: The retirement saver’s credit is available for the first $2,000 of voluntary contributions made to a tax-qualified retirement plan such as a 401(k) or an IRA. Although greater contributions are permitted, the maximum amount allowed for the credit remains $2,000.
For low-income taxpayers, the credit is equal to 50% of the qualified contribution. This percentage is 20% for individuals in the next income bracket. Finally, the percentage drops to 10% for the next income group (see chart below). Once your offspring exceeds the income level for the 10% credit, he or she can’t claim any credit.
Therefore, the maximum credit allowed for a single filer is $1,000 (50% of $2,000 in contributions). A couple filing a joint tax return is entitled to a maximum $2,000 credit (50% of $4,000).
Certain other restrictions may apply. For instance, the credit can’t be claimed by a taxpayer who was under age 18 last year, a full-time student or a child who can be claimed as a dependent on someone else’s tax return. A full-time student is an individual who was enrolled at school for five months during the year. For example, if your child graduated last May, he or she probably would not qualify for the credit on a 2013 return.
Tip: The credit is nonrefundable. So, it may reduce a child’s tax bill to zero, but no refund is available for any excess credit amount.