How to Turn $350 Into $1,000 Overnight: (This is not a scam)

6a0133f3fc5805970b0147e2984679970b-320wiIf you had the chance to put $350 into a savings account and have it immediately turn into $1,000, 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. If you are single you are eligible for this credit if your adjusted gross income is less than $30,000. If you are married your adjusted gross income must be less than $60,000. These are the limits for 2014.

If you are eligible you can claim this credit by making a 2014 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 1, 2014.

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 $17,500 in 2014. (Adjusted gross income is your business profit plus any adjustments on the front of Form 1040.) She contributes $1,000 into her 2014 Traditional IRA account in March 2014. She is entitled to a 50% tax credit on her contribution – $500. Also, her contribution is tax deductible and since she is in the 15% tax bracket she will receive an additional $150 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!

If Jayne had an adjusted gross income of $20,000 she would receive a 10% Saver’s Credit ($100), plus a $150 tax deduction, for a total of $250 tax savings. If she made a contribution to a Roth IRA she would only get the $100 Saver’s Credit since contributions to a Roth IRA are not tax deductible.

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: portfo.li

Money Management GuideFor mor information on the Saver’s Credit, see my book Family Child Care Money Management and Retirement Guide.



Categories: Money Management & Retirement, Record Keeping & Taxes, Retirement Planning, Tax Return

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12 replies

  1. Will this work for next year? I do not have an IRA set up yet.

  2. You can still set up and make a contribution to an IRA for 2010 by the April 18, 2011 deadline.

  3. Our MFJ is less than the $55,500. So I can contibute to an IRA. If my husband also contibutes to an IRA, does he have to make less than $27,750? Can we get kind of a double credit that way?

  4. You are eligible for the Saver’s Credit because of your family income. This means you can get the credit, plus the benefits of a tax deduction from your IRA.
    You are always eligible to set up an IRA, regardless of your income. So, your husband can open an IRA even if he makes more than $27,750.

  5. I can’t figure out which line to deduct the IRA from. Is it on the 1040 or is it on the Schedule C. If so, which line is it? Thank you

  6. You show an IRA deduction on Form 1040, line 32.

  7. I had a daycare partnership from jan – april and then we dissolved the partnership and i have been doing daycare on my own since may. The food program used my SSN for the food payments so the entire amount for the year is on my 1099misc. I called and they said they can not correct this and it is my fault the SSN was used and not an EIN. What should I do? I already had my taxes for the partnership done and have my K1 from it. Now I have to show it as income again on my individual taxes because the food program will not send me a corrected 1099. What should I do? Please help

  8. Did the partnership report as income 4 months of the Food Program income? If so, then I’d write a letter between you and your partner stating that the F P income was split between the two partners. If the IRS audits you over the Form 1099 you can explain that the other partner reported half of it.
    If none of the Food Program income was reported by the partnership, then amend the partnership return to account for this.

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  10. Is there a age limit to join.

  11. There is no age limit to qualify for this credit.

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