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