Thrifty Spending Issue 81

FEATURE ARTICLE:  How to Get the Saver’s Credit

Low income workers who save for retirement using a 401(k) or IRA can earn a tax credit worth up to $1,000 for individuals and $2,000 for couples in 2011 and future years.

The saver’s credit can be claimed by workers whose modified adjusted gross incomes are up to $28,250 for singles, $42,375 for heads of households, and $56,500 for married couples in 2011. In 2012 those income limits will increase to $28,750 for singles, $43,125 for heads of households, and $57,500 for couples.The first $2,000 workers contribute to an IRA, 401(k), or similar workplace retirement account can count towards the saver’s credit. The credit can be used to increase your refund or reduce the tax you owe. This tax credit is available in addition to the tax deferral you get for making a traditional 401(k) and IRA contribution and any 401(k) match you get from your employer.

Consider a married couple who earned $30,000 in 2011 and contributed $1,000 to an IRA. They will be able to claim a $500 tax credit for their $1,000 IRA contribution.

Saver’s credits totaling just over $1 billion were claimed on approximately 6.25 million individual income tax returns in 2009. The credit varies based on your income and tax filing status and ranges from 10 percent to 50 percent of the amount you saved up to $2,000. Most taxpayers received modest tax credits for their retirement account contributions. Saver’s credits averaged $121 for single filers, $159 for heads of households, and $202 for married couples. “Though the maximum saver’s credit is $1,000, $2,000 for married couples, it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers,” the IRS says in a statement.

Awareness of the saver’s credit is increasing, but remains low. Just 21 percent of people earning less than $50,000 say they are aware of the saver’s credit, according to a Transamerica Center for Retirement Studies online survey of 4,080 workers age 18 and older at for-profit companies, but that’s up from 12 percent in 2010.

The saver’s credit was first added to the tax code in 2002 as a temporary provision, and was then made permanent in 2006. Income limits are now adjusted annually to keep pace with inflation. Workers under age 18, full-time students, and individuals claimed as dependents on someone else’s tax return are not eligible for the credit. Rollovers and trustee-to-trustee transfers into retirement accounts don’t count toward the credit. Your eligible contributions may be reduced by recent distributions you have taken from a retirement account.

Workers interested in getting the saver’s credit in 2011 must make 401(k), 403(b), 457, or Thrift Savings Plan contributions by the end of the calendar year. However, retirement savers have until April 17, 2012 to add money to an IRA that will allow them to get the credit in tax year 2011.

MONEY SAVING TIP:  Pursue goals of intense concern to you and you alone.

Have you ever had the experience of enjoying a nice dinner out with your spouse or a good friend, commenting that you were too full to have dessert, and then found yourself wavering when the waiter came by with the dessert tray? If you love cheesecake, and you see that this place makes a good cheesecake, you want some, whether in theory it is a good idea for you to order some on this particular occasion or not.

You need to want to save the way you want to eat cheesecake (if you love cheesecake), or the way you want to eat a chocolate brownie (if you are a chocolate brownie lover), or the way you want to eat an apple cobbler (if you are an apple cobbler lover). A general desire to save is like a general desire for desert — it’s not compelling enough to inspire action. Find what you’re passionate about and make your savings account turn it into a reality. The trick to becoming an effective saver is identifying that something, the saving goal that provides you with the motivation needed to get the job done.

People trying to sell always try to hit the emotional hot buttons with their sales pitches. They do this because it works. It works on the saving side too. To save well, you need to direct your money management energies to the pursuit of a goal that hits your emotional hot buttons.

DID YOU KNOW…You need to protect yourself in a short sale?

After a short sale, the mortgage lender often will report to credit bureaus that the home loan was settled for less than the full amount. In addition, it can also note the amount of the deficit as “balance owed” on the credit report, even though the obligation has been finalized and no additional money is owed.

In other words, if you have a $300,000 mortgage and sell your house for $250,000, the bank could report a balanced owed of $50,000.

While the short sale will damage your credit score dramatically (as much as a foreclosure, according to examples recently released by FICO), you can mitigate the damage slightly by arranging with the lender not to report a balance owed.

The best time to negotiate this with the lender: before or during the short sale process, says Ulzheimer. While you can attempt it after the fact, that’s not as practical.

“After it’s been paid, the lender starts to lose interest in speaking with a former customer.”