Encourage Retirement Savings Early & Take Advantage of the Tax Credit
It may seem odd to talk to your kids about their retirement when they’re just entering the 401k used shutterstock_169837361workforce, but it’s never too early to encourage good saving habits and knowledge of advantageous tax breaks. Putting money away is a long-term investment, and pays greater dividends the sooner one starts. The retirement saver’s credit, which was designed to help low-income earners, can apply to taxpayers of any age and gets a jump on building those dividends.
The tax credit works like this: If your child turned 18 before the previous filing year, is no longer a full-time student (defined as having spent five months or more in school during the year), and can no longer be claimed as your dependent, he or she is eligible to receive a break based on their qualified contributions to a retirement savings vehicle such as an IRA or 401k. Single filers that earn $18,000 or less in 2014 receive a 50% credit on these contributions, to a ceiling amount of $2,000—meaning a maximum $1,000 credit on their return.
The credit adjusts for those whose earnings exceed $18,000. Single filers in the next tax bracket (making between $18,000 – $19,500) are only allowed a 20% credit on contributions, and those in the $19,500 – $30,000 bracket only get a 10% credit. Earners making above $30,000 are not eligible for this credit at all. The credit also takes joint filers into account: For example, if your child is married and filing jointly, the couple is eligible for the 50% credit if they have earned $36,000 or below. They have a tax credit contribution ceiling of $4,000, allowing for a $2,000 credit. The 50% / 20% / 10% progression applies as well, with the brackets for joint filings identified as twice the ranges as single filers.
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