The IRA and the Saver's Credit: An Unbeatable Tax Benefit!
Condensed text by Fernando Olmedo, focalerta@yahoo.es
One of the biggest tax breaks available to family child care providers is the Individual Retirement Account (IRA).
When you put money into an IRA for 2012 it will reduce your 2012 taxable income. You won't have to pay tax on it (along with the interest you earned) until you withdraw it after age 59 1/2.
By not having to pay tax on your contributions and interest for many years your money will accumulate much faster than if you invested outside an IRA
Note: a ROTH IRA works differently than all other IRAs. You won't get an immediate tax deduction when you make your contributions, but you won't pay any tax on the contributions and the interest earned when you withdraw them.
In general, you will be better off contributing to a Roth IRA than a Traditional IRA.
Family child care providers may be eligible to contribute to the following IRAs:
Eligibility - You are eligible to contribute to a Traditional IRA if your family's taxable income* is below:
$69,000 in 2013 or $70,000 in 2014 - Single
$115,000 in 2013 or $116,000 in 2014 - Married filing jointly where your spouse is covered by an employer-based retirement plan
$188,000 in 2012 or $191,000 in 2013 - Married filing jointly where your spouse is not covered by an employer-based retirement plan
Contributions are tax deductible. Contributions and interest earned are taxed when withdrawn
Maximum contribution amount
2013: $5,500 per person + $1,000 if you are age 50 or older
2014: $5,500 per person + $1,000 if you are age 50 or older
Deadline for 2013 contributions: April 15, 2014.
Eligibility - You are eligible to contribute to a Roth IRA if your family's taxable income* is below:
$127,000 in 2013 or $129,000 in 2014 - Single
$188,000 in 2013 or $191,000 in 2014 - Married filing jointly
Contributions are not tax deductible. Contributions and interest earned are not taxed when withdrawn
Maximum contribution amount
2013: $5,500 per person + $1,000 if you are age 50 or older
2014: $5,500 per person + $1,000 if you are age 50 or older
Deadline for 2013 contributions: April 15, 2014.
Eligibility - All family child care providers are eligible regardless of their family's income.
Contributions are tax deductible. Contributions and interest earned are taxed when withdrawn
Maximum contribution amount
2013: $12,000 + $2,500 if you are age 50 or older
2014: $12,000 + $2,500 if you are age 50 or older
Deadline for 2013 contributions: April 15, 2014. However, you must have first established your SIMPLE before October 1, 2013 to make a 2013 contribution.
Note: For all IRA contributions, you cannot make a contribution in excess of your profit for the year. So, if your profit was $4,000, the maximum you could contribute to an IRA would be $4,000.
* family taxable income is the profit from your business (income - expenses), plus the gross income from your spouse.
The saver’s credit
If 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 15, 2012.
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 $28,750 ($29,500 for 2013). If you are married your adjusted gross income must be less than $57,500 ($59,000 for 2013).
If you are eligible you can claim this credit by making a 2012 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, 2012.
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 is single and has an adjusted gross income of $16,500 in 2012. (Adjusted gross income is your business profit plus any adjustments on the front of Form 1040.) She contributes $1,000 into her 2012 Traditional IRA account in March 2013. 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 made a contribution to a Roth IRA she would only get the $500 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.
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.
If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be eligible for a tax credit, depending on your age and income.
Here are six things the IRS wants you to know about the Savers Credit:
1. Income limits The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and 2011 income of:
Single, married filing separately, or qualifying widow(er), with income up to $28,250
Head of Household with income up to $42,375
Married Filing Jointly, with incomes up to $56,500
2. Eligibility requirements To be eligible for the credit you must be at least 18 years of age, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.
3. Credit amount If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 ($2,000 if filing jointly). The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.
4. Distributions When figuring this credit, you generally must subtract distributions you received from your retirement plans from the contributions you made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date - including extensions - for filing the return for the credit year.
5. Other tax benefits The Retirement Savings Contributions Credit is in addition to other tax benefits you may receive for retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.
6. Forms to use To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.
For more information, review IRS Publication 590, Individual Retirement Arrangements (IRAs), Publication 4703, Retirement Savings Contributions Credit, and Form 8880. Publications and forms can be downloaded
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