Easy to Miss Tax Savings

Don't Overlook the Savings Credit when filing Your 2011 Tax Return!
The savings credit can be worth as much as 50% of the amount you contribute to a retirement plan. However, you don't automatically receive this credit.  You have to claim the credit by filing Form 8880 with your 1040 or 1040A.   You cannot use Form 1040EZ when claiming this credit.

Who Meets the Requirements
Recent changes in the tax laws have encouraged many employers to adopt automatic enrollment arrangements for their 401k plans. One effect will be a significant increase in the number of participants with moderate income — the kind who may qualify for the retirement savings contribution credit.
This credit is available for people who contribute to IRAs, 401k accounts, or certain other types of retirement accounts, but only if they meet certain requirements. The main ones include:
  • You had to turn 18 by the end of the year.
  • You couldn't be a full-time student during five months of the year.
  • You won't be claimed as a dependent by someone else for that year.
  • Your adjusted gross income for the year is no more than $55,500 if married filing jointly, $41,625 if filing as a head of household, or $27,750 for any other filing status. (These numbers are for 2010 only.)
Income limits are lower for the maximum credit of 50%, but you can get at least some credit up to the limits mentioned above.
Easy to miss
This credit is easy to overlook, especially if your retirement plan contribution doesn't show up on your tax return.
  • You generally don't have to report contributions to Roth IRAs because those contributions don't provide a deduction. But the credit is allowed for these contributions.
  • You don't report contributions you make to 401k or 403b accounts as an employee because the contributions simply reduce the amount that appears as compensation on Form W-2. Here again, the credit is available, but only if you claim it.
Even if you have a visible contribution on your tax return, such as a deduction for contributing to a traditional IRA, the IRS won't automatically grant the credit. It's your responsibility to attach Form 8880 if you want this credit.
A professional tax return preparer should know enough to ask whether you've made a retirement plan contribution in the past year and make sure you claim the credit if you're eligible. But you shouldn't assume you'll get this credit just because you use a pro (or a software program). Check to see if Form 8880 is attached to your return, and if not, find out if that's because you failed an eligibility test, or perhaps simply an oversight.