IRS Promotes Saver’s Credit

IRS Promotes Saver’s Credit

by | Dec 27, 2011 | Archives

WASHINGTON, D.C. – The Internal Revenue Service is encouraging more taxpayers to take advantage of the “saver’s credit.”

The credit enable low- and moderate-income workers to begin to save for their retirement while earning a special tax credit in 2011 and the years ahead, the IRS noted.

The saver’s credit helps offset part of the first $2,000 that workers voluntarily contribute to individual retirement arrangements, 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2011 tax return, according to the IRS. Taxpayers have until April 17, 2012, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2011. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2012 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

• Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012;
• Heads of households with incomes up to $42,375 in 2011 or $43,125 in 2012; and
• Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that 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.

A taxpayer’s credit amount is based on the taxpayer’s filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is filed to claim the saver’s credit. The form’s instructions provide the details on figuring the credit correctly.
In tax year 2009, the most recent year for which complete figures are available, saver’s credits totaling just over $1 billion were claimed on just over 6.25 million individual income tax returns. The saver’s credits claimed on these returns averaged $202 for joint filers, $159 for heads of household, and $121 for single filers.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

• Eligible taxpayers must be at least 18 years of age.
• Anyone claimed as a dependent on someone else’s return cannot take the credit.
• A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.
• Certain retirement plan distributions reduce the contribution amount used to figure the credit.

For 2011, this rule applies to distributions received after 2008 and before the due date, including extensions, of the 2011 return. Form 8880 and its instructions have details on making this computation.

The saver’s credit began in 2002 as a temporary provision. However, it was made a permanent part of the Tax Code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation.

By Michael Cohn, Accounting Today

Payroll Tax Cut Temporarily Extended into 2012

Payroll Tax Cut Temporarily Extended into 2012

by | Dec 23, 2011 | Archives

WASHINGTON — Nearly 160 million workers will benefit from the extension of the reduced payroll tax rate that has been in effect for 2011. The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.


Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld
during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.


Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.


Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year  amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).    


This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions.  The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.


The IRS will issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision.  For most employers, the quarterly employment tax return for the quarter ending March 31, 2012 is due April 30, 2012.


IRS Issue Number:    IR-2011-124

Money-Saving Year-End Tax Tips for Small Business

Money-Saving Year-End Tax Tips for Small Business

by | Dec 22, 2011 | Archives

Although tax season is still a few weeks away, now is the time to take advantage of a basket of tax opportunities that can help your small business reduce its tax liability and save money come April 2012.  

Read on for seven tips that can help you maximize your deductions and claim the credits you deserve.

Spend Some Money Before Deduction Limits are Cut – This is definitely the year to take advantage of the Section 179 deduction, which allows businesses to deduct expenses for a variety of capital equipment purchases including computers, furniture, certain business software, vehicles, manufacturing equipment, and more. Thanks to both the 2010 Tax Relief Act and the Small Business Jobs Act, deduction limits under Section 179 have increased to $500,000 as long as you spend less than $2 million in new purchases.
This means that if your small business makes any purchase before the end of the year, you may be able to deduct most of your outlays for capital equipment. Even if you don’t think you need to make new purchases, review your inventory and equipment and use this time to replace obsolete or aging assets.
If possible, take advantage of this temporary opportunity before the end of the year.  Next year, the deductible limit drops to $139,000 on purchases only up to $560,000, unless there is an extension from Congress.  Be sure to talk to your tax advisor or accountant for more specifics on qualifying purchases and read more about the ins and outs of business expenses and tax deductions from SBA.
Hire a Returning or Disabled Veteran – In November, the President signed into law specific tax credits for businesses that hire unemployed veterans.  The Returning Heroes Tax Credit provides businesses that hire unemployed veterans with a maximum credit of $5,600 per veteran, and the Wounded Warriors Tax Credit offers businesses that hire veterans with service-connected disabilities with a maximum credit of $9,600 per veteran. Read more in this White House fact sheet: Returning Heroes and Wounded Warrior Tax Credits
Defer your Income – If you think you will be in the same or lower tax bracket next year, deferring income might make sense for you (more income next year could push you into a higher tax bracket and a bigger tax bill).Billing late in December will defer your taxable income for 2011 (since it’s unlikely you’ll get paid until 2012.) You can also defer income by taking capital gains in 2012 instead of in 2011.
While you can’t defer income or wages for your employees, you might consider delaying the payment of bonuses until the new year. Note that if you operate on an accrual accounting basis, you can claim a deduction for the bonuses this year even though the bonuses aren’t paid until next year. However, the bonuses must be paid within 2.5 months of year-end.
Take Advantage of the R&D Tax Credit (It’s Not Just for High Growth Startups) – Another tax saving that’s up for expiration unless Congress extends it in 2012 are certain credits for research and development. This one doesn’t apply only to high tech or bio tech, but extends to certain companies that employ engineers, outsource product testing, or are seeking to diversify a product line. This article from Bloomberg Businessweek explains more about how small businesses can benefit from and claim the credits. Again, talk to your tax advisor to see if you qualify.
Set Up a Retirement Plan or Fully Fund One Before Year-End – If you are self-employed, now is the time to set up a retirement plan or add pre-tax money to your existing plan to reduce this year’s income. If you still can, max out your pre-tax contributions to your traditional IRA, 401k, or 403b, and get a tax deduction to lower your taxable income. This year, sole proprietors can put $16,500 (pre-tax) into a solo 401(k), ($22,000 if you are 50 or over). Check with your plan administrator for limits and deadlines for different types of plans.
Contribute to Charity– With the holiday season upon us, now is the time to consider making a business charitable contribution. You can donate money and/or usable items such as clothing, toys, and other goods, and claim a deduction for the fair market value. Be sure to get proper documentation or a receipt for your records.
Keep your Records Straight – Keeping your books in order throughout the year is critical. Use the time now to make sure everything is up-to-date and accurate so that you maximize your deductions and save your accountant time and billable hours when tax season rolls around. Read these tips from the SBA about Managing Your Small Business Tax Obligations.
By Caron Beesley, SBA.gov