There is a report called Making Ends Meet that has been in the news the past few months. This research, put together by the Center on Policy Initiatives, calculated the average income needed to cover basic living expenses in San Diego for different types of families.
For instance, a single person needs to make $27,655 per year to cover housing, food, transportation, healthcare, and taxes. A couple with one child needs to make $67,277 per year to cover these same living expenses plus childcare costs. These are bare-bones budgets that don’t include anything for entertainment or retirement savings.
What’s shocking is that the study found 38 percent of working-age households (people under age 65) don’t earn incomes high enough to pay for basic living expenses. Even with full-time work, about one in four households in San Diego earn less than the amount needed to cover living expenses.
It’s pretty tough to save for retirement when you barely earn enough to pay rent and buy groceries. However, there is a little known tax credit for low income workers called the Qualified Retirement Savings Credit if you can somehow manage to save a little bit toward retirement. Low income workers that contribute up to $2,000 to a retirement savings account can receive up to $1,000 in tax credit. A retirement savings account can be a 401(k), 403(b), IRA or Roth IRA.
Let’s say a single person makes $20,000 a year. They would owe about $1,045 in federal income tax. If they contributed $2,000 to an IRA, then they would reduce their taxable income by $2,000 and owe about $800 in taxes. But they would get the Retirement Savings Credit that would completely eliminate their $800 in taxes. So not only do they save $2,000 for retirement, but they also wouldn’t owe any federal income tax.
It’s a great deal if a low income worker can come up with the $2,000. It’s easier said than done though. Some ideas to lower expenses are to cancel cable, switch to a low-cost cell service like Ting.com that has a plan starting at $15 per month or get a roommate to lower rent expense. Get creative with those expenses. Also consider taking on extra part-time work during the busy holiday season. Then put that money into a retirement account to get this tax credit.
It’s tough for everyone to save for retirement and even harder for low income workers. But if you can do it, be sure to claim this tax credit to reduce and possibly even eliminate your taxes.
Steve Doster is a Certified Financial Planner™ professional providing commission-free financial advice for do-it-yourself investors. You can reach Steve at Doster Financial Planning by phone 619-688-1192 or email steve@dosterfinancialplanning.com. You can also follow Steve on Facebook, Linked In, Twitter, or blog to get more personal finance advice and tips.
