As the year winds down, many individuals are anticipating the upcoming tax season – some with dread as they known they’ll likely have to pay in to the IRS. However, many Americans overlook the retirement savings contribution credit. This tax break, also known as the savers’ credit, is often overlooked by taxpayers.
The saver’s credit has recently been updated by the Internal Revenue Service, and it can benefit many Americans. Individuals who qualify may take $1,000 off their tax liability; married couples can see a savings of $2,000.
In order to qualify for the saver’s credit, taxpayers must be over the age of eighteen, and they cannot be claimed by anyone else as a dependent. Taxpayers must not be enrolled as a student, and they must be making contributions to a retirement-specific account.
The tax credit is specifically set up for low-income and middle-income taxpayers.
Taxpayers must be contributing to an IRA or to an employer-sponsored retirement account. These include contributions made to a 401(k), a governmental 457(b), contributions made to a Thrift Savings Plan (contributions must be made after taxes are deducted from one’s paycheck). Retirement plans including the 403(b) are also eligible for this type of tax credit.
It is important to note that there are certain income thresholds that taxpayers must meet in order to be eligible for the saver’s credit tax break. Single filers must have an income of $34,000 or less; married couples filing jointly are allowed to make up to $68,000 yearly. Those who are filing as the head of household are allowed to make $51,000 annually.
The tax credit allows taxpayers to receive ten, twenty, or up to fifty percent of their contributions back up to $2,000. This means taxpayers could claim $200, $400, or $1,000. The credit tapers off for those earning more money each year. For example, in order to claim the fifty percent, a taxpayer can earn no more than $20,500. A married couple may earn no more than $41,000 in order to claim the fifty percent, and a head of household taxpayer may earn no more than $30,750. For filers earning more than these amounts, a taxpayer may be able to recoup ten or twenty percent of their contributions as a tax credit.
A married couple filing jointly making $41,000 would be able to claim the fifty percent tax break. If said couple contributed $2,000 to a retirement savings account such as the 401(k) or the 403(b), then they could claim a $1,000 credit on their taxes for the year 2021.
Ironically, taxpayers whose annual income is $100,000 or more, had more knowledge of the tax credit than those in lower income brackets. Over fifty percent of taxpayers in this income bracket were aware of the saver’s credit.
Because tax credits are subtracted from the taxes one owes rather than one’s taxable income – giving taxpayers a dollar-for-dollar reduction in tax liability, taxpayers who are unaware of this credit could greatly overpay when they could be saving money. A taxpayer who owed $10,000 – and falls into the appropriate tax threshold – could see a savings of up to $2,000 in tax liability.
Tax credits tend to lower a taxpayer’s overall bill rather than using deductions. In 2019, those in the twenty-four percent tax bracket would see a $100 deduction in their taxable income only net a savings of $24, while an individual with a $100 tax credit would see their tax liability lessened by $100.
Megan Brinsfield, with the Motley Fool, reminds taxpayers that tax credits win every time over deductions because tax credits reduce one’s tax liability dollar for dollar.
Accountants or tax preparation firms such as H&R Block and Liberty Tax can assist you in taking advantage of the saver’s credit, if you need help preparing your return.