Saving for retirement is difficult – especially when you have so many bills to pay today. You are probably already using all the tricks you can find to stretch your budget.
But the government is really interested in Americans accumulating eggs for retirement, so it tries to push it along with a good tax cut to get some extra money.
See how you can win up to $ 2,000 in free money for retirement through a little-known tax cut called the saver’s credit.
What is the saver’s credit?
Savers’ credit – previously called retirement savings credit – is a tax credit that can be claimed by middle and low income taxpayers who contributed to a retirement account during the fiscal year. The credit is worth up to US $ 1,000 for individuals and at most $ 2,000 for a married couple record.
If this is your first time to hear about the saver’s credit, well, that’s common. A survey by the Transamerica Center for Retirement Studies revealed that only 38% of American workers were aware of tax cuts.
In fact, in a new retirement savings legislation, lawmakers specifically ask the Treasury Department to improve public awareness.
Savers’ credit is very useful to be ignored.
Who can claim the saver’s credit?
To be eligible, you must be at least 18 years old, cannot be a full-time student, and cannot be claimed as dependent on someone else’s income tax return.
Next, you must contribute to a retirement plan, which can be a 401 (k) or other employer-sponsored plan, or a traditional or Roth IRA. And your earnings must not exceed credit revenue limits.
How do you qualify for the saver’s tax credit?
You can receive the saver’s credit if your adjusted gross income falls below these limits:
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$ 65,000 for a married couple order in 2020, $ 66,000 in 2021.
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$ 48,750 for a householder in 2020, $ 49,500 in 2021.
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$ 32,500 for all other taxpayers (including individuals) in 2020, $ 33,000 in 2021.
Not eligible? You will likely find many other ways to make better use of your retirement savings, especially by working with a financial advisor. Did you know that certified financial planners are still available online today?
What is the saver’s credit amount?
The dollar value of the saver’s credit is calculated based on your income, your income tax return status and the amount you contribute to a qualifying retirement account during a tax year. You may be eligible to claim 50%, 20% or 10% of the first $ 2,000 you have placed, if you are an individual, or $ 4,000, if you are a couple requesting a joint statement.
This means that the saver’s credit is worth up to $ 1,000 for individuals or $ 2,000 for couples filing joint actions.
If you want to use the credit when you register in 2021 – in your 2020 income tax return – use the table below to see if your income would qualify you for the 50%, 20% or 10% credit.
If you are married and register together
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You can receive 50% credit if your adjusted gross income is $ 39,000 or less.
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You can receive a 20% credit if your adjusted gross income is between $ 39,001 and $ 42,500.
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You can receive a 10% credit if your adjusted gross income is between $ 42,501 and $ 65,000.
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You will not receive credit if your adjusted gross income is more than $ 65,000.
If you file as head of the family
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You can receive 50% credit if your adjusted gross income is $ 29,250 or less.
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You can receive a 20% credit if your adjusted gross income is between $ 29,251 and $ 31,875.
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You can receive a 10% credit if your adjusted gross income is between $ 31,876 and $ 48,750.
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You will not receive credit if your adjusted gross income is more than $ 48,750.
For all other contributors (including individuals)
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You can get 50% credit if your adjusted gross income is $ 19,500 or less.
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You can receive a 20% credit if your adjusted gross income is between $ 19,501 and $ 21,250.
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You can receive a 10% credit if your adjusted gross income is between $ 21,251 and $ 32,500.
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You will not receive credit if your adjusted gross income is more than $ 32,500.
So, how much can I get?
The math of the saver’s credit is not very difficult.
For example, let’s say you are a couple who are filing the lawsuit together, won $ 38,000 last year and contributed $ 1,000 to a qualifying account.
Your credit amount would be 50% of your $ 1,000 in contributions – or $ 500. If you put in $ 5,000, only the first $ 4,000 would count and your credit would reach the $ 2,000 limit.
Remember that a credit is much better than a tax deduction. A deduction only reduces the amount of your taxable income, but a credit actually reduces your invoice, dollar for dollar.
So yes, in a way it’s free money – enough to meet other financial goals, like buying affordable life insurance or paying for a car.
Which accounts are eligible?
The IRS offers a number of tax-saving options to save for retirement – and take advantage of the saver’s credit.
In addition to a 401 (k), you can contribute to a traditional plan or Roth IRA, a SIMPLE IRA, 403 (b) (for certain public school employees and tax-exempt organizations) or through the Thrift Savings Plan, which is open to federal officials and uniformed service members.
The IRS also extends savers’ credit to Americans with ABLE accounts, which are savings plans for people with disabilities.
Make sure you meet the deadline
The limit for many tax incentives is the end of the calendar year. For example, any donations to charities that you cancel on your 2020 return must have been made during 2020. It makes sense, right?
However, you can make retirement contributions up to the April tax deadline, which count towards the saver’s credit for that fiscal year.
To claim the saver’s credit, you must complete IRS Form 8880 and include it in your tax return. You will need two important pieces of information to complete Form 8880: your adjusted gross income calculated on your income tax return and documents showing your retirement contributions for the year.
Does the thought of having to fill out yet another tax form make your head spin? Claiming your saver’s credit is much easier with the help of good tax software and tax professionals.