Here's How The Saver's Credit Can Lower Your Tax Bill by $2,000 - MrLiambi's blog

Breaking

My tweets

Advertisement

Thursday, 13 January 2022

Here's How The Saver's Credit Can Lower Your Tax Bill by $2,000

Believe it or not, the government will pay you to save.

Seriously. Check this out.

It's called the Saver's Credit, and it's one of the most valuable tax credits available. But it's also one of the most overlooked.

Keep reading to learn who is eligible for the Saver's Credit and how it works.

What Is the Saver's Credit?

The Saver's Credit is a way to put money back in your pocket when you save for retirement.

If you're a low- or middle-income worker, you can claim the Saver's Credit â€" also known as the retirement savings contributions credit â€" by adding money to a 401(k) or individual retirement account (IRA).

The Saver's Credit is worth up to $1,000 for single filers, or $2,000 for married couples filing jointly.

Depending on your adjusted gross income and tax filing status, you can claim the credit for 50%, 20% or 10% of the first $2,000 you contribute to a retirement account within a tax year.

Not only do a lot of people forget about this credit, many low-income workers miss out on the sweet tax benefits of saving for retirement because they worry doing so will strain their tight budgets.

It's worth checking to see if you qualify for the Saver's Credit, especially if you or your spouse were unemployed or experienced a reduction of income in 2021.

How Do You Qualify for the Saver's Credit?

First, you'll need to meet some basic requirements.

To be eligible for the Saver's Credit, you must:

  • Be 18 years or older and file a tax return.
  • Not claimed as a dependent on someone else's tax return.
  • Not be a full-time student. (However, you're still eligible for the Saver's Credit if you're enrolled in an online-only school or participating in on-the-job training).
  • Save some money in a retirement account, like an employer-sponsored 401(k).

The Saver's Credit can be claimed by any filing status: Married filing jointly, head of household, single, married filing separately or qualifying widow(er).

The Internal Revenue Service sets maximum adjusted gross income caps for the retirement savings contribution credit each year.

When you file your 2022 taxes for the 2021 tax year, your adjusted gross income (AGI) must fall below the following thresholds to qualify for the Saver's Credit:

  • $66,000 for married filing jointly.
  • $49,500 for head of household.
  • $33,000 for a single filer or any other filing status.
Pro Tip

If you earn too much to qualify for the Saver's Credit, you can still receive a tax deduction by contributing to a traditional IRA.

How Much Is the Saver's Tax Credit Worth?

How much the Saver's Credit is worth depends on how much you contribute to your retirement account, your filing status and your AGI.

Pro Tip

The maximum amount of the Saver's Credit cannot exceed $1,000 for single filers or $2,000 for joint filers in 2022.

Your income determines the percentage of your retirement savings that will be credited to your tax bill.

You might be eligible for 50%, 20% or 10% of the maximum contribution amount.

Keep in mind that the percentage of your retirement contribution you can receive as a credit decreases as your income increases.

Saver's Credit Rate for 2022

Filing status 50% of contribution 20% of contribution 10% of contribution

Single Filers, Married Filing Separately, or Qualifying Widow(er)

AGI of $19,750 or below

AGI of $19,751 - $21,500

AGI of $21,501 - $33,000

Married Filing Jointly

AGI of $39,500 or below

AGI of $39,501 - $43,000

AGI of $43,001 - $66,000

Head of Household

AGI of $29,625 or below

AGI of $29,626 - $32,250

AGI of $32,251 - $49,500

For example, a single filer earning $18,000 who invests $2,000 in a Roth IRA would receive a maximum credit for 50% of their contribution, or $1,000.

But a single filer earning $30,000 who contributed $2,000 to a Roth IRA would receive a credit of just 10% of the amount they invested, or $200.

As you can see, people with the lowest income benefit most from the Saver's Tax Credit.

How Do I Claim the Saver's Credit?

Here's what eligible taxpayers need to do to take advantage of the Saver's Credit.

First, you'll need to open a retirement account if you don't have one already. You can open one with any brokerage firm or robo-advisor. Or, you can start contributing money to your workplace 401(k).

Contributions to the following retirement accounts qualify for the Saver's Credit:

  • Traditional or Roth IRA
  • Traditional or Roth 401(k)
  • SIMPLE IRA
  • SEP IRA
  • ABLE account (if you're the designated beneficiary)
  • 403(b) plan
  • 457(b) plan
  • A federal Thrift Savings Plan

Next, make your deposit.

The IRS actually gives taxpayers until April 15, 2022, to make contributions to individual retirement accounts and include those investments on their 2021 taxes. Pretty cool, huh?

Lastly, you need to file Form 8880: Credit for Qualified Retirement Savings Contributions with the IRS. If you're using online tax software, like TurboTax, then it's even easier to file this form with your tax return.

Other Information About the Saver's Tax Credit

It's important to note that this government tax benefit is not a deduction, but a credit.

On the scale of great tax breaks, tax credits are the best. While deductions merely lower your taxable income, a tax credit reduces your actual tax bill dollar-for-dollar.

Let's say you do your taxes and discover you owe $1,000. If you paid $1,000 out of your paycheck to your retirement accounts over the course of the year and received a $500 Saver's Credit, your tax bill would shrink to $500.

It's also worth noting that the Saver's Credit can be claimed in addition to any tax deduction you receive by making qualified retirement savings contributions.

So if you contribute to a traditional IRA or traditional 401(k), you could receive double tax savings: A reduction in your taxable income equal to the amount you kicked into your retirement account plus the Saver's Credit (if you qualify).

One drawback about the Saver's Credit is it's nonrefundable. That means the tax credit can be used to offset income-tax liability but not as a refund. In other words if you owe no taxes but qualify for the Saver's Credit, Uncle Sam won't cut you a check. Bummer.

Finally, you must contribute new money to a retirement plan: Rollover contributions from an existing account â€" like a 401(k) rollover into an IRA â€" don't count.

It's never too late to start your nest egg. Here's how to save for retirement from your 20s to your 60s. 

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.



Source : https://www.thepennyhoarder.com/taxes/savers-credit/?aff_id=178&aff_sub3=MainFeed__taxes/savers-credit/

No comments:

Post a Comment