When you’re having trouble stretching your paycheck to cover immediate costs like room, board, and transportation every month, saving for something years away may seem like a lower priority. However, you may be eligible for a federal income tax credit also known as Saver Credit, that could give you some additional benefit from your retirement savings at this time.
In this article, we’ll talk to you about the Saver’s Credit, which is a non-refundable tax credit for the contributions an eligible taxpayer makes to a 401 (k), 403 (b) retirement plan, or another similar plan sponsored by the employer, a traditional IRA, an IRA Roth, or an ABLE account.
You should know that currently, the maximum credit is $1,000 for single filers and $2,000 for married people filing jointly, which it’s not much but something.
“Those who are saving for retirement can take advantage of this credit and lower their federal taxes,” says Catherine Collinson, executive director of the Transamerica Center for Retirement Studies.
The Savers Tax Credit is intended to encourage people to save money.
Although few taxpayers receive the full credit of $2,000, many people say that although it’s not much, it helps.
However, few people know about the credit, so not all eligible taxpayers receive it.
Check your eligibility
You can be eligible for the saver’s credit if you are 18 or older, and not claimed as a dependent on someone else’s tax return and not a full-time student.
For this credit, you are considered a full-time student during the year if during any part of the five calendar months of the fiscal year you were enrolled as a full-time student in a school or took an ongoing full-time course, agricultural training provided by a school or a state, county, or local government agency.
You can be eligible and that doesn’t necessarily mean you get the credit because you must also make a retirement plan or IRA contribution, and it must be within the maximum adjusted gross income limits that the IRS sets each year.
To be eligible, the maximum AGI for single taxpayers must be $33,000 this year (2021).
For a head of household, the maximum AGI is $ 49,500 this year 2021.
For married individuals filing a joint return upon return, the maximum AGI is $ 66,000. Also, the saver’s credit is worth up to $2,000 or $4,000 for married couples filing jointly.
So, it’s important to know that a credit is not the same as a tax deduction, it is better: while a tax deduction only reduces the amount of your income that is subject to tax, a tax credit reduces your actual tax bill dollar for dollar.
The IRS offers a questionnaire to determine if you qualify for the Saver’s Credit.
File your tax return and apply for the Saver’s Credit
Let the IRS help you file your taxes through a network of nine Free File partners who operate the free online file filing program.
This program offers online tax preparation tools at no cost to taxpayers with an adjusted gross income of $ 72,000 or less.
Make sure you contribute to a retirement account that qualifies for a saver’s credit
Different types of retirement accounts could qualify you for saver credit. If you contribute often to a 401 (k) plan, it can help you claim the saver’s credit.
There are also other types of eligible workplace retirement accounts including 403 (b) plans for public school employees, other 457 plans for state or local government employees, and there are also SEP or SIMPLE plans, which are typically used by small business employers; and the federal government’s Thrift Savings Plan.
But you don’t have to have a retirement account at the workplace where you work to qualify for the credit.
Contributions to a traditional IRA, Roth IRA, or ABLE of which you are the designated beneficiary may also make you eligible for the saver’s credit.
Christopher Jervis is the president of Lone Wolf Financial Services LLC in Conyers, and he says it’s important to understand the difference between the deduction you receive for contributions and the tax credit.
“A deduction can simply ‘deducts’ an amount from the amount of taxable income, but a credit is a dollar-for-dollar reduction in the tax you owe,” says Jervis. “Most of the time, credits are like cash paid to reduce the tax.”
Know the difference between tax deductions and tax credits
Jeffrey Schneider, an enrolled agent with SFS Tax & Accounting Services in Stuart, Florida, notes a caveat: The credit is non-refundable, which means that the saver’s credit would not result in a refund if it reduces your income tax bill below zero.
Also, keep in mind that rollover contributions, such as funds transferred from a previous employer’s 401 (k) plan to an IRA, do not qualify as contributions to the saver’s credit.
You can try to claim the Saver’s Credit by filing Form 8880 if you have your individual 140 tax return.
Credit Karma Tax is a free online tax filing service, and it is compatible with Form 8880 and can help you claim the Saver’s Credit if you meet the requirements.
If you were eligible to claim the credit in a previous year but you didn’t, you’re in luck.
“If you think you qualify and did not take the credit, you can go back and amend the statements for up to three years to take the credit and receive an additional refund,” says Jervis.
Many eligible taxpayers lose valuable Saver’s Credit. Actually, only one in three American workers is aware of this credit. That’s unfortunate, as the Saver’s Credit is intended to help qualified taxpayers who find it more difficult to save for retirement but manage to do so.
If you’re eligible, the Saver’s Credit could not only lower your tax bill but also reimburse you for doing something you know you need to do: saving for your retirement.