This little-known tax break can give you up to $ 2,000 in free money

Saving for retirement is hard – 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 keen on Americans building retirement eggs, so they are trying to give you a boost with a good tax break to escape the extra money.

Here’s how you could earn up to $ 2,000 in free money for retirement through a little-known tax break called the Savers Credit.

What is the saver’s credit?

The Savings Credit – formerly known as the Retirement Savings Contribution Credit – is a tax credit that can be claimed by middle- and low-income taxpayers who have contributed to a retirement account in the year d ‘taxation. The credit is worth up to $ 1,000 for individuals, and a maximum $ 2,000 for a married couple filing jointly.

If this is the first time you’ve heard of Saver Credit, well, it’s common. A survey by the Transamerica Center for Retirement Studies found that only 38% of American workers were aware of the tax break.

In fact, in a new retirement savings law, lawmakers specifically call on the Treasury Department to improve public awareness.

Saver credit is simply too useful to ignore.

Who can claim the credit of the saver?

To be eligible, you must be at least 18 years of age, cannot be a full-time student, and cannot be considered a dependent on someone else’s 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 income should not exceed the credit income thresholds.

How are you eligible for the savings tax credit?

You can take the saver’s credit if your adjusted gross income falls below these limits:

• $ 65,000 for a married couple declaring jointly in 2020, $ 66,000 in 2021.

• $ 48,750 for a head of household in 2020, $ 49,500 in 2021.

• $ 32,500 for all other taxpayers (including individuals) in 2020, $ 33,000 in 2021.

Not eligible? You can probably find many other ways to get the most out of your retirement savings, including working with a financial advisor. Did you know that certified financial planners are even available online today?

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What is the saver’s credit value?

The dollar value of the saver’s credit is calculated based on your income, your tax reporting status, and the amount you contribute to a qualifying retirement account in a tax year. You may be entitled to 50%, 20% or 10% of the first $ 2,000 you invest if you are an individual, or $ 4,000 if you are a married couple filing a joint return.

This means that the saver credit is worth up to $ 1,000 for individuals, or $ 2,000 for married couples filing jointly.

If you want to use the credit when you file in 2021 – on your 2020 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 you are filing jointly

• You can claim the 50% credit if your adjusted gross income is $ 39,000 or less.

• You may qualify for the 20% credit if your adjusted gross income is between $ 39,001 and $ 42,500.

• You may qualify for the 10% credit if your adjusted gross income is between $ 42,501 and $ 65,000.

• You don’t get credit if your adjusted gross income is over $ 65,000.

If you declare as head of household

• You can take the 50% credit if your adjusted gross income is $ 29,250 or less.

• You may qualify for the 20% credit if your adjusted gross income is between $ 29,251 and $ 31,875.

• You can claim the 10% credit if your adjusted gross income is between $ 31,876 and $ 48,750.

• You don’t get any credit if your adjusted gross income is over $ 48,750.

For all other taxpayers (including individuals)

• You can claim the 50% credit if your adjusted gross income is $ 19,500 or less.

• You can claim the 20% credit if your adjusted gross income is between $ 19,501 and $ 21,250.

• You may qualify for the 10% credit if your adjusted gross income is between $ 21,251 and $ 32,500.

• You don’t get any credit if your adjusted gross income is over $ 32,500.

So how much can I get?

Calculating the saver’s credit is not too difficult.

For example, let’s say you are a married couple who jointly declare that you earned $ 38,000 last year and that you contributed $ 1,000 to an eligible account.

The value of your credit would be 50% of your $ 1,000 in contributions – or $ 500. If you put in $ 5,000, only the first $ 4,000 will count and your credit will hit the $ 2,000 limit.

Remember that a credit is much better than a tax deduction. A deduction simply reduces the amount of your income subject to tax, but a credit actually reduces your tax bill dollar for dollar.

So yes, in a way, it’s free money – enough to accomplish other financial goals, like getting affordable life insurance or making a down payment on a car.

Which accounts are eligible?

The IRS gives you several tax-efficient options for saving for retirement – and taking advantage of the savings credit.

In addition to a 401 (k), you can contribute to a Traditional or Roth IRA plan, a SIMPLE IRA plan, 403 (b) (for certain employees of public schools and tax-exempt organizations) or through the Thrift Savings Plan, which is open to federal employees and uniformed service members.

The IRS also extends savings credit to Americans with ABLE accounts, which are savings plans for people with disabilities.

Make sure you meet the deadline

The deadline for many tax breaks is the end of the calendar year. For example, any charitable donations that you reverse on your 2020 return must have been made in 2020. That makes sense, doesn’t it?

However, you can make pension contributions up to the April tax deadline that count towards the saver’s credit for that tax year.

To claim the saver’s credit, you must complete IRS Form 8880 and attach it to your income tax return. You will need two key pieces of information to complete Form 8880: your adjusted gross income that you calculated on your income tax return and documents showing your pension contributions for the year.

Does the thought of having to fill out another tax form make your head spin? Claiming your saver’s credit is much easier with the help of good tax software and tax specialists.