If you're seeking to boost your tax benefits this year, don't overlook the Saver's Credit.
Formerly known as the Retirement Savings Contribution credit, this tax break is available to low- and moderate-income earners who tuck away money for retirement. You can get a credit worth as much as $2,000 if you're filing your tax return as a married couple ($1,000 if filing single). The Saver's Credit can come in handy if you're trying to reduce or wipe away your tax bill.
You won't be eligible for the Saver's Credit if your income tips over a certain threshold. We'll break down the rules, so you can take advantage of this credit if you qualify.
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Don't miss out on this retirement savers' perk
The latest Transamerica Center for Retirement Studies report shows that many Americans are leaving money on the table. Out of more than 5,800 workers surveyed, only 46% are aware that the Saver's Credit exists. You may be in the running to take advantage of this credit if you are 18 or older, not a full-time student, or listed as a dependent on another person's tax return.
The Saver's Credit is a tax perk you should know about if you think you'll owe money during tax time. This credit can reduce your tax bill dollar-for-dollar, reducing your tax burden for the year. It ends up being a better deal than a deduction on your tax return. However, the Saver's Credit is nonrefundable, so you won't be eligible for a refund if your tax credit is worth more than your tax liability. This credit can only drop your tax bill to zero, and not a penny beyond that.
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Take the Saver's Credit test to determine if you're eligible
Your adjusted gross income (AGI) will determine if you are eligible for the Saver's Credit during the 2022 tax year — the one for which your return is due by April 2023. For example, if you are married filing jointly, you won't be eligible for the credit if AGI exceeds $68,000. If you make too much money, you'll have to hunt for other tax breaks that can reduce your tax liability.
Depending on your filing status and which income bucket you fall in, your tax benefit will be limited to the 50%, 20%, or 10% credit rate for retirement account contributions. Only qualifying contributions made to a 401(k), IRA, ABLE, or other approved accounts will qualify.
Take a look at the 2022 income ranges and credit rates based on your filing status to see if you qualify for the 2022 Saver's Credit.
The Saver's Credit in action
If you're single, you can claim the credit for your first $2,000 in contributions to a qualifying retirement account. That number goes up to $4,000 if you're married filing jointly. Any contributions over that amount won't qualify toward the Saver's Credit. That means if you are single and qualify for a credit worth 50% of your retirement contributions, the maximum credit you can receive is $1,000.
Let's look at an example of how the Saver's Credit works. Say you are single, have an AGI of $20,000, and contribute $6,000 to a Roth IRA (individual retirement account). Only your first $2,000 worth of contributions will count toward the Saver's Credit. Since you meet the income requirements for the 50% credit rate, your credit would be $1,000.
Let's say your tax liability is $700 for 2022. The Saver's Credit can wipe away your entire tax bill since your $1,000 credit is greater than your $700 liability. However, the Saver's Credit is nonrefundable, so it won't leave you with a tax refund.
Don't let the Saver's Credit go to waste
The AGI limits for the Saver's Credit change every year. Review the limits for the year to see if your income is over the threshold.
The benefits of the Saver's Credit can add up over time. If you're married filing jointly and qualify for the maximum Saver's Credit, that could lead to $20,000 in tax savings over a decade. That's thousands of dollars you can keep in your pocket to invest in assets that can get you on the path toward financial freedom.
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