You may be able to cut down your tax bill with a little-known credit if you saved for retirement in 2020

  • The saver’s credit can reduce or eliminate your tax bill if you saved for retirement in 2020.
  • Tax credits are subtracted directly from the amount you owe in taxes.
  • You may qualify when you file your 2020 tax return if you earned less than $32,500 as a single filer or less than $65,000 as a joint filer.
  • This article was reviewed for accuracy and clarity by Michele Cagan, an expert on Personal Finance Insider’s tax review board
  • See Personal Finance Insider’s picks for the best tax software »

If you saved money in a retirement account in 2020, you may be eligible for a tax break called the saver’s credit.

The credit enables low- to moderate-income taxpayers saving for retirement to reduce, or completely eliminate, their tax bill by up to $1,000, or $2,000 if married filing jointly. 

Tax credits and tax deductions can help you pay less income tax. Tax credits are subtracted directly from the amount you owe in taxes on a dollar-for-dollar basis, while tax deductions are subtracted from your gross income. In any given year, you can either take the standard deduction or itemize your deductions, but you can’t do both. Tax credits can apply to you in either scenario.

Some tax credits are refundable, meaning that if they reduce your tax bill to $0, you can get any leftover credit added to your refund. The saver’s credit is non-refundable.

To be eligible for the saver’s credit, you must meet three basic requirements: You’re at least 18 years old, not a full-time student, and aren’t claimed as a dependent on someone else’s return. 

How much is the saver’s credit?

Depending on your adjusted gross income (AGI), you can claim a credit that’s equal to 50%, 20%, or 10% of the first $2,000 in contributions to your retirement account, or $4,000 if you’re a married joint filer. That means the maximum possible credit is $1,000, or $2,000 for joint filers.

AGI limit required to receive credit equal to 50% of 2020 retirement contribution:

Filing status AGI
Married filing jointly $39,000 or less
Head of household $29,250 or less
Single, married filing separately, qualifying widow(er) $19,500 or less

This credit is worth up to $1,000 for single filers and $2,000 for joint filers.

AGI limit required to receive credit equal to 20% of 2020 retirement contribution:

Filing status AGI
Married filing jointly $39,001 – $42,500
Head of household $29,251 – $31,875
Single, married filing separately, qualifying widow(er) $19,501 – $21,250

This credit is worth up to $200 for single filers and $400 for married joint filers.

AGI limit required to receive credit equal to 10% of 2020 retirement contribution:

Filing status AGI
Married filing jointly $42,501 – $65,000
Head of household $31,876 – $48,750
Single, married filing separately, qualifying widow(er) $21,251 – $32,500

This credit is worth up to $100 for single filers and $200 for married joint filers.

Here’s an example: Let’s say a woman, Jennifer, files as head of household and her adjusted gross income is $28,000 for 2020. During the course of the year, she contributed $1,000 to her employer-sponsored 401(k) plan. Jennifer can claim a credit worth 50% of her contribution when she files her 2020 tax return, which cuts $500 off her tax bill.

The saver’s credit can be taken for contributions to a traditional or Roth IRA, 401(k), SIMPLE IRA, Salary Reduction Simplified Employee Pension Plan (SARSEP), Simplified Employee Pension Plan (SEP), 403(b), 501(c)(18) or governmental 457(b) plan, or ABLE account.

Note that rollover contributions and employer contributions aren’t eligible, and any recent distributions from your ABLE account, IRA, or retirement plan may lessen your eligible contributions.

The saver’s credit can be claimed by filing Form 8880 — Credit for Qualified Retirement Savings Contributions. If you use an online filing service like H&R Block or TurboTax, you just need to record your retirement contributions for the year and the service will do the rest.

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