What is the saver’s tax credit, and how can you claim it?
Discover how you can boost your retirement savings by utilizing the saver's tax credit.
Summary
Only 5.7% of taxpayers in 2021 claimed saver's tax credit, exhibiting a low utilization rate.
Saver's tax credit isn't refundable, meaning those who don't owe taxes may not claim it.
In 2024, individuals can claim up to $1,000, while married couples filing jointly can claim a maximum of $2,000,
What is the saver's tax credit?
The saver's tax credit is a federal tax incentive designed to encourage lower and middle-income individuals to save for retirement.
Available only to eligible taxpayers who contribute to retirement accounts, including 401(k)s, IRAs, or similar plans, the credit directly reduces the amount of federal income tax owed.
The government offers this credit to help people build their retirement savings.
In 2024, the Savers Tax Credit is capped at a maximum for individuals of $1,000, while for married couples filing jointly, the maximum is $2,000. This financial benefit helps taxpayers lower their tax bills while promoting long-term financial security.
Who is eligible for the saver's tax credit?
Am I eligible for saver's tax credit?
To be eligible for saver's tax credit 2024, you must be at least 18 years old, not studying full-time, and not claimed as a dependent on another person's tax return. Additionally, you must fall within specific income brackets to be eligible to apply for the incentive.
Qualifying retirement contributions include those made to IRAs, 401(k)s, 403(b)s, 457(b)s, and specific other retirement plans. Additionally, contributions must be voluntary and not from employer matches. This credit helps lower and middle-income individuals reduce their federal tax bills while saving for their future.
What are the income thresholds for saver's tax credit?
Income thresholds exist for those who are eligible for the 2024 saver's tax credit. But how much is the saver's tax credit?
The credit amount is a percentage of your retirement contributions based on your adjusted gross income (AGI). The IRS adjusted gross income (AGI) limits for eligibility are as follows:
50% of eligible contributions
Single filers: AGI of no more than $23,000
Head of household: AGI of no more than $34,500
Married filing jointly: AGI of no more than $46,000
20% of eligible contributions
Single filers: $23,001 - $25,000
Head of household: $34,501 - $37,500
Married filing jointly: $46,001 - $50,000
10% of eligible contributions
Single filers: $25,001 - $38,250
Head of household: $37,501 - $57,375
Married filing jointly: $50,001 - $76,500
0% of eligible contributions
Single filers: More than $38,250
Head of household: More than $57,375
Married filing jointly: More than $76,500
These thresholds adjust annually based on inflation. Therefore, checking for updates each year is crucial to make sure you meet the eligibility requirements and maximize your potential credit.
How do you calculate saver's tax credit?
Follow these steps to calculate saver’s tax credit:
Determine your AGI: Find your AGI on your tax return.
Identify your filing status and income threshold: Check the applicable income threshold based on your filing status (e.g., single, head of household, or married filing jointly).
Calculate your eligible contributions: Add up your contributions to qualify for retirement accounts such as 401(k)s, IRAs, and other eligible plans.
Apply the percentage credit: Based on your AGI and filing status, determine your credit amount using the appropriate percentage (50%, 20%, or 10%).
Examples
Example 1: Single-filer
AGI: $22,000
Retirement contribution: $2,000
Credit percentage: 50% (since AGI is within the 50% threshold for single filers)
Credit amount maximum: $2,000 x 50% = $1,000
Example 2: Head of household
AGI: $34,000
Retirement contribution: $1,500
Credit percentage: 20% (since AGI is within the 20% threshold for head-of-household filers)
Credit amount: $1,500 x 20% = $300
Example 3: Married filing jointly
AGI: $34,000
Retirement contribution: $1,500
Credit percentage: 10% (since AGI is within the 10% threshold for married filing jointly)
Credit amount: $4,000 x 10% = $400
How do you claim the saver’s tax credit on your tax return?
Claiming the saver's tax credit on your federal income tax return involves a few straightforward steps. Here's how to claim saver's tax credit:
Complete your tax return: Use saver's tax credit Form 1040 or 1040-SR to file your federal income tax return. You cannot claim saver's tax credit on Form 1040EZ.
Fill out Form 8880: This saver's tax credit form (Credit for Qualified Retirement Savings Contributions) helps you calculate the amount of your credit based on your contributions and AGI. You must enter your contributions and calculate the credit on them.
Transfer the credit: Transfer the credit amount from Form 8880 to the designated line on your Form 1040 or 1040-SR.
Attach the forms: Include Form 8880 with your completed Form 1040 or 1040-SR when you file your tax return.
What are some tips for maximizing the saver’s tax credit?
You can maximize your saver's tax credit through strategic contributions and financial planning:
Increase contributions: Increase your contributions to 401(k)s or IRAs through automation, utilizing employer matches, or additional contributions if you have extra funds.
Adjust withholding: Adjust your withholding on Form W-4 to better manage cash flow and increase retirement contributions.
Estimated payments: Make quarterly estimated tax payments if self-employed to manage cash flow and contribute more to retirement accounts.
Use tax refunds: Contribute tax refunds to your retirement accounts.
Coordinate with spouse: If married, both spouses should contribute to retirement accounts to maximize the credit.
Get expert financial advice
Understanding and maximizing the saver's tax credit can significantly benefit your retirement saver's tax credit.
Ensure you meet eligibility criteria, accurately calculate and claim your credit, and use strategies to increase your contributions.
For expert financial advice and to optimize your financial planning, consider consulting a financial advisor through Unbiased. Their expertise can help you make the most of your retirement savings opportunities.
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