For many Americans, one of the biggest challenges is retirement. After working hard all of your life, you deserve a break. However, this is difficult if you don’t have the proper savings, which is more common than you might think.
According to a Bankrate.com survey of 1,000 working adults, more than 21 percent said they don’t save any of their annual income. Twenty percent said they save 5 percent or less, and 28 percent save between six and 10 percent of their annual salary. Only 16 percent said they’re saving 15 percent of more of their income.
This is frightening since financial experts recommend individuals saving at least 10 to 20 percent of your income just for retirement. Having another 5-10 percent in savings is recommended for emergencies or sudden unemployment.
To consider your own retirement savings, look at how much you already have saved. If you’re keeping with sound financial principles, you’ll have about twice your salary saved for retirement by the time you're 40. By increasing your retirement contributions and letting compound interest do its work, you should have 8 times your salary saved by the time you’re 65.
But there’s a financial crisis out there spurred by individuals who don’t make wise financial decisions and fail to save any money at all. So, the U.S. government came up with an incentive to help individuals save more called the Saver’s Credit.
It’s a tax credit that allows you to get back some of the contributions you made to your IRA or ABLE accounts. It’s designed for those with low or moderate incomes, so your income must fall below a certain level. If you’re seeking a way to maximize your tax deductions this year while boosting your retirement savings, read on.
The Saver’s Credit Explained
The ability to deduct any contributions made towards your retirement accounts has always been tax deductible, but the Saver’s Credit, which was born during the early 2000s, takes it one step further for those of middle to low incomes.
The U.S. government knows that it’s much harder to save for retirement when your income is small. Therefore, they know that many individuals will be living off of Social Security and other government programs when they reach retirement age. The Saver’s Credit is designed to help those with little income to feel like their retirement contributions are worthwhile, even though it’s a sacrifice to their monthly budget.
It’s important to understand that the Saver’s Credit is a tax credit, not a deduction. A deduction minimizes what you owe in taxes because it decreases your taxable income. Your retirement contributions help to lower your taxable income. A tax credit directly reduces your tax bill without taking into consideration your taxable income.
The Saver’s Credit is also not refundable, which means that you can only receive the tax credit if you owe taxes. Plus, it can’t lower your tax liability further than zero. So, if you’re owed a refund or owe very little, you won’t see this credit at work, even if it’s technically worth more than you owe in taxes. You’ll simply have to forfeit what’s leftover.
The Worth of the Saver’s Credit and Eligibility Requirements
The amount your get for applying the Saver’s Credit depends on your income. Depending on which tax bracket you’re in, it’s worth 10, 20, or 50 percent of what you contribute to qualified retirement accounts annually. If you were able to take the maximum amount, it would be worth up to $1,000 for single filers and up to $2,000 for those married filing jointly.
As mentioned previously, there are income limits for those taking the Saver’s Credit. If you’re a joint filer and make more than $65,000 in annual gross income (AGI), you cannot qualify for the Saver’s Credit. If you’re a single filer, the limit is $32,500, and for head of household filers it’s $48,750.
Otherwise, the amount of credit you can claim goes as follows:
Here’s an example of what the tax credit would look like for someone who contributes the 2019 max of $6,000 to an IRA account. Let’s say that person’s income is $30,000, and they’re married filing jointly. They can receive a credit of up to 50 percent of their contribution, which is $3,000, but it cannot exceed the max of $2,000. Therefore, they would receive $2,000 as a credit.
Other requirements for applying the Saver’s Credit include being a legal adult aged 18 or older and not being claimed as a dependent on anyone else’s tax returns. You also cannot be a full-time student. (Thankfully, there are other great deductions and tax credits for full-time students).
Most importantly, you need to make contributions to a retirement fund that qualifies for government tax deductions and credits. These include:
Unfortunately, you cannot use your rollover contributions in a taxable year towards your credit.
Additionally, pulling money out of your retirement savings can impact your eligibility. It might disqualify you from receiving the credit or significantly reduce the amount you receive.
Claiming the Saver’s Credit
The Saver’s Credit is claimed using the IRS Form 8880. You’ll fill out all relevant fields and attach it to your tax return.
Most online tax preparation software will ask questions to see if you qualify for the Saver’s Credit, but mistakes are often made. It’s better to use a certified CPA to prepare your taxes and credits because they can ask you questions and customize your tax return to include all of the information that makes you eligible for the Saver’s Credit.
If this is the first time you’re hearing about the Saver’s Credit, and during past years you fell into the window of eligibility, it’s worth looking back at past income tax returns to see if you claimed the credit. If you haven’t claimed it in eligible years past, you can go back and amend your returns.
If you haven’t heard of it, you’re not alone! TransAmerica Center, an institution that performs retirement studies throughout the U.S., found that only a third of working Americans are aware of the credit, so chances are, you haven’t filed for it in the past.
Remember, this is a nonrefundable tax credit, so it’s only worth amending returns where you owed money. Since you already paid the taxes owed in qualifying years, you’ll receive a refund. If you did not owe taxes in years when you didn’t apply for the Saver’s Credit, you won’t receive any returns.
Let Taxfyle Get You the Biggest Refund
If you’re trying to get the very best refund on your taxes, it’s always best to use a human, certified CPA. They can ask you relevant questions, gather information, and get the most deductions and tax credits for you.
At Taxfyle, we have a whole team of human CPAs that are ready and able to get you the best possible return. For more information about how you can connect with a licensed CPA to file your taxes, click here to learn more now!
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