March 10, 2021
In 2018 a new tax credit was conceived, the Retirement Savings Contribution Credit, or “Saver’s Credit.” To help lower-income individuals save for retirement (and take some of the burden off the government), this credit was created as an incentive. Here is how it works:
If a taxpayer contributes to a retirement account, including an IRA, a Roth IRA and employer-sponsored plans such as a 401(k), he or she receives a credit for a percentage of the contribution. The credit is based on the taxpayer’s adjusted gross income (see the table below) and is a dollar-for-dollar reduction in the amount of income tax owed.
2021 AGI Limits:
|
Single Filer AGI |
Credit |
|
$0 - $19,750 |
50% of contribution |
|
$19,751 - $21,500 |
20% of contribution |
|
$21,501 - $33,000 |
10% of contribution |
|
Head of Household Filer AGI |
Credit |
|
$0 - $29,625 |
50% of contribution |
|
$29,626 - $32,250 |
20% of contribution |
|
$32,351 - $49,500 |
10% of contribution |
As an example, Ginger is divorced and has two children. She claims “Head of Household” on her tax return. Ginger’s adjusted gross income for 2021 is $35,000 and she contributed $4,000 to an IRA. She is entitled to a Saver’s Credit of $400.
There is a cap on the amount of the credit; $1,000 for single taxpayers and $2,000 for those filing as Head of Household. Also, the credit is non-refundable which means you cannot receive a credit for greater than your total tax liability for the year.
Credits are the preferred type of tax savings because they reduce the dollar amount of tax owed, as compared to a deduction which reduces the income upon which tax is computed. For instance, a $1,000 tax deduction for an individual in the 12% tax bracket saves $120 in taxes. But a $1,000 tax credit saves $1,000 in taxes. Someone who qualifies for the Saver’s Credit is getting both benefits – a tax deduction for the retirement contribution and the Saver’s Credit as well.
The ability to qualify for the Saver’s Credit is helped by the fact that alimony no longer counts as taxable income. This can be very helpful to a divorced individual who, through support payments and employment income, has enough to cover living expenses but does not have a lot of excess income to save for retirement. The tax credit can free up money that could be used towards living expenses or additional savings. When you are working with a client for whom every dollar counts, the Saver’s Credit may be a helpful tool.
