We all know how important saving for retirement is, but it’s not always easy, especially for those earning low to moderate incomes. And with those many people losing their jobs or having their hours cut in 2020, putting aside money for retirement was even more challenging. But there is an excellent reason to make an effort to save even if things have been tight; the Retirement Savers Tax Credit.
Let’s explore this tax credit and see how it can benefit us.
What is the Retirement Savers Tax Credit?
The Retirement Savers Tax Credit is a special tax break the IRS created to encourage low and moderate-income earners to save for retirement. Filers can claim the credit for a portion of the money they contribute to a qualifying retirement plan.
A tax credit reduces your gross tax liability, the total you owe the IRS. If you owe the IRS $3,000 and claim a tax credit worth $1,000, your tax bill would be reduced to $2,000. A tax credit is more beneficial than a tax deduction as a deduction only reduces your taxable income, not your tax liability.
Who is Eligible for the Retirement Savers Tax Credit?
- Those at least 18 years old
- Those who are not full-time students
- Those who are not claimed as a dependent on another person’s tax return
- Those who have made eligible contributions to an IRA or employer-sponsored retirement plan during the tax year, the credit is being claimed
How Much Can the Retirement Savers Tax Credit Reduce Your Tax Bill?
The tax credit is 50%, 20%, or 10% of your retirement plan contributions for the year. The percentage you’re eligible to claim depends on the amount of your adjusted gross income.
For 2020, the maximum adjusted gross income (AGI) to be eligible for the credit is:
- $65,000 for married couples filing jointly
- $48,750 for a head of household
- $32,500 for all other taxpayers
The maximum credit you’re allowed to claim phases out as your income increases.
Credit Single Filer Head of Household Joint Filers
50% $19,500 or less $29,250 or less $39,000 or less
20% $19,501-$21,250 $29,251-$31,875 $39,001-$42,500
10% $21,251-$32,500 $31,876-$48,750 $42,501-$65,000
The maximum contribution amount that qualifies for the credit is $2,000 or $4,000 if you’re married and filing jointly, making the maximum credit $1,000 or $2,000 if you’re married and filing jointly.
Here’s an example; if you earn $19,000 and are a single filer who contributed $1,000 to an eligible account, the value of your credit would be $500. If you contributed $5,000, the value of your credit would be $1,000 because of the cap.
Eligible Retirement Accounts
If you’ve met the income criteria, you can claim the Retirement Savers Tax Credit when contributing to these eligible accounts:
- Traditional IRA
- Roth IRA
- Thrifts Savings Plan
- SIMPLE IRA
- Simplified Employee Pension Plan
- Section 501(c)(18) Plan
How To Claim The Retirement Savers Tax Credit
To claim the credit, you’ll need Form 8880, “Credit for Qualified Retirement Savings Contributions.”
Saving for retirement is a vital part of being able to live the life you love. The Retirement Savers Tax Credit will provide you with a little extra incentive!
LPL Tracking # 1-05125930