If you are an American looking to stash away some money for next year, you need to take advantage of this unknown tax break that has been recently updated by the IRS to reduce liability next year.
The condensed term saver’s credit from the retirement savings contribution credit offers up to $1,000 in credit to help middle-income Americans who want to set money aside for retirement. If you are married, you can claim up to $2,000.
As a taxpayer, you can take full advantage of this credit as long as you are 18 years of age or older, are not a student, and are not claimed by anyone as a dependent. To claim this credit, you must contribute to an IRA or an employer-sponsored retirement account. That includes any contributions made to a 401(k), 403(b), governmental 457(b), and any after-tax contribution made to a Thrift Savings Plan.
There are limits for those who can claim this tax credit. The maximum income for anyone to claim the saver’s credit in 2022 is $34,000 for single filers, $68,000 for married couples filing jointly, and $51,000 for the head of the household.
As a taxpayer who qualifies for the credit, you can get 10%, 20%, or 50% of the first $2,000 you save which means you could claim $200, $400, or $1,000. That said, the credit starts to decrease for those earning more. You must earn less than $20,000 to get the 50% of retirement contributions, the maximum is $41,000 for married couples and $30,750 for the head of a household.
As an example, if a married couple earned $41,000 in 2021 and contributed $2,000 to their IRA for the year, they could deduct a 50% credit of $1,000 for the $2,000 contribution on their 2021 tax return.
According to a recent publication by the Transamerica Center for Retirement Studies said that only 43% of workers are even aware of the saver’s credit. Worse yet, only 35% of those with a household income below $50,000 are aware of this tax credit even though this program was intended for them as the biggest beneficiaries. The study also showed that half the households with incomes over $100,000 knew about the credit.
Tax credits are subtracted from the taxes that you owe, not your taxable income. You will get a dollar-for-dollar reduction on your liability. In other words, if your federal tax bill was $5,000 and you are entitled to a $2,000 tax credit, your bill would be cut to $3,000.
Largely, experts agree tax credits are the better option for reducing your amount than deductions. If you had to choose between a $100 deduction and a $100 credit, you should choose the credit which would reduce your bill by $100. That said, the amount of money you saved by reducing your taxable income by $100 would depend on your tax bracket. If you are in the 22% bracket, the $100 deduction would reduce your taxes by $22.