If you’re saving in a retirement plan (either through work or on your own) you might be eligible for a credit on your income taxes.
Tax credits are quirky. You have to owe taxes back to the government on your tax return in order to use the credit. If you’re already getting money back, then this doesn’t work for you – the IRS won’t let you get more back by taking the credit.
Here’s what you need to know about the Saver’s Tax Credit:
- You calculate the credit on the Form 1040 tax return. No EZs allowed.
- Your income determines whether you’re eligible for the credit: your AGI (adjusted gross income –calculated on your tax return) has to be less than $63,000 if you are married and file a joint return or $31,500 if you file single.
- You have to have made contributions to a qualified retirement plan during the year – that means a 401k, an IRA, a 403b, etc.
- The amount of the credit depends on your income and the amount you contributed to your retirement plan. The credit is either 10%, 20% or 50% of your contribution, depending on where your income falls.
A quick example: Let’s say you and your partner have an AGI of $50,000. You contributed $8,000 to retirement plans this year. Tax credit math: $8,000 in contributions * 10% based on income = $800. If you owe $1,500 on your 1040, you would lower that to $700 if you took the tax credit. Not bad!