The Tax Credit You’ve Never Heard of That Could Add $2K to Your Refund
Some of the links in this post are from our sponsors. We’re letting you know because it’s what Honest Abe would do. After all, he is on our favorite coin.
Believe it or not, the government will pay you to save.
I’m serious. Check this out.
It’s called the Saver’s Credit, and it’s one of the most valuable tax credits available. But sadly it’s one of the most overlooked.
If you’re a low- or middle-income worker, you can take this tax credit if you contribute to a 401(k), Roth IRA or traditional IRA — up to $1,000!
Not only do a lot of people forget about this credit, but tragically, too many low-income workers take a pass on the benefits of retirement investing because of the financial strain they worry it will have on their tight budgets.
But keep reading, and I’ll show you how to make saving a little easier.
How Do You Qualify for the Saver’s Credit?
For any tax credit, you need to jump through qualification hoops to take advantage of the benefits.
Obviously, you’ll need to file a tax return, and for this credit, you’ll also need to save some money in an IRA or employer-sponsored retirement account, like a 401(k).
The credit is for mid- to low-income earners, and the amount of the credit is determined by your income.
The income limits for the 2017 tax year are $61,500 for married filing jointly; $46,123 for head of household; and $30,750 for single filers.
The maximum amount of the credit cannot exceed $2,000 for single filers and $4,000 for joint filers in 2017.
Your income also determines the percentage of your retirement investment that will be credited to your tax bill. The percentage of your retirement contribution you can receive as a credit decreases as your income increases. (See table here.)
For example, a single filer earning $17,000 and investing $2,000 in a Roth IRA would receive a credit for 50% of their contributions, or $1,000. But a single filer earning between $20,001 and $30,000 who contributed $2,000 to a Roth IRA would receive a credit of just 10% of the amount they invested, or $200.
How do I claim the credit?
Here’s what you need to do to take advantage of the Saver’s Credit.
- The first thing you want to do is open a retirement account (my preference is a Roth IRA). You can open this with any brokerage firm, but I’m partial to Lending Club, because it gives me the best interest rate (one year I earned 14%).
- Next, make your deposit. This year, the IRS actually gives taxpayers until April 17, 2018, to make contributions to IRA accounts and include those investments on their 2017 taxes. Pretty cool, huh?
- Lastly, you need to file a FORM 8880 with the IRS. If you’re using a tax service like TurboTax (federal and state tax preparation is free via TurboTax’s 1040EZ/A Absolute Zero guarantee!), then it’s even easier to file this form.
It’s important to note that this benefit the government offers is not a deduction, but a credit.
On the scale of great tax breaks, tax credits are the most beneficial for taxpayers. While deductions merely lower how much income you report for taxes, a tax credit is a dollar-for-dollar reduction of the actual tax bill you pay.
So if you owed $1,000 in taxes, paid $1,000 out of your paycheck all year and your credit is $1,000, you will get $1,000 back from the IRS for a tax refund.
Another way to take advantage of the credit (besides a hefty refund check) is to use the credit in a way that the government pays up to 50% of your retirement contribution.
If you struggle to come up with the money to open a qualifying retirement account, the Saver’s Credit gives you the opportunity to increase your exemptions on your W-2 and lower the taxes that come out of your paycheck.
It’s like getting a pay raise, because you can reduce the amount that comes out of your paycheck for taxes by the amount of the credit you’d receive.
Just make sure the “pay raise” is going into your retirement account and not your bank account, or you’ll get a hefty tax bill instead of free money.
How to Make Saving a Little Easier
Now, I know for a lot of us, saving $1,000 or more can be a little tricky.
But consider this: You only need to make an extra $2.74 per day throughout the year to save up $1,000. And if you make less than the limits above, the government will chip in the other $1,000.