Formerly known as the Retirement Savings Contribution Credit, the savings credit offers a unique tax advantage to low- and moderate-income taxpayers who save for retirement. This credit is in addition to other tax benefits related to savings on a retirement account. If you qualify, a savings credit can reduce or eliminate the tax receipt. Funding the pension plan is not always a priority, and many taxpayers may think that their disposable income should be allocated to immediate needs. However, if you meet the necessary income requirements, there is an additional incentive for retirement that saves lives: a non-refundable tax credit called a "the saver's tax credit" (or saver’s credit). Because this credit is in addition to the tax deductions received for contributions to a traditional IRA, it helps to reduce the tax liability of taxpayers vis-à-vis the IRS and offsets the cost of financing an account old age.
Unfortunately, many eligible taxpayers do not use this opportunity because they do not know it. Indeed, a recent study reveals that only 12% of US workers with annual household incomes of less than $ 50,000 have a savings credit.
The saver’s tax credit is a non-refundable tax credit available to eligible contributors who make deferred salary contributions to their 401 (k), 403 (b), SIMPLE, SEP or government plans and pay contributions to traditional IRAs and Roths. The loan represents between 10% and 50% of the eligible person's contribution, up to a maximum of $ 2,000, which means it cannot exceed $ 1,000. Also, the maximum amount of the credit is less than $ 1,000 or the amount of tax that the eligible payer would have to pay without credit. The savings account can be used to offset the liability for personal income tax. When determining the amount of the credit for sports activities, the refundable credits and the credit for adoption are not taken into account.
You are entitled to a saver’s credit if you are 18 years of age or older, you are not a full-time student, and you do not have to depend on someone else's tax return.
But that does not certainly mean you have it: you also need to create a pension plan or IRA contribution, and you must adhere to the correct gross income limits set each year by the IRS.
If the adjusted gross income exceeds one of these limits in 2019, you will not benefit from the savings loan:
A savings credit can be claimed for contributions at 401k, 403 (b), 457, a single IRA or an IRA SEP. (However, it is not possible to claim your employer's contributions to these accounts). Your contributions to a traditional IRA or Roth IRA are also eligible for the Savers credit.
By contributing to a pension plan and claiming a taxable tax credit, the taxpayer reduces the quantity of income tax owed to the IRS. To illustrate this, the IRS provided the following example and permitted employers to use it, along with other explanations, in communications with employees.
Example 2 Sara, who works at a retail store, is married and earned $ 37,000 in 2016. Sara's husband was unemployed in 2016 and had no income. Sara paid IRA $ 1,000 in 2016. After deducting her contribution to the IRA, the adjusted gross profit shown in her joint performance was $ 36,000. Sara can apply for a 50% credit, $500 for her $1,000 contribution to the IRA.
To apply for credit, use form 8880, "Credit for contributions eligible for the pension scheme."
Heads-up: For tax years before 2018, you can apply for a savings credit if you use Form 1040A, 1040 or 1040NR (not TurboTax compatible) to file your federal income tax return. Although the IRS has included credit savings information in the 1040EZ instructions, these indicate another form. You cannot request it on Form 1040EZ.
As of 2018, the 1040EZ and 1040A modules are no longer used. They have been replaced by a new Form 1040. For those submitting or modifying the returns from the previous year, it is possible to continue using Form 1040A or EZ.
The savings loan was made available for the financial years 2002-2006 by the law on the Economic Growth and Tax Relief Reconciliation Act of 2001(EGTRRA) and became permanent under the Pension Protection Act of 2006 (PPA). Using the saver's credit to reduce taxes you would otherwise have paid cannot be reduced, nor can the opportunity cost of not funding the retirement if you do not qualify for this credit. If you think you can profit from the protector's credit, talk to your tax experts.
Roland Zita, CPA