Treavor Dodsworth CFP®, CPA, CKA®
#86 - Saver's Credit
There are several tax credits and deductions that are available to taxpayers. Having a good understanding of these tax benefits can pay significant dividends. One tax credit that can be overlooked is the Retirement Savings Contributions Credit or Saver’s Credit. Effectively this tax credit gives you money when you contribute to certain retirement accounts (and contributions made to an ABLE account where you are the designated beneficiary). For example, a single taxpayer that contributes $2,000 to their Roth could receive up to a $1,000 tax credit. Let’s go over some quick characteristics of the tax credit:
You have to be age 18 or older, not a dependent on someone else’s return, and not a student.
It is phased out by Adjusted Gross Income or AGI (with certain add-backs). For 2020, the credit is completely phased out at AGI of more than $65,000 for married filing joint taxpayers, $48,750 for head of household, and $32,500 for single taxpayers.
It is a nonrefundable tax credit.
The credit only applies to the first $2,000 of contributions per person.
How to plan around this credit:
The first thing is just making sure you are taking it into account when filing your return. For example, you may have already made the contributions to a 401k or Roth required for the credit but your tax prep software or tax preparer may not be aware of it and it gets left out.
There are easy ways to increase your credit. For example, let’s say you are a married filing jointly taxpayer and income for the year is showing at $65,100 when you prepare your return. Even if you and your spouse have already made $2,000 contributions to Roth IRAs for 2020, you would not be eligible for the credit given your income level. But if you reduced income just $100 you could be eligible for a $400 credit. There are several ways you can go about reducing income for 2020 even now that we are in 2021. For example, HSA contributions if you qualify and have not maxed out, deductible Traditional IRA contributions if you qualify and have not maxed out, or recharacterizing your Roth contributions to Traditional IRA contributions could be options. For 2020, the deadline to make HSA/Roth IRA/Traditional IRA contributions has been extended to May 17th.
Pulling levers to increase your retirement savers credit could impact you positively or negatively in other areas as well.
I fully admit this credit is not going to buy you a Lamborghini or even an equally flashy Prius, however, with some simple planning, you could increase your tax refund by several hundred dollars. Please see the IRS website here for more information about this credit. They will explain the definition of a student, give the eligible accounts you can contribute to, show a chart of income limits, etc. You can also review Publication 590-A. It will go into more detail regarding the credit. For example, there are certain items that have to be added back into AGI to determine if you qualify for the credit.
Interesting Article(s) or Video(s)
New York Times - Biden Details $2 Trillion Plan to Rebuild Infrastructure and Reshape the Economy
The article details a spending plan that Biden has proposed. For personal finance sake, whenever the government proposes a spending plan it is of interest to know how they propose paying for the plan. Biden maintains that tax will not be increased on people making less than $400,000. It remains to be seen how that will be defined.
Thank you for reading!