This Overlooked Retirement Tax Credit Gets Better in 2021

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The saver’s credit can knock as much as $1,000 or $2,000 off your federal income tax bill, depending on whether you file an individual or joint return. Yet many folks don’t know this tax credit exists.

That’s right: Only 38% of workers are aware of the saver’s credit, also known as the retirement savings contributions credit, according to a 2019 survey. And retirees who still save money in retirement accounts may be unaware they could be eligible for the credit.

If you, too, are unfamiliar with the saver’s credit, now’s as good a time as any to get acquainted. The IRS announced recently that the income limits for the credit — which are a key factor in determining your eligibility for the tax break — will rise in 2021 on account of inflation.

How much is the saver’s credit worth?

The first step toward becoming eligible for the retirement savings contributions credit — as its formal name implies — is saving money in a retirement account.

The IRS says you may be able to take the credit for the following types of contributions:

  • Contributions to traditional or Roth individual retirement accounts
  • Elective salary deferral contributions to a 401(k), 403(b), governmental 457(b), SARSEP or SIMPLE plan
  • Voluntary after-tax employee contributions to a qualified retirement plan (including the Thrift Savings Plan) or 403(b) plan
  • Contributions to a 501(c)(18)(D) plan
  • Contributions to an ABLE account for which you are the designated beneficiary

The credit is worth 10%, 20% or 50% of the amount of money that you contribute to such accounts in a given year. The maximum possible contribution is $2,000 or, for married couples filing a joint return, $4,000.

That means the maximum amount of the saver’s credit itself is $1,000 or $2,000, depending on your tax-filing status. And that comes right off the top of your tax bill.

Remember, as we explain in “3 Key Questions Every Taxpayer Must Answer“:

“A tax deduction lowers your taxable income, while a tax credit lowers your tax bill dollar for dollar.”

What are the income limits for the saver’s credit?

The saver’s credit is for taxpayers with low to moderate incomes. To be eligible for it, your adjusted gross income, or AGI (found on your tax return), must be under a certain threshold.

For the 2021 tax year — the one for which your return is due by April 2022 — you may be eligible for the saver’s credit if your AGI is:

  • $66,000 or less, and your tax-filing status is married filing jointly (up from $65,000 for 2020)
  • $49,500 or less, and your tax-filing status is head of household (up from $48,750)
  • $33,000 or less, and your tax-filing status is single, married filing separately or qualifying widow(er) (up from $32,500)

If you are eligible for the saver’s credit, your AGI also determines how much the credit is worth — that is, the percentage of your retirement account contributions. For 2021, those AGI ranges are as follows:

How much the credit is worth For married filing jointly For head of household For all other tax-filing statuses
50% of your contribution AGI is up to $39,500 (up from $39,000 for 2020) AGI is up to $29,625 (up from $29,250 for 2020) AGI is up to $19,750 (up from $19,500 for 2020)
20% of your contribution AGI is $39,501 – $43,000 (up from $42,500) AGI is $29,626 – $32,250 (up from $31,875) AGI is $19,751 – $21,500 (up from $21,250)
10% of your contribution AGI is $43,001 – $66,000 (up from $65,000) AGI is $32,251 – $49,500 (up from $48,750) AGI is $21,501 – $33,000 (up from $32,500)

Let’s say your AGI is $30,000 next year, and your tax filing status is single. If you contributed $2,000 to an eligible account in 2021, the saver’s credit would be worth 10% of that contribution. That’s $200 off your tax bill.

There are a few other stipulations for the credit, though.

Notably, you must be 18 or older, not a student and not claimed as a dependent on someone else’s tax return to be eligible for the saver’s credit. You can learn more about it on the IRS’ saver’s credit webpage.

You also can learn about other tax breaks that you might be unaware of by checking out “Did You Miss These 7 Tax Credits and Deductions?

Editor’s note: The example in this article, involving a single taxpayer with an AGI of $30,000, has been corrected to reflect that the maximum possible qualifying contribution for a single taxpayer is $2,000.

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