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Low and middle income workers who are saving on a 401 (k) plan or individual retirement account may qualify for the saver’s credit. This pension contribution credit can be claimed in addition to any tax deduction that you earn by depositing into a traditional retirement account.
How to qualify for the saver’s credit on your tax return for 2021:
- Review the saver’s credit income requirements.
- Save in a qualified retirement account, e.g. B. a 401 (k) or an IRA.
- Contribute enough for the full balance.
- Respect the saver’s loan contribution deadline.
Find out if you are eligible for the saver balance and what to do to claim the saver balance in 2021.
Review the saver’s credit income requirements
Individuals with adjusted gross income of up to $ 33,000 in 2021 could qualify for the saver’s balance by contributing to a retirement account. “Many workers who have failed to meet saver’s income limits in recent years may now be eligible because their annual earnings have decreased due to unemployment, vacation and / or wage cuts,” said Catherine Collinson, president of the Transamerica Center for Retirement Studies.
Heads of household have a higher saver credit threshold of $ 49,500 in 2021. Married couples can earn up to $ 66,000 in 2021 and are still eligible for the saver’s credit.
Contribute to a saver’s balance
There are several types of retirement accounts that you can qualify for the saver’s balance. When you contribute to a 401 (k) plan, you can often call in the saver’s funds. Other types of eligible occupational retirement accounts include 403 (b) plans for public school employees, 457 plans for state or local government employees, SEP or SIMPLE plans sometimes used by smaller employers, and the federal government savings plan.
However, you do not necessarily need a company retirement account to qualify for the credit. Contributions to a traditional IRA, Roth IRA or ABLE account of which you are the beneficiary can also qualify for the saver’s balance.
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Save enough to qualify for the Full Saver balance
The saver’s credit can be used on retirement account contributions of up to $ 2,000 for individuals and $ 4,000 for couples. However, distributions from your retirement account may reduce the amount used to calculate the balance.
Meet the deadline for the saver’s loan contribution
Contributions to 401 (k) plans and similar types of company retirement account that may qualify for the saver’s credit are typically due by the end of the calendar year. However, you have until the April tax return due date to make an IRA contribution, which will count towards the saver’s credit. So savers have until April 18, 2022 to make a traditional IRA or Roth IRA contribution, which entitles them to credit the saver in their tax return for 2021.
Don’t expect credit from a big saver
The saver’s balance can lower the income tax you owe or increase your refund. “The saver’s balance is better than a deduction,” said Mark Steber, chief tax information officer at Jackson Hewitt Tax Service. “It’s reduced tax liability or money back on your tax return.”
The maximum possible balance is $ 1,000 for an individual or $ 2,000 for a couple. Most people, however, get smaller credits. The average loan amount for tax advisors in 2018 was $ 187, an analysis by the IRS-Transamerica Center for Retirement Studies. According to an IRS statement, “it is often much less and may even be zero for some taxpayers, in part due to the impact of other deductions and credits.”
Most workers are unaware of the tax savings that they could get from using the saver. According to a 2020 online survey by Transamerica of 5,277 employees in for-profit companies, 43% of employees say they are aware of the saver’s credit. According to the survey, millennials (49%) are more likely to know about the saver’s credit than Gen X (40%) or baby boomers (34%).
Dependents and students are not entitled to the saver’s balance
People under the age of 18 or dependent on someone else’s tax return are not entitled to the saver’s credit. Those enrolled as full-time students for five or more months during the calendar year may also not receive credit, including students in engineering, commercial, and mechanical schools. However, taking online courses or taking part in on-the-job training does not prevent you from using the Saver’s balance.
Calculate your saver’s balance
The saver balance is 10%, 20% or 50% of your contributions to the retirement account, with employees with the lowest income receiving the largest amount. Retirement savers with adjusted gross income of $ 19,750 or less ($ 39,500 for couples) in 2021 are entitled to a savings balance equal to half of their contributions to the retirement account. Employees earning a little more than these income limits are eligible for 20% credit. Investors making between $ 21,500 and $ 33,000 ($ 43,000 to $ 66,000 for couples) could receive a savings balance equal to 10% of their 401 (k) or IRA deposit. The saver’s credit can be used in addition to the tax deduction for saving in a traditional retirement account.
“There are only a limited number of cases in tax law where you can double the time,” says Barbara Weltman, attorney and author of “JK Lasers 1001 Deductions and Tax Reliefs 2021.” “You will receive the IRA contribution deduction and you may also receive a tax credit.”
Copyright 2020 US News & World Report