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Taxpayers need to set up their retirement funds, as it offers financial security once they retire from their jobs/are no longer capable of carrying out their business. There are tax benefits to contributing to retirement funds, including tax credits and IRS refunds, which makes the concept more lucrative. The tax credit under consideration, known as the retirement savings contribution credit, makes it easier for taxpayers to save up for their retirement. This tax credit allows taxpayers to avail of tax breaks other than the standard deductions that all taxpayers are entitled to by contributing to their IRAs. Eligible taxpayers need to contribute to employee-sponsored 401(k), 403(b), TSP (Thrift Savings Plans), and governmental 457 plans, among many others, to be able to avail of this credit. Let us dive into this topic and find out who can avail of this tax credit and how the saver’s tax credit is calculated.
How is the saver's tax credit calculated?
The Saver’s tax credit is calculated based on a taxpayer’s AGI, reported on their Form 1040 series return. The tax credit amount they are eligible for can be 10%, 20%, or 50% of their contributions to a traditional IRA or a Roth IRA. The exact percentages can be applied to contributions made directly to a 501(c)(18)(D) plan, or to a 401(k), governmental 457(b), or SIMPLE plans by elective salary deferrals, or voluntary contributions to qualified retirement plans like the Thrift Savings Plan. The credit has an upper limit of $2,000 for single taxpayers ($4,000 for married people filing taxes jointly). If a single taxpayer has made a $2,000 contribution to their IRA, they can claim 50% of this contribution as the saver’s tax credit. This entitles them to a $1000 Saver’s tax credit. Let us find out who is eligible for these tax credits and who’s not.
Who can claim the saver's tax credit?
The savings tax credit has been introduced to help people who do not have high-paying jobs save enough money for their retirement. A taxpayer eligible for this tax credit must be over 18 years old. If the taxpayer is mentioned as a dependent on someone’s tax returns, they will not be eligible for the tax credit under discussion. It is essential for the taxpayer not to be enrolled as a full-time student for them to be able to claim this tax credit. However, people seeking on-the-job training, correspondence school students, and courses that a taxpayer avails of over the Internet do not count as full-time students.
Let us find out the limits for income for the 2023 Saver’s credit.
|
Rate of credit |
Married taxpayers filing taxes with their partner |
Head of Household |
Taxpayers with other filing statuses |
|
50% of the contribution |
AGI<$43,500 |
AGI<$32,625 |
AGI<21,750 |
|
20% of the contribution |
$43,501–$47,500 |
$32,626–$35,625 |
$21,751–$23,750 |
|
10% of contribution |
$47,501–$73,000 |
$35,626–$54,750 |
$23,751–$36,500 |
|
0% of contribution |
AGI>$73,000 |
AGI>$54,750 |
AGI>$36,500 |
If taxpayers' contributions to the retirement plan exceed the prescribed limit, they must divest the extra amount within a specific time frame. Let us explain this through an example. Let us imagine that Mr. Morris has an AGI of $20,000, and she files her taxes individually. He would be allowed to claim 50% of the contributions he has been making to his retirement funds mentioned earlier. Suppose he contributes $1,000 to her 401(k) and $500 to his traditional or Roth IRA; his total contributions are $1500. He can claim 50% of her total contributions, i.e., $750, as the saver’s tax credits for the year. Therefore, the saver’s tax credit allows the taxpayer to enjoy double benefits upon their retirement plan contributions by allowing them to deduct their contribution from their taxable income and by reducing their tax bills dollar for dollar with the saver’s tax credit.
How to claim the saver’s tax credit
To claim this tax credit, eligible taxpayers must complete Form 8880, provided by the IRS. Taxpayers use this form with modest incomes within the AGI ranges stated above to report the contributions made by them to their retirement plans. To determine the amount of tax credit they are entitled to, taxpayers must report the contributions made by them and their spouses, along with their AGI. The taxpayer must report the credit amount on Form 1040 while filing Form 8880 with their tax return for lower tax bills or IRS refunds. A taxpayer can file online or offline via post to avail of this tax credit and the others they are entitled to.
While tax filing online, people often make mistakes and leave out tax deductions and credits on the table. In several cases, taxpayers pay more than they should because of simple errors on their tax returns. This is undesirable and can be mitigated by sourcing help from tax professionals who know taxation laws and provisions. Tax professionals often allow you to avail of tax deductions and credits you are unaware of. Therefore, it is suggested that taxpayers hire professionals to deal with their tax affairs, allowing them to enhance their incomes. NSKT Global makes things easier for you by keeping tabs on all the ins and outs of your bank accounts to prepare your tax returns, which ensures accurate tax filing practices. You can head over to the official website of NSKT Global to learn more about their services and how you can benefit from them. Click here to book a free appointment with a tax expert and understand how to save more on your tax bills!
