Investing in your financial freedom might win you a tax advantage this year. When filing your federal tax return, you can claim a portion of your contributions to qualified retirement savings accounts (Saver’s Credit). Your eligibility and the amount you are eligible for vary according to your retirement plan, adjusted gross income, filing status, and other variables.
Regarding retirement contributions for 2022, you may qualify for the Saver’s Credit. Listed below are the qualification for receiving the credit. Additionally, it is not too late to start an IRA and apply it to last year, allowing you to claim the Saver’s Credit if you meet the qualifications.
What Is the Saver’s Credit?
Contributing to a qualified retirement account qualifies eligible taxpayers for the Saver’s Credit, which allows for tax savings.
These tax credits provide some of the most lucrative tax reductions available. Tax credits directly reduce your tax liability or raise your refund amount, whereas tax deductions reduce your taxable income.
In addition to the benefits that tax-advantaged retirement accounts, such as a Roth IRA or 401(k), already provide, the Saver’s Credit effectively multiplies the tax advantage of your contributions.
Mark Steber, chief tax information officer at Jackson Hewitt, a company that offers tax preparation services, states, “There are three benefits.” You receive a decrease in income tax, a dollar-for-dollar offset of your tax burden through the Saver’s Credit, and tax-free profits. And it doesn’t involve much more work than depositing a few hundred or a few thousand dollars.
For example, if you contribute $1,000 pre-tax to your employer-sponsored 401(k) plan during the year, your taxable income will be reduced by $1,000. As a result, if you qualify for the full Saver’s Credit, you’ll get 50% returned to you, or $500, back when you submit your federal income taxes. Over time, your contributions increase within the account until you reach retirement age.
There Is Still Time to Make Donations for 2022.
Suppose you did not contribute the maximum amount to your retirement plan in 2022. Many accounts qualifying for the Saver’s Credit allow you to count contributions until April 15 against your 2022 total.
Steber notes that if you contribute to a regular or Roth IRA before filing your tax return in spring, you can claim the Saver’s Credit and other eligible tax deductions. Remember to earmark these funds for your 2022 contributions and that the 2022 IRA contribution maximum is $6,000 (or $7,000 if you are 50 or older).
According to the IRS, you can make 2022 IRA contributions until April 15, 2023.
Nonetheless, not all retirement accounts permit this. Since the 2022 401(k) contributions deadline was December 31, 2022, you cannot make any further contributions to your 2022 total.
Who Can Receive the Saver’s Credit?
The Saver’s Credit is available to taxpayers with incomes below a particular level who contribute to qualified retirement plans. It is important to note that qualifications for the credit require you to have reached the age of 18 or older, not be a student, and not be claimed as a dependent.
However, eligibility is constrained at particular income thresholds. If you earn more than $34,000 as a single filer, $51,000 as a household head, or $68,000 filing jointly, you will not be eligible for any amount of the Saver’s Credit.
Only recent contributions to a qualified retirement account are applicable. Thus rollover contributions do not qualify. There are several qualified retirement plans, including Traditional or Roth Individual Retirement Account Contributions to a 401(k), 403(b), government 457(b), SARSEP, or SIMPLE plan through salary deferral. Contributions you made to a retirement plan after tax to a 501(c)(18)(D) plan are tax-deductible. Beneficiary contributions to an Achieving a Better Life Experience (ABLE) account.
What to Anticipate from the Saver’s Credit
The amount of the Saver’s Credit to which you are entitled depends on the amount you contributed to qualified retirement plans in 2022 and your adjusted gross income as reported on Form 1040.
Here is how the IRS phases out the percentages based on income level:
An example will be if you are married and filing jointly with a $43,000 AGI. It is possible to claim up to 20% of your eligible retirement contributions beginning in 2022; if you contributed a total of $2,000, you would receive a credit of $400 on filing your tax return.
How to Apply for a Saver’s Credit
The Saver’s Credit is a lesser-known credit that applies only to people within a specified income threshold and is not applied automatically. Inquire with your tax preparer about your eligibility and other tax benefits for which you may qualify.
To claim the Saver’s Credit, fill out form 8880 – Credit for Qualified Retirement Savings Contributions. You must provide evidence of your contributions, often your paycheck, IRA statement, or contribution statement. To assess your eligibility for the credit, you’ll also need to provide documentation of your income, such as a W2 confirming your contributions to your 401(k) (k).
Tony Chan, CFP, financial adviser and tax planner at Crossroads Planning in Orange, California, explains that even if you don’t believe you qualify based on income but are on the edge of the income level, you may still be eligible for the credit. Because eligibility is based on AGI (adjusted gross income), which is computed after retirement contributions, this is the case. Check your eligibility using the chart above, your return, and Form 8880.
Verify that Form 8880, Credit for Qualified Retired Savings Contributions, populate before completing your tax return if you use tax software, or be on the alert for the software to ask you questions concerning retirement contributions. Before submitting a tax return generated by any tax preparation program, Chan suggests double-checking it for inaccuracies.
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