Lisa Whitley — I know, I know...you feel as if you just finished your 2019 tax return and now I am going to talk to you about tax planning for next year? Madness! But of course, now is the perfect time to make moves that can minimize your tax payment and maximize your tax refund in 2021.
Let me introduce you to the Saver’s Credit…
Never heard of it? Join the club! A recent survey found that only 29% of persons with household incomes less than $50,000 are aware of the Saver's Credit. And yet, it is designed specifically for them. Here’s how it works: If you make a contribution to a retirement account — 401(k), 403(b), IRA, etc. — and your income is below the threshold, you will receive a credit on your tax return for a portion of the contribution. And as you know (right?), a tax credit reduces the taxes that you owe, dollar for dollar. It looks like this:
- Paul and his spouse have a combined income of $55,000 and they each contribute $3000 to their employer’s retirement plan. They are eligible to take a credit on their taxes owed of $600 (10% of their combined contribution of $6000).
You can find the details here, but in summary if your household income is less than $65,000 (married filing jointly), $48,750 (head of household) or $32,500 (single filer), you can claim a credit of 10%, 20% or 50% of the amount that you contribute to your retirement account. The maximum amount of the credit is $1000 per person. These aren’t easy times and, quite frankly, many of us may not have the ability to save for retirement right now. But if you are able and are on the fence about participating in your employer’s retirement plan (or if you do not have one available to you, opening an IRA), the Saver’s Credit may be just the incentive you need to get started.