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The Tax Credit Nobody Knows About

By Todd Campbell - Feb 10, 2018 at 6:15PM

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This little-known tax loophole could give you a nice tax break in April.

Tax time is fast approaching, and while many of the moves Americans can make to reduce their tax bill had to be done before the calendar flipped to 2018, there's still time to take advantage of the little-known Saver's Credit. This credit can save Americans a lot of money, yet according to the Transamerica Center for Retirement Studies, almost two out of every three Americans have no idea what it is.

Yet another reason to stash away money for your golden years

The Saver's Credit is a tax perk you can get for socking money away in your workplace retirement plan or an IRA.

A man in a shirt and tie listens through a wall using a plastic cup.

IMAGE SOURCE: GETTY IMAGES.

As a refresher, the IRS lets you save up to $18,000 per year, or $24,000 per year if you're age 50 or older, in an employer-sponsored retirement plan, such as a 401(k) or 403(b) plan.

If your workplace plan is a traditional one, then any money you save is done with pre-tax money, which means that you won't pay taxes on those savings until you withdraw the money later.

If your workplace plan is a Roth 401(k) or 403(b) instead, then any money you save is done with after-tax money, but in exchange, you get tax-free withdrawals in retirement.

Traditional and Roth IRAs offer similar tax benefits, but they have lower annual savings limits than 401(k) and 403(b) plans. In 2018, you can save up to $5,500 in a traditional or Roth IRA ($6,500 if age 50 or older).

Those are great tax benefits, but if you qualify, the Saver's Credit makes saving in these accounts an even better idea. In addition to reaping the tax-advantaged benefits associated with retirement accounts, the credit allows you to reduce your tax bill dollar for dollar by up to $1,000 if you file single, or up to $2,000 if you file as married filing jointly.

How it works

Taking advantage of the Saver's Credit is easy. All you do is save money in your retirement plan and then claim the credit by filing your taxes using Form 1040, Form 1040A, or Form 1040NR. The credit isn't available with Form 1040EZ, so if you want this extra money, don't use that form.

To qualify for the credit, you must be 18 or older and meet the adjusted gross income (AGI) requirements. If you're filing as single, your AGI can't be over $31,000, or if you're married filing jointly, your AGI can't exceed $62,000 in 2017. In 2018, those AGI limits increase to $31,500 or $63,000, respectively.

The following table shows the amount of you can get in a tax credit, based on filing status and AGI in 2017.

Credit Rate

Married Filing Jointly

Head of Household

All Other Filers*

50% of your contribution

AGI not more than $37,000

AGI not more than $27,750

AGI not more than $18,500

20% of your contribution

$37,001-$40,000

$27,751-$30,000

$18,501-$20,000

10% of your contribution

$40,001-$62,000

$30,001-$46,500

$20,001-$31,000

0% of your contribution

More than $62,000

More than $46,500

More than $31,000

Data source: IRS.

If your income is above those levels, or you're a full-time student or a dependent on someone else's tax return, you can't take the credit.

A word to the wise

Your workplace plan may not let you make a contribution for 2017 if you haven't done so already, but you can still make a 2017 contribution to a traditional IRA or Roth IRA until April 17.

Filing taxes can be complicated, so you might want to use tax preparation software if you plan on taking advantage of the Saver's Credit. If your AGI is $66,000 or less, you can access free tax software through the IRS Free File program. If you want to do your own taxes, then just make sure to complete Form 8880 so that you claim the right amount of credit on your tax return.

Overall, the IRS is giving you free money to save, so make sure you take advantage of this tax giveaway.

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