Save For Your Future and Get a Tax Credit (Article)

Save For Your Future and Get a Tax Credit

Who knew you could get a tax credit for saving in your workplace retirement plan? That’s right; the Retirement Savings Contribution Credit (known as the “Saver’s Credit”) is a tax credit worth up to $1,000 ($2,000, if married filing jointly) for mid- and low-income workers who contribute to a retirement plan.

The Saver’s Credit can be claimed for contributions to 401(k), 403(b), 457, Simple IRA, and SEP IRA accounts. Roth IRA or workplace retirement plan contributions are eligible for the Saver’s Credit; however, you can’t claim your employer’s contributions to these accounts.

If you qualify, the Saver’s Credit can reduce or even eliminate your tax bill. Tax credits are much more powerful than a tax deduction because they reduce the amount of tax you owe, not just the income on which taxation is based. You’re eligible for the Saver’s Credit if you are 18 or older, not a full-time student (for at least the last 5 months), are not claimed as a dependent on another person’s tax return, and have income under certain limits.

See the chart for the tax credits available based on income and tax filing status.

Here are a couple of examples* to help make sense of how this works.

Maria is a single taxpayer with gross income of $20,000. She contributes $2,000 to her workplace retirement plan. Based on her income and the standard income tax deduction in 2022, she would owe $800 in Federal income tax. Her tax credit would be 50% of her contribution ($1,000), which would reduce her tax liability to zero.

Marcus and Alina are married taxpayers with a combined gross income of $40,000. They each contribute $2,000 to their workplace retirement plan. Based on their income and the standard income tax deduction in 2022, they would owe $1,600 in Federal income tax. Their tax credit would be 20% of their $4,000 contribution or $800, cutting their Federal income tax liability in half.

* Source: Examples are for illustrative purposes only. Francis Investment Counsel does not provide legal or tax advice.

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