Where can you expect to find a 50 percent return on some of your extra money? For some workers, the answer is: Internal Revenue Service.
If that prospect seems too good to be true, take a look at the Retirement Savings Contribution Credit, also known as the “Saver’s Credit,” financial seminar firm Taxspeaker suggested recently. You can find that 50 cents on the dollar in your federal tax return, if you satisfy two basic qualifications:
· Savings: Make a contribution to either a personal or an employer-sponsored retirement plan. Just about any type qualifies including traditional and Roth IRAs, a 401(k) account, a 403(b), SEP, etc. So does the specialized ABLE (Achieving a Better Life Experience) account. One caution: Rollover contributions won’t work for this tax break.
· Income: Report adjusted gross income of $39,000 or less for a married couple filing jointly or $19,500 for a single individual in 2020, the current tax year. (Those amounts were $38,500 for marrieds and $19,250 for 2019.)
Taxpayers meeting both requirements can take a 50 percent tax credit on new retirement deposits as large as $4,000 for married couples or $2,000 for single individuals. Credits directly reduce taxes, so we’re talking about cutting a maximum $2,000 or $1,000, respectively, off the income tax bill.
The IRS also offers credits of 20 percent and 10 percent for bigger incomes, phasing out at $32,500 for singles and $65,000 for marrieds.
The tax break has been around for a number of years. Reduced earnings due to COVID-19 job losses, furloughs or pay cuts could make more workers eligible for it in 2020. For some more depth, see the IRS explanation at https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit
To plan for this year’s Saver’s Credit — or other tax matters — feel free to contact Eric Buechler of EricJohn Ltd., tax specialist and an enrolled agent recognized by the IRS.