If you had the chance to put $370 into a savings account and have it immediately turn into $1,000, would you do it?
You have this chance if your family is low income and makes a contribution to any Individual Retirement Account (IRA) by April 15th.
This federal rule is called the Saver’s Credit. If you are single, you are eligible for this credit if your adjusted gross income is less than $34,000. If you are married your family's adjusted gross income must be less than $68,000. These are the limits for 2022.
If you are eligible you can claim this credit by making a contribution to any IRA: it could be you spouse’s 401(k) or 403(b) plan. Or you can contribute to a Traditional IRA, Roth IRA, SIMPLE IRA or SEP IRA. To contribute to a SIMPLE IRA you must have set one up before October 1st.
The tax credit is worth 10%, 20%, or 50% of your IRA contribution, up to a maximum $2,000 contribution. The amount of credit depends on how low your family income is.
Let’s look at an example of how this works.
Let's say an eligible taxpayer (married, filing jointly) who contributed $1,000 to a Traditional IRA and whose family adjusted gross income was $37,000 would get a $500 tax credit; the tax-deductible contribution would save about $120 in income taxes (12% tax bracket) for a total of $620 tax savings. It would actually cost the taxpayer about $370 to get a $1,000 added to her retirement fund. If this person contributed to a Roth IRA she would still get the $500 tax credit, but not the $120 tax savings because contributions to a Roth IRA are not tax deductible.
To claim this credit, fill out Form 8880 and report the amount on Form 1040, Schedule 3, line 4.
If you did make a contribution to your IRA in an earlier year but did not claim this tax credit, you can file an amended tax form (Form1040X) and get a refund!
Tom Copeland – www.tomcopelandblog.com
Image credit: https://www.nirsonline.org/resources/federal-savers-credit/
