Most Americans Can Save $2,000 a Year From Little-known Tax Break

Americans planning to block out some additional money in 2022 can take advantage of tax breaks that get unnoticed very often. The tax break has been updated recently by the Internal Revenue Service to reduce their tax liability in the approaching year. 

The retirement savings contribution credit, often reduced to the saver’s credit, gives an amount of up to $1,000 as a credit to households having low and middle earnings and keeping money aside in a specific retirement account. Married couples are entitled to a credit of up to $2,000. 

Taxpayers are entitled to enjoy the benefit of the credit as long as they are above the age of 18, are not a student, and are not claimed as dependent by anybody else.

To be able to take advantage out of it, taxpayers must provide some contributions to either an IRA or an employer-funded retirement account. That includes any contribution made to a 401(k), 403(b), governmental 457(b), and also any after-tax contribution made to a Thrift Savings Plan.

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Also, income limits are restricting who is entitled to get the tax credit. The new maximum income thresholds for anybody to get the saver’s credit next year are $34,000 for single filers, for married couples filing collectively it’s $68,000 and the amount is $51,000 for heads of households.

Maximum Amounts Any Taxpayer Can Be Entitled to Claim

Taxpayers who are eligible for the credit can get 10%, 20%, or 50% of the first $2,000 that they save, which means that they could get either $200, $400, or $1,000. Although, the credit starts to thin out for those who have higher earnings.

Individuals should have an income of less than $20,500 to get 50% of their retirement contribution, though the highest amount married couples can claim is $41,000 and for heads of household, it’s $30,750. 

little-known tax break
little-known tax break

Take, for example, if a married couple has an income of $41,000 in this year and made a contribution of $2,000 to their IRA for the year, they could take off a 50% credit of $1,000 for the contribution of $2,000 on their tax return of this year.

According to the latest report published by the Transamerica Center for Retirement Studies, only 43 percent of workers are familiar with the saver’s credit.

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A more concerning matter is that a mere 35 percent of those having family income of less than $50,000 know the tax credit, even if they are supposed to be the biggest recipients of it.

Comparatively, fifty percent of families having earnings of more than $100,000 claimed that they are aware of the credit, as per the study.

The Deduction Is Over Taxes Payable and Not Taxable Income

Tax credits are deducted from the taxes you are required to pay, not from your taxable income, and provide you with a dollar-for-dollar deduction upon your liability. For example, if your federal tax bill was $10,000, and you are eligible to claim a tax credit of $2,000, your bill would be reduced to $8,000.

Analysts have majorly claimed that tax credits are better than deductions to minimize your bill. Most probably, if you ever had to select between a deduction of $100 and a credit of $100, you would rather choose the credit, which would result in the reduction of your bill by $100, as per TurboTax.

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On the other side, how much money you saved with the reduction of your taxable income by $100 would rely upon your tax frame. If in 2019, you were falling under the tax bracket of 24 percent, a deduction of $100 decreases your taxes by $24.

Megan Brinsfield, CPA and director of financial planning at Motley Fool Wealth Management, said “Credits win every time because they are a dollar-for-dollar reduction of your tax bill,” adding “Deductions will reduce your overall income before applying to your tax rate.”

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