Tax deductions and tax credits both allow us to save money on our income taxes. However, the two are very different. A taxdeductionreduces the amount of income that you will pay income tax on, whereas a taxcreditis a dollar-for-dollar reduction of your taxes owed.
Let's say that Sonya, who files as the head of a household, has $30,000 in taxable income and $1,000 in tax deductions. Sonya will only pay income tax on $29,000. If Sonya is in the 15% marginal tax bracket, then her $1,000 in deductions will save her $150 in income taxes ($1,000 x 0.15 = $150). But if Sonya has a $1,000 taxcredit, then she will save the full $1,000 in income taxes.
The Saver's Credit is one of these beautiful tax credits, and it's available to certain individuals who contribute to qualified retirement savings plans such as 401(k)s, 457 Deferred Compensation Plans, 403(b) plans, and both traditional and Roth IRAs by the time they file their taxes or April 15th whichever comes first. The amount of the credit depends on the adjusted gross income of the individual and the amount of their retirement plan contribution.
The IRSexplainsthat in order to qualify for the Saver's Tax Credit you must be at least 18 years old, must not be a full-time student, and must not be claimed on anyone else's tax return as a dependent. If you qualify, the amount of your credit ranges from 10% to 50% of your retirement plan contribution, up to $2,000 per person depending upon your adjusted gross income. You enter the credit information in the section of your 1040 form called Tax and Credits.
Here are the income guidelines for this year and next:
*Single, married filing separately, or qualifying widow(er). Source:IRS.
The Saver's Credit is a great incentive for Americans who may think they can't afford to fund a retirement plan due to a year of low income. The truth of the matter is that if you qualify for this incentive, you can't affordnotto take it, as the credit is like a 10-50% immediate return on the money you invest in your retirement plan! While this credit may not apply to you if you make over the amounts stated, think of your children or grandchildren that are just starting out or a friend is who heading into retirement and only working part time -- this credit is just too good a deal to pass up!
The article Could the Saver's Tax Credit Save You $1,000? originally appeared on Fool.com.
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