How to Claim This Lesser-Known Tax Credit That Could Get You up to $2,000

Many Americans are yet to start saving for their retirement, but if you are one of those who have already started, then you could be eligible for a lesser-known tax credit that could score you up to $2,000 in free government money. According to a Transamerica Center for Retirement Studies survey, less than 49% of United States workers are aware of the tax credit called the saver's credit, credited as part of the government's way of asking people to save for retirement. This credit cuts the federal income taxes of those facing competing financial priorities to make it easier for workers to save, per TCRS.

"On top of the tax-deferred benefits of saving for retirement in a 401(k), 403(b) or IRA, the saver’s credit is an additional benefit that may reduce a person’s federal taxes," Collinson said in a press release. "Many eligible retirement savers could be confusing these incentives, simply because the idea of a double tax benefit sounds too good to be true." Unlike a deduction, a tax creditinb is a dollar-for-dollar reduction of your federal income tax liability, so it's free income, per Moneywise.

Can you claim the saver's credit?

To be able to claim the saver's credit for last year, you must be 18 years or older and you cannot be a full-time student. It's also important to note that you cannot claim it as a dependent on another's tax returns. Also, you must have an adjusted gross income of not more than $73,000 if you are married; $54,750, if you are the head of the household; and $36,500 if you are a single person or a married person filing as a single person (divorced, or widow/widower).

The credit is worth up to $1000 for single filers and $2000 for married couples who want to file jointly. You can apply to a 401(k), 403(b), or similar employer-sponsored retirement plan, or even a traditional or Roth IRA and ABLE account. According to the TCRS survey, the average amount of the saver's credit was around $186 back in 2020.

What is AGI?

It's the adjusted gross income which you can find on line 11 of your 1040 form. As the AGI rises, the tax credit slowly gets removed.

Here's how you can claim the saver's credit from TCRS

You can use the IRS online tool to help determine your eligibility for the credit. Once that's done, you can then use the online tax preparation tool to prepare for your tax return including those offered through the IRD Free File program. For this, you may be asked to answer questions about their saver's credit. If you are somebody who prepares your tax return manually, you can simply fill up 8880 to determine your credit rate and amount. If you get the return successfully, you can then deposit this amount into an IRA to boost your retirement savings further.

In 2027, the SECURE Act 2.0, which was implemented in 2022, will replace the credit with the saver's match which is a contribution from the government for the retirement savers meeting the income eligibility requirements. It's said to be around 50% of a worker's retirement plan or IRA contributions up to $2000, which means a match of $1000. All in all, you need to be someone who contributed to a retirement plan, and then all you have to do is fill up the 8880 to determine your exact credit rate and amount. It was reported by many that most people are unaware of the saver's credit so, if you are an employer, then you can take steps to inform your employees.