The Low-Income Tax Credit The IRS Forgot To Tell You About

We don’t want to waste your time. This is only going to be beneficial if you or somebody you know fit this criteria:

  1. You or your household are truly in the low-income range
  2. You want to save for retirement
  3. You sometimes end up having to PAY taxes at the end of the year
    (this will not get you a tax refund)
  4. You are not currently enrolled as a full-time student
  5. You are not claimed as a dependent by anybody else

It’s called the Saver’s Credit and nobody seems to have heard of it. If you do fit the bill, this is a really easy way reduce what you’re paying out to the IRS. It works like this: you contribute to your 401K, IRA, Roth, etc for the year like normal. That’s going to reduce your taxable income to start like normal, which is great. But when you claim this credit, the IRS matches a portion of your contribution that can be taken directly off your tax bill. To see if you’re eligible based on income see the table below or you can find it here.

 

savers credit 2018

 

Understandably, this probably seems pretty confusing if you’re newer to learning about money. First off, AGI  is “Adjusted Gross Income,” which is how much you or your household makes total BEFORE taxes. Here’s an example to break it down for ya.

Example:

Renee makes $27,000 this year as an artist.

So $27,000 is her “AGI” adjusted gross income.

She is lucky enough that she feels she can afford to contribute $1,000 ($83.33 a month) to her traditional IRA (individual retirement account)

Her taxable income is now $26,000. ($26,000 – $1,000). Remember, contributions to traditional IRAs and 401ks are made with “before-tax” dollars.

Because she’s freelance, she hasn’t paid any taxes yet for 2018. So her
federal tax bill on $26,000 ends up being about $1,489
(we just did a quick estimate here)

Because Renee decides to claim the Saver’s Credit when she does her taxes, she gets a credit of $100. The $100 is because she’s not filing as married or head of household (head of household basically means you’re claiming a dependent like having a kid) she goes to “all other filers” and she makes between $20,501 – $31,500 = 10% of her contribution.

That means her final tax bill for the year is $1,389.

…#stillsuxballs

But let’s look at what it would have been if she hadn’t contributed to her retirement…

$27,000 with no deduction or credit = $1,609

$1,609 (no contribution) – $1389 (contribution + credit) = $220

$220, not $100… 

So instead of thinking about the IRS f*cking you on your tax bill, which will never go away… think of it like you put $780 into your retirement and they paid you $220 for doing it.

Some of you are probably scoffing right now and saying “Well, pshhh, not even worth it,” but if you’ve ever complained about the rich using loopholes and strategies to get around paying taxes and if you DON’T take advantage of this you then don’t get to complain. You are throwing away the opportunity to do it the way the people with REAL money do it.

You need to change your mindset about what really just happened. Sure, its only $220. But how long did it take for you to check a box to contribute to your retirement plan + claim the tax credit? Less than an hour I’m sure. That’s $220 for less than one hour of work. 

Not a bad hourly rate…

 

Further Reading:

TurboTax on the Saver’s Credit

How the Saver’s Credit Works

How Saving for Retirement Could Lower Your Taxes With a Credit

IRS