UPDATED FOR 2021

Most people have no idea they could shrink their tax bills by up to $1,000 extra.

But it’s actually very easy. Plus, it’s in the form of a tax credit – called the Saver’s Credit – that benefits you twice.

First, this is a tax credit, not a tax deduction. A tax deduction lowers the amount of money you have to pay tax on, so you get to keep only a percentage of it (for example, you’d pay tax on $29,000 instead of $30,000). A tax credit comes right off of your tax bill, dollar for dollar. So if your tax bill was $3,600 before the credit, it would drop down to $2,600 after… a full $1,000 back in your pocket – and who couldn’t use that?

Second, this tax credit goes to people who voluntarily put money into some kind of retirement account – which I 100% recommend you do. Money you stash away for retirement can usually be deducted from your taxable income. For example, if you put $2,000 into your 401(k) or an IRA, that $2,000 comes off of the income you have to pay taxes on.

So with the Saver’s Credit, you really get a tax deduction and a tax credit. That’s a double tax bonus for you.

Plus, you’ve put some money into a tax-advantaged retirement account. So it’s really a triple tax bonus.

Here’s how it works:

The Saver’s Credit is based on a percentage of the first $2,000 you contribute to a retirement account, or $4,000 if you’re Married Filing Jointly. That contribution could be through the retirement plan at your job, like a 401(k) or 403(b) plan. Or it could be an IRA that you fund on your own.

The maximum Saver’s Credit is $1,000.

There are a bunch of conditions for this tax credit. And millions of people meet the requirements without even realizing that they can get this great tax benefit. To be eligible for the credit…

  1. You have to be at least 18 years old.
  2. You can’t be a full-time student.
  3. You can’t be claimed as a dependent on someone else’s tax return.
  4. Your adjusted gross income has to be less than $32,500 if you file as Single or Married-Separate, less than $48,750 if you file as Head of Household, and $65,000 if you’re Married Filing Jointly.

Once you qualify, there are different percentages for different income levels: 50%, 20%, and 10%. The less money you make, the bigger your percentage. Here’s the Saver’s Credit table put out by the IRS for your 2020 taxes (the ones you’re filing in 2021):

2020 Saver’s Credit
Credit Rate Married Filing Jointly Head of Household All Other Filers*
50 % of your contribution AGI not more than $39,000 AGI not more than $29,250 AGI not more than $19,500
20% of your contribution $39,001 – $42,500 $29,251 – $31,875 $19,501 – $21,250
10% of your contribution $42,501 – $65,000 $31,876 – $48,750 $21,251 – $32,500
0% of your contribution more than $65,000 more than $48,750 more than $32,500

* All other filers includes Single, Married Filing Separate, and Qualifying WidowHere are some examples of how this credit could apply to you:

Stacy and Andy had a combined income of $40,000 for 2020. They use the Married Filing Jointly tax status. They each contributed $2,000 to their 401(k) plans at work (that amount is already deducted from their income). Stacy and Joe can deduct 20% of both contributions, for a Saver’s Credit of $800 (20% of $4,000).

Steve, the butcher at a grocery store, made $29,500 in 2020. He contributed $1,500 to his IRA. That retirement plan contribution reduced his adjusted gross income (AGI) down to $28,000. Steve files as Single, and can claim a 10% tax credit – $150 – for his $1,500 IRA contribution.

Meredith, a single mom, works as the assistant manager of a bookstore. She contributed $5,000 to the retirement plan at work, and her 2020 income (after the deduction for her retirement contribution) was $29,000. Filing as Head of Household, Meredith qualifies for the full $1,000 Saver’s Credit – 50% of the maximum eligible $2,000 retirement contribution.

Whatever amount of Saver’s Credit you’re eligible to get, it comes straight off your tax bill. So you’ll either pay less or get a bigger refund.

Because this is a nonrefundable credit, though, it lower your tax bill below zero. For example, if your income tax comes to $800, and you would be eligible for a $1,000 credit, you don’t get the extra $200 refunded to you – it would just zero out your tax bill.

To take full advantage of the Saver’s Credit, have to fill out an extra form, Form 8880 with your taxes.

If you have any questions about this lucrative tax credit, feel free to contact me here.