Home retirement bill would expand tax credit for low-income earners

The U.S. House of Representatives on Tuesday passed a retirement reform bill, which includes an increase to an often overlooked tax credit for low-income people who invest money in accounts of retirement.

The bill will increase the credit for retirement savings contributions, known as the savings credit, by hundreds of dollars for certain households if the “Securing 2.0” law becomes law. The bill now faces a vote in the Senate after the House approved the bill by a bipartisan vote of 414 to 5 earlier this week.

Here’s what the changes would look like and who is eligible for the credit in 2021.

What is the saver’s credit?

Only 48% of filers are aware of the tax credit, according to a Transamerica Center for Retirement Studies 2021 Survey. Of those earning less than $50,000 a year, only 41% have heard of it.

the savings loan provides tax relief to low-income individuals investing for retirement. The credit is worth up to $1,000 for single filers or $2,000 if married and filing jointly, for pension plan contributions totaling $2,000 or $4,000 in a tax year given, respectively.

To qualify for the 2021 tax year, your maximum adjusted gross income (AGI) must be equal to or less than the following amounts, depending on your filing status:

  • $66,000 for a married couple filing jointly
  • $49,500 for a head of household
  • $33,000 for all other taxpayers

Currently, the amount of the credit gradually decreases according to your income. If you earn $19,750 or less as a single filer, 50% of your contributions count, up to $2,000. Co-registrants earning $39,500 or less are also entitled to 50% of their contributions, up to a maximum of $4,000.

Credit is worth less if you earn more than that. The amount of the credit gradually increases to 20% and 10% of your contribution as your income increases, even if these income levels are still relatively low, especially for people who are struggling to save for their retirement.

However, if the new legislation becomes law, the saver’s credit will be a flat rate of 50% per contribution made to a retirement account, regardless of AGI. These changes will come into effect for the 2026 tax season.

That means co-filers earning $66,000 who reach the $4,000 contribution maximum would be eligible for a $2,000 credit instead of $400, under the new rules.

How to apply for a savings loan for 2021

To qualify for the Savings Credit Now, contributions must have been made to a 401(k), 403(b), 457 plan, or the federal government’s Thrift Savings Plan by the end of calendar year 2021.

However, it’s not too late to make a contribution to an IRA investment account and claim the credit for 2021. The credit isn’t automatic, so you’ll need to proactively claim it.

For tax returns filed using tax preparation software, you will be prompted to ask about the saver’s credit. Remember that it may be called a credit for retirement savings contributions or a credit for eligible retirement savings contributions.

For manually prepared tax returns, be sure to complete Form 8880, Credit for Eligible Retirement Savings Contributions, to calculate your exact credit rate and amount. Then, transfer the amount to the designated line on your Form 1040 (Annex 3).

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