If you could reduce your taxes in three ways with one simple tactic, would you pass it up?
Believe it or not, that's exactly what many hard-working Americans are unknowingly doing. Only 12% of Americans who reported an annual household income of less than $50,000 and may therefore be eligible for the "Saver's Credit" know that it exists, according to recent research by Transamerica's Center for Retirement Studies. This tax credit, intended to encourage retirement savings amongst every day Americans, may be applied up to the first $2,000 of contributions made by eligible workers to employer-sponsored retirement plans (like 401ks and 403bs) or IRAs.
Whenever tax season rolls around I get lots of questions from people asking, "Is XYZ deductible?" That's a smart question because these days it's the rare person who couldn't benefit from some extra dollars in our pockets. But the real magic tax bullet isn't a tax deduction... it's a tax credit. That's because a tax credit results in a dollar for dollar reduction of your tax bill. In other words, a $1,000 credit means $1,000 is shaved off your tax bill. By contrast, if you had a $1,000 deduction and your marginal tax rate were 25%, your tax bill would only be reduced by the deductible amount multiplied by your marginal tax rate for a $250 savings.
If that math just made your head spin, you are not alone. Every single year when tax time comes around I have to pull out my notes (which have grown longer and more detailed as I've moved from a "W2" worker paid by a corporation to being a self-employed small business owner). When the complexity of our tax code makes me want to pull my hair out in frustration (which is often), I remind myself -- by looking closely at charts like this one -- how lucky we are to live in America.
As for the triple-header, depending upon your income and tax filing status, if your employer offers a 401k with a match and you contribute... you benefit from the match, from the reduction of your taxable income (a.k.a. a deduction), AND from the tax credit. That's a sweet deal. And even if your employer doesn't match or you are making the contribution through your IRA you still get the double benefit of a reduction in your taxable income plus the credit against any tax liability.As someone who focuses her financial literacy advocacy work on women, I was particularly struck by data in the Transamerica's 11th annual Women & Retirement study that shows:
- Women are less likely to contribute to 401k plans
- When we do we contribute a smaller percentage of our income than men
- We are less aware of this valuable Saver's Credit than men
Given that we women (grumble, grumble) earn less than men yet live longer, it's extra important for us to share the word about this credit with each other.
Here are the details on income limits for the credit. If you work with a tax preparation firm like H&R Block, Jackson Hewitt, or an individual CPA be sure to ask them if you eligible for this valuable savers credit:
For single filers, the adjusted income limit is $27,750 in 2010. For the head of a household, the adjusted income limit is $41,625 in 2010. For those who are married and file a joint return, the adjusted income limit is $55,500 in 2010. Additionally, the filer cannot be a full-time student or be claimed as a dependent on another person's tax return.
Do you know a woman who can benefit from this information? If so, please pass it along.
This post originally appeared at ManishaThakor.com.
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