Forty-five percent of adults surveyed by Gallup said that they believe they pay too much in federal income taxes each year. That matches the lowest reading on record for this multi-decade survey and was likely helped by recent tax reform. However, 45 percent still implies that almost half of Americans believe their taxes are too high, and a resounding 70 percent of respondents in another Gallup survey said that taxes were an “extremely/very important” issue for them when voting in last month’s midterm election. With such sentiment it should not be surprising that many people will use every tool at their disposal to help shelter their hard-earned money from Uncle Sam.
One of the most popular ways of doing this is to utilize a 401(k) plan, a widely accessible retirement savings vehicle that provides its users with more control over how and when they pay taxes. Another incentive of 401(k)s (and a variety of other qualifying retirement plans) is the Saver’s Credit, a special tax break available to many low- and moderate-income Americans. The amount of the credit is equal to 50%, 20% or 10% of a given year’s retirement plan contributions up to $2,000 ($4,000 if married and filing jointly), depending on the adjusted gross income reported on your Form 1040 series return. Although the ceiling for the tax credit has not changed in quite some time, the income ranges for determining eligibility have increased during the past few years due to the recent uptick in household inflation.
Some members of Congress last month proposed restructuring the Saver’s Credit into a government matching contribution, but this tax incentive in its current state is already a great tool that too many people fail to utilize. In fact, a Transamerica Center for Retirement Studies report revealed that only 36 percent of U.S. households are even aware of this tax break. On the bright side, that is a marked improvement from 24 percent just a few years ago, and Millennials were by far the most likely age group to be aware of the Saver’s Credit. The latter is especially encouraging since it has repeatedly been demonstrated that the sooner a person begins saving for retirement the better, and younger workers just starting their careers typically fall in the income range that allows them to claim the Saver’s Credit.
Transamerica’s Catherine Collinson added that “The Saver’s Credit is a tax credit in addition to the benefit of tax-advantaged savings when contributing to a 401(k), 403(b) or IRA. Many eligible retirement savers may be confusing these two incentives because the notion of a double tax benefit seems too good to be true.” Most importantly, since it is December it is worth noting that contributions must be made to 401(k)s, 403(b)s, 457s or the federal government’s Thrift Savings Plan by the end of the calendar year to qualify for the Saver’s Credit. Retirement savers using IRAs, though, have until April 15, 2019 to make contributions that could qualify them for the Saver’s Credit for tax year 2018.
Sources: Gallup, U.S. IRS, TCRS, NAPA
Post author: Charles Couch