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The House's retirement bill would expand a largely unknown tax credit for low-income earners

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

The bill will increase the Retirement Savings Contributions Credit, known as the saver's credit, by hundreds of dollars for some households if the "Secure 2.0" Act becomes law. The bill is now up for a vote in the Senate after the House approved the bill by a bipartisan vote of 414-5 earlier this week.

Here's what the changes would look like and who qualifies for the credit in 2021.

What is the saver's credit?

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

The saver's credit offers a tax break for low-income earners who invest for retirement. The credit is worth up to $1,000 for single filers or $2,000 if married filing jointly, for retirement plan contributions totaling $2,000 or $4,000 within a given tax year, respectively.

To qualify for the 2021 tax year, your maximum adjusted gross income (AGI) has to be equal to or less than the following amounts, based 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 credit amount phases out based on how much you make. If you earn $19,750 or less as a single filer, 50% of your contributions count, up to $2,000. Joint filers earning $39,500 or less also qualify for 50% of their contributions to count, up to $4,000.

The credit is less valuable if you earn more than that. The credit amount phases out to 20% and 10% of your contribution as your income increases, even though these income levels are still relatively low, especially for people that struggle to save for retirement. 

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

That means that joint filers earning $66,000 who hit the contribution maximum of $4,000 would qualify for a credit of $2,000 instead of $400, under the new rules.  

How to file for the saver's credit for 2021

To qualify for the saver's credit now, contributions must have been made to a 401(k), 403(b), 457 plan or the federal government's Thrift Savings Plan before the end of the 2021 calendar year.

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

For tax returns filed using tax preparation software, you will be prompted with questions about the saver's credit. Just remember that it might be referred to as the Retirement Savings Contributions Credit or the Credit for Qualified Retirement Savings Contributions.

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

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