The 2023 savings credit is available to more taxpayers than ever before

(Dan Caplinger)

Everyone can benefit from saving for retirement. But especially when times are tough, it’s hard to find money to allocate. Anytime you can get help, it is worth taking advantage of it.

The federal government has been concerned about making sure low- and middle-income Americans are ready for retirement. That’s why legislators created the retirement savings contribution trust, also known as savings credit, to help give millions of people a boost in their savings efforts. Thanks to inflation adjustments, more people will be able to take advantage of the savings balance in 2023 than ever before.

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How does savings balance work?

The idea behind the savings credit is very simple. If you contribute to Irish Republican Army, 401(k), or any other eligible retirement plan, you can qualify for a tax credit that you can use to reduce your tax bill. The credit applies to up to $2,000 in retirement contributions.

However, not everyone is eligible for credit. You must be 18 years of age or older and not be a full-time student or dependent for tax purposes. Furthermore, there are income limits that apply not only to receiving the savings credit at all, but to determining the amount of credit you will receive. Depending on your income, you can get back anywhere from 10% to 50% of your contributions in the form of credit.

Income and credit limits for 2023

This chart shows how much credit you can claim, based on your enrollment status and adjusted gross income:

credit ratio

Single or married separately

Head of the family

married jwent

50% of the contribution

0 to $21,750

0 to 32,625 dollars

0 dollars to 43,500 dollars

20% of the contribution

$21,751 to $23,750

$32626 to $35625

43,501 USD to 47,500 USD

10% of the contribution

$23,751 to $36,500

$35626 to $54,750

$47501 to $73,000

Those limits are much higher than they were in 2022. For example, the maximum income for a married couple to qualify for a savings credit in 2022 was $68,000 – $5,000 less than it would be in 2023.

To see how this works, let’s take a simple example. Let’s say you’re married, file a joint return, and decide to put $1,500 into a Roth IRA. If your adjusted gross income is $50,000, you would qualify for the 10% credit, so the amount would be $150. But if your income is $40,000, you’ll qualify for the 50% larger credit, making the $750 tax credit.

Additionally, let’s say your spouse is also saving money in a retirement account. Contributions from both spouses qualify, so you can double your tax savings by having both spouses participate.

It’s a win

To be clear, a savings credit provides additional incentives in addition to what’s already available to those who use tax-preferred retirement accounts to increase their long-term savings. If you choose a traditional IRA or 401(k) for your retirement savings, you’ll likely still qualify for a tax deduction that can save you more at tax time. And if you prefer a Roth IRA, you’ll get the same tax-free treatment on retirement withdrawals as everyone else from those accounts.

Because low-income taxpayers don’t benefit as much from the deductions they earn from traditional retirement account contributions, the saver’s credit often represents the largest tax cut available to them. However, many qualified taxpayers don’t even know that a savings balance exists, not to mention that it can put hundreds or even thousands of dollars back in your pocket.

When money is tight and you’re trying to move forward with your financial planning, you’ll appreciate the full value of what savings credit brings to the table.

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