Most single moms have no idea they could shrink their tax bills by up to $1,000 extra.
But it’s actually very easy. Plus, it’s in the form of a tax credit – called the Saver’s Credit – that benefits you twice.
First off, this is a tax credit, not a tax deduction. A tax deduction lowers the amount of money you have to pay tax on, so you get to keep only a percentage of it (for example, you’d pay tax on $29,000 instead of $30,000). A tax credit comes right off of your tax bill, dollar for dollar. So if your tax bill was $3,600 before the credit, it would drop down to $2,600 after… a full $1,000 back in your pocket – and what single mom couldn’t use that?
Second – this tax credit goes to people who voluntarily put money into some kind of retirement account – which I 100% recommend you do. Money you stash away for retirement can usually be deducted from your taxable income. For example, if you put $2,000 into your 401(k) or an IRA, that $2,000 comes off of the income you have to pay taxes on.
So with the Saver’s Credit, you really get a tax deduction and a tax credit – a double tax bonus for you. Plus, you put some money into a retirement account, something every single mom should do – even if it’s just a small amount.
Here’s how it works:
The Saver’s Credit is a percentage (more on that in a second) gets applied to the first $2,000 you contribute to a retirement plan. That could be through your job: a 401(k) or 403(b) plan, for example. Or, it could be a self-funded IRA. The maximum credit is $1,000.
There are a bunch of conditions for this tax credit – but millions of people meet them, even though they don’t realize they could take the credit. To be eligible for the credit…
- You have to be at least 18 years old.
- You can’t be a full-time student.
- You can’t be claimed as a dependent on someone else’s tax return.
- Your adjusted gross income has to be less than $30,750 if you file as Single or less than $46,125 if you file as Head of Household (and you should absolutely use this filing status if you can).
Once you qualify, there are different percentages for different income levels: 50%, 20%, and 10%. The less money you make, the bigger your percentage. Here’s the Saver’s Credit table put out by the IRS for your 2016 taxes:
|2016 Saver’s Credit|
|Credit Rate||Married Filing Jointly||Head of Household||All Other Filers*|
|50 % of your contribution||AGI not more than $37,000||AGI not more than $27,750||AGI not more than $18,500|
|20% of your contribution||$37,001 – $40,000||$27,751 – $30,000||$18,501 – $20,000|
|10% of your contribution||$40,001 – $61,500||$30,001 – $46,125||$20,001 – $30,750|
|0% of your contribution||more than $61,500||more than $46,125||more than $30,750|
* All other filers includes Single, Married Filing Separate, and Qualifying Widow
Here are some examples of how this credit could apply to you:
Joanna, a pre-school teacher and single mom, made $28,500 in 2016. She contributed $1,200 to her IRA. That retirement plan contribution reduces her adjusted gross income (AGI) down to $27,300. If she files as Head of Household, Joanna can claim a 50% tax credit – $600 – for her $1,200 IRA contribution.
Belinda, another single mom, had $42,000 of AGI for 2016. During the year, she contributed $4,000 to her 401(k) plan at work. At that income level, she can deduct 10% of her retirement contributions up to $2,000 (if she files as Head of Household). So Belinda’s Saver’s Credit would come to $200.
The amount you’re eligible for comes right off of the amount of taxes you owe – so you’ll either pay less or get a bigger refund – but the credit can’t be more than your total tax bill. For example, if your income tax comes to $800, and you would be eligible for a $1,000 credit, you don’t get the extra $200 refunded to you – it would just zero out your tax bill.
To take full advantage of the Saver’s Credit, you have to use either Form 1040 or 1040A when you do your taxes – you can’t use Form 1040-EZ for this. You also have to fill out an extra form, Form 8880. If you have any questions about this lucrative tax credit – or any other tax questions – please post them in the comments, and I will answer you as soon as possible.