IRS Offering Taxpayers Special Tax Credit in 2024

Internal Revenue Service (IRS) building in Washington on Oct. 16, 2023. Madalina Vasiliu/The Epoch Times

The Internal Revenue Service (IRS) issued a reminder to low- and moderate-income taxpayers that they can save more in taxes next year by taking advantage of a “special” tax credit.

The “special” tax credit is the Retirement Savings Contributions Credit, also known as Saver’s Credit. Qualified taxpayers can use it to offset a portion of voluntary contributions they make to 401(k) plans, IRAs, and other retirement plans, the IRS said in a Nov. 22 press release. To qualify, a taxpayer’s adjusted gross annual income should be below $36,500 if filing individually, $73,000 for married couples filing jointly, and $54,750 for heads of households.

Individual taxpayers can get a credit of 10 percent, 20 percent, or 50 percent of their contributions depending on income level, subject to a maximum contribution limit of $2,000.

As such, the maximum Saver’s Credit for an individual will be 50 percent of $2,000 or $1,000. For married couples filing jointly, the contribution limit is set at $4,000, with the maximum Saver’s Credit at $2,000.

Taxpayers with IRAs have time until April 15, 2024—the tax filing due date—to add money to their accounts and benefit from Saver’s Credit. Taxpayers can also open a new IRA account to take advantage of the credit.

Individuals with workplace retirement accounts like 401(k), 403(b), governmental 457 plan, and Thrift Savings Plan (TSP) have time until Dec. 31 to contribute to such accounts and qualify for the credit.

In addition to income limits, taxpayers should be above 18 and must not claim the credit as a dependent or student in order to be eligible for Saver’s Credit.

The credit also applies to eligible disabled people who are designated beneficiaries of Achieving a Better Life Experience (ABLE) accounts and make contributions. ABLE accounts are tax-advantaged savings programs for disabled people.

Saver’s Credit “can increase a taxpayer’s refund or reduce the tax owed but is affected by other deductions and credits. Distributions from a retirement plan or ABLE account reduce the contribution amount used to figure the credit,” the IRS said.

As Saver’s Credit is a tax credit, it will have a different impact on taxes owed compared to tax deductions. While deductions reduce the taxable income, a tax credit directly reduces the amount of taxes owed.

For example, if an individual earns $20,000 in income and qualifies for a tax of 12 percent, the total tax owed will come to $2,400.

A tax deduction of $1,000 will reduce the taxable income from $20,000 to $19,000. As such, the taxes owed will be 12 percent of $19,000 or $2,280.

In contrast, a Saver’s Credit of $1,000 will directly reduce the $2,400 in taxes owed to $1,400. The above numbers are used for reference and may not reflect actual tax rates.

Income Limits

The income limits used to calculate the credits will be based on the adjustable gross income (AGI) of the individual. AGI is the total of a person’s income minus certain eligible deductions.

The incomes used for calculation are money earned via employment, investment, real estate, social security, businesses, pensions, farms, and unemployment benefits.

Deductions will include contributions for retirement plans, student loan interest, tuition and fees, certain business expenses, and contributions toward a health savings account (HSA).

The 10, 20, and 50 percent Saver’s Credit limits are based on which income group a taxpayer belongs to.

• For an individual taxpayer, an AGI of $21,750 and below gets them a 50 percent Saver’s Credit, which drops to 20 percent for AGI between $21,751 and $23,750, then to 10 percent for AGI between $23,751 and $36,500, and finally disqualifies them for an AGI of over $36,500.
• For married couples filing jointly, 50 percent credit is applicable if their AGI is not more than $43,500; 20 percent for an AGI between $43,501 and $47,500; and 10 percent in case the contribution is between $47,501 and $73,000.
• Heads of households become eligible for a 50 percent credit for an AGI that is not more than $32,625, which drops to 20 percent for an AGI between $32,626 and $35,625, and then to 10 percent for AGI between $35,626 and $54,750.

Saver’s Credit is a non-refundable tax credit, meaning that it is only worth as much as the tax owned by an individual. Thus, it won’t reduce tax liability below $0 and generate a refund.

For example, if an individual owes $700 in taxes and is qualified for $1,000 in Saver’s Credit, their $700 in tax dues will be wiped off. However, this won’t mean they will get a refund for the remaining $300 in credit.

For individuals, the deadline for filing and paying their 2023 taxes is April 15, 2024. The penalty for those who fail to file their returns by the deadline is 5 percent per month on unpaid taxes. The penalty will not exceed 25 percent of the unpaid taxes.

In case of failure to pay the taxes on time, the penalty is 0.5 percent of the unpaid taxes per month, which can accrue to a maximum of 25 percent.

There are seven income tax brackets for the 2023 tax year. The lowest marginal tax is 10 percent, which applies to single filers making up to $11,000 annually or married individuals filing jointly making up to $22,000 annually.

The highest marginal tax rate is 37 percent—applicable to single filers making $578,125 or more in a single year. For married individuals who file jointly, the rate is applicable when the annual income is $693,750 or more.