This little-known tax credit could give your retirement savings a huge boost

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Fewer than half of U.S. workers are aware of a tax credit that’s “almost too good to be true,” says Catherine Collinson, CEO and president of the Transamerica Institute and Center for Retirement Studies. The Saver’s Credit, also known as the Retirement Savings Contribution Credit, is available to eligible taxpayers who make voluntary contributions to eligible retirement accounts. Collinson says the Saver’s Credit acts as a “double tax benefit.” The credit is available on up to $2,000 of contributions for individuals, and can reduce your tax burden by up to $1,000 ($2,000 if married filing jointly).

“If an individual is saving for retirement in a tax-advantaged retirement account like a 401(k), 403(b) or IRA, they’re already getting some tax-advantaged savings if they’re saving on a pre-tax basis,” Collinson says.

The Saver’s Credit reduces your tax bill for saving for retirement, which already comes with tax benefits. It’s available to people 18 or older who have contributed to an eligible retirement plan and meet the income requirements for 2022:

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  • For single filers, a maximum adjusted gross income of $34,000

  • For heads of household, a maximum AGI of $51,000

  • For married filing jointly, a maximum AGI of $68,000

Students and anyone claimed as a dependent on someone else’s tax return are ineligible.

 

The average size of the credit was $191 in 2019, based on Transamerica analysis of IRS data. Every bit of savings can help, especially considering how much money can grow over time if it’s invested, Collinson says.

“For many, it could be an incentive to start saving,” Collinson says. “For others it could be something that’s available that they’re not taking advantage of, simply due to lack of awareness.”

As the economy deals with rising inflation and faces a possible recession, more people may be eligible for the credit because of reduced income, Collinson says. That’s why she and the Transamerica Center for Retirement Studies are trying to make more people aware of the credit.

More people should use the Saver’s Credit

It’s not clear how many eligible people are failing to take advantage of the Saver’s Credit. Collinson says there’s not enough data to get an exact number. But given how low awareness is, it’s clear more people could benefit from it, she says.

Transamerica has run publicity campaigns for the Saver’s Credit for years and has measured the public’s level of awareness since 2007. The 48% level of awareness among workers reached in 2021 represents a high, compared to the low of 20% in 2009 and 2010. The number of tax filers claiming the credit has also increased, from 5.3 million in 2002 to 9.6 million in 2019.

But Collinson says it’s not enough: Employers, as well as the IRS, could do more to make workers aware of this credit.

How to take advantage of the Saver’s Credit

One reason takeup of the Saver’s Credit has increased is its inclusion in tax preparation software, Collinson says. In-person tax preparers have also become more aware of the Saver’s Credit and are more likely to ask about it. If not, be sure to mention it, she says.

“Tax preparation software is getting more sophisticated all the time,” Collinson says. “It’s much more likely to pick it up when someone is filling out their tax questionnaire.”

People who are eligible for the credit are also usually eligible for the IRS Free File program, so they can earn extra money for saving for retirement and save money on tax preparation software.

To increase takeup further, Collinson hopes the IRS makes the Saver’s Credit fully refundable. As of now, you can use the credit to reduce your tax liability, but not to increase the size of your refund. Making it refundable “could open it up to millions more tax filers,” Collinson says, and provide an even bigger incentive to save for retirement.

This article originally appeared on Policygenius.com and was syndicated by MediaFeed.org

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Can you pay taxes with a credit card?

 

If you have a credit card, you may have wondered if you can pay taxes with it. While it’s possible to pay taxes with a credit card, it won’t be free. On the other hand, you could potentially enjoy benefits like earning rewards or hitting your credit card spend threshold to snag the welcome bonus.

 

Read on to learn more about paying the IRS with your credit card, from the potential benefits to a full rundown of the fees you may face.

 

Related: 401(k) tax rules on withdrawals and contributions

 

 

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If you owe money to the IRS for your taxes, you have a number of options for payment and those do include paying by credit card. The IRS lets you pay your taxes with a credit card through a third-party payment processor. However, the companies that are allowed to accept credit card payments on behalf of the IRS will charge fees for paying with a credit card.

 

Therefore, it is important to carefully consider the benefits of paying taxes with a credit card in order to decide if paying these fees is worth it for you. And always make sure that you have a full understanding of credit card terminologies before using a credit card.

 

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There are a few major benefits of paying taxes with a credit card instead of paying by check, direct deposit or money order. This includes earning rewards from your credit card, securing a welcome bonus or hitting a credit card spending threshold to earn a bonus. Some taxpayers may also wish to use a credit card to finance their payment, either by using their credit card’s interest-free grace period or extending payment.

 

 

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One of the biggest benefits of paying your taxes with a credit card is the potential to earn travel rewards or cash back from the credit card. Even with the credit card processing fee, some of the top rewards credit cards can offer rewards that can offset the cost of the fee. For example, with a 2% credit card fee, you would want to choose a card or cards that offer more than 2% cash back, or the equivalent in rewards.

 

 

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With a large tax bill, you could earn a valuable new account welcome bonus on one or more credit card offers. These welcome bonuses can reach up to $1,000 in value and even secured credit cards may offer them. If these offers are worth more to you than the 2% credit card fee, it can be an easy choice to pay your taxes with your credit card.

 

Some of the highest welcome bonus offers have large minimum spending requirements to get those bonuses. If you may not otherwise be able to meet that minimum spend, paying your taxes could be a way to pay for a significant portion, or all of that amount. Depending how large your tax bill is, you could even split the tax payment across two rewards credit cards to earn more than one welcome bonus.

 

If you move forward with this though, just make sure you have a firm handle on how credit card payments work to avoid ending up with debt.

 

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Some credit cards have additional spending thresholds besides those required to earn a welcome bonus. This could be another reason to use a credit card to pay your taxes. For example, these spending thresholds could help you reach the next level of elite status for an airline or hotel loyalty program. Or spending a certain amount could offer you a free night stay certificate or a companion airfare certificate.

 

You will need to weigh whether the status or other benefit is worth the credit card fee you will incur when paying your taxes with a card. Adding a load of debt to your card that you don’t have the funds on hand to pay off, for instance, won’t improve your credit score.

 

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As mentioned above, the three payment processors accepted by the IRS charge different fees for credit card payments, which are:

  • ACI Payments, Inc.: 1.98% (minimum fee of $2.50)
  • Pay1040: 1.87% (minimum fee of $2.50)
  • payUSAtax: 1.96% (minimum fee of $2.69)

Depending on the tax payment type, there may be a maximum number of times per year that you can pay with a credit card. In addition, tax payments over $100,000 may have special requirements and must be processed over the phone instead of online.When deciding whether to pay your taxes with a credit card, it’s important to compare the pros and cons. While you could reap rewards, you could also face steep costs.

 

 

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  • Earn rewards, points, miles or cash back for the spending
  • Get extra time to pay off your taxes, especially if using a 0% APR offer card
  • Meet a spending threshold

 

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  • Fees to pay by credit card
  • High credit card interest rates can hurt your finances
  • Incurring debt can hurt your credit score

 

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There are several reasons to consider using a credit card to pay your taxes. As discussed, one of the most popular reasons is to earn rewards from your credit card, including travel rewards, points or cash back. This could also include earning a welcome bonus on a credit card or reaching a minimum spending threshold with a card that opens up new membership tiers or special perks.

 

If you need more time to pay your taxes, you can file an extension with the IRS or set up a payment plan. However, you can expect to pay penalties for the extension and interest on the payment plan. Instead, you could pay your taxes with a credit card that offers 0% APR to give yourself more time to pay your taxes. You’ll still have to pay the credit-card processing fee, but it could end up being a cheaper option.

 

Credit: Jirapong Manustrong / istockphoto

 

This also could also be convenient if you have other debts you could move over to the card through credit card consolidation. Just be sure to pay off the balance in full before the promotional period ends to avoid paying the high interest charges.

 

Ultimately, it’s important to fully understand how cards operate and how credit card payments work before using a credit card to make a large and important payment like taxes. And it’s always good practice to get in the habit of regularly reviewing your credit card statement, especially after paying taxes to make sure that the transaction went through correctly.

 

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It’s absolutely possible to pay taxes with a credit card, but there are pros and cons to doing so that you’ll want to consider before going ahead and paying the IRS with plastic. For one, there are fees you’ll incur, which will vary by payment processor, and there are always risks to your credit score when taking on debt. Still, the potential for rewards and more time to pay your taxes may outweigh potential downsides.

 

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Myles Ma

Myles Ma is an editor at PolicyGenius.com.