If you regularly save money (whether for retirement or other purposes), you’ve made a smart financial choice. What’s more, the government wants to reward responsible people like you by offering these four great tax breaks just for savers.
1. IRA deduction
Contribute to a traditional IRA (not a Roth IRA), and you may be eligible for a fat tax deduction. If you’re not covered by a workplace retirement plan such as a 401(k), you’re automatically eligible to deduct your IRA contributions in full on your federal tax return (although you still can’t exceed the annual contribution limit — in 2017, that’s $5,500 for everyone under 50).
If you file as single or head of household, you can take a full IRA deduction with an annual income of up to $62,000; a partial deduction if your income is between $62,000 and $72,000; and no deduction if your income is $72,000 or more.
For married filing jointly, the income limits are $99,000 or less (full deduction), more than $99,000 but less than $119,000 (partial deduction), and $119,000 or more (no deduction).
Assuming you qualify for an IRA deduction, you simply total up your contributions for the year, apply any limitations based on your annual income, then note the final figure on your Form 1040. The IRA deduction is a particularly useful one because it’s a “for AGI” deduction, meaning that it’s subtracted from your income before you do the annual gross income calculation. That means the IRA deduction can reduce your annual gross income, potentially making you eligible for other income-dependent tax breaks such as the Earned Income Credit.
2. HSA deduction
If you have a health savings account, you can deduct the amount you contribute for the year on your federal tax return. Like the IRA deduction, this is a “for AGI” deduction taken on your Form 1040, so it can be a particularly powerful tax break.
There is a limit to how much you’re allowed to contribute to an HSA for the year. In 2017, the limits are $3,400 for individual HSAs and $6,750 for family HSAs. These limits are slated to increase slightly for 2018. However, if tax reform passes in time to apply for the 2018 tax year, HSA contribution limits may increase far more dramatically than that.
President Trump has repeatedly stated his intention to greatly increase HSA contribution limits so that savers can get more from these accounts. The increase in HSA limits was originally slated to be part of the Trumpcare bill, but since healthcare reform is currently on hold, the HSA contribution limit increase might just work its way into tax reform legislation instead.
3. Savers Tax Credit
If you contribute money to pretty much any type of retirement savings account and you meet certain income limits, you may qualify for a tax credit in addition to any tax deduction that applies to these contributions. The Savers Tax Credit allows you to claim a tax credit of up to $1,000 (or $2,000 if you’re married filing jointly). Because it’s a credit rather than a deduction, it’s directly subtracted from your tax bill. This is one tax break that’s definitely too good to pass up, so if you qualify, grab a copy of Form 8880, fill it out, and turn it in with the rest of your federal tax return.
4. 401(k) deduction
In some ways, the 401(k) deduction is the best of the many saver tax breaks. Why? Because you don’t have to do anything to claim it (other than contribute money to your 401(k)).
When you set up your 401(k) contribution, typically in the form of a percentage of your paycheck, your company will take the money out of your pre-tax salary. For example, let’s say that your pre-tax paycheck is $4,000 per month and you’ve set it up with HR to contribute 10% to your 401(k). Your employer would then take $400 from that pre-tax money and put it into your 401(k) account, leaving $3,600 on which to calculate your tax withholdings.
So instead of having to add up your contributions for the year, calculate your deduction, and slap the result on your tax return, you just quietly enjoy the tax break you get as a result of having your annual income reduced by your 401(k) contributions before you even touch your paycheck. Not only is your tax bill reduced, but you have one less task ahead of you when preparing your tax return.
— Wendy Connick[ad#fool]
Source: The Motley Fool