You may be able to cut down your tax bill with a little-known credit if you saved for retirement this year

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You may be able to cut down your tax bill with a little-known credit if you saved for retirement this year

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The Saver's Credit gives eligible taxpayers saving for retirement a tax break.

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  • The Saver's Credit is a little-known tax credit that can reduce, or even eliminate, your tax bill.
  • Tax credits are subtracted directly from the amount you owe in taxes on a dollar-for-dollar basis, whereas tax deductions are subtracted as a percentage from your gross income.
  • You may qualify for the Saver's Credit when you file your 2018 tax return if you earn less than $31,500 as a single filer and less than $63,000 as a joint filer.

If you saved money in a retirement account in 2018, you may be eligible for a tax break called the Saver's Credit.

The Saver's Credit enables low- to moderate-income taxpayers saving for retirement to reduce or eliminate their tax bill by up to $1,000, or $2,000 if married and filing jointly.

Only 12% of American workers with an annual household income of less than $50,000 know about the Saver's Credit, according to Turbo Tax.

Tax credits, like tax deductions, can help you pay less income tax, according to the IRS. Tax credits, however, are subtracted directly from the amount you owe in taxes on a dollar-for-dollar basis, while tax deductions are subtracted as a percentage from your gross income.

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Read more: 10 things you probably didn't know you could deduct on your taxes

To be eligible for the Saver's Credit, you must meet three requirements: You're at least 18 years old, not a full-time student, and aren't claimed as a dependent on someone else's return. Your adjusted gross income (AGI) also must be less than $31,500 if you're a single filer, and less than $63,000 if you're a joint filer.

Depending on your income, you can claim a credit that's equal to 50%, 20%, or 10% of the first $2,000 in contributions to your retirement account or Achieving a Better Life Experience (ABLE) account (a tax-advantaged savings account for people with disabilities and their families). That means the maximum possible credit is $1,000.

Here's how the credit amount is determined based on income:

Receive credit equal to 50% of 2018 retirement contribution

  • Married filing jointly: $38,000 or less
  • Head of Household: $28,500 or less
  • Single filers: 19,000 or less

Receive credit equal to 20% of 2018 retirement contribution

  • Married filing jointly: $38,001 - $41,000
  • Head of Household: $28,501 - $30,750
  • Single filers: $19,001 - $20,500

Receive credit equal to 10% of 2018 retirement contribution

  • Married filing jointly: $41,001 - $63,000
  • Head of Household: $30,751 - $47,250
  • Single filers: $20,501 - $31,500

Here's an example: Let's say Jennifer files as head of household and her adjusted gross income is $28,000 for 2018. During the course of the year, she contributed $1,000 to her employer-sponsored 401(k) plan. Jennifer can claim a 50% credit when she files her 2018 tax return, which cuts $500 off her tax bill.

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The Saver's Credit can be taken for contributions to a traditional or Roth IRA, 401(k), SIMPLE IRA, Salary Reduction Simplified Employee Pension Plan (SARSEP), 403(b), 501(c)(18) or governmental 457(b) plan, or ABLE account (new in 2018 under the new tax law).

Note that rollover contributions and employer contributions aren't eligible, and any recent distributions from your ABLE account, IRA, or retirement plan may lessen your eligible contributions.

The Saver's Credit can be claimed by filing Form 8880.

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