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 can reduce your tax bill by up to $2,000 if you file jointly with your spouse.

• Tax Day 2020 is Wednesday, April 15, when taxes are due for income earned in 2019.
• The Saver's Credit is a little-known tax credit that can reduce, or even eliminate, your tax bill if you saved for retirement in 2019.
• Tax credits are subtracted directly from the amount you owe in taxes on a dollar-for-dollar basis, whereas tax deductions are subtracted from your gross income.
• You may qualify for the Saver's Credit when you file your 2019 tax return if you earn less than $32,000 as a single filer and less than $64,000 as a joint filer.
• This post has been reviewed for accuracy by Thomas C. Corley, CPA.

If you saved money in a retirement account in 2019, 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 completely eliminate, their tax bill by up to $1,000, or $2,000 if married and filing jointly. The maximum annual contribution amount allowed is $2,000 ($4,000 if married 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 and tax deductions can help you pay less income tax. Tax credits are subtracted directly from the amount you owe in taxes on a dollar-for-dollar basis, while tax deductions are subtracted from your gross income. In any given year, you can either take the standard deduction or itemize your deductions, but you can't do both. Tax credits can apply to you in either scenario.

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 $32,000 if you're a single filer, and less than $64,000 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 ($4,000 if married filing jointly) - an IRA or employer-sponsored retirement plan - 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 ($2,000 if married filing jointly).

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

Receive credit equal to 50% of 2019 retirement contribution

• Married filing jointly: $38,500 or less
• Head of Household: $28,875 or less
• Single filers: $19,250 or less

Receive credit equal to 20% of 2019 retirement contribution

• Married filing jointly: $38,501 - $41,500
• Head of Household: $28,876 - $31,125
• Single filers: $19,251 - $20,750

Receive credit equal to 10% of 2019 retirement contribution

• Married filing jointly: $41,501 - $64,000
• Head of Household: $31,126 - $48,000
• Single filers: $20,751 - $32,000

Here's an example: Let's say Jennifer files as head of household and her adjusted gross income is $28,000 for 2019. 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 2019 tax return, which cuts $500 off her tax bill.

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), Simplified Employee Pension Plan (SEP), 403(b), 501(c)(18) or governmental 457(b) plan, or ABLE account.

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 - Credit for Qualified Retirement Savings Contributions. If you use an online filing service like H&R Block or TurboTax, you just need to record your retirement contributions for the year and the service will do the rest.

• More tax day coverage:
• When are taxes due?
• How to file taxes for 2019
• What is a tax credit?
• H&R Block vs. TurboTax

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