Fight The IRS With First-Time Abatement
First-time abatement can help taxpayers in good tax standing avoid penalties -- if you can qualify. Read on to learn more.
Tax season is here, and if you’re like most people, you’d like to hold on to as much of your 2021 earnings as possible. One way to do that is to make sure you’re claiming all the tax credits and deductions you’re eligible for.
Though we’re into 2022 now, there are still a few last-minute tax breaks you can take advantage of if you’d like to bring your tax bill down a little. Here’s one worth considering if you have a little extra cash on hand.
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How saving for your future can lead to savings today
Investing in a retirement account can help you build the nest egg you’ll need to help you cover your future expenses, but if you use a tax-deferred retirement account, there’s also an immediate benefit.
Tax-deferred retirement account contributions reduce your taxable income for the year. That means that if you put $5,000 in a traditional IRA right now for the 2021 tax year, you’ll reduce your 2021 taxable income by $5,000.
This can lead to a smaller tax liability and possibly a larger refund, especially if your retirement contribution drops you into a lower tax bracket. If this happens, you’ll pay a smaller percentage of your income to the government, which means more money left in your pocket.
There’s an added bonus for low-income savers
Stashing money in a retirement account may also make you eligible for the Saver’s Tax Credit. This could be worth up to 50% of your retirement contribution, with a maximum contribution of $2,000. That means that if you qualify for the 50% credit and you contribute $2,000 to a retirement account for 2021, you could shave $1,000 off your 2021 tax bill.
This is different from a deduction, which reduces your taxable income. A $1,000 tax credit essentially means you owe the government $1,000 less than you would have otherwise. That can have a significant effect on the size of your refund.
In order to qualify for this credit, you must be 18 or older and not claimed as a dependent on anyone else’s tax return. You also cannot be a student.
How much of a credit you get depends in part on how much you contribute, but also on your adjusted gross income (AGI) and tax filing status for the year. This table shows how much you’ll get if you claim this credit on your 2021 taxes.
Credit Rate
Married Filing Jointly
Head of Household
All Other Filers
50% of your contribution
AGI not more than $39,500
AGI not more than $29,625
AGI not more than $19,750
20% of your contribution
$39,501 to $43,000
$29,626 to $32,250
$19,751 to $21,500
10% of your contribution
$43,001 to $66,000
$32,251 to $49,500
$21,501 to $33,000
0% of your contribution
AGI more than $66,000
AGI more than $49,500
AGI more than $33,000
Data source: IRS.
So if you’re a single filer, you can only take advantage of this credit if your AGI is under $33,000. Individuals with higher AGIs will still get the tax deduction discussed above, but they aren’t eligible for the Saver’s Credit.
How to get started
If you have a little extra cash and you think a tax-deferred retirement contribution makes sense for you, there’s no time to waste. A traditional IRA is probably your best bet, because you can make prior-year contributions to these accounts up until the tax deadline for the year, while 401(k)s don’t allow prior-year contributions.
Open an IRA with any broker that interests you, and deposit some funds into the account. Keep in mind the annual contribution limits. You can only contribute up to $6,000 to an IRA for 2021 or $7,000 if you’re 50 or older.
Since you’re making a prior-year contribution, you may also have to follow up with your account provider to make sure they apply your contribution to the correct year. Otherwise, they may default to a current-year contribution, and that won’t help you with your taxes right now.
Make sure you do all of this before you file your taxes. If you wait until afterward, you’ll have to submit an amended tax return to claim your credit. And no one wants to do their taxes twice.
One last thing: Tax-deferred retirement contributions aren’t the best choice for everyone. If you think you’re in the same or a lower tax bracket now than you’ll be in once you retire, a Roth account might be better for you long term. But since these offer tax-free withdrawals, you must pay taxes on your contributions in the year you make them. So if your goal is to slash your taxes right now, stick to a traditional IRA. You can always switch to a Roth IRA for 2022 if that fits in better with your retirement strategy.
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