Are you or someone you know overlooking one of Uncle Sam’s most generous tax breaks—the Saver’s Tax Credit? It lets low- to moderate-income workers who are saving for retirement reduce their federal income tax bill by as much as $2,000 ($4,000 for married couples filing jointly). But just 25% of workers with annual household incomes of less than $50,000 are aware of the credit, according to a 2016 Transamerica Retirement Survey.1
“Unfortunately, many eligible workers may be missing out on the Saver’s Credit simply because they don’t know that it exists,” Catherine Collinson, president of the nonprofit Transamerica Center for Retirement Studies said in the news release that announced the survey.
What Is the Saver’s Tax Credit?
The Saver’s Credit is also called the Retirement Savings Contribution Credit. It’s a credit applied toward your taxable balance of up to $2,000 per individual ($4,000 if applying jointly). It applies to voluntary contributions made to a traditional or Roth IRA or your employer-sponsored retirement plan, such as a 401(k).
Contributions in employer-sponsored retirement plans and IRAs grow tax-free. What people don’t realize is that they can get that tax benefit and the Saver’s Credit. They’re actually eligible for two tax benefits for the same savings. After all, how often does that happen?
New in 2018
Starting in 2018, designated beneficiaries may qualify for a credit for contributions to an Achieving a Better Life Experience (ABLE) account. ABLE accounts are savings accounts for people with disabilities and their families. The designated beneficiary owns the account. In the past contributions to the account weren’t eligible for the Saver’s Credit. But in 2018, contributions by the beneficiary may qualify.
Who’s Eligible for the Saver’s Tax Credit?
Eligible applicants include anyone who contributes to an eligible account during the tax year and who is:
- 18 or older
- Not a full-time student
- Not claimed as a dependent on another filer’s tax return
The total credit you’re eligible for depends on your adjusted gross income and the amount you contributed to an eligible retirement account. Let’s break down the details.
How the Saver’s Credit Works
To get your credit, you have to file using form 1040, 1040A or 1040NR. You also have to submit Form 8880, the Credit for Qualified Retirement Savings Contributions form. The credit isn’t available to those who file using Form 1040EZ. You can also get the credit contributions made during the tax year for which you’re filing.
The amount of credit you qualify for depends on the adjusted gross income you report on your Form 1040, known as the long form. Those who earn more get a smaller credit with credits being 50%, 20% or 10% of your adjusted gross income (AGI). Essentially, if you earn more than the maximum income limits, you can’t get the credit at all. If you earn on the lower end of the AGI range, you get a higher credit percentage-wise. Here’s how it breaks down for the 2018 tax year:
|Credit||Married Filing Jointly||Head of Household||Single Filers|
|50% of your contribution up to the maximum||AGI up to $38,000||AGI up to $28,500||AGI up to $19,000|
|20% of your contribution up to the maximum||AGI of $38,001–$41,000||AGI of $28,501–$30,750||AGI of $19,001–$20,500|
|10% of your contribution up to the maximum||AGI of $41,001–$63,000||AGI of $30,751–$47,250||AGI of $20,501–$31,500|
|0% of your contribution||AGI of $63,000+||AGI of $47,250+||AGI of $31,500+|
Say you’re single, your AGI for the tax year is 18,000 and you contributed $500 to your employer’s 401(k), you can claim a Saver’s Tax Credit of $250. That’s 50% of your contribution because of your AGI bracket. If your AGI were $28,000, your credit would be $50 or 10% of your contribution.
If you’re married and filing jointly and you and your spouse’s AGI is $34,000 and you contributed $5,500 to your an IRA, you qualify for a credit of $2,750 or 50% of your contribution. If your contribution was $10,000, your credit would be $4,000, which is the maximum allowable credit for married people filing jointly. If you and your spouse made $83,000, you wouldn’t be eligible for a credit at all.
The Saver’s Credit Is Not a Tax Refund
The Saver’s Tax Credit won’t increase your refund. It’s not a tax deduction. It’s called a non-refundable credit, so it won’t result in money back in the form of a refund. Instead, it reduces your total tax balance due and decreases the amount of taxes you owe. It is not a refundable credit or tax deduction that reduces your taxable income and may net you a refund or higher refund. Learn more about refundable versus nonrefundable tax credits from the IRS.
Retirement Accounts that Qualify
The Saver’s Credit applies to several different retirement accounts, including:
- Individual IRA—traditional and Roth
- SIMPLE IRA
- Salary Reduction Simplified Employee Pension (SARSEP)
- Savings Incentive Match Plans for Employees (SIMPLE IRA Plan)
- Simplified Employee Pension (SEP) Plan
- 457(b) plan
Only your own contributions are eligible for the credit, however. Your employer’s contributions don’t apply to your credit.
For 403c(b) accounts, only your voluntary after-tax employee contributions apply to your credit.
Save for Retirement and Save on Taxes Either Way
Even if you’re not eligible for the Saver’s Credit, contributing to your employer-sponsored retirement account or a traditional IRA is one of the best ways to maximize your tax refund. The reason? Your contributions are made with pre-tax dollars, which helps lower your taxable income and helps you save for the future.
Find out more about common tax exemptions and deductions.
Find more information on the Saver’s Credit at www.IRS.gov.
Maximize Your Refund with Professional Preparation
With all the tax laws and a mind-numbing array of deductions, you may want to enlist the help of a professional preparer, especially if you have a lot of income and potential deductions. If you’re math challenged—like me—a pro can help reduce errors as well as understand all of your options to reduce your tax bill and also increase any refund you may have coming.
Also remember, filing your taxes early can minimize the odds of falling victim to taxpayer identity theft. And, if you’re a victim of tax refund fraud and believe your Social Security number was compromised, you can keep an eye on your credit for signs of other types of identity theft. To do so, pull your credit reports for free each year at AnnualCreditReport.com and view your credit score for free on Credit.com.
This article was originally published April 20, 2011, and has since been updated by a different author.
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