If you're a lower- to moderate-income taxpayer and contribute to a retirement plan, you can take advantage of a little-known credit called the saver's tax credit. Formerly called the retirement savings contributions credit, the credit encourages taxpayers to put money into retirement accounts, like a 401(k), by giving them a tax break on that money.
Unfortunately, not many Americans know about the saver's tax credit. In fact, a 2010 Harris survey reported that only 12 percent of qualified taxpayers were even aware of it.
The IRS calculates the saver's tax credit based on filing status (joint or single), adjusted gross income, and the amount contributed to retirement accounts. On the next few pages, we'll explain what the saver's tax credit might mean for you, and if you're eligible to file for it.
The Saver's Tax Credit Explained
If you're contributing to a retirement savings plan, congratulations -- you're already ahead of the game. If you're eligible, the saver's tax credit rewards you for your foresight. If you're a low or moderate wage earner, this program was created to encourage your long-term savings plans. Generally the lower your income, the higher your credit.
The saver's tax credit can reduce your income tax by up to $1,000 if you file singly and or $2,000 if you file jointly. Of course, not everyone gets the same credit. It's determined by several different factors, like how much money you contributed to your retirement plan and the percentage of your contributions that qualify. It's also important to remember that this is a tax credit, not a refund -- so it will reduce your tax bill, but the savings won't come back to you in the form of money.
You can get a 10 percent, 20 percent, or 50 percent credit on the first $2,000 per year that you contribute to your retirement plan. The credit that you receive is calculated as a percentage and mostly depends on your adjusted gross income (AGI). Your AGI is your gross income after subtracting any allowable deductions.
Here is the saver's tax credit information for 2014 [source: IRS].
For a 50 percent credit:
- Married and filing jointly: AGI no more than $36,000
- Filing as head of household: AGI no more than $27,000
- All other filers: AGI no more than $18,000
For a 20 percent credit:
- Married and filing jointly: AGI between $36,001 - $39,000
- Filing as head of household: AGI between $27,001 - $29,250
- All other filers: AGI between $18,001 - $19,500
For a 10 percent credit:
- Married and filing jointly: AGI between $39,001-$60,000
- Filing as head of household: AGI between $29,251 - $45,000
- All other filers: AGI between $19,501 - $30,000
You receive no credit if:
- Married and filing jointly: AGI more than $60,000
- Filing as head of household: AGI more than $45,000
- All other filers: AGI more than $30,000
So do you qualify? Find out if you can make the saver's tax credit work for you.
Do I Qualify for the Saver's Tax Credit?
The saver's tax credit is a great way to cut down on your tax bill, but you need to ensure you qualify first. You can claim the credit on contributions to retirement accounts like 401(k)s, 403(b)s, 457 plans, Roth IRAs, traditional IRAs, Simple IRAs, and SEP IRAs. Check with your tax professional to see if others apply. Keep in mind, however, that you can't claim any contributions your employer might make to these accounts.
To claim the credit, you must be age 18 or older. You cannot be a full-time student, and you cannot be listed as anyone's dependent. You must have made your retirement contribution in the year you are filing. You must meet the income requirements as described on the previous page. These change, so be sure to check each year.
If you have made any money from retirement plan or annuity distributions during the current year as well as the past two tax years, you must deduct that money from your retirement contributions. Rollover contributions aren't eligible, either, and you can't use any foreign income when calculating your adjusted gross income (AGI).
Another positive aspect of the saver's tax credit is that you can use it in addition to the tax deduction you already get for contributing to your 401(k) or IRA. Make sure you take advantage of this double savings if you qualify.
This is the most important part -- if you do qualify, you need to file your taxes using IRS Forms 1040, 1040A, or 1040N. The 1040EZ form doesn't allow you to file for this credit. The saver's tax credit form is IRS Form 8880. Fill it out and attach it to your Form 1040. If you use tax filing software, look for the credit while preparing your taxes. For most people, the saver's tax credit saves them a few hundred dollars -- and every little bit helps [source: Brandon].
- Bell, Kay. "Tax credit for savings made for retirement." Bankrate. 2014. (Oct. 16, 2014) http://www.bankrate.com/finance/money-guides/tax-credit-for-savings-made-for-retirement-1.aspx
- Brandon, Emily. "Tips for Claiming the Retirement Saver's Credit." U.S. News & World Report. Jan. 13, 2014. (Oct. 16, 2014) http://money.usnews.com/money/retirement/articles/2014/01/13/tips-for-claiming-the-retirement-savers-credit
- efile.com. "Saver's Credit - Retirement Savings Contributions Credit." 2013. (Oct. 16, 2014) http://www.efile.com/tax-credit/savers-credit-retirement-savings-contributions-credit/
- IRS. "Retirement Topics - Retirement Savings Contributions Credit (Saver's Credit)." IRS.gov. Apr. 30, 2014. (Oct. 16, 2014) http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit- percent28Saver percentE2 percent80 percent99s-Credit percent29
- TurboTax. "What Is The Savers Credit?" Intuit. 2014. (Oct. 16, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Taxes-101/What-Is-The-Savers-Credit-/INF15617.html