The current economic and political climate is making it difficult for average Americans and their families to save for retirement. However, retirement savings are a vital element of any good financial plan, and there are special tax incentives for making contributions to a retirement plan.
One such incentive is the Saver’s Tax Credit, which provides taxpayers with a helpful income tax credit. The Saver’s Tax Credit, formerly known as the Retirement Savings Contributions Credit (RSCC), is a special tax break designed to help people with lower incomes contribute to their retirement savings.
(Remember that a deduction lowers your taxable income and is calculated according to your tax bracket. A tax credit, on the other hand, is a dollar-for-dollar reduction of your gross tax liability, which is the amount of taxes you owe. The Saver’s Tax Credit is a nonrefundable tax credit, which means it can’t reduce your liability below zero or add to your refund, but it can help you save significantly on your annual income taxes.)
A recent survey found that only 25% of households earning less than $50,000 know that these sort of tax credits even exist. Keep reading to learn more and take advantage of potentially thousands in savings.
Eligibility for the Saver’s Tax Credit
To receive the Saver’s Tax Credit, you must meet four eligibility requirements:
- You must be 18 or older
- You can’t be a full-time student (refer to Form 8880 for a full definition and to check your status)
- You must not be claimed as a dependent by another taxpayer on their return
- You must make contributions to either an individual retirement account (IRA) or employer-sponsored retirement plan during the tax year in which you are seeking to claim the credit
How to Claim the Saver’s Tax Credit
Taxpayers who wish to claim the Saver’s Tax Credit must file a Form 8880 “Credit for Qualified Retirement Savings Contributions.” In addition, you must complete a 1040, 1040A, or 1040NR to claim the tax credit. Individuals who use a 1040EZ are not eligible for the Saver’s Tax Credit.
How Does the Saver’s Tax Credit Work?
The Saver’s Tax Credit can equal 50%, 20%, or 10% of your IRA or retirement plan contributions up to $2,000 ($4,000 for taxpayers who are married and filing jointly). Which percentage you receive depends on your adjusted gross income (AGI).
The credit favors people with lower incomes, and only individuals whose adjusted gross income is less than $31,001 are eligible if their filing status is “single” or “married filing separately.” However, for those filing as the head of a household, the maximum adjusted gross income is significantly higher at $46,500. And for married couples who are filing jointly, their adjusted gross income must be less than $62,001 to qualify for the credit.
Click here for a more in-depth review of Saver’s Tax Credit rates and income-based eligibility requirements.
Eligible Retirement Savings Types
Individuals who make contributions to the following retirement types are eligible for the Saver’s Tax Credit:
- Traditional or Roth IRA
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Section 501(c)(18) plans
- Simplified employee pension (SEP) plans
- Traditional or Roth IRA
- SIMPLE IRA
- Thrift Savings Plan (TSP)
- myRA (starter savings accounts offered by the U.S. Treasury)
Voluntary post-tax employee contributions to qualified retirement plans also render taxpayers eligible for the credit. Unfortunately, rollover contributions are not eligible.
As an example of how the Saver’s Tax Credit works, consider an individual who files as “single,” earned $30,000 in 2017, and contributed $2,000 to his or her 401(k) during the year. In this instance, the taxpayer can claim a 50 percent credit on their $2,000 contribution, so they will receive a Saver’s Tax Credit of $1,000.
While that example probably makes the Saver’s Tax Credit seem straightforward and simple, things can get complicated in a hurry, so please contact S.H. Block Tax Services if you feel confused or if you have any other questions related to tax credits, deductions, or liabilities.
Contact S.H. Block Tax Services to Learn More
In this post, we have done our best to simplify the Saver’s Tax Credit, but depending on your income and contribution status, things can get complicated in a hurry. Don’t feel bad if you find the Saver’s Tax Credit or any other tax credit confusing or intimidating; just contact us for help by calling (410) 727-6006 or completing this brief online form.
During your free consultation, we can further explain the Saver’s Tax Credit or discuss any other personal or business-related tax issue you might be dealing with. Our attorneys and staff have decades of experience helping Maryland taxpayers resolve their tax problems, and we would love the opportunity to do the same for you. Reach out today to learn more!
The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.