If you have started saving for yourretirement, then it’s not only good for your future but for the present as well. The federal government offers a tax credit to incentivize low- and moderate-income Americans to save more. We call this credit the Retirement Savings Contributions Credit or Saver’s Credit. This credit is available to almost everyone who made contributions to a 401(k) or IRA.
So, if you have also been making such contributions, but were unaware of this credit, or how to claim the Saver’s Credit, don’t worry. In this article, we walk you through everything about this credit, including, what it is, eligibility requirements, how much to expect and how to claim it.
Saver’s Credit – What is it?
As mentioned above, it is a tax credit that encourages low- and moderate-income households to save for their retirement. This credit can help taxpayers reduce their income tax liability, or it could even result in a refund for taxpayers. A taxpayer, who makes a contribution to a retirement account, can claim the Saver’s Credit of up to $1,000 ($2,000 if married and filing jointly).
According to theIRS, this credit is available to those “making eligible contributions to your IRA or employer-sponsored retirement plan. Also, you may be eligible for a credit for contributions to your Achieving a Better Life Experience (ABLE) account, if you’re the designated beneficiary.”
Who All Are Eligible?
You must meet the below eligibility requirements to be eligible for the Saver’s Credit:
- Be 18 years or older.
- Must not be claimed as a dependent by anyone on their return.
- Must not be a student.
Just meeting the above requirements won’t get you the Saver’s Credit, unless you make eligible contributions toward your retirement fund. It must be noted that the contributions you make toward retirement must be new money. In other words, rollovers from an existing account won’t count toward the Saver’s Credit.
Also, you need to meet the adjusted gross income caps of the year you want to claim the credit. The IRS sets AGI caps each year.
For instance, you won’t be eligible for the 2023 Saver’s Credit if your adjusted gross income is above:
- $73,000 for married joint filer.
- $54,750 for the head of household filer.
- $36,500 for any other filing status.
Visit thislinkfor more details on the eligibility requirements and income caps.
Apart from the above requirements, you also need to meet the contribution deadlines to not only qualify, but to claim the Saver’s Credit as well.
Generally, the contributions to401(k) plansand other retirement accounts that qualify for the Saver’s Credit, are due by the end of the calendar year. Taxpayers, however, have until the tax return deadline, i.e., usually April, to make eligible contributions toward the Saver’s Credit.
So, this year, taxpayers have until April 18, 2023, to make retirement contributions that will allow them to qualify for the Saver’s Credit on their 2022 tax return.
How Much Could You Get?
You can claim the Saver’s Credit of up to $1,000 ($2,000 if married and filing jointly). The credit amount, however, depends on your “adjusted gross income reported on your Form 1040 series return.”
Depending on your filing status and adjusted gross income, you could be eligible to claim 50%, 20% or 10% of your total contribution toward retirement. The maximum contribution amount that qualifies for the credit is $2,000 ($4,000 if married and filing jointly).
So, if you are eligible to claim 50%, and your maximum contribution is $2,000, then you could claim $1,000 in Saver’s Credit. Visit thislinkfor more details on the Saver’s Credit rates for different types of filers.
How To Claim The Saver’s Credit
Now that you know what the Saver’s Credit is, what its requirements are and how much you could get, the last important detail you need to know is how to claim the Saver’s Credit.
If you meet the eligibility requirements, as well as the income limits, then you need to use IRS Form 8880 (“Credit for Qualified Retirement Savings Contributions”) to claim the Saver’s Credit. It is a one-page form. You can file it electronically or print out the form from the IRS website and mail the completed form back.
Completing the form is easy as well. You just need to enter your contributions toward eligible retirement accounts (and your spouse’s contributions, if applicable). You will have to specify the contributions to various types of retirement accounts, including 401(k), traditional or Roth IRAs, and ABLE accounts.
The form also provides instructions on calculating the credit amount. Once you calculate the amount, you need to mention it in line 4 of Form 1040.
Final Words
The Saver’s Credit, undoubtedly, is a great way for low- and moderate-income households to save money by contributing toward theirretirementcorpus. This credit could reduce your income tax liability or boost your income tax refund.
Though the maximum credit amount is $2,000, the actual credit amount that most get is much smaller. According to the IRS, the smaller credit is partly due to the impact of other deductions and credits. The average credit amount in 2020 was $186 per eligible return, the agency estimates.
Despite the low credit amount, the Saver’s Credit is an efficient way to encourage people, especially lower-income earners, to save for their retirement.
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