When you begin saving for retirement now, the Saver’s Credit may help reduce your tax bill.
Saving for retirement becomes even more rewarding if you qualify for the Retirement Savings Contribution Credit, also known as the Saver’s Credit. This tax break is intended to encourage low- and middle-income people, including younger workers just starting out, to save for retirement. If you qualify for the Saver’s Credit, the lower your income, the greater the percentage of retirement plan contributions you receive back on your tax return.
Also, people with disabilities with an ABLE account can benefit from the Saver’s Credit. Contributions to these accounts are eligible for credit if made by the designated beneficiary.
Who Is Eligible for the Saver’s Credit?
Couples filing separately or a single person with a modified adjusted gross income of $34,000 or less may be eligible for the 2022 tax year. Married couples filing jointly must have an adjusted gross income of $68,000 or less, while head-of-household individuals are required to have an adjusted gross income of $51,000 or less.
However, some people cannot claim the Saver’s Credit regardless of income. Taxpayers under 18, full-time students, and anyone claimed as a dependent on another person’s tax return are not eligible. For the Saver’s Credit, you are considered a “full-time student” if, during any part of the year, you:
- Â Enrolled full-time in a school (including a technical, trade, or mechanical school)
- took a full-time on-farm training course offered by a school, state, county, or local government agency.
- If you are taking an on-the-job training course,
- Â attending a correspondence school,Â
- Â participated in online classes that are only available on the Internet.
If you participated in any of the above, you are not eligible for the credit.
What is the value of the saver’s credit?
If you meet the income requirements, you can claim a tax credit of up to $1,000 for singles and $2,000 for joint filers. The credit is based on 10%, 20%, or 50% of the first $2,000 ($4,000 for joint filers) you contribute to retirement accounts such as 401(k)s, traditional IRAs, and Roth IRAs (rollover contributions do not count).
The Saver’s Credit has one unfavorable feature: it is a “non-refundable” credit. In most cases, the credit is worth as much as the tax you owe. In other words, the credit cannot reduce your tax liability to zero or produce a tax refund on its own. For example, if you owe $500 in tax before applying for the credit but qualify for a $750 Saver’s Credit, you won’t owe any tax, but you also won’t get a $250 refund. But, hey, at the very least, you’re still getting $500 off your tax bill, right?
How to Apply for the Saver’s Credit
To claim the credit, you must first fill out Form 8880, which calculates the amount of your credit. The credit amount will then be reported on Part I of Schedule 3 (Form 1040), which will then be carried over to your Form 1040. When you file your return, make sure to include Form 8880 and Schedule 3.