retirement

The Saver’s Tax Credit is a tax benefit for workers who make contributions to a retirement plan or Individual Retirement Account (IRA). The Saver’s Tax Credit, is referred to in IRS tax forms as the “Credit for Qualified Retirement Savings Contributions.” This non-refundable credit may be particularly valuable for workers in areas where matched-savings plans, such as Individual Development Accounts (IDAs), are not available or when saving for retirement is a high priority.


ELIGIBILITY

To claim the Saver’s Tax Credit, taxpayers must:

  • be age 18 or older;
  • not be full-time students;
  • not be claimed as a dependent on someone else’s return; and
  • have adjusted gross income in 2016 under:
    • $61,500 if married filing jointly
    • $46,125 if filing as head of household
    • $30,750 if filing single or married filing separately

Unlike the Earned Income Tax Credit (EITC), workers who don’t owe income tax cannot claim the Saver’s Tax Credit. Some moderate-income workers with children may get a larger EITC when they contribute to a retirement account through pre-tax salary deductions and claim the Saver’s Tax Credit.

Most EITC claimants who make contributions for retirement through pre-tax salary deductions are in the “phase- down” range of the EITC, where the credit decreases as taxable income increases. Since the salary deductions made for retirement reduce the worker’s taxable income, the worker will qualify for a larger EITC.

Example: Randy and Meg are married, earned $33,000 in 2016 and have two children attending college full-time. They ordinarily would owe income tax of $410 and would qualify for an EITC of $3,684. Since they made contributions of $1,000 to Meg’s retirement plan at work through pre-tax salary deductions in 2016, their taxable income is reduced to $32,000. Their income tax is now $310 and since only their $32,000 in taxable earnings is considered in calculating the EITC, they qualify for a higher credit of $3,895. They can claim the Saver’s Tax Credit (in their case worth up to 50 percent of their $1,000 contribution — as much as $500 in reduced income tax), which eliminates their $310 income tax. Overall, by making the $1,000 contribution to Meg’s retirement account and taking the Saver’s Tax Credit, the couple gets a tax benefit of $621.

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QUALIFYING CONTRIBUTIONS

Employer-Administered Retirement Plans

Retirement contributions made through pre-tax salary reduction to the following types of plans are eligible:

  • a 401(k) plan, including a SIMPLE 401(k)
  • a section 403(b) annuity
  • a governmental 457(b) plan
  • a SIMPLE IRA plan
  • a salary reduction SEP (Simplified Employee Pension)

Individual Retirement Accounts

Contributions to both traditional and Roth IRAs are eligible for the Saver’s Tax Credit. Workers that can deduct IRA contributions can do so and also claim the credit.

Voluntary after-tax contributions to a qualified retirement plan or 403(b) annuity also qualify for the Saver’s Tax Credit.

Siblings


BENEFITS

Workers can receive a tax credit worth up to 50 percent of a maximum $2,000 contribution. Married workers may each make the maximum contribution. The credit amount is based on the worker’s adjusted gross income for the tax year.

2016 Adjusted Gross Income

Married Filing Jointly Head of Household All Other Filers Credit
$0 – $37,000 $0 –  $27,750 $0 –  $18,500 50% of contribution
$37,001 –  $40,000 $27,751 – $30,000 $18,501 –  $20,000 20% of contribution
$40,001 –  $61,500 $30,001 – $46,125 $20,001 – $30,750 10% of contribution
More than $61,500 More than $46,125 More than $30,750 Credit not available

CLAIMING THE CREDIT

Workers must complete IRS Form 8880,“Credit for Qualified Retirement Savings Contributions,”  enter the amount of the credit on Form 1040 or 1040A, and submit Form 8880 with the tax return.


ADDITIONAL RESOURCES

See Chapter 3, “Retirement Savings Contributions Credit (Saver’s Credit),” in the following IRS publications:

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