Posted by Fletcher Accounting and Tax Service Inc.

What is Savers Credit and What Can It Do For You

What is Savers Credit and What Can It Do For You

If you’re one of the many taxpayers who will be retiring soon and are currently saving for it, then you need to know about Savers Credit or formerly known as the Retirement Savings Contribution Credit. It gives a special tax break to low-and-moderate-income taxpayers aside from other tax benefits for saving in a retirement account. It’s important that you know about this because it may reduce or even eliminate your tax obligation once you qualify.

Since most qualified taxpayers don’t know about this tax break, not many of them are able to take advantage of it. A recent survey showed that only 12% of American workers earning an annual household income of less than $50,000 are knowledgeable about the Savers Credit.

How much is your tax savings after Savers Credit?

You can claim the credit for 50%, 20%, or 10% of the first $2,000 that you contributed within the year to your retirement account. This means your savings will depend on your adjusted gross income and the status you take for filing. The maximum credit amounts you can therefore claim are $1,000, $400 or $200.

If you and your spouse decide to file jointly, the biggest amount you can claim together is $2,000. However, if both or either of you received taxable distributions from your retirement account during the two years before the due date for filing your tax return, the Savers Credit available for you will be reduced because of the distribution.

Although your tax obligation may be reduced to zero, Savers Credit won’t provide you with a tax refund since it is a considered as a non-refundable credit.

How to find out if your retirement account qualifies for Savers Credit?

If you have the following retirement accounts, you will be able to claim the Savers Credit for your contributions:

  • 401k
  • 403 (b)
  • 457 Plan
  • Simple IRA
  • Traditional IRA or Roth IRA

Take note that you can’t claim your employer’s contributions to 401k, 403(b), 457 plan, Simple IRA or SEP IRA accounts.

How to find out if you qualify?

A Savers Credit is only available for individuals aging 18 or older, those who are not a full-time student or be claimed as dependents on another person’s income tax return. Your retirement contribution must also be made during the tax year for which your tax return is filed as well as meet the income requirements.

The maximum adjusted gross income in 2017 for Savers Credit eligibility is $61,500 for a married couple filing jointly, $46,125 for a head of household, and $30,750 for all other taxpayers. As your income increases, the maximum credit you can claim phases out.

2017 Adjusted Gross Income:

Credit  Single Filer         Head of Household    Joint Filers

50%    $18,500 or less        $27,750 or less     $37,000 or less
20%    $18,501-$20,000    $27,751-$30,000    $37,001-$40,000
10%    $20,001-$31,000    $30,001-$46,500    $40,001-$62,000

There are some taxpayers who are slightly above the income cut-off but can still qualify. They do it by pushing their income below the threshold for the Saver’s Credit by opening a tax-deductible IRA instead of having a Roth IRA.

What should I do to claim the Savers Credit?

You will be required to use Form 8880 or the Credit for Qualified Retirement Savings Contributions in order to claim Savers Credit.

When filing your federal tax return, make sure you use form 104A, 1040, or 1040NR to be able to claim the Savers Credit. The IRS included information about the Savers Credit in the instructions for Form 1040EZ, however, those instructions will direct you to a different form. You won’t be able to claim the Savers Credit on Form 1040EX.

It’s unfortunate that not all taxpayers know about Savers Credit since it is supposed to help qualifying individuals who are going through difficulties in saving for retirement but manage to do so. The Savers Credit does not only reduce your 2017 tax bill but it will also pay you back for saving for your retirement.
If you’re still not sure what Savers Credit is and what other tax credits are available for you, consult a tax professional to help find the tax breaks you qualify for. There are tons of tax experts who can handle all the necessary steps in your behalf for a stress-free filing of income tax return.

Fletcher Accounting and Tax Service Inc.
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