Posted by Unifirst Financials & Tax Resources

What Is the Saver’s Credit?

What Is the Saver’s Credit?

Setting out some amount for retirement may look like a severe task when you are trying to meet up other competing issues such as paying off debt or gathering up saving for short term objectives or emergency. Fortunately, the IRS has made available an additional incentive via an individual tax credit made solely for low and average income taxpayers to  encourage saving more for retirement

Saver’s Credit is formerly known as Retirement Saving Contributions Credit. The Saver's Credit is a small- known tax credit that can cut or even eliminate your tax bill. The average credit gives a particular break to low and moderate -income taxpayers that are saving for retirement. This credit is a plus to the other tax advantage for keeping in a retirement account. If you are eligible, a Saver's Credit could reduce or even totally cancel your tax bill. 

It is unfortunate that many taxpayers don’t make use of this break because they are not aware of it. It has been shown by research that only 12% of American labor force having a yearly income of $50,000 is mindful of the Saver's Credit. The tax credit is removed directly from the amount owed in taxes on a dollar- for dollar basis, whereas tax subtractions are removed as a percentage from your gross income

How much could the Saver's Credit Reduce from my Bill?

You could lay claim on the credit for 10%, 20% or 50% of the first $2,000 you contribute in the year to a retirement account depending on your adjusted gross income and tax filing status. 

The maximum credit amount a couple filing together could claim together is $2,000. But if any of you took a taxable distribution out of your retirement account during the two years before the fixed date for filing your return, that distribution will cause a reduction in the amount of Saver's Credit made available to you.

The Saver's Credit is a non- refundable credit, this implies that this credit can reduce the tax you owe to zero, but it is not able to provide you with a tax refund.

Which Retirement Account Qualify for the Credit?

The claim could be based on the Saver's credit for contributions made to a 401k, 403(b), 457 plan, a SEP IRA or a Simple IRA. Your donations made to a Roth IRA or traditional IRA is also qualified for the Saver's Credit.

Am I qualified?

To claim a Saver's credit, you must be an 18years old and above, and you cannot be claimed as a dependent on a person's tax return or be a full-time student. Your retirement contributions must be made during the tax year that you choose to file your return, and the requirements must be met.

The maximum adjusted gross income for Saver's Credit in 2018 is $63,000 for a couple filing jointly, $47,250 for a leader of a household and $31,500 for other taxpayers. The highest credit you can claim erases as there is an increase in your income.

CreditSingle Filer              Head of Household        Joint Filers

50%$19,000 or less$28,500 or less$38,000 or less

20%$19,001-$20,500$28,501-$30,750$38,001-$41,000

10%$20,501-$31,500$30,751-$47,250$41,001-$63,000

 Examples 

1. George and Vivian are married and file jointly. George will contribute $1,000 to his 401(k) plan this year. Vivian will make a contribution of $1,000 to an IRA.  Their 2018 adjusted gross income is $33,500. 

Each of them is, therefore, qualified to lay claim on 50% credit for their contributions; their credits are worth $1,000 together.

2. Veronica files as a leader of a household. She will make a contribution of $1,200 to her 403(b) plan this year. If her 2018 adjusted gross income is $28,000, she can lay claim of a 20% Saver's Credit for her contribution of $240.

How do I claim Saver's Credit? 

Form 8880, "Credit for Eligible Retirement Savings Contributions “is required to claim the credit.

For tax years before 2018, the claim of the Saver's Credit could be made if you use form 1040A, 104NR, or 1040 to file your federal tax return.

Starting from 2018 forms 1040EZ and 1040A were no more used. They have been replaced with a new 1040 form. 

Using TurboTax TO prepare your taxes, we enable you to locate all deductions and credits for which you are eligible.

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