The saver’s credit, also known as the retirement savings contributions credit, provides these taxpayers with a special tax break. They can claim the credit for a portion of the income they contribute to a qualifying retirement plan.
Tax Credits vs. Tax Deductions
To better understand the saver’s credit, it’s important to distinguish before tax credits and deductions. A tax credit is a dollar-for-dollar reduction of your gross tax liability—the total amount of taxes you’re responsible for paying as you finish your tax return. For example, you might owe the IRS $3,000, then you go back and claim a $1,000 credit. Now you’d only owe $2,000. The saver’s credit is non-refundable, which means that it can reduce your income tax liability, but the IRS won’t be sending you a check for any balance that might be left over. A deduction, on the other hand, reduced the amount of your income before you calculate the tax you owe.
Are You Eligible for the Saver’s Credit?
There are three main criteria to meet to be eligible for the saver’s credit:
You must be at least 18 years old You are not a full-time studentYou are not claimed as a dependent on another person’s tax return
How Much Can the Credit Cut Your Tax Bill?
The tax credit is 50%, 20%, or 10% of your retirement plan or IRA contributions for the year, depending on your adjusted gross income (AGI). For that reason, the saver’s credit is most beneficial for taxpayers with low incomes. The maximum credit amount is $2,000 as of 2022, or $4,000 if you’re married and filing a joint return.
Contributions for the 2021 Tax Year
Contributions for the 2022 Tax Year
Eligible Retirement Accounts
The saver’s credit can be claimed when you make contributions to certain types of retirement accounts:
Traditional or Roth IRAs401(k) plans403(b) plans457(b) plansThrift Savings Plans (TSP)SIMPLE IRAsSimplified Employee Pension (SEP) plansSection 501(c)(18) plans
Contributions aren’t eligible for the saver’s credit if you completed a rollover from a qualified plan or an IRA. Plus, your eligible contributions would be reduced by the amount received if you took any distributions from a retirement plan or IRA.
How To Claim the Saver’s Credit
File IRS Form 8880, “Credit for Qualified Retirement Savings Contributions,” to take advantage of the Saver’s Credit. You must use the Form 1040 tax return or Form 1040NR.
