Saver's Credit: What It Is and How It Works
It can be difficult for many people to consistently put aside the money they need to save for retirement. Thankfully, the Retirement Savings Contribution Credit (RSCC), a non-refundable tax credit, can greatly facilitate financial planning for retirement.
Commonly known as the "saver's credit," it provides low-income individuals and families with additional tax benefits on top of any deductions for IRA and 401(k) contributions they may have already received. The credit reduces the taxpayer's annual income tax bill, which in turn reduces the out-of-pocket expense of contributing to a retirement account and, in the long run, increases the retiree's savings.
How Much Can You Save With the Saver's Tax Credit?
Eligible taxpayers can claim the saver's tax credit if they make contributions to qualified retirement plans such as a 401(k), 403(b), SIMPLE IRA, SEP, TSP, or government 457 plan offered by their employer. Those who make contributions to traditional or Roth IRAs can also take advantage of this. Those who contribute to ABLE accounts (accounts for people with disabilities and their families) on behalf of others can receive the saver's credit as well.
The saver's tax credit income thresholds for the 2022 tax year are as follows: $68,000 for joint filers, $51,000 for HOHs, and $34,000 for singles and those filing separately from couples. The income thresholds for various tax filing statuses in 2023 are as follows: $73,000 for joint filers, $54,750 for heads of household, and $36,500 for singles and those in separate filing statuses.
Limits have been set for how much can be contributed. If you are single and filing taxes as a head of household in 2022, the most you can contribute is $2,000. The limit for joint filers is $4,000 for married couples. Therefore, a married couple filing jointly can claim a maximum credit of $2,000 (50% x $4,000) and a single person can claim a maximum credit of $1,000 (50% x $2,000).
Who Is Eligible?
A person must not be claimed as a dependent on another person's tax return and be at least 18 years old by the end of the tax year in question in order to be eligible for the saver's credit. Additionally, they cannot be enrolled as full-time students during the tax year.
For the year 2023, for instance, Beth, who files as a single taxpayer, has an adjusted gross income of $19,200. She also puts $600 into a traditional IRA in addition to the $800 she puts into her company's 401(k) plan. This means that Beth is entitled to a nonrefundable tax credit of $700 [($800 + $600 = $1,400) 50%].
Financial Impact of the Saver's Tax Credit
A person's income tax liability can be reduced by making retirement plan contributions and claiming a saver's credit. To begin, you can reduce your taxable income by the amount you put into your retirement plan. One additional benefit is that the saver's credit reduces tax liability by the same amount saved.
Take the following as an example: Jessica is a married clerk that is earning $38,000 in 2023. She put away $1,000 in her IRA that year, while her unemployed husband had no income. She contributed to an IRA, so her adjusted gross income (AGI) for filing jointly is $37,000 after deductions. Jessica can deduct $500 from her taxes because she put that money into an IRA, and the government will give her a tax break for it.
An individual's credit is calculated based on their total contributions and their adjusted gross income. When finished, they must attach Form 8880 to their tax return and enter the credit amount on Form 1040.
The Tax Break for Savers: How to Apply
Taxpayers who make contributions to qualified retirement plans offered by their employers, Individual Retirement Accounts (IRAs), or Achieving a Better Life Experience (ABLE) Plans are eligible to claim the Saver's Tax Credit by filing IRS Form 8880. Only taxpayers whose combined income does not exceed the threshold for their filing status should use this form to report their contributions.
How Much Credit Does the Saver Have?
In order to encourage middle and low income taxpayers to put money away for retirement, the government offers a tax credit of up to $1,000 ($2,000 if filing jointly) for those who do so.
Who Gets the Tax Break for Saver's Credit?
If you are not a full-time student and do not qualify as a dependent for another taxpayer, you may be eligible for the saver's credit if you are 18 or older. But that does not guarantee you will get it; you also need to contribute to a retirement plan or IRA and have an adjusted gross income that does not exceed the limits set by the Internal Revenue Service.
You would not qualify for the saver's credit if your AGI is more than the following levels:
- $68,000 as a married joint filer in 2022; $73,000 in 2023.
- $51,000 as a head of household filer in 2022; $54,750 in 2023.
- $34,000 as any other filing status in 2022; $36,500 in 2022.
The Value of the Saver's Credit
The maximum value of the saver's credit is $1,000 ($2,000 if filing jointly). Remember that a credit is superior to a deduction in the following ways: A tax credit reduces your taxable income by the same amount that you claim it, while a tax deduction only reduces the portion of your income that you have to pay taxes on. (Learn the distinctions between tax credits and deductions)
Your contributions to a traditional or Roth IRA, 401(k), SIMPLE IRA, ABLE account, SARSEP, 403(b), or 457(b) plan determine the amount of your saver's credit. Based on your filing status and AGI, you could receive a 50%, 20%, or 10% contribution match, respectively.
Rollovers from an existing account, such as a 401(k) rollover into an IRA, do not count as qualifying contributions for the saver's credit.
Savings Credit Value Calculation
As opposed to many IRS regulations, the math involved here is straightforward: The credit is worth fifty percent, twenty percent, or ten percent of a maximum contribution of two thousand dollars ($4,000 for married taxpayers filing jointly).
Let us say your adjusted gross income as a single taxpayer is $19,000, and you put $1,000 into a tax-deferred account. Your $500 saver's credit is worth its full value. Due to the maximum, your credit would only be worth $1,000 even if you contributed $5,000 to a qualified account.
The amount you contribute to a tax-deferred retirement account (like a traditional IRA, 401(k), or similar account) can reduce the amount of income tax you owe.
When are 401(k)s and other retirement plans disqualified?
Any excess contributions to a retirement account must be withdrawn within a specified time frame. The saver's credit cannot be applied to the amount that was returned. Similarly, if a worker transfers funds from an old employer's 401(k) to a new employer's traditional IRA, the money in the latter account will not be eligible for the saver's credit because it was previously contributed to the former account.
How Much Is the Saver’s Tax Credit?
You can get a tax break for saving for retirement if you contribute 10%, 20%, or 50% of your income to a qualified retirement plan (QRP). The size of the credit is calculated as a percentage of the total amount contributed. Credits range from 10% for those in the highest tax bracket to 50% for those in the lowest tax bracket, depending on their adjusted gross income (AGI). The maximum amount of the credit is $2,000 for a married couple filing jointly and $1,000 for an individual.
When you receive a tax credit, the amount of taxes you owe is reduced by the same amount. It is preferable to a tax deduction, which simply reduces taxable income. Eligible taxpayers can claim the saver's credit if they make contributions to a qualified retirement plan, ABLE plan, traditional IRA, or Roth IRA. Retirement plan contributions, tax filing status, and adjusted gross income are just a few of the factors that go into calculating the amount of the credit (AGI).
No one can claim this credit if they are under 18 or if they are enrolled as a full-time student. You can figure out your Saver's Tax Credit and file for it using Form 8880. Increased retirement savings potential thanks to the saver's credit. Those who are eligible for this credit but fail to claim it are missing out on a straightforward way to significantly bolster the value of their savings accounts.
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This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.