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What is the Saver's Credit?

By Louis DeNicola

Need an extra incentive to save for retirement? The Retirement Savings Contributions Credit, also known as the Saver's Credit, rewards eligible taxpayers who made contributions to qualified retirement accounts with a tax credit that's worth up to $1,000 — or up to $2,000 if you're married and filing jointly.

In this article, we’ll cover:

1. Tax credits versus tax deductions
2. How to qualify for the Saver’s Credit
3. How to maximize the Saver’s Credit
4. The deadline for making a contribution

Tax credits versus tax deductions

Both tax credits and deductions can lower your tax burden, but tax credits are generally more valuable. That's because tax deductions lower your taxable income, while tax credits decrease your tax bill on a dollar-to-dollar basis.

Here’s a hypothetical example to demonstrate the difference between a deduction and a credit. If you have $10,000 worth of taxable income that's taxed at 25 percent, your tax bill would be $2,500.

If you take a $1,000 tax deduction, you'd be taxed on $9,000 worth of income, and your tax bill would be $2,250. With a $1,000 tax credit, on the other hand, your tax bill would only be $1,500.

Qualifying for the Saver's Credit

There are six basic requirements you'll need to meet to qualify for and receive the Saver's Credit:

  • You must be 18 years or older, and
  • Aren’t a full-time student, and
  • Aren't claimed as a dependent on someone else's tax return, and
  • Don't exceed the adjusted gross income limits, and
  • Make a contribution to a qualified retirement account, and
  • Complete and file Form 8880.

You're considered a student if, during any part of five months throughout the year, you were either enrolled as a full-time student or had a full-time, on-farm training course.

The credit's value is a percentage of the contributions you made to the following types of tax-advantaged retirement accounts:

  • Traditional, Roth or SIMPLE IRAs, including SEP IRAs and "myRA" accounts
  • 401(k)
  • 403(b)
  • 501(c)(18) or governmental 457(b) plan
  • Qualified retirement plans as defined in section 4974(c) (including the federal Thrift Savings Plan)
  • SARSEP

If you roll over money into one of the above accounts, it won’t count towards the credit. Only new contributions for the tax year qualify (you can also continue to make contributions to your IRA for the 2016 tax year until April 18, 2017.)

The percentage you're eligible for also varies depending on your filing status and adjusted gross income (AGI). (Your AGI is your taxable income, including wages and interest, minus certain deductions or adjustments.)

Saver's Credit rate and AGI limits for the 2016 tax year
Saver's Credit rate Maximum credit value Married filing jointly Head of household Single, Married filing separately or Qualified widow(er)
50% of your contribution $1,000 (single);
$2,000 (joint returns)
AGI not more than $37,000 AGI not more than $27,750 AGI not more than $18,500
20% of your contribution $400 (single);
$800 (joint returns)
$37,001 to $40,000 $27,751 to $30,000 $18,501 to $20,000
10% of your contribution $200 (single);
$400 (joint returns)
$40,001 to $61,500 $30,001 to $46,125 $20,001 to $30,750
0% of your contribution $0 more than $61,500 more than $46,125 more than $30,750

The credit only applies to the first $2,000 in eligible contributions, or $4,000 if you're married and filing jointly.

The amount of your contributions that qualify also might be reduced if you take distributions from a retirement plan or IRA during the same year.

Because the Saver’s Credit is a non-refundable tax credit, you’ll only receive a benefit if you owe taxes for the year. So if you don’t owe anything, you won’t receive a refund because of the credit.

Form 8880, which you'll need to complete and attach to your tax return, has instructions and guidelines that can help you determine your eligibility and the value of the Saver's Credit for you.

Make financial moves to maximize the Saver's Credit

Once you know the requirements for claiming the Saver's Credit, you can make financial moves that help you maximize its value. That's what Joseph Hogue, a Chartered Financial Analyst® and financial blogger at My Stock Market Basics, did with his wife in 2009.

Hogue recalls, "I had just gotten married and was looking for ways to save on income taxes against our new, higher joint income."

They had a combined income of about $49,000, making them eligible for a Saver's Credit worth 10 percent of their contributions. By contributing the maximum to their IRAs and selling losing investments for a short-term capital loss, they were able to lower their AGI even more.

This allowed them to get the 20-percent rate with the Saver’s Credit and lowered their tax bill for the year.

For Hogue and his wife, "getting the max Saver's Credit was worth scrimping as much as possible.”

After the new year? It might not be too late to make a contribution and claim the credit.

Many tax moves, such as selling investments for a gain or loss, or making charitable contributions, must be completed before the end of the calendar year if you want them to factor into that year's tax return.

However, you have until the filing deadline to make IRA contributions for the previous year — April 18, 2017, for the 2016 tax year, for example.

In other words, you can lower your 2016 AGI by making a qualified contribution during the first quarter of 2017. You may especially want to consider making a last-minute traditional IRA contribution if you're close to the AGI cutoff line to be eligible for the Saver's Credit.

For instance, if you file as "Single" and have an AGI of $31,000, a $250 contribution to a pre-tax retirement account will lower your taxable income to $30,750, and you'll get 10 percent of your contribution back as a credit. You'll have more money put away for your retirement years.

Even if you won't benefit from the Saver's Credit, saving for retirement in a tax-advantage account is generally a good idea.

 

About the Author: Louis DeNicola is a personal finance writer and educator. In addition to being a contributing writer at Credit Karma, you can find his work on MSN Money, Cheapism, Business Insider and Daily Finance. When he's not revising his budget spreadsheet or looking for the latest and greatest rewards credit card, you might spot Louis at the rock climbing gym in Oakland, California.

Disclaimer: We know taxes are complicated, so we provide this information for general educational purposes only. It isn’t intended to be personalized legal, financial or tax advice, and we don’t guarantee the accuracy, completeness or reliability of this content. If you have questions about your personal tax situation, consider contacting an accountant, tax attorney or financial advisor. Come back to Credit Karma Tax when you’re ready to file your taxes for free!

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