What is the Saver’s Tax Credit?

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If you’ve been thinking of setting aside some money for retirement, but just haven’t gotten around to it, the Saver’s Tax Credit might be just the incentive you need to start saving.  The tax credit is designed to help low to moderate income earners who put money into a 401(k), IRA, or similar retirement fund.  If you qualify, the Saver’s Tax Credit can save you up to $1,000, or $2,000 if you are filing jointly.

As with any tax credit, there are certain requirements you must meet to qualify for the savings:

1. You have to be making retirement account contributions.
2. You have to be at least 18 years old
3. You cannot be a full-time student.
4. You cannot be claimed as a dependent on someone else’s tax return.
5. Your Adjusted Gross Income (AGI) must fall below the specified level.

You should be able to know fairly quickly if you meet qualifications one through four.  However, figuring out if you fall into the eligible income category might be a little trickier.  We’ll help you sort through it.  Your AGI is your total income minus all tax deductions for which you qualify.  Once you figure that out, you just have to see whether you fall below the AGI limit.

• If you’re a single filer this year, your AGI limit is $28,500
• If you’re the head of a household, your limit is $42,375
• If you’re a married couple or joint filer, your limit is $56,500

Depending on your income, your tax bill will be reduced by a percentage of the amount you contribute to your retirement fund—ranging from 10% to 50%.  Let’s look at an example to get a better understanding of how the Saver’s Tax Credit works.  Let’s say Tom is a single filer who qualifies for a 20% Saver’s Tax Credit.  His AGI is $24,000 after he contributes $2,000 to his employer’s 401(k) plan.  Tom receives a tax credit equal to 20% of his total contribution of $2,000.  That means Tom will pay $400 less in taxes!

If you qualify for the Saver’s Tax Credit, all you have to do is fill out the correct forms.  Many low-to-mid earners use the 1040EZ form to file taxes.  Unfortunately, this is a problem because the credit can only be claimed on Forms 1040A, 1040, and 1040NR.  The tax credit can significantly reduce your tax bill, so you might seriously consider switching forms.  If you use software to fill out your taxes, make sure you answer all the questions about the Saver’s Credit, Retirement Savings Contributions Credit, and Credit for Qualified Retirement Savings Contributions.  Answering these questions can help guide you in the right direction and ensure you receive your tax credit.  If you don’t use software, but instead prepare your taxes by hand, complete Form 8880.  This form will help you find your credit rate, which will tell you the exact amount you will save.  You will then transfer that figure to Form 1040A, 1040, or 1040NR.

This credit is designed to help workers who contribute money towards their retirement.  Unfortunately, only 12% of full-time workers in households making less than $50,000 know about it.  Don’t be part of that 88% and miss out on this easy savings opportunity.

Published or updated March 8, 2011.