Saving for retirement doesn’t always come easy, but there are significant tax benefits to low- and moderate-income families who choose to prioritize these long-term savings. The Retirement Savings Contributions Credit (otherwise known as the “Saver’s Credit”), a tax credit designed to encourage retirement savings, makes it possible for individual filers to receive up to $1,000 as a tax credit, while married couples filing jointly can receive up to $2,000.
The really good news is that the Saver’s Credit works with any other retirement-based tax incentives you already benefit from. For instance, if you can already deduct your 401k contributions from your taxes, you may still be able to use the Saver’s Credit, reducing your tax liability even further.
Saver’s Credit Eligibility
Not everyone is eligible for the Saver’s Credit since it’s a tax credit designed to encourage low- to moderate-income families to start saving for retirement. Therefore, there are limits on age, income level, and filing status.
First and foremost, the following individuals are ineligible for the credit:
- Those under 18 years of age
- Those who are full-time students
- Those who can be claimed as a dependent on anyone else’s tax return
If none of these apply to you, then you may be eligible for a 10%, 20%, or 50% tax credit on your retirement contributions, up to a total contribution of $2,000 for an individual or $4,000 for a married couple filing jointly. This means an individual can receive a credit of up to $1,000 if he or she contributes $2,000 to a retirement account, while a couple can receive a credit of up to $2,000 if they each contribute $2,000 to their individual retirement accounts (50% of a $4,000 retirement contribution).
Filing Status and Income Level
The percentage credit that you’re actually eligible for is based on your filing status and income level:
- Married Filing Jointly: If you’re married filing jointly for tax year 2014, you may qualify for a credit if your adjusted gross income is $60,000 or less. The full 50% credit is for married couples making less than $36,000; the 20% credit is for those making between $36,001 and $39,000; the 10% credit is for those making between $39,001 and $60,000.
- Head of Household: If you’re filing as a head of household for the tax year 2014, you may qualify for a credit if your adjusted gross income is $45,000 or less. The full 50% credit is for individuals making less than $27,000; the 20% credit is for those making between $27,001 and $29,250; the 10% credit is for those making between $29,251 and $45,000.
- Single, Married Filing Separately, or Widow(er): If you’re filing as any of these statuses for the tax year 2014, you may qualify for a credit if your adjusted gross income is $30,000 or less. The full, 50% credit is for individuals making less than $18,000; the 20% credit is for those making between $18,001 and $19,500; the 10% credit is for those making between $19,501 and $30,000.
Remember, the credit is limited to a percentage of your retirement contributions. For instance, if a married couple filing jointly has an adjusted gross income of $37,000, and each contributes $500 to his or her respective retirement accounts, they would qualify for a 20% tax credit on the total contribution of $1,000. In other words, they would qualify for a $200 tax credit (20% of $1,000 is $200).
According to the IRS, for tax year 2010, the average Saver’s Credit was $204 for joint filers, $165 for heads of household, and $122 for single filers.
Eligible Retirement Contributions
Almost all retirement plan contributions qualify for the Saver’s Credit, including those contributed to the following:
If you participate in an employer-match retirement fund, monies invested by your employer are ineligible for the credit, while those you contribute are eligible. For instance, if you contributed $500 to your 401k, and your employer matched your contribution, only the $500 you contributed would be eligible for the Saver’s Credit.
Finally, if you recently took distributions from a retirement account, your eligibility could be reduced. In other words, if you contributed $2,000 to a retirement account, but you took a distribution of $1,000, your total saver’s credit eligibility would be reduced to $1,000 – the difference between the amount you contributed and the amount you received as a distribution.
Increased Benefit, Decreased Tax Liability
Like other tax credits, the Saver’s Credit decreases your total tax liability. The amount of tax you owe is directly reduced by the amount of credit you’re eligible for. For instance, if you owe $2,000 to the IRA but have a Saver’s Credit of $500, your tax bill would be reduced to $1,500.
However, it’s important to note that the Saver’s Credit itself is a “nonrefundable” credit. In other words, while the credit can reduce your tax liability to $0, you can’t use any “leftovers” to receive a tax refund. For instance, if your total tax liability for 2014 was $516, and you qualified for the full $1,000 Saver’s Credit, your tax liability would simply reduce to $0 – you wouldn’t be able to take the remaining $484 as a tax refund.
That said, because the Saver’s Credit applies to the first $2,000 an individual voluntarily contributes to retirement (or $4,000 for a married couple filing jointly), taking this credit makes it possible for other refundable credits to add up. The result is either a lower tax bill to Uncle Sam, or a greater end-of-year refund.
Claiming the Saver’s Credit
To include the Saver’s Credit on your 2014 tax refund, simply fill out IRS Form 8880 and turn it in with your 1040A, 1040, or 1040NR. You can’t claim the credit directly on a 1040EZ. That, or most tax prep software programs will determine if you’re eligible and apply the savings to your tax bill.
Taking Full Advantage
Even if you haven’t made significant retirement contributions so far in 2014, or want to make more, you still have time to take advantage of the Saver’s Credit. Contributions invested in a either a Roth or traditional IRA before April 15, 2015 can be claimed on your 2014 tax return. Unfortunately, contributions to an employer retirement fund, such as a 401k or 403b must be made by December 31, 2014 to qualify for the 2014 tax year.
The Retirement Savings Contributions Credit is a permanent addition to the tax code, so even if you’re unable to take advantage of the credit for 2014, start planning for the future. Talk to your employer about setting up automatic contributions to your retirement account at work or talk with your bank or a financial planner to help you determine which individual retirement account is right for you.
Saving for retirement is an incredibly important part of long-term financial planning, and the tax benefits for saving are significant. Enjoy long-term financial stability with regular contributions, while also enjoying annual reductions in tax liability – it’s like having your cake, and eating it too.
Have you used the Saver’s Credit to reduce your tax liability?