Formerly called the Retirement Savings Contributions Credit, the Saver's Credit gives a special tax break to low-to-moderate-income workers who are saving for retirement. Contributions to a traditional or Roth IRA, 403(b), 457 and 401(k) plans are eligible to claim the saver's credit, a tax credit worth up to $1,000 for individuals and $2,000 for married couples. Workers can claim this credit in addition to the tax deduction they get for their retirement-account contributions. According to one survey, only 12 percent of American workers with annual household incomes of less than $50,000 are aware of the Saver's Credit.
Here are five things the IRS wants you to know about the Saver's Credit:
Income limits. For the 2020 tax year, the Saver's Credit applies to individuals with a filing status and income of:
- Single, married filing separately or qualifying widow(er), with income up to $32,500;
- Head of household with income up to $48,750;
- Married filing jointly, with incomes up to $65,000.
- As a rule, the lower your income, the bigger your credit.
Eligibility requirements. To be eligible for the credit, you must be at least 18 years of age, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person's return. Additionally, if you have taken any distributions or withdrawals from a retirement account in the past two years (i.e., 2018 or 2019) your Saver's Credit will be reduced or eliminated.
Credit amount. If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000, or up to $2,000 if filing jointly. Because the tax break is a credit instead of a deduction, it's a better deal. Tax deductions reduce taxable income, but credits reduce your tax bill dollar for dollar. The credit is a percentage of the contribution amount, with the highest rate for taxpayers with the least income.
Double tax benefits. The Retirement Savings Contributions Credit is in addition to other tax benefits which may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. For example:
Jill is single and earned $16,500 in 2020. Jill contributed $1,000 to her traditional IRA in 2020. Jill is entitled to a 50-percent tax credit on her contribution = $500. Also, her contribution is tax-deductible, and since she is in the 12-percent bracket, she will receive an additional $120 tax deduction. In the end, Jill contributed $1,000 into her IRA and reduced her taxes by $620. Yes, she gets a double-tax benefit for her contribution!
Forms to Use. To claim the credit, use Form 8880, Credit for Qualified Retirement Savings Contributions. You can only claim the Saver's Credit if you use Form 1040 or 1040NR to file your Federal tax return.
For more information, see IRS Publication 590, "Individual Retirement Arrangements."
Barry Lisak is an IRS Enrolled Agent, meaning that he has passed special U.S. Treasury Department exams that qualify him to represent clients dealing with audits or tax-resolution cases. Any questions can be directed to him at (516) TAX-SAVE, or firstname.lastname@example.org.
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