For some people, allocating even a small amount of their monthly budget for retirement is difficult. That’s where the Saver’s Tax Credit comes in. It rewards you for making retirement account contributions by giving you a dollar-for-dollar break on your tax bill, doubling the retirement savings incentive.
What is the Saver’s Tax Credit?
The Saver’s Tax Credit is a tax break the IRS gives to low and moderate income taxpayers who make contributions to their retirement accounts. The tax break is a dollar-for-dollar reduction in your tax liability based on how much you’ve contributed, your adjusted gross income (AGI), your tax filing status and a couple of other factors.
It’s important to note that this is not a tax refund. It’s a subtraction from your tax bill. That means if you owed $1,000 in income taxes for the year, and your tax credit was $500, you would still owe $500 in income taxes. In this scenario, the Saver’s Tax Credit could still result in a tax refund if, over the course of the year, you paid more than $500 in taxes. If that was the case, you would receive the difference between what you paid and what you owe in the form of a tax refund.
Who is Eligible for the Saver’s Tax Credit?
To be eligible for the Saver’s Tax Credit you must:
- Be at least 18 years of age by the end of the tax year.
- Not be a full-time student.
- Not be claimed as a dependent on someone else’s taxes.
- Pay income taxes.
- Have an AGI that falls within the IRS guidelines.
- Have contributed to a qualifying retirement account.
The following are the types of accounts which qualify for this retirement savings incentive:
- Traditional and Roth IRA
- Government issued 457
How Do I Calculate my Savers Tax Credit?
The amount of the credit you can receive depends on your adjusted gross income (AGI). The credit can be 50%, 20%, or 10% of your contributions to a retirement plan or IRA, up to $2,000 if filing single or $4,000 if married and filing jointly.
For 2022, the adjusted gross income (AGI) eligibility requirements for the Saver’s Tax Credit are:
|Credit Rate||Married Filing Jointly||Head of Household||All Other Filers*|
|50% of your contribution||AGI not more than $41,000||AGI not more than $30,750||AGI not more than $20,500|
|20% of your contribution||$41,001- $44,000||$30,751 – $33,000||$20,501 – $22,000|
|10% of your contribution||$44,001 – $68,000||$33,001 – $51,000||$22,001 – $34,000|
|0% of your contribution||more than $68,000||more than $51,000||more than $34,000|
When determining your annual contribution amount the following are excluded for the purposes of the Saver’s Tax Credit calculation:
- Rollover contributions.
- Any distributions you’ve taken during that tax year.
- Any contributions made that were in excess of the annual limit.
Here is an example:
Dylon earns $32,000 in 2022 and contributes $1,000 to her Icon account. When filing her taxes, assuming Dylon doesn’t have any other write-offs, her AGI is $31,000 and it qualifies her to claim a Savers Tax Credit of $100 (10% of her $1,000 annual contribution).
Why You Should Claim this Retirement Savings Incentive
Claiming your Savers Tax Credit is as easy as filling out Form 8880 and submitting it along with your income tax filing. And doing so doubles the retirement savings incentive. Most retirement savings plan contributions result in a tax exemption in the year they’re made, which reduces the amount of income on which income taxes are assessed. By claiming the credit, you can reduce your tax liabilities dollar-for-dollar by the credited amount.