What is the Saver’s Credit and How to Claim the Saver’s Credit?
The Savers Credit gives a special tax break to low- and moderate-income taxpayers who are saving for retirement.
The Saver’s Tax Credit is a tax benefit for workers who make contributions to a retirement plan or Individual Retirement Account (IRA). The Saver’s Tax Credit is referred to in IRS tax forms as the “Credit for Qualified Retirement Savings Contributions.”
This non-refundable credit may be particularly valuable for workers in areas where matched-savings plans, such as Individual Development Accounts (IDAs), are not available or when saving for retirement is a high priority.
Saver’s Credit Income Limits
The income thresholds for the credit change each year to keep pace with inflation. You can find the income limits for the current tax year in the table below.
This tax benefit is designed to give low- to moderate-income taxpayers an additional incentive to save for retirement.
To be eligible, you must meet all of the following requirements:
Be 18 or older
Not be a full-time student
Not be claimed as a dependent on another person’s return
Meet the limits for adjusted gross income, also known as AGI
For the purposes of this credit, you are considered a full-time student for the year if during any part of five calendar months of the tax year you were enrolled as a full-time student at a school or took a full-time on-farm training course given by a school or a state, county or local government agency.
You also need to contribute to a qualified retirement plan, such as a traditional or Roth IRA, 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18), or a governmental 457(b) plan.
Saver’s Credit Checklist
Check these rules, tips and realities off your list before claiming the Saver’s Credit for the 2020 tax year:
1. Age limits
To earn the tax credit, the individual or dual filers must be 18 years or older (not a problem for most retirement savers,) can’t be full-time student, and must not be claimed as a dependent on another individual’s tax return.
2. Retirement plan mandates
There are several caveats on what contributions to a retirement plan can be taken by someone looking to benefit from the Saver’s Credit. For instance, the credit is allowable for plan contributions to the following retirement plan vehicles:
A traditional or Roth IRA
A SIMPLE IRA
A SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan
Any voluntary after-tax employee contributions to qualified retirement and 401(k) and 403(b) plans.
3. Calendar limits
Allowable contributions must be made by the end of the tax year by the end of the calendar year. For example, to qualify for this tax benefit, the retirement saver must have made contributions to a qualified plan by Dec. 31, 2020.
There is a grace period for IRA contributions – they’re allowed to be made by April 15 of the next calendar year.
4. No “old money” rollovers
The IRS also places limits on what accountants call “new” retirement funds. That means old retirement plan contributions, specifically retirement plan rollovers, aren’t allowable per the Saver’s Credit.
5. No refund
The credit is deemed as ‘non-refundable’ by the IRS. In other words, the Saver Credit can significantly reduce your tax burden, but it won’t lead to any type of tax refund.
6. No early distributions without repercussions
You’ll be nicked by Uncle Sam if you accept any early distributions from a 401(k), IRA, or other retirement plans. If that’s the case, any tax credit savings can be significantly reduced for anyone who took out early retirement plan distributions.
The IRS is fairly explicit on how retirement savers can claim the Saver’s Credit. Below are the guides you should follow, if you’re eligible, and get your tax credit:
Use Form 8880:
The IRS tax form needed to file for the Saver’s Credit is Form 8880. The form is straightforward and will walk you through the steps needed (and the rules that apply to) this benefit.
There is no EZ Form:
Starting with the 2018 tax year, taxpayers could no longer use either IRS tax form 1040EZ or 1040A. Instead, the IRS is mandating that Saver’s Credit tax filers to use the new 1040 tax form.
There is an out for retirement savers who want to amend an old tax return. For years prior to 2018, the Saver’s Credit can be amended using either tax form 1040A or 1040EZ.
If you’re unsure of exactly how to proceed in claiming the Saver’s Credit, and you file using a professional tax service like H&R Block (HRB) – Get Report, TurboTax, TaxSlayer or even your local accountant, chances are they’ll handle the Saver Credit filing for you.
Still, it’s a good idea to check, especially to make sure that tax form 8880 is filed and that you’re eligible to receive the Saver’s Credit in the 2019 tax year, and going forward after that.
The Saver’s Credit is a great way for low- and moderate-income individuals or couples to save for retirement while also saving money on their taxes. The credit is worth a maximum of $1,000 ($2,000 if you file jointly) and there are three tiers of the credit.
Filers at the lowest income level qualify to receive a credit worth up to 50% of their contributions to a retirement account. As your income increases, the credit for which you qualify is smaller, providing a credit of either 20% or 10% of your contributions.
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