What is the Saver’s Credit

The saver’s credit, formerly called the retirement savings contributions credit, is a tax credit that can be claimed by middle and lower income taxpayers who contributed to a retirement account during the tax year. The credit is worth up to $1,000 for individuals, and a maximum $2,000 for a married couple filing jointly.

If this is the first you’re hearing about the saver’s credit, well, that’s common. A survey from the Transamerica Center for Retirement Studies found only 38% of U.S. workers were aware of the tax break.

WHO CAN CLAIM THE SAVER’S CREDIT

To be eligible, you must be at least 18 years old, cannot be a full-time student and cannot be claimed as a dependent on someone else’s tax return.

Next, you must contribute to a retirement plan, which can be a 401(k) or other employer-sponsored plan, or a traditional or Roth IRA. And, your earnings must not top the credit’s income thresholds.

HOW DO YOU QUALIFY FOR THE SAVER’S TAX CREDIT

You can take the saver’s credit if your adjusted gross income falls below these limits:

  • $65,000 for a married couple filing jointly in 2020, $66,000 in 2021.
  • $48,750 for a head of household in 2020, $49,500 in 2021.
  • $32,500 for all other taxpayers (including individuals) in 2020, $33,000 in 2021.

Not eligible? You can probably find plenty of other ways to get more from your retirement savings, especially by working with a financial adviser.

WHAT IS THE SAVER’S CREDIT WORTH

The dollar value of the saver’s credit is calculated based on your income, your tax filing status, and the amount you contribute to an eligible retirement account during a tax year. You may be eligible to claim 50%, 20% or 10% of the first $2,000 you put in if you’re an individual, or $4,000 if you’re a married couple who files a joint return.

What that means is the saver’s credit is worth up to $1,000 for individuals, or $2,000 for married couples filing jointly.

If you want to use the credit when you file in 2021 — on your 2020 tax return — use the table below to see if your income would qualify you for the 50%, 20% or 10% credit.

If you’re married and file jointly

  • You can take the 50% credit if your adjusted gross income is $39,000 or less.
  • You can take the 20% credit if your adjusted gross income is between $39,001 and $42,500.
  • You can take the 10% credit if your adjusted gross income is between $42,501 and $65,000.
  • You get no credit if your adjusted gross income is over $65,000.

If you file as a head of household

  • You can take the 50% credit if your adjusted gross income is $29,250 or less.
  • You can take the 20% credit if your adjusted gross income is between $29,251 and $31,875.
  • You can take the 10% credit if your adjusted gross income is between $31,876 and $48,750.
  • You get no credit if your adjusted gross income is over $48,750.

For all other taxpayers (including individuals)

  • You can take the 50% credit if your adjusted gross income is $19,500 or less.
  • You can take the 20% credit if your adjusted gross income is between $19,501 and $21,250.
  • You can take the 10% credit if your adjusted gross income is between $21,251 and $32,500.
  • You get no credit if your adjusted gross income is over $32,500.

WHAT ACCOUNTS ARE ELIGIBLE

The IRS gives you several tax-advantaged options for saving for retirement — and taking advantage of the saver’s credit.

In addition to a 401(k), you can contribute to a traditional or Roth IRA, a SIMPLE IRA, 403(b) plan (for certain employees of public schools and tax-exempt organizations) or through the Thrift Savings Plan, which is open to federal employees and members of the uniformed services.

The IRS also extends the saver’s credit to Americans with ABLE accounts, which are savings plans for people with disabilities.

MAKE SURE YOU MEET THE DEADLINE

The cutoff for many tax breaks is the end of the calendar year. For example, any donations to charity that you write off on your 2020 return must have been made during 2020.

But, you can make retirement contributions right up to the April tax deadline that count toward the saver’s credit for that tax year.

To claim the saver’s credit, you must complete IRS form 8880 and include it with your tax return. You’ll need two key pieces of information to fill out Form 8880: your adjusted gross income you calculated on your income tax return, and documents that show your retirement contributions for the year.

Claiming your saver’s credit is a lot easier with the help of a financial advisor on your side.  Contact Coach Pete D’Arruda and his team to help you get the most out of your tax return and retirement.