Tax Credit for Contributions to Your Retirement Accounts
If your adjusted gross income (AGI) is below a certain amount, you may be eligible to receive a nonrefundable tax credit for contributions to your retirement accounts, thereby lessening the cost of making the contributions. This nonrefundable credit is referred to as the saver’s tax credit (saver’s credit), and can reduce your federal income tax on a dollar-for-dollar basis.
In order to be eligible for the saver’s credit, you must meet a few requirements. These include the following:
- You must be at least 18 years of age,
- You should not be a full-time student, and
- You must not be claimed as a dependent on someone else’s return.
In addition to these requirements, your AGI must not exceed certain amounts, and the amount of credit for which you are eligible is also subject to AGI limits. The saver’s credit can be claimed by:
- Married couples filing jointly with incomes up to $59,000 in 2013 or $60,000 in 2014;
- Heads of Household with incomes up to $44,250 in 2013 or $45,000 in 2014; and
- Married individuals filing separately and singles with incomes up to $29,500 in 2013 or $30,000 in 2014.
The dollar amount of credit is limited to $1,000 per individual, $2,000 for married couples.
You may claim the credit for the following types of contributions:
- Pre-tax salary deferral contributions to 401(k), 403(b) annuity, eligible deferred compensation plan of a state or local government [457(b) or governmental 457 plan], SIMPLE IRAs and salary reduction SEPs (SARSEPs).
- Voluntary after-tax employee contributions to a qualified retirement plan or section 403(b) annuity. and
- Contributions to traditional IRAs and Roth IRAs.
You can split the contribution among more than one of these accounts, or deposit the entire amount to one account.
Distributions Can Reduce the Saver’s Credit
Certain distributions can reduce the contribution eligible for the saver’s credit. These include any taxable distributions from a retirement plan or IRA:
- That is received during the year that the credit is claimed
- During the two preceding years, or
- During the period after the end of the year for which the credit is claimed and before the due date for filing your tax return for that year.
A distribution from a Roth IRA that is not rolled over is taken into account for this reduction, even if the distribution is not taxable.
How to Claim the Credit
The saver’s credit is claimed by Filing IRS Form 8880 and following the instructions provided on the form. These include instructions on how to indicate the correct amount on Form 1040.
Form 8880 must be attached to Form 1040 in order for the IRS to approve the claim.
Other Features and Benefits
Other features of the saver’s credit include the following:
- It may be claimed for the same year that you claim a deduction for a traditional IRA contribution. For those eligible for the deduction, this means double benefits,
- It will not change the amount of your refundable tax credits, such as the earned-income-credit or the refundable amount of the child-tax-credit,
- The saver’s credit for any year cannot exceed the amount of tax that you would otherwise pay (not counting any refundable credits or the adoption credit) in any year,
- Your tax liability is reduced to zero because of other nonrefundable credits, such as the Hope Scholarship Credit, you will not be entitled to the saver’s credit , and
You can also use the saver’s credit to offset both an alternative minimum tax liability and a regular income tax liability.