Double your retirement tax benefits

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If you contribute to a retirement savings account, either at work or on your own, you might be able to get a double tax break.

The Saver’s Credit provides low- and moderate-income workers the opportunity to offset part of their contributions to an IRA, as well as money put into a company retirement plan.

Because this is a tax credit instead of a deduction, you get more bang for your tax break buck. A tax deduction reduces your income, meaning the tax bill you compute using that income amount should be smaller.

But a credit is claimed after you arrive at your tax bill. The credit amount reduces that tax bill dollar-for-dollar. If you owe $1,000 and are eligible for a $500 credit, your tax bill is halved.

The Saver’s Credit, originally called the Retirement Saver’s Credit, was created to help workers, particularly those who stretch their day-to-day budgets to put something aside for retirement, recoup some of those contributions.

The credit could be as much as $1,000 per eligible taxpayers, meaning that for a husband and wife filing jointly, each could possibly qualify for the maximum tax break.

Just what is that maximum? It depends. There is no fixed Saver’s Credit amount. Instead, the Saver’s Credit is based on your filing status, how much you contribute to a qualified retirement account, and how much you earn. Basically, the lower your adjusted gross income (AGI), the larger your credit.

Income and contribution limits

Although you can put up to $5,000 (or more) into an individual retirement account and many thousand more into a 401(k), only $2,000 of your contributions count in figuring your credit amount.

Your actual Saver’s Credit is a percentage — either 10 percent, 20 percent or 50 percent — of that $2,000. Which percentage you use to calculate your credit depends upon your adjusted gross income. Basically, the smaller your adjusted gross income (AGI), the larger your credit.

If you’re in the lowest income range, for example, and contribute at $2,000 or more to a retirement plan, you can claim 50 percent of $2,000, or $1,000. If you’re married and both you and your spouse contribute at least $2,000 to your respective accounts, you each can take the maximum allowable credit amount for your income range, effectively doubling the tax break.

Another benefit of the Saver’s Credit is that it is an add-on to other tax advantages associated with your retirement plan contribution. For example, Joe makes $15,000 a year, which puts him in the lower AGI range for purposes of claiming the Saver’s Credit.

His employer does not offer a retirement plan, so Joe is able to deduct the $2,000 he contributed to his traditional IRA.

Thanks to the Saver’s Credit, Joe also can claim 50 percent of that same IRA contribution.

Effectively, Joe’s one retirement contribution amount has shaved $1,300 off his tax bill. His IRA deduction accounts for a $300 tax saving because he’s in the 15 percent tax bracket ($2,000 x 15 percent = $300).

Then Joe gets to subtract the full $1,000 Saver’s Credit from his eventual tax bill.

As Joe’s case illustrates, the maximum benefit of the Saver’s Credit goes to lower-income workers. It’s phased out as your AGI increases, and if you make more than the top amount in your income range, you can’t claim the credit at all.

The income ranges are adjusted annually for inflation. Form 8880, which you must file along with Form 1040 or 1040A to claim the credit, will contain the tax year’s eligible income ranges and details on how to compute your credit.

What contributions to count

Contributions you make to traditional and Roth IRAs, as well as to your workplace 401(k) plan, or similar 403(b) or 457 accounts or other IRS-qualified company plans, can be used to figure your Saver’s Credit amount.

The amount, however, is the total contributions to all these retirement plans.

If you put $2,000 into a Roth IRA and another $2,000 into your 401(k), even though you’ve contributed to two eligible retirement accounts, you can claim just one Saver’s Credit. And the amount you use to figure that credit amount is the maximum $2,000, not the $4,000 you put into all your retirement accounts.

Other requirements

There also are a few special rules that apply to the Saver’s Credit:

  • You must be at least 18 years old to claim it.
  • If you are listed as a dependent on someone else’s return, you cannot take the credit.
  • If you are a student, you cannot take the credit.

Also note that the Saver’s Credit is nonrefundable. Your credit amount can help reduce your tax bill, even zero it out, but if your credit amount is more than any tax you owe, you lose the advantage of that excess amount. You can’t claim it to get a refund.