What Is a Qualified Retirement Savings Contribution Credit?

The Qualified Retirement Savings Contribution Credit is a credit filed on a one-page tax form which is also used to calculate the amount of an individual, head of household, or married couple's saver's credit. This credit directly reduces the amount of taxes owed to the taxing authority. The credit is also known as a saver's credit and uses IRS Form 8880.

Key Takeaways

  • The Qualified Retirement Savings Contribution Credit is also known as a saver's credit.
  • Taxpayers use IRS Form 8880 for the Qualified Retirement Savings Contribution Credit.
  • As of 2019, the credit is available to single taxpayers with income up to $32,000.

Understanding the Qualified Retirement Savings Contribution Credit

The IRS offers the saver's credit to encourage low-income individuals to contribute to qualified retirement plans. Eligible qualified retirement accounts include traditional IRAs and Roth IRAs, as well as 401(k) plans, 403(b) plans, and 457 plans. Taxpayers may take advantage of this credit even when claiming deductions for their IRA contributions. As of 2018, a taxpayer who is the beneficiary may also be able to take this credit for contributions to Achieving a Better Life Experience (ABLE) savings accounts.

Eligible participants must meet adjusted gross income (AGI) limits. As of 2019, the credit is available to a single taxpayer with incomes up to $32,000. Heads of household with incomes up to $48,000, and married couples filing jointly with incomes up to $64,000 are also eligible. Additional eligibility requirements include the claimant being at least 18, not claimed as a dependent on another person's tax return, and not a full-time student. Self-employed persons are also eligible for the credit.

Preparing Form 8880

Form 8880 must accompany a 1040, 1040 A, or 1040-NR tax return. To complete the form, taxpayers need their adjusted gross income (AGI) and the totals of their contribution to a qualified plan. Credits range between 10% and 50% and are dependent on the AGI. The maximum credit is $2,000 ($4,000 for married persons filing jointly) for IRA contributions.

For example, in 2019, taxpayers who are married filing jointly may receive a credit rate worth 50% of their contributions to a qualifying plan or ABLE account if their AGI is $38,500 or less; heads of households may receive a credit rate of 50% of their AGI is $28,875; and single filers may receive the 50% credit of their AGI is $19,250 or less. Taxpayers who are married filing jointly may receive a credit rate of 20% if their AGI is between $38,501 and $41,500; heads of households may receive the 20% rate if their AGI is between $31,126 and $48,000; and single filers may receive the 20% rate if their AGI is between $20,751 and $32,000. Filers who are married filing jointly may receive the 10% credit rate if their AGI is between $41,501 and $64,000; heads of households may receive the 10% rate if their AGI is between $31,126 and $48,000; and single filers may receive the 10% rate if their AGI is between $20,751 and $32,000.

So, a single taxpayer with an income of $19,500 and IRA contributions totaling $2,000 may claim 20% of the $2,000, or $400. It is important to note that rollover contributions are not eligible. Also, distributions from a qualified plan may reduce the amount claimed for the credit. Each year, the IRS updates income and contribution limits, which is on its website, www.irs.gov.