Qualified Retirement Savings Contribution Credit

What Is a Qualified Retirement Savings Contribution Credit?

The Qualified Retirement Savings Contribution Credit, often abbreviated as the "saver's credit," encourages low-income individuals to contribute to their qualified retirement plans by ultimately reducing their overall tax obligations. It is filed on the one-page IRS Form 8880, which is used to calculate saver's credits by individuals, heads of household, or married couples. 

Understanding the Qualified Retirement Savings Contribution Credit

The qualified retirement accounts eligible for saver's credit include traditional IRAs, Roth IRAs, 401(k) plans, 403(b) plans, and 457 plans. Taxpayers may take advantage of this credit even when claiming separate deductions for their IRA contributions. Furthermore, a taxpayer who is the beneficiary may also be entitled to receive this credit for contributions to Achieving a Better Life Experience (ABLE) savings accounts.

To take advantage of this credit, claimants must satisfy a host of eligibility requirements. First and foremost, they must be at least 18 years old and they cannot be claimed as dependents by other individuals. Eligible participants must also meet adjusted gross income (AGI) limits. As of 2023, the Saver's Credit is available to single taxpayers with maximum incomes of $36,500, heads of household with maximum incomes of $54,750, and married couples filing jointly with maximum incomes of $73,000. Although full-time students are not eligible for this credit, self-employed individuals may participate in this program.

Preparing Form 8880

Form 8880 must accompany Form 1040, Form 1040-SR, or Form 1040-NR in your tax return. To complete the form, taxpayers must declare their AGIs, as well as the total amount of their contributions to a given qualified plan. Credits range between 10% and 50%, depending on the AGI. For IRA contributions, the maximum allowable credit is $2,000 for individuals and $4,000 for spouses filing jointly.

Consider the following breakdowns, for tax filers, as of 2023:

• Married taxpayers filing jointly may receive a credit worth 50% of their contributions to a qualifying plan or ABLE account if their combined AGI is $43,500 or less. Heads of households may receive a 50% credit if their AGIs are $32,625 or less. And single filers may receive the 50% credit if their AGIs are $21,750 or less.
• Married taxpayers filing jointly may receive a credit worth 20% of their contributions to a qualifying plan or ABLE account if their combined AGI ranges between $43,501 and $47,500 in 2023. Heads of households may receive a 20% credit if their AGIs range between $32,626 and $35,625. And single filers may receive the 20% credit if their AGIs fall between $21,751 and $23,750.
• Married taxpayers filing jointly may receive a credit worth 10% of their contributions to a qualifying plan or ABLE account if their combined AGI ranges between $47,501 and $73,000 in 2023. Heads of households may receive a 10% credit if their AGIs range between $35,626 and $54,750. And single filers may receive the 10% credit if their AGIs fall between $23,751 and $36,500.

Given the aforementioned data, a single taxpayer with an income of $19,500 and IRA contributions totaling $2,000 may claim 50% of the $2,000, which calculates to $1,000. It is important to note that rollover contributions are not eligible. Furthermore, distributions from a qualified plan may reduce the amount claimed for the credit.