What is a 'Qualified Retirement Savings Contribution Credit'

 The Credit for Qualified Retirement Savings Contribution is a one-page tax form 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.

BREAKING DOWN '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.

Eligible participants must meet adjusted gross income (AGI) limits. As of 2018, the credit is available to a single taxpayer with incomes up to $31,500. Heads of household with incomes up to $47,250, and married couples filing jointly with incomes up to $63,000 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, 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.

RELATED TERMS
  1. Saver's Tax Credit

    The saver's tax credit is meant to encourage tax-advantaged savings ...
  2. Phase Out

    A phase-out applies to certain tax credits which disappear beyond ...
  3. Traditional IRA

    An individual retirement account allows individuals to direct ...
  4. Child Tax Credit

    The child tax credit is a credit given to taxpayers for each ...
  5. Research Activities Credit

    The Research Activities Credit is a nonrefundable federal tax ...
  6. Separate Return

    A separate return is an annual tax form filed by a married taxpayer ...
Related Articles
  1. Taxes

    Saver's Tax Credit: A Retirement Savings Incentive

    Here's another reason to put money toward your retirement nest egg.
  2. Taxes

    Important Year-End Tax Moves for 2016 (Part 1)

    Here's part of a year-end tax strategy for 2016, to make the most of your retirement savings plans.
  3. Retirement

    IRA Contributions: Deductions and Tax Credits

    We outline the incentives and help you take full advantage of the benefits.
  4. Retirement

    Traditional and Roth IRA Income Limits: Are You Eligible?

    If and how much you can contribute to a Roth or traditional IRA depends on your AGI.
  5. Retirement

    The basics of Roth IRA contribution rules

    What you need to know about Roth IRA contributions – from eligibility to dollar limits, to deadlines, to tax breaks.
  6. Financial Advisor

    8 Essential Tips For Retirement Saving

    Whether you're a saver or a financial advisor who wants to give clients a leg up, these 8 tips are essential for financial planning.
  7. Retirement

    Benefits Of A SIMPLE IRA

    If you're at a small company, you may be offered a SIMPLE IRA retirement plan. Contribution limits are lower, but vesting is instant, with other benefits.
  8. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  9. Retirement

    Using IRAs to Save Additional Retirement Funds

    Traditional IRAs and Roth IRAs are both good options for saving more for retirement.
  10. Taxes

    20 Tax Changes You Need To Know About

    Don't miss out on the tax changes. Here's a list that you need to know about.
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center