Saver's Tax Credit

What Is the Saver's Tax Credit?

The saver's tax credit is an added tax break for people with moderate incomes who contribute part of their salaries to retirement accounts. For those who are eligible, the credit reduces their income taxes owed dollar for dollar, up to a cap that depends on their incomes.

The tax credit is open to eligible taxpayers who contribute to employer-sponsored 401(k), 403(b), SIMPLE, SEP, or governmental 457 plans, or who make contributions to traditional or Roth IRAs.

Key Takeaways

  • The saver's tax credit can be claimed by taxpayers with moderate incomes who make contributions to certain defined-contribution plans and IRAs.
  • You could think of it as a subsidy for your retirement savings.
  • The saver's tax credit is a non-refundable tax credit between 10% and 50% of the individual taxpayer's eligible contribution of up to a total of $2,000—which gives it a maximum value of $1,000.
  • The maximum credit amount is the lesser of either $1,000 or the tax liability the taxpayer would have had without the credit.

How the Saver's Tax Credit Works

The saver's tax credit ranges between 10% and 50% of the individual taxpayer's contribution, depending on income, up to a total of $2,000. That gives it a maximum value to the taxpayer of $1,000.

In addition, the maximum credit amount is the lesser of either $1,000 or the tax liability the taxpayer would have had without the credit.

This means simply that the tax credit is non-refundable. The taxpayer may have a zero tax liability, but if it's less than zero the government won't send a refund for that amount.

To be eligible to claim the saver's tax credit, the taxpayer must be 18 years old by the end of the tax year, not be a full-time student, and not be claimed as a dependent on another taxpayer's return.

Restrictions on Saver’s Tax Credit

The income levels for the tax credit are revised every year to account for inflation.

Saver's Tax Credit for the 2022 Tax Year

The saver's tax credit is based on several different levels of adjusted gross income (AGI).

As of 2022, the saver's tax credit rate is 50% for households with a total AGI of $41,000 and under or individuals with an AGI of $20,500 or under.

The saver's tax credit is 20% for households with a total AGI of to $41,001 to $44,000 or individuals with an AGI of $20,501 to $22,000.

The saver's tax credit is 10% for households with an AGI of $44,001 to $68,000 or individuals with an AGI of $22,001 to $34,000.

Saver's Tax Credit for the 2023 Tax Year

As of 2023, the saver's tax credit rate is 50% for households with a total AGI of $43,500 and under or individuals with an AGI of $21,750 or under.

The saver's tax credit is 20% for households with a total AGI of to $43,501 to $47,500 or individuals with an AGI of $21,750 to $23,750.

The saver's tax credit is 10% for households with an AGI of $47,501 to $73,000 or individuals with an AGI of $23,751 to $36,500.

Note that a taxpayer who contributes more than the allowable limit in a given year to their qualified retirement account is required to correct the excess contribution by removing the amount from the fund within a certain time limit. Removing this excess amount is referred to as a return of excess contribution. 

Example

For example, a household earning $43,900 in 2021 that contributes $2,000 to a retirement plan will receive a tax credit of $200, calculated by multiplying 10% by $2,000. Any amount contributed above that 10% is not eligible for the saver's tax credit.

What Are the Tax Advantages of an IRA or a 401(k)

The individual retirement account (IRA) and the 401(k) are the most widely used of a number of tax-advantaged retirement savings accounts.

They are tax-advantaged because the federal government basically called for their creation and attached tax breaks to them as a way to encourage Americans to save money for retirement.

The 401(k) is used by companies as a benefit open to all employees. The IRA is primarily for self-employed people. Variations have been created for public employees, small businesses, and others.

All of these have tax advantages. The "traditional" variety allows people to contribute pre-tax income up to a maximum amount each year. That means that the income deposited in the account is not taxed until after the person retires and starts withdrawing it. The Roth version allows people to pay in income that has already been taxed, and won't be taxed again when they withdraw it.

The saver's tax credit is an additional incentive to encourage people with moderate incomes to undertake the admittedly difficult task of setting aside part of every paycheck for a long-term goal. The credit effectively subsidizes that effort.

Who Qualifies for the Saver's Tax Credit?

Taxpayers with moderate earned income qualify for the saver's tax credit. The income ranges are set by the IRS and are revised each year.

Depending on their income ranges, taxpayers can get a 50%, 20%, or 10% credit for their contributions, up to a maximum. That means the government will repay the taxpayer between 10% and half of the amount of money they paid into their retirement accounts.

How Do I Get the Saver's Tax Credit

To get the saver's tax credit, the eligible taxpayer must fill out IRS Form 8880 and attach it to Form 1040.

Article Sources
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  1. Internal Revenue Service. "Retirement Savings Contributions Credit (Saver’s Credit)."

  2. Internal Revenue Service. "Form 8880 Credit for Qualified Retirement Savings Contributions."

  3. Internal Revenue Service. "Saver’s Tax Credit for Contributions by Individuals to Employer Retirement Plans and IRAs," Page 5.

  4. Internal Revenue Service. "401(k) Plan Overview."

  5. Internal Revenue Service. “Traditional and Roth IRAs.”

  6. Internal Revenue Service. "About Form 8880, Credit for Qualified Retirement Savings Contributions."

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