What Is the Saver's Tax Credit?
The saver's tax credit is a non-refundable tax credit that can be claimed by taxpayers who make salary-deferral contributions to their employer-sponsored 401(k), 403(b), SIMPLE, SEP, or governmental 457 plan and/or make contributions to their traditional and/or Roth IRAs. The amount of the credit varies and depends on the adjusted gross income (AGI) of the taxpayer and the amount of the contribution or contributions.
Tax Deductions Vs. Tax Credits
How the Saver's Tax Credit Works
The saver's tax credit was legislated into effect for tax years 2002-2006 by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and was made permanent by the Pension Protection Act of 2006 (PPA). 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. 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 so the credit can only take the taxpayer down to zero tax liability, not into a refund. The saver's tax credit can be used to offset income-tax liability but not as a refund. To determine the amount of the saver's tax credit, the taxpayer cannot take refundable credits or the adoption credit into consideration.
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 saver's tax credit is based on several different levels of adjusted gross income (AGI). As of 2020, the saver's tax credit rate is 50% for households with total AGI of $39,000 and under or individuals with an AGI of $19,500 or under. The saver's tax credit is 20% for households with a total AGI of $39,001 to $42,500 or individuals with an AGI of $19,501 to $21,250. The saver's tax credit is 10% for households with an AGI of $42,501 to $65,000 or individuals with an AGI of $21,251 to $32,500.
For 2021, the saver's tax credit rate is 50% for those households with $39,500 in AGI or less, or individuals with an AGI of less than $19,750. The saver's tax credit is 20% for households with with an AGI of between $39,501 and $43,000, or $19,751 to $21,500 for individuals. At the 10% saver's tax credit level, the AIG limit is 43,001 to $66,000 for households and $21,501 to $33,000 for individuals.
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. A taxpayer who contributes more than the allowable limit is required to correct the excess contribution by removing the amount from the fund in a certain time limit. Removing this excess amount is referred to as a return of excess contribution.