Loading the player...

What is '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.

BREAKING DOWN 'Saver's Tax Credit'

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 percent and 50 percent 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 fulltime 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) . The saver's tax credit rate is 50 percent for households with total AGI of $30,000 and under or individuals with an AGI of $22,500 or under. The saver's tax credit is 20 percent for households with a total AGI of $30,001-$32,500 or individuals with an AGI of $22,501-$24,375. The saver's tax credit is 10 percent for households with an AGI of $32,501-$50,000 or individuals with an AGI of $24,376-$37,500.

For example, a household earning $32,900 that contributes $2,000 to a retirement plan will receive a tax credit of $200, calculated by multiplying 10 percent by $2,000. Any amount contributed above that 10 percent 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. 

RELATED TERMS
  1. Refundable Credit

    A refundable credit is a tax credit that can lower a taxpayer's ...
  2. Phase Out

    A phase-out applies to certain tax credits which disappear beyond ...
  3. All Savers Certificate

    A type of nontaxable certificate of deposit account with a duration ...
  4. Advanced Premium Tax Credit

    The Advanced Premium Tax Credit helps alleviate the cost of monthly ...
  5. Child Tax Credit

    The child tax credit is a credit given to taxpayers for each ...
  6. Business Tax Credits

    Business tax credits are federal income tax credits available ...
Related Articles
  1. Investing

    4 Reasons Why Savers Fare Better Than Spenders

    A recent HSBC study suggests that savers had an easier time weathering the recent financial storm.
  2. 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.
  3. Taxes

    How Obamacare Is Raising Your Taxes

    There are literally dozens of new, amended or broadened tax provisions under the Obamacare legislation. Find out how your taxes will be affected in the years to come.
  4. Personal Finance

    Are You Taking Advantage of the College Tuition Tax Credit?

    Parents with a child enrolled in college should check out the college tuition tax credit, a boon that can help defray the cost of a university education.
  5. Retirement

    How to Become a Retirement Super Saver

    Accelerating your retirement savings may mean trimming other areas of your financial life.
  6. Taxes

    Top Tax Refunds For Recent Grads

    Don't miss out on these tax credits if you have recently graduated.
  7. Taxes

    Tax Credit For Plan Expenses Incurred By Small Businesses

    Determine whether your business is eligible to claim a tax credit for establishing a retirement plan.
  8. Personal Finance

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  9. Personal Finance

    Take the Right Steps to Build Excellent Credit

    There are several things you can do to protect and improve your credit score.
Trading Center