What is Saver’s Tax Credit?
Saver’s tax credit is also called as “Retirement Savings Contributions Credit”. It is a nonrefundable tax credit designed to help low to moderate income taxpayers who put money into retirement saving funds. Specifically, the credit is available to those who contribute to 403(b), 401(k), SEP, SIMPLE, governmental 457 plans. It’s also available to people who contribute to traditional and/or Roth IRAs. In 2018, the saver’s tax credit started to be provided for those who contribute to tax-advantaged savings accounts for people with disabilities and their families (referred to as ABLE accounts).
How to Qualify?
In order to qualify for the saver’s tax credit, you need to meet several requirements, which include: (1) you must be above 18 by the end of the applicable tax year, and you cannot be claimed as a full-time student or a dependent on some taxpayer’s return. (2) Your adjusted gross income (AGI, used to determine the amount of your taxable income) shall not exceed certain limits. The lower your AGI is, the higher percentage of the saver’s credit you will receive.
The effect of the saver’s credit is that it will lift the burden of paying income tax for the individuals who are contributing to a retirement plan. For one thing, the contribution to the retirement plan itself presents as a tax deduction. For another, the saver’s credit can reduce the tax liability dollar for dollar as a nonrefundable credit (when the credit reduces your tax liability below zero, you will not get a refund). A simple example: if you need to contribute $1,000 to your IRA this year, and you are eligible for the highest percentage of saver’s tax credit deduction, which is 50%, you only need to pay $500 for that IRA contribution.