If your earnings are below certain amounts, the government wants to give you a monetary incentive to save for retirement.
The Retirement Savings Contributions Credit, or “Saver’s Credit” for short, is worth up to $4,000 in tax savings for married couples filing a joint return ($2,000 for individuals). The credit reduces your income taxes dollar for dollar. If you don’t pay taxes, you can’t benefit from the credit.
To receive the credit, you would make an “eligible” contribution to an IRA (traditional or Roth), or to a retirement plan, such as a 401(k), 403(b), 457 plan, SIMPLE IRA or a salary reduction SEP.
First, let’s talk about who does not qualify: You cannot be under the age of 18, be a full-time student or be claimed as a dependent on your parent’s (or someone else’s) tax return. Your earnings cannot be above certain amounts. For couples (filing jointly in 2017) to be eligible, adjusted gross income, or AGI (line 38 of Form 1040 or line 22 of Form 1040A), must be no more than $62,000.
For single filers, AGI must be no more than $31,000 (that also applies to married filing separately or qualifying widow or widower). For heads of households, AGI must be no more than $46,500.
The amount of the credit will depend on the “credit rate,” which varies based on your AGI. The credit rate can be 50 percent of your contribution, 20 percent, 10 percent or zero.
Here is an example posted online by the IRS: “Jill, who works at a retail store, is married and earned $37,000 in 2017. Jill’s husband was unemployed in 2017 and didn’t have any earnings. Jill contributed $1,000 to her IRA in 2017. After deducting her IRA contribution, the adjusted gross income shown on her joint return is $36,000. Jill may claim a 50 percent credit, $500, for her $1,000 IRA contribution.”
The credit rate in the above example is 50 percent. The best way to assess the credit rate that applies to you is to fill out IRS Form 8880, “Credit for Qualified Retirement Savings Contributions,” which you can find at irs.gov. You’ll need to attach the form to your tax return. But note that if you do your taxes online, the tax software you use will do the calculation for you.
Lines 1 and 2 of Form 8880 capture the contributions you made for the 2017 tax year to your IRAs and qualified retirement plans, such as 401(k)s. Line 6 will limit you to $2,000. (The form has two columns, one for you and one for your spouse. Between both spouses, the limit is $4,000.)
Line 8 calls for you to provide your AGI from line 38 of Form 1040 (or line 22 of Form 1040A).
Line 9 provides a table with a range of numbers that picks up your line 8 figure, along with a decimal to use to calculate the credit. Line 10 provides the result.
For an IRS chart showing 2017 and 2018 Saver’s Credit limits, see tinyurl.com/grmnoz9.
For taxpayers who qualify, the Saver’s Credit offers an incentive to save that should not be ignored. Too bad that students can’t use it.
Julie Jason is a personal money manager at Jackson, Grant of Stamford, Conn., and an award-winning author. Contact her at firstname.lastname@example.org.