Imagine you lived as frugally as possible to put money away for retirement. You deserve a little something for that effort, and that prize could be the savers credit.
Not everyone will qualify for it, but if you do, it may help you save on your taxes. Then, you can work on other financial goals, even if you don’t make six figures.
Keep reading to learn more.
- 1 Overview of the Savers Credit
- 2 Eligibility Requirements
- 3 Income Requirements
- 4 How Much You Can Get
- 5 How to Estimate Your Tax Credit
- 6 Non-Refundable Tax Credit
- 7 Eligible Retirement Accounts
- 8 How to Claim the Savers Credit
- 9 Can You Include Employer Retirement Contributions?
- 10 Do Income Requirements Change?
- 11 How Should You File Your Taxes to Get the Credit?
- 12 Can You Deduct Retirement Contributions?
- 13 Why Don’t I Qualify for the Savers Credit?
- 14 Will You Get the Savers Credit?
- 15 Learn More
Overview of the Savers Credit
The savers credit is a tax credit, which means you can lower your tax bill if you qualify. Credits are different from tax deductions, which lower your taxable income.
If you qualify for the savers credit, you can save money in exchange for contributing to your retirement savings. This is an excellent incentive if you struggle to set aside money for later.
Unfortunately, not everyone who contributes to a retirement account qualifies. Be sure to consider if you’re eligible when filing your taxes this year.
To claim the savers credit, you must bet at least 18 years old. No one else can claim you as a dependent on their tax return, and you can’t be a student.
For the tax year, the IRS defines a student as anyone who was a full-time student for at least five months of the year. Anyone who took an on-farm training course for at least five months of a year also counts as a student.
On-the-job training and correspondence schools don’t count as schools. The same is true of a school that only offers online classes.
Even if you meet the other eligibility requirements, you can’t make more than a certain amount. The savers credit is for low- and middle-income Americans and the requirements vary within that.
Income thresholds change every year, so consider the current requirements. You may qualify for a credit of 10, 20, or 50% of your contribution.
The qualifying incomes vary based on your tax filing status. Consider the following differences and how you may be able to save more.
Married Filing Jointly
Married couples can usually save a lot of money when filing taxes jointly. Qualifying for the savers credit when you’re married and filing taxes with your spouse can be easier because of higher income limits.
Couples who file jointly can get 50% of their retirement savings contributions if they made up to $39,500 in 2021. If you and your spouse made up to $43,000, you can get a credit for 20% of your savings.
Finally, couples with incomes between $43,001 and $66,000 can get a 10% credit. Couples who made more than that won’t qualify for the savers credit.
Head of Household
Filing as the head of household is a good option for parents who covered more than half of the cost of maintaining a household. You can qualify for tax savings in a variety of ways, including the savers credit.
For 2021, you can get up to 50% of your retirement savings as a credit if you made up to $29,625. If you made between that and $32,250, you may get up to 20% of your contributions.
A head of household with an income from $32,250 to $49,500 can get a 10% credit. If your income was higher than that, you won’t qualify for the credit.
Other filers include single, qualifying widow or widower, and married filing separately. Unfortunately, these groups have the lowest income maximums to qualify for the savers credit.
You can get up to 50% of your savings as a credit if you made up to $19,750. If you made up to $21,500, you may qualify for 20% as a credit.
The maximum for a 10% credit for 2021 is $33,000. Anyone who made more than that won’t be able to get any money back with this credit.
How Much You Can Get
If you’re planning for taxes and retirement, you should consider how much money you can get. Regardless of your income and the amount you saved, you can get up to $1,000 or $2,000.
The maximum credit for married couples filing jointly is $2,000. All other filers won’t receive more than $1,000.
You’ll also need to consider your income and the percentage your credit will be. Qualifying for the savers credit doesn’t mean you’ll get the maximum amount.
Maybe you contributed $6,000, but you only qualify for a 10% credit, so you get $600. Even if you qualified for a 50% credit, you wouldn’t get more than $1,000 if you’re single or $2,000 if you’re married.
How to Estimate Your Tax Credit
To estimate your savers credit, you’ll need to calculate how much money you made last year. If you’re filing with your spouse, include their income as well.
Look at how much you contributed and how that affected your income. The IRS uses your adjusted gross income (AGI), which is your income minus qualifying deductions, including your retirement contributions.
So even if you made more than a specific threshold, you may still qualify for a credit. Be sure to consider all of your finances to get the most accurate estimate.
Non-Refundable Tax Credit
For better or worse, the savers credit is a non-refundable tax credit. If you owe money on your tax return, the credit can help you save a specific amount.
However, the credit won’t increase the total of your tax refund. The best it can do is bring your tax bill to $0, which can still help you save money.
You should look at other refundable credits that can increase the amount you’ll get back. Then, you can maximize your savings at tax time.
Eligible Retirement Accounts
Luckily, the IRS lets you take the savers credit on contributions to plenty of retirement accounts. You can save money on contributions to a traditional or Roth IRA.
Other qualifying accounts include a SEP IRA, a 401(k), a 403(b), and a 457 plan. People contributing to SIMPLE IRAs and 501(c)(18)(D) plans may also qualify for the savers credit.
If you’re the designated beneficiary for an ABLE account, you can also use those savings to increase your savers credit. However, if you took money out of qualifying plans, that can reduce your credit.
How to Claim the Savers Credit
Once you determine that you’ll qualify for the savers credit, you should consider how to claim it. You can do a few things to claim and potentially increase your savers credit.
The credit is particularly useful for self-employed people and anyone else who owes taxes. You can do a few things before and as you file your taxes to help claim the best possible credit.
Consider the following steps as you prepare to do your taxes.
Contribute as Much as You Can
You can increase your retirement savings contributions until the tax deadline for the year, not the end of the calendar year. So if you have a bit of extra cash to save, do so now.
Then, you can increase your maximum contribution. Depending on your income, you may lower your AGI enough to qualify for a bigger credit.
For example, maybe you’re a single filer, and your current AGI is $20,000. You’ve contributed $1,000, so you decide to contribute an extra $1,000.
If you didn’t save the extra money, you would qualify for a $200 credit. However, after the extra savings, your AGI would be low enough to qualify for the full $1,000 credit.
File Form 8880
Form 8880 is where you claim your savers credit and any other credits for retirement savings. You will need to fill this form out to claim your savers credit on your tax return.
The form asks for details like IRA contributions, 401(k) contributions, and other deductions. You’ll have to add up those numbers and use a table to calculate your savers credit.
Be sure you’re honest on the form so that you won’t owe the money later. That way, you won’t have problems if the IRS audits you.
File the Rest of Your Taxes
After you complete your Form 8880, you should continue with filing your taxes. Report your income and that of your spouse if you’re filing jointly.
Include any other credits or deductions that you qualify for to maximize your savings. Then, you’ll be able to lower your tax bill or get a bigger refund.
You should finish all of your taxes before the deadline, which is usually on or just after April 15. If you can’t finish by then, you can request an extension to have until October.
Review Your Return
Before you submit your tax return, look it over to make sure you didn’t miss anything. If you use tax software, it should alert you to problems that you need to fix.
Otherwise, make sure you entered your income accurately. Consider your tax credit for retirement savings as well as any other credits or deductions.
Then, you can send the paper copy or submit the electronic form when filing. While you won’t get the savers credit as part of your return, you may have a lower tax bill than in the past.
Can You Include Employer Retirement Contributions?
If you contributed to a 401(k) or another sponsored retirement account, you can’t include an employer match. A good employer might match your savings up to a specific amount.
However, that won’t double your total contributions for the savers credit. A 401(k) match can help encourage you to save as much as you can to get free money, which is nice if you’re low-income.
When filing your Form 8880, be sure to consider what you put into your account. Then, you can more accurately estimate how much you may save on your taxes.
Do Income Requirements Change?
Income requirements for the savers credit generally go up each year. In the past, the income threshold for most filers has gone up by $250, and it’s increased by $500 for married couples.
From 2021 to 2022, the threshold will go up by $750 and $1,500, respectively. These numbers apply to those qualifying for a 50% credit.
The maximum income for any credit will go up by $1,000 to $2,000, depending on how you file. Keep that in mind when deciding how to file your taxes.
How Should You File Your Taxes to Get the Credit?
You can file your taxes online with the IRS or tax software. Another option is to print the files and fill them out to mail them straight to the IRS.
If you want to work with an expert, you can hire an accountant to help with your taxes. That can be an excellent way to lower your taxable income, which may lower your tax bill as well.
Think about your budget and if you can afford to pay for help. Then, you can file your taxes in a way that makes the most sense for you.
Can You Deduct Retirement Contributions?
If you contributed to a traditional IRA or 401(k), for example, note that on your return. Not only may that help you get the savers credit, but it can lower your taxable income.
Unfortunately, you can’t deduct contributions to a Roth IRA or a similar account. You will pay the taxes on those contributions now, but you won’t have to pay taxes on them later.
That can be an excellent choice for low-income Americans since your tax rate is pretty low. If you expect your income to increase in the future, you can always open a traditional account for tax benefits now.
Why Don’t I Qualify for the Savers Credit?
You may not qualify for the savers credit if you don’t meet the income threshold for your filing status. If you do meet the income requirements, you may still not qualify.
Students, even those who make a little money and save for retirement, can’t get the credit. The same is true of anyone who is a dependent on someone else’s tax return.
Be sure to talk with your parents or anyone else who may claim you as a dependent. That way, you can make sure they don’t so that you can get your credit.
Will You Get the Savers Credit?
The savers credit is an excellent tax credit for low-income and middle-income Americans. If you saved for your retirement, you may be able to get a credit on your tax balance.
While you can’t get the money in your return, it may still help you save. Then, you can use that savings to put towards retirement this year.
Do you want to estimate how much you’ll owe in income tax? Use an income tax calculator to prepare for tax season.