The saver's credit is a non-refundable tax credit that offsets the first $1,000 of an individual's contributions to retirement, lowering tax liability. Find out if you're eligible for this program and how it may help you.
Understanding Saver's Credit
The saver's credit is a non-refundable tax credit that applies as a reduction which may lower a taxpayer's tax liability or increase a refund. This program encourages individuals to take steps to save for their retirement by offsetting the first $1,000 contributed to programs such as a 401(k) or an IRA. These contributions must qualify for the saver's credit, however.
Amount of Saver's Credit
The saver's credit is up to $1,000 for each individual filing (or $2,000 total for married couples filing jointly). The Internal Revenue Service warns, however, that the amount credited is often lower due to other contributions and credits, and may be zero. In 2005, average saver's credit claims were $216 for joint filers, $140 for individuals, and $149 for heads of household ("Plan").
Qualifications for Saver's Credit
Taxpayers must be 18 years old, not enrolled in school full-time, not claimed as a dependent on someone else's return, and not have an adjusted gross income above a certain amount, which will be defined. It's also important to note that some "retirement plan distributions ("Plan")" may reduce the amount of contribution considered for the credit. For 2009, the credit can be claimed by taxpayers filing jointly with gross adjusted incomes up to $55,500, individually with an income up to $27,750, or as Head of Household with an income up to $41,625. It's important to remember that the adjusted gross income must include any foreign earned income and housing costs, as well as income for residents of Somoa and Puerto Rico.
The Basis for the Credit
The saver's credit is based on many things, including filing status (married, joint, or head of household), adjusted gross income, tax liability, and the amount contributed to a qualifying retirement program. The Form 8880 is used to calculate the amount of credit due to an individual.
Understanding Elgible Contributions
Eligible contributions are those made to a traditional or Roth IRA, contributions made to a section 501(c)(18) plan, and salary reduction contributions, which are elective deferrals that include amounts designated to the following: a 401(k) plan, a section 403(b) annuity, a SIMPLE IRA plan, an eligible deferred compensation plan of a local or state government, or a salary reduction SEP. Also included is any voluntary after-tax contribution to a tax-qualified retirement plan or section 403(b) annuity.
Other Tax Benefits for Retirement
Individuals that contribute to a traditional IRA may deduct the amount, while Roth IRA contributions can have qualifying withdraws that are tax free. Contributions to 401(k)s and similar workplace programs also generally are not taxed until withdrawn, when an individual's taxes will most likely be much lower.
"Plan Now to Get Full Benefit of Saver's Credit; Tax Break Helps Low- and Moderate-Income Workers Save for Retirement." IRS.gov. 09 November 2007. 29 March 2009. http://www.irs.gov/newsroom/article/0,,id=175591,00.html
"Retirement Savings Contributions Credit (Saver's Credit)". IRS.gov. 30 January 2009. 29 March 2009. http://www.irs.gov/pub/irs-pdf/p590.pdf
"Saver's Credit for Retirement Savings Contributions." IRS.gov. 11 August 2008. 29 March 2009. http://www.irs.gov/newsroom/article/0,,id=172969,00.html