Save for Retirement Now; Get a Tax Credit Later

A tax credit known as the Retirement Savings Contributions Credit is designed to offset a percentage of the initial $2,000 that taxpayers put toward their individual retirement accounts or other retirement accounts established through their employers. Also called the Saver’s Credit, this IRS-backed tax credit makes it possible for people with disabilities to contribute to an Achieving a Better Life Experience account as long as they are the beneficiaries of the ABLE account.

For those of you who may be unfamiliar with ABLE accounts, be sure to look at the IRS website for information about Publication 907. In order to benefit from the Saver’s Credit as part of your 2022 tax return, you must ensure that you make the qualifying retirement contribution by April 18, 2023, which is the official deadline for filing your 2022 tax returns.

To apply the Saver’s Credit to your 2022 tax return, you still have time to establish a new IRA or contribute money to an existing IRA. Keep in mind that both Roth IRAs and traditional IRAs count in the eyes of the Saver’s Credit, so you have options.

Who else can claim the Saver’s Credit?

  • Married couples:
    • Must file jointly.
    • Must have a combined income no greater than $68,000 in 2022.
    • Must have a combined income no greater than $73,000 in 2023.
  • Heads of households:
    • Must have an income no greater than $51,000 in 2022.
    • Must have an income no greater than $54,750 in 2023.
  • Married individuals:
    • Must file separately.
    • Must have a single income no greater than $34,000 in 2022.
    • Must have a single income no greater than $36,500 in 2023.

Income limits are taken into consideration when looking at people’s eligibility for the Saver’s Credit, and the increased income limits for the year 2023 reflect the impact of inflation. Similar to other tax credits available to eligible parties, the Saver’s Credit has the propensity to increase the value of your tax refund or lower the amount of money you owe in taxes.

For individuals, the maximum value of the Saver’s Credit is $1,000. For married couples, the maximum value of the Saver’s Credit is $2,000. That said, the IRS makes note of the fact that some applicants for the Saver’s Credit will receive a dollar value of zero.

But how is it possible that someone eligible for the Saver’s Credit might receive $0 from the tax credit? Ultimately, the amount that a taxpayer can receive from the Saver’s Credit will depend on the taxpayer’s filing status, adjusted gross income for the year, tax liability and IRA or ABLE account contribution amounts. As such, all these factors could yield a situation in which the taxpayer does not benefit from the Saver’s Credit despite being eligible.

Regardless, if you are interested in claiming the Saver’s Credit for tax purposes, fill out Form 8880. Even if you think it would be a waste of your time or you are not sure that the Saver’s Credit would help you, there is no harm in claiming the tax credit as long as you are eligible.

For the 2020 tax year, over $1.7 billion in Saver’s Credit was claimed by a collective of 9.4 million individuals who filed income tax returns and claimed the Saver’s Credit on said tax return. When you calculate the amount each person received, it averages out to about $186 per eligible individual.

The Saver’s Credit can also be used to supplement other tax benefits that you are eligible for. When you invest your money in retirement accounts, doors to other tax benefits will open for you. For instance, you may be able to deduct your contributions toward a traditional IRA.

While this is not true for Roth IRA contributions, as Roth IRA contributions are not deductible, any withdrawals that you make after the age of retirement will not be taxed, which is a benefit in its own regard. Under many circumstances, you will not have to pay taxes on any contributions you make toward a 401(k) or other workplace retirement plans until you withdraw funds.

Are there additional requirements for eligibility? 

  • Must be an adult who is at least 18 years old.
  • Cannot be claimed as a dependent on another person’s tax return.
  • Cannot be enrolled in school or considered a student.

Keep in mind that any distributions you make from either your retirement plan or your ABLE account will lower the contribution amount that is used to determine the value of the Saver’s Credit that you are eligible for.

This is just a summary of a complex series of provisions. Work with a qualified tax adviser to see if this credit applies to you.

Reach out to Roz Carothers and her team at Triplett & Carothers to learn more.