Most people have some sort of savings for retirement. While we know it's beneficial to save, sometimes the additional money we lose from our wages to save for retirement can be a burden. The US Government implemented the savers credit back in 2002 as a way to encourage Americans to start saving more money for retirement. Since then the program has become permanent, and as of 2006 has remained available for those who qualify to claim on their income tax returns. Unlike tax deductions, tax credits can do more then just reduce the tax you owe, they can increase your refund. It is worth trying to see if you are eligible to claim this credit.
Not everyone is eligible to claim the savers credit. However, if you contribute to a retirement account like a Roth IRA and meet the other requirements you may be eligible to claim the savers credit. Students can not claim the credit, nor can someone who is claimed as a dependent on another persons tax return. You must also be 18 years old or older in order to apply for the credit.
Being eligible for the credit is dependent on your adjusted gross income (AIG). Your AGI must be below the set limits in order to apply. Here are the limits for each filing status:
- Single $27,750
- Head of Household $41,625
- Married filing jointly $55,500
What is the Credit
The savers credit is determined based on a percent of your total contribution to a retirement account. The maximum amount one is allowed to contribute to a Roth IRA is $5000 annually. The savers credit is figured on the first $2000 of that money or as much as you have contributed up to $2000. So for example, if you had contributed the full $5000 for the year, then you could claim credit on $2000. If you were eligible for a 50% credit, then you could subtract $1000 off your income on your tax return.
Because the savers credit is based on the person's adjusted gross income in conjunction with their filing status, the amount of the credit will vary for all filers.
Contributions made to military retirement accounts do not qualify for the credit. Also, you can not claim the credit on rollover distributions, nor can you claim the credit on contributions made to repay a previous distribution.
How to Claim
In order to claim the savers credit for Roth IRA savings you must complete form 8880. You must file form 1040 or 1040A in order to use form 8880. It can not be use with form 1040ez. This form is filed with your regular tax return and supports your deduction. Even if you did not make any contributions in the previous year, you can still claim the credit up to the April 15th tax deadline.