The saver's credit

In short

A friend of mine worked two jobs for years and never once thought of herself as a person who got tax breaks. Then she put a little into her retirement account, and the government gave some of it back. If you earn a modest income, you may be in her shoes. The saver's credit is a federal tax credit for people who put money into a retirement account. It can shrink the tax you owe, dollar for dollar. Your income has to fall under a limit, and that limit changes each year, so check the current figure on the IRS page. The IRS says you file Form 8880 with your return to claim it. If you are holding a retirement account that has little in it, a deposit this year may qualify.

The whole of it

What it is

I once watched a neighbor of mine, a hardworking man who drove a delivery truck, stare at his pay stub and say he would never get ahead. He was wrong about that, but I understood why he felt it. When money is tight, saving feels like a game for other people.

The saver's credit was built for him. It is a tax credit, which means it comes straight off the tax you owe. A deduction only lowers the income you are taxed on. A credit lowers the bill itself. That is a bigger bite per dollar.

The credit goes to people who contribute to a retirement account and who earn under a set income level. Its official name is the Retirement Savings Contributions Credit. Folks just call it the saver's credit. It is meant to give lower income workers a reward for putting something aside.

One more thing is worth knowing. The credit is not refundable. That means it can bring your tax bill down to zero, but it will not turn into a check beyond that. If you owe nothing, there is nothing for it to reduce.

How it works

You have probably noticed that the tax rules love to pile one thing on top of another. This one is simpler than most. You put money into a qualifying account during the year. Then you claim a credit equal to a share of what you put in.

The share depends on your income. The lower your income, the bigger the share. It comes in three steps. The top step is the current figure, which the official source publishes each year of your contribution, the middle step is the current figure, which the official source publishes each year, and the bottom step is the current figure, which the official source publishes each year. Above the top income line, you get no credit at all.

There is also a cap on how much of your saving counts. Only the first the current figure, which the official source publishes each year you contribute is used to figure the credit. A larger deposit will not raise the credit past that point. The credit simply stops growing there.

Qualifying accounts include a traditional IRA, a Roth IRA, a 401(k), a 403(b), and a few others. If you have a workplace plan, contributions taken from your paycheck count. Money you put into an IRA on your own counts too. Rollovers from one account to another do not count as new savings.

The IRS also sets a few basic tests. You need to be at least the current figure, which the official source publishes each year years old. You cannot be a full time student. And no one else can claim you as a dependent on their return. These tests aim the credit at working adults who are building their own savings.

The numbers, and where to find yours

Here is a thing I learned the slow way. A number you find in a magazine may be last year's number. Tax limits move, and the saver's credit income lines move with them.

The income that counts is your adjusted gross income, often called AGI. That is your total income after a few specific subtractions. You will find it on your tax return. The income lines depend on your filing status, so a single person, a head of household, and a married couple filing together each have their own cutoffs.

For the current year, the income cutoffs sit on the IRS page called Retirement Savings Contributions Credit (Saver's Credit). The same facts appear in the instructions for Form 8880. Look there for the exact figures, and note the date on the page. The site will show the verified limits next to the source.

For a single filer, the top of the range is the current figure, which the official source publishes each year. For a head of household, it is the current figure, which the official source publishes each year. For married couples filing together, it is the current figure, which the official source publishes each year. These are the lines past which the credit goes away. The IRS page is the place to confirm them.

A worked example

Let me tell you about a woman named Marisol. She works as a medical assistant and is single. Her adjusted gross income for the year is 24,000 dollars. She has a small IRA, and in the spring she put 1,000 dollars into it.

Say, for the sake of the story, that her income lands her in the top step. We will use a plain 50 percent rate here just to show the arithmetic. The real rate for any year is listed on the IRS page.

Her contribution is 1,000 dollars. That is below the cap, so all of it counts. Now multiply. 1,000 dollars times 50 percent equals 500 dollars. That is her credit.

Now see what it does. Say Marisol figured her tax at 900 dollars before the credit. She subtracts the 500 dollar credit. 900 dollars minus 500 dollars equals 400 dollars owed. She put 1,000 dollars into her own account, and her tax bill dropped by 500.

Notice what happened. The money did not vanish. It sits in her IRA. And the credit cut her bill besides. Not bad for a woman who thought saving was for somebody else.

Now suppose Marisol had owed only 300 dollars before the credit. The credit is not refundable. So her bill would fall to zero, and the leftover 200 dollars of credit would be lost. That is the arithmetic: 500 dollars of credit minus 300 dollars of tax leaves 200 dollars unused.

Where it goes wrong

I have seen smart people miss out on money they were owed, and the reasons are almost always small. The first is simply not knowing the credit exists. Plenty of tax software asks the right questions, but a paper filer can sail right past it.

The second is the form. The IRS says you claim the credit on Form 8880, filed with your return. Leave the form out and the credit does not get claimed. It is short, but it has to be there.

The third is the income line. If your income is a hair over the cutoff, the credit is gone entirely. There is no gentle slope at the very edge. You move from one step to the next, and past the last step you get nothing. So a small raise, or a bit of side income, can change the answer.

The fourth is the student rule. A full time student cannot claim the credit, even with a low income and a retirement account. If you are in school, this rule applies to you.

The fifth is the dependent rule. If a parent or someone else can claim you on their return, you are out. This catches young workers more than any other group.

A last trap is the tax bill itself. Because the credit is not refundable, it only helps if you owe some tax. A person who owes nothing gets nothing from it. That is no fault of yours. It is simply how the credit is built.

Questions to answer before you leave this page

Have you looked at the current income cutoffs on the IRS page for your filing status? Do you know your adjusted gross income, and where it sits against those lines? Did you put money into a qualifying account this year, such as an IRA or a workplace plan? Are you at least the minimum age, and are you free of the student and dependent rules? Will you owe some tax, so the credit has a bill to reduce? And when you file, will you include Form 8880, so the credit lands on your return?