If you have started saving for your retirement, it is not only good for your future but for the present as well. The federal government offers a tax credit to motivate low- and middle-income Americans to save more. We call this credit the retirement savings contribution credit or savings credit. This credit is available to almost everyone who has made contributions to a 401(k) or IRA.
So, if you make such contributions as well, but weren’t aware of this credit, or how to claim the savings credit, don’t worry. In this article, we tell you everything about this credit including, what it is, eligibility requirements, expected amount and how to claim it.
Savings balance – what is it?
As mentioned above, it is a tax credit that encourages low- and middle-income families to save for their retirement. This credit can help taxpayers reduce their income tax liability, or it can result in a taxpayer refund. A taxpayer who makes a contribution to a retirement account can claim the savings credit of up to $1,000 ($2,000 if married and co-filing).
According to the IRS, this credit is available to those who “make qualifying contributions to your IRA or employer-sponsored retirement plan.” Also, you may qualify for credit for contributions to your Achieving a Better Life Experience (ABLE) account, if you are the designated beneficiary. “.
Who are all eligible?
You must meet the following eligibility requirements to be eligible for a savings credit:
- Be 18 years of age or older.
- No one should claim to be a dependent upon their return.
- He must not be a student.
Simply meeting the above requirements will not give you saver credit, unless you make qualifying contributions to your retirement fund. It should be noted that the contributions you make for retirement must be new money. In other words, carryovers from an existing account will not count toward the savings balance.
You also need to meet the adjusted gross income cap for the year you want to claim the credit. The IRS sets limits for AI every year.
For example, you will not qualify for the 2023 Savings Credit if your adjusted gross income is higher than:
- $73,000 for married participants.
- $54,750 for the head of household.
- $36,500 USD for any other filing status.
Visit this link for more details on eligibility requirements and income caps.
Apart from the above requirements, you also need to meet the contribution deadlines to not only qualify, but to claim the savings credit as well.
Generally, contributions to 401(k) plans and other retirement accounts that qualify for savings credit are due by the end of the calendar year. However, taxpayers have until the tax filing deadline, usually in April, to make eligible contributions to the saver’s credit.
So, this year, taxpayers have until April 18, 2023, to make retirement contributions that will allow them to qualify for the saver’s credit on their 2022 tax return.
How much can you get?
You can claim the savings credit of up to $1,000 ($2,000 if you’re married and co-enrolling). However, the credit amount is based on the “adjusted gross income recorded on your Form 1040 series return.”
Depending on your filing status and adjusted gross income, you may be eligible to claim 50%, 20%, or 10% of your total contribution in retirement. The maximum contribution amount eligible for the credit is $2,000 ($4,000 if married and registered together).
So, if you qualify for the 50% claim, and your maximum contribution is $2,000, you can claim the $1,000 savings credit. Visit this link for more details on saver credit rates for different types of depositors.
How to claim a savings balance
Now that you know what a savings credit is, what its requirements are and how much you can get, the last important detail you need to know is how to claim a saver’s credit.
If you meet the eligibility requirements, in addition to the income limits, you need to use IRS Form 8880 (“Credit for Qualified Retirement Savings Contributions”) to claim the savings balance. It is a one page form. You can file it electronically or print the form from the IRS website and mail back the completed form.
Completing the form is also easy. Simply enter your contributions to eligible retirement accounts (and your spouse’s contributions, if any). You’ll have to limit contributions to different types of retirement accounts, including 401(k) accounts, traditional accounts, or Roth IRAs and ABLE accounts.
The form also provides instructions for calculating the credit amount. Once you calculate the amount, you need to state it on line 4 of Form 1040.
A saver’s credit is, without a doubt, a great way for low- and middle-income families to save money by contributing to their retirement pool. This credit can reduce your income tax liability or increase your income tax refund.
Although the maximum credit amount is $2,000, the actual credit amount most people get is much smaller. According to the IRS, smaller credit is due in part to the effect of deductions and other credits. The agency estimates that the average credit amount in 2020 was $186 per eligible returnee.
Despite the low amount of credit, a saver’s credit is an effective way to encourage people, especially low-income earners, to save for their retirement.
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