The saver’s credit can be as much as $1,000 or $2,000 from your federal income tax bill, depending on whether you file an individual or joint return. Yet many people don’t know that this tax credit exists.
That’s right: According to a survey by the Transamerica Center for Retirement Studies, less than half of workers are aware of the saver’s credit, also known as the Retirement Savings Contribution Credit. And retirees who still save money in retirement accounts may be unaware that they may be eligible for credits.
If you too are unfamiliar with saver’s credit, now is as good a time as any to get familiar with. The IRS announced on October 21 that the income limit for the credit — which is a key factor in determining your eligibility for tax breaks — will increase in 2023 due to inflation.
What is the saver’s credit value?
The first step toward becoming eligible for the Retirement Savings Contribution Credit — as its formal name implies — is saving money in a retirement account.
The IRS says you may be able to take a tax credit for the following types of contributions:
Contributions to Traditional or Roth Individual Retirement Accounts Optional Pay Deferred Contributions to a 401(k), 403(b), Government 457(b), SARSEP or SIMPLE plan Voluntary after-tax employee contributions (including thrift savings) to a qualified retirement plan ) Plan) or 403(b) Plan Contribution to a 501(c)(18)(d) Plan Contribution to the ABLE Account for which you are the designated beneficiary
However, rollover contributions are not eligible.
The credit value is 10%, 20% or 50% of the amount you contribute to such accounts in a given year. The maximum possible contribution is $2,000, or $4,000, for married couples filing joint returns.
This means the maximum amount of a saver’s credit is $1,000 or $2,000, depending on your tax-filing status. And that comes right on top of your tax bill.
Remember, while a tax deduction only reduces your taxable income, a tax credit lowers your tax bill dollar for dollar.
What are the income limits for the saver’s credit?
The Saver’s Credit is for low- to middle-income taxpayers. To be eligible, your adjusted gross income (AGI) must be within a certain threshold.
For the 2023 tax year — for which your return is due by April 2024 — you may be eligible for the saver’s credit if your AGI is:
$73,000 or less, and your tax-filing status jointly (up from $68,000 in 2022) is $54,750 or less, and your tax-filing status as head of household (above $51,000) is $36,500 or less, and your tax -Filing status is unmarried, married filing separately or eligible widow(er) (above $34,000)
If you’re eligible for the saver’s credit, your AGI also determines how much the credit is worth — that is, a percentage of your retirement account contributions. For 2023, those AGI ranges are as follows:
How Much is a Credit 50% of Your Contribution for Head of Household for Married Filing Jointly AGI is up to $43,500 (was $41,000 for 2002) AGI is up to $32,625 (was $30,750 for 2002) AGI is up to $21,750 (was $20,500 for 20,500) 20% of your contribution AGI $47,501 – $73,000 (was $44,001 – $68,000) AGI $35,626 – $54,750 (was $33,001 – $51,000) AGI $23,751 – $36,500 (was $22,001 – $34,000)
Let’s say your AGI in 2023 is $30,000, and your tax filing status is Single. If you contribute $2,000 to an eligible account in 2023, the saver’s credit will be 10% of that contribution. This is $200 off your tax bill.
Who is eligible for the saver’s credit?
There are some other conditions for the credit of the saver.
Specifically, you must be 18 years of age or older, not a student, and not claimed as a dependent on someone else’s tax return to be eligible for the credit.
In addition, if you are withdrawing or recently withdrawing savings from a retirement plan, IRA, or ABLE account, your eligible contributions may be reduced.
You can learn more at the IRS’s Saver’s Credit webpage.