Sometimes, being in a lower income group pays off. Case in point, the Retirement Savings Contributions Credit, a federal income tax credit that’s specifically designed to encourage people on a low or modest-income to start planning for retirement. The tax credit, which you might know better as the Saver’s Credit, offers a tax break to qualifying individuals who’ve saved towards a retirement plan. How much you can claim will depend on factors such as your federal income tax filing status and your adjusted gross income. It’s not available to everyone, but for those who do qualify, it’s a great little incentive to start preparing for the future.
Who Qualifies for the Retirement Savings Contribution Credit?
Very few American’s are aware of the Retirement Savings Contribution Credit. Considering that many of them may qualify for the credit, that means millions of people are needlessly losing out on a tax break. So, who exactly qualifies? The Retirement Savings Contribution Credit is only open to those who meet the qualification standards set out by the IRS. As per irs.gov, qualifying candidates must:
- Meet income limits
- Have contributed money to a retirement plan
- Not be a full-time student
- Be aged 18 or older
- Not be claimed as any other taxpayer’s dependent
Acceptable Pension Plans
To access the Retirement Savings Contribution Credit, you’ll need to have made a contribution to a retirement plan. However, as thestreet.com notes, there are several restrictions in place regarding what contributions are considered eligible for the credit. For a start, the credit will only be considered for contributions to the following retirement schemes:
- A traditional or Roth IRA
- Any voluntary after-tax employee contributions to qualified retirement and 401(k) and 403(b) plans
- A SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan
A SIMPLE IRA
Note that if your employer makes any contributions to your plan, you won’t be able to claim against those contributions. This doesn’t, however, impact your right to claim against your personal contributions to the same plan. You should also bear in mind that the IRS doesn’t look kindly on anyone who applies for the credit while also accepting any early distribution from the retirement plan. If you take an early distribution, expect to see a significant reduction in your credit rate.
Calendar Cut Off Points
If you intend to claim a Retirement Savings Contribution Credit, you’ll need to have made your retirement contribution to a qualifying plan by the end of the calendar year in most cases. So, for example, the last date you’ll need to make your contribution to claim credit for 2021 will be December 31, 2021. If you have an IRA plan, the last qualifying date will be April 15 of the following calendar year.
In terms of the income limit required to claim the credit, this will be based on your adjusted gross income (AGI), which is in turn based on your tax filing status. The AGI limit for 2020 is:
- $65,000 for married couples filing jointly
- $48,750 for heads of household
- $32,500 for single filers and married individuals filing separately
- For 2021, the AGI limit required to qualify is:
- $66,000 for married couples filing jointly
- $49,500 for heads of household
- $33,000 for single filers and married individuals filing separately
As the income limits are adjusted each year to reflect inflation, you’ll need to check in each year to ensure that your income continues to qualify.
How Much Credit Can You Claim?
If you meet the income limits to claim the credit, the total amount you receive will vary between 10 to 50 percent, depending on your AGI. Those with the lowest incomes will typically qualify for a 50% credit, while those with the highest incomes may qualify for as little as 10%. Essentially, the less you earn, the more you’ll get. Bear in mind that your filling status will also impact the maximum amount of credit you can claim. As per thebalance.com, if you’re single, a widow(er), or filling separately as part of a married couple, you can claim a credit of 50% on contributions up to $2000 if your AGI is less than $19,750 in 2021, or was less than $19,500 in 2020. If your AGI was $19,501 to $21,250 in 2020 or $21,500 in 2021, the maximum credit you can apply for is 20%. You will be able to claim a maximum credit of 10% if your AGI in 2020 was $21,500 to $32,500 and $21,501 to $33,000 in 2021.
If you are the head of household, you can apply for a 50% credit on contributions up to $2000 if your AGI was less than $29,250 in 2020 and less than $29,625 in 2021. This drops to 20% if your AGI was $29,251 to $31,875 in 2020 or $29,626 to $32,250 in 2021, and to 10% if your AGI was $31,876 to $48,750 in 2020 or $32,251 to $49,500 in 2021. Married taxpayers filing jointly can apply for a 50% credit on savings up to $4000 if their combined AGI was $39,000 or less in 2020 and $39,500 or less in 2021. This drops to 20% for a combined AGI of $39,001 to $42,500 in 2020 or $39,501 to $43,000 in 2021, and to 10% for a combined AGI of $42,501 to $65,000 in 2020 or $43,001 to $66,000 in 2021. If you’re unsure of how much you can claim, you can use IRS Form 8880 to help calculate your total credit.
How to Claim the Retirement Savings Contribution Credit
If you believe you are eligible for the Retirement Savings Contribution Credit, you’ll need to complete IRS Form 8880. This will tell you how much you can claim. The form is straightforward and will guide you through all the steps needed to calculate your credit. When you complete your federal income tax return, you’ll need to add the amount confirmed by Form 8880 to line 4 on Schedule 3 ( Form 1040). You’ll need to ensure that you attach the completed IRS Form 8880 along with Form 1040 to your tax return.