If you earn less than a certain amount of money and you contribute money to a retirement account, you can get a federal tax credit called the Retirement Savings Contributions Credit, also known as the Saver's Credit. To claim it, you need to fill out IRS Form 8880 either electronically or on paper when you file your tax return. Follow the Form 8880 instructions that accompany the form or consult your tax prep software or tax preparer for details.
Claiming the Saver's Credit
If you earn less than a certain amount of money and you contribute to a retirement plan, like an IRA or a 401(k) plan through your employer, you could be eligible for up to a $1,000 tax credit. Like all tax credits, the Saver's Credit reduces the amount of tax you owe, so it's essentially a $1,000 discount on your federal income tax bill.
To claim the credit, you need to fill out tax Form 8880, available from the IRS or through online tax prep tools. The form asks you to itemize how much you and your spouse (if you are married) contributed to IRAs and to employer plans like a 401(k), 403(b), SEP or SIMPLE plan. It's a good idea to have your financial records handy when you fill out the form, including statements and tax forms from your employer and retirement plan provider.
You must also list the total amount of distributions from such plans that you and your spouse received over the course of the tax year. You'll subtract this number from the amount of contributions you made. If the difference is $2,000 or more, simply write $2,000 since that's the maximum amount you're allowed to use to figure out your credit.
Then, follow the instructions on the form to determine what percentage of your net contributions you're allowed to claim as a credit. It's based on your filing status and income and can be as high as 50 percent, meaning that if you claim the maximum of $2,000 in net contributions and can get a 50 percent credit, you can save $1,000 on your taxes.
Who's Not Eligible
Not everyone is eligible for the Saver's Credit. For 2018, if you make more than $63,000 as a married couple filing jointly, more than $47,250 if filing as head of household or more than $31,500 otherwise, you're not eligible because of your income. If you didn't contribute to a retirement plan or your withdrawals exceeded your contributions, you're also not eligible.
If you're under 18 or if you are someone's dependent, you also can't claim the credit regardless of your income and contributions. If you were a full-time student during part of at least five calendar months, you can't take the credit for that year. On-the-job training and training through online-only schools doesn't count as full-time student status.
2018 Tax Year Changes
The Saver's Credit isn't significantly changing under the 2018 tax code changes. One difference is that contributions to Achieving a Better Life Experience accounts are eligible for the first time. These are accounts for certain people with disabilities. Additionally, the income limits for different levels of the credit are slightly higher in 2018 than in previous years.
2017 Tax Rules
Under the tax laws in effect for 2017, married couples making up to $62,000 can claim the credit, as can a head of household making up to $46,500 and other taxpayers making up to $31,000. Adjusted gross income levels determine the percentage of your contributions that you're allowed to claim as a credit. Use the 2017 rules for 2017 returns, even if you're filing them or amending them in later years.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.