The Saver’s Tax Credit

February 20, 2013 | Kate Horrell

Most Americans are somewhere in the tax return filing process right now, and many of us are trying to calculate ways to save money on our taxes for 2013.  If your adjust gross income (AGI) is less than the limits listed below, you may be eligible for the Saver’s Tax Credit, aka the Credit for Qualified Retirement Savings Contributions.  This credit is perfectly designed to benefit lower-income servicemembers, or those who are earning income in a tax-exempt combat zone.

What Is The Saver’s Credit?

The Saver’s Credit is a very valuable tax credit that designed to encourage lower-income taxpayers to contribute to qualified retirement savings accounts.  Because of the way that the credit is designed, many military families could be eligible for a substantial tax credit just by saving money for retirement.  The value of this credit increases if you spend time in a qualified tax-exempt combat zone, decreasing your taxable income.  Plus, because this is a  credit, it takes money directly off of your tax bill.

How Much Can I Save?

The amount of your credit is calculated by a formula that includes the amount of retirement savings, your AGI, and your filing status. The maximum credit is $2,000, for a married couple filing jointly, with retirement contributions of $4,000 and an AGI of less than $34,500.

If you file your income tax return as single or married filing separately, your credit will be calculated as follows:

  • Up to $17,250 AGI, credit is 50% of qualified savings.
  • Between $17,251 and $18,750 AGI, credit is 20% of qualified savings.
  • Between $18,751 and $28,750 AGI, credit is 10% of qualifiedsavings.
  • Over $28,751 AGI, no credit for qualified savings.
If you file your income tax return as a head of household, your credit will be calculated as follows:
  • Up to $25,875 AGI, credit is 50% of qualified savings.
  • Between $25,876 and $28,125 AGI, credit is 20% of qualified savings.
  • Between $28,126 and $43,125 AGI, credit is 10% of qualified savings.
  • Over $43,126 AGI, no credit for qualified savings.
If you file your income tax return as a married filing jointly, your credit will be calculated as follows:
  • Up to $34,500 AGI, credit is 50% of qualified savings.
  • Between $34,501 and $37,500 AGI, credit is 20% of qualified savings.
  • Between $37,501 and $57,500 AGI, credit is 10% of qualified savings.
  • Over $57,501 AGI, no credit for qualified savings.

Am I Eligible?

There are many eligibility qualifications for the Saver’s Credit.  In addition to the income qualifications listed below, you must also be born before 1 January 1995, you must not be claimed as a dependent on anyone else’s federal income tax return, and you must not meet the qualifications as a student.  The student criteria include spending any part of five or more months enrolled full-time at any school, except that on-the-job training, correspondence courses, and internet only courses.

Also, you have to save money in a qualified retirement account.  Both the Thrift Savings Plan (TSP) and any Individual Retirement Accounts (IRAS) meet the criteria for eligibility.

2012 Saver’s Credit Thresholds:

  • $28,750, single
  • $43,125, head of household
  • $57,500, married filing jointly

2013 Saver’s Credit Thresholds:

  • $29,500, single
  • $44.250, head of household
  • $59,000, married filing jointly
Here’s the awesome part about this credit – income earned in tax-exempt combat zones doesn’t apply towards your AGI.  Even if you’ve been in the service for a while, you may still have a low enough AGI to qualify for this credit. It is just free money! (Okay, I know there are going to be commenters who know tell me I’m dumb because it isn’t free money, but it is effectively free money.  It is a tax credit, directly into your pocket.  That is as close to free money as most of us are likely ever to see.)

How Do I Claim This Credit?

The Saver’s Credit is calculated using IRS Form 8880, Credit for Qualified Retirement Savings Contributions (pdf).

Line One: Enter your AGI from IRS Form  1040, line 38, or  Form 1040A, line 22, or Form 1040NR, line 37.

Line Two:  Enter your retirement savings for the year.  This is usually found in Box 12 of your W-2(s).  For most people, this will include contributions to TSP, IRAS, and 401(k) or 403(b) plans.  It can also include contributions to more unusual retirement plans.  If you have retirement savings and you’re not sure if it meets the criteria for this credit, check with your human resources department or a tax professional.

Line Four:  Probably doesn’t apply to you.  This is for people who have, in the past, taken distributions from any retirement plan.  This will not apply to most taxpayers.  If you have taken a retirement plan distribution in the last four years, check with a tax professional.

Everything else on the form is simple math.  When you get to the bottom, you will either have a credit or not.  If you do have a great, whoohooo!  Move it back to the correct line on your tax form and enjoy the tax bonus you’ve just received for saving.

How Does This Work?

Here’s an example:  Seaman Timmy is an E4 and he is married to Jennifer, who works as a substitute teacher.  Seaman Timmy makes $27,660 in 2012, and Jennifer makes $9,000.  They have very simple taxes, so their AGI is just the combination of their two incomes: $36,660.  If they contributed  $2,000 to Seaman Timmy’s TSP and $2,000 to Jennifer’s IRA, they would receive a tax credit of $2,000 on their income taxes.  Basically, they’ve deferred $2,000 of today’s income to save $4,000 for retirement.  How great is that?

Example two:  Lt. Dan is single and is deployed to Djibouti for ten months of the tax year.  He has some adjustments to income, but his AGI ends up being $5,988.  He always puts 5% of his pay into TSP, so he has more than exceeded the $2,000 cap on the savings that can be used to calculate the credit.  He’s going to save $1,000 on his taxes, just for contributing his regular amount to his TSP account.

As you can see, I am completely in love with this tax credit from a consumer standpoint.  I don’t know if it makes fiscal sense for our country, but nobody asked me.  I’m just here to explain the laws as they are written and make sure that my readers know about every tax rule that impact them.

This tax credit gives the biggest benefit to the lowest earners, so it is important to take advantage of it when you are in a lower-earning situation.  If you are below the thresholds for the credit, it would be ridiculous not to take this free gift for doing something that is already a good choice.  (Saving for retirement, silly.)

Now I’m all giddy inside, and we’re not even eligible for this credit.  I look forward to hearing if any of you benefit from it, or if knowing about this credit will convince you to start that TSP or IRA now.

 

Comments

  1. C Smith says:

    Who can qualify? Born after 1 Jan 95 means 17-18 years old!

  2. KLS says:

    Yeah, I like how it says, "Even if you've been in the service for a while you may qualify," But you can't have been in the service long if you are only 18 years old… The author of this article clearly didn't do their math on that one.

    • KLS says:

      In fact, this is what I pulled straight from the IRS website regarding this same tax credit, so the Author must have meant that you had to be born BEFORE that date, not after. A simple typo, I suppose.
      "Other special rules that apply to the saver’s credit include the following:
      Eligible taxpayers must be at least 18 years of age.
      Anyone claimed as a dependent on someone else’s return cannot take the credit.
      A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student."
      http://www.irs.gov/uac/Newsroom/Plan-Now-to-Get-F

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