To encourage more low and middle-income taxpayers to save for retirement, the IRS provides benefits to those who contribute to their retirement accounts. If you make contributions to certain eligible retirement plans such as a 401(k) or Individual Retirement Arrangement (IRA), you may be eligible for the Saver’s Credit.
The amount of taxes you can save using this tax credit depends upon the amount you contribute to your account and your credit rate. The amount of the credit can be 10% to 50% of your contributions based on your adjusted gross income. The credit rate is a percentage of the qualifying contribution. The lower your income, the higher the credit rate. This credit is only available to those whose adjusted gross income is less than the threshold determined by the IRS.
You are eligible for this tax credit if your income is up to:
- $29,500 if you file as single, married filing separately or qualifying widow(er)
- $44,250 if you file as head of household
- $59,000 if you file as married filing jointly
Along with fulfilling these criteria, you must 18 years or older to claim this credit. Individuals who were full-time students at any time during the calendar year can not qualify for this credit. In addition, if somebody else is claiming you as a dependent on their tax return, you cannot claim this credit on your return.
Calculating the Credit Amount
The credit amount can be as much as $1,000 for individuals or $2,000 for couples filing jointly. On average, taxpayers claiming the credit receive less than $500. If your income level allows, you shall be able to deduct all or a significant part of the contributions made to a traditional IRA. Remember, any contribution made to a regular 401(k) is free from income tax until a withdrawal is made.