Understanding the Savers Tax Credit
February: Groundhogs & Shadows, Valentine’s Day, and the IRS has opened to receiving tax returns! As a knowledgeable small business owner or member of the Human Resources team, you can help your employees to be aware of potential tax credits that can help them save money when they file their taxes. One such credit that often goes unnoticed is the Savers Tax Credit. This credit is designed to encourage low- to moderate-income individuals to save for retirement by offering a valuable tax break. In this guide, we'll break down what the Savers Tax Credit is and how employees can claim it on their taxes in 2024.
What is the Savers Tax Credit?
The Savers Tax Credit, also known as the Retirement Savings Contributions Credit, is a tax credit of up to $1,000 ($2,000 for joint filers) provided by the IRS to eligible individuals who contribute to their retirement savings accounts. It is a nonrefundable credit, meaning it can only reduce taxes; the government won't "refund" or pay you out any remainder. There is no minimum amount to be eligible for the Saver's Credit, and you may be able to apply for up to 50% of your eligible contributions credited to your tax return.
This credit can be claimed for contributions made to retirement plans such as 401(k) plans, 403(b) plans, Traditional or Roth IRAs, SIMPLE IRAs, Governmental 457 plans, SEP IRAs, and possibly some Governmental 457 plans
Who is Eligible?
To qualify for the Savers Tax Credit, employees must meet the following criteria:
Income Limits: The credit is available to individuals with a certain level of adjusted gross income (AGI). These income limits are adjusted annually and vary based on filing status. For 2024, the income limits are as follows:
Single filers: AGI of up to $38,250
Head of household: AGI of up to $57,375
Married filing jointly: AGI of up to $76,500
Age Requirement: Taxpayers must be at least 18 years old to qualify for the credit.
Not a Full-Time Student: Individuals enrolled as full-time students during any part of five calendar months during the tax year are not eligible for the credit.
How to Claim the Savers Tax Credit
Claiming the Savers Tax Credit is relatively straightforward. Employees can follow these steps to ensure they receive the credit on their taxes:
Contribute to a Qualifying Retirement Plan: Ensure that you have made contributions to an eligible retirement savings plan throughout the tax year. Contributions made by the tax filing deadline, typically April 15 of the following year, to an IRA can also count for that tax year.
Obtain Form 8880: The Savers Tax Credit is claimed using IRS Form 8880, Credit for Qualified Retirement Savings Contributions. This form can be downloaded from the IRS website or obtained from a tax professional.
Calculate the Credit: Use the information from Form 8880 to calculate the amount of the credit you are eligible for. The credit is calculated as a percentage of the eligible contributions, with a maximum credit of $1,000 for individuals and $2,000 for married couples filing jointly.
File Your Taxes: Include Form 8880 when filing your federal income tax return. Be sure to follow all instructions carefully to ensure accurate reporting.
Beginning in 2027, the SECURE Act 2.0 will transform this from a nonrefundable credit into a direct contribution into the eligible account where contributions were made to receive the credit.
The Savers Tax Credit is a valuable incentive for some employees to save for retirement while also reducing their tax burden. By understanding the eligibility criteria and following the necessary steps to claim the credit, you can share with your employees a potentially advantageous opportunity to maximize their savings and secure their financial future by participating in the retirement plan. Encourage your employees to consult with a tax professional or utilize tax preparation software for assistance in claiming the Savers Tax Credit and optimizing their tax returns.
This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
#548790 February 2024