Everything You Need to Know About Retirement Savings Credit

Tax Credits vs. Tax Deductions

To better understand the tax credit for retirement savings, it is important to distinguish between tax credits and tax deductions. A tax credit is a dollar-for-dollar reduction in your overall tax liability – the total amount of taxes you are responsible for paying when you finish your tax return. For example, you may owe the IRS $3,000, then come back and claim a credit of $1,000. Now you will only owe $2,000.

Are You Eligible for a Retirement Savings Credit?

There are three main criteria that must be met to qualify for a retirement savings credit: you must be at least 18 years old, not a full-time student, and not claimed as a dependent on someone else’s tax return.

How Much Can the Credit Reduce Your Tax Bill?

The tax credit is 50%, 20%, or 10% of your contributions to a retirement plan or IRA for the year, depending on your adjusted gross income. For this reason, the retirement savings tax credit is very beneficial for low-income taxpayers.

Contributions for Tax Year 2021

The allowable contribution limits and income thresholds mentioned above apply to your 2021 tax return, which you file in 2022. The first column specifies the amount of contribution you can claim, followed by the income criteria for each percentage for different filing statuses.

Contributions for Tax Year 2022

Income thresholds for the credit percentages are indexed for inflation. They may increase annually. The numbers above are relevant for the tax return you will file in 2023.

Qualified Retirement Accounts

You can claim the retirement savings credit when you contribute to certain types of retirement accounts such as traditional or Roth IRA accounts, 401(k) plans, 403(b) plans, 457(b) plans, Thrift Savings Plans (TSP), SIMPLE IRA plans, and Simplified Employee Pension (SEP) plans, as well as Section 501(c)(18) plans.

How to Claim the Retirement Savings Credit

Submit IRS Form 8880 “Credit for Qualified Retirement Savings Contributions” to take advantage of the retirement savings credit. You must use Form 1040 or Form 1040NR for your tax return.

Frequently Asked Questions

What retirement contributions do not qualify for the retirement savings credit?
With this credit, you can include contributions to any type of retirement plan when claiming the credit, including 401(k) plans, traditional IRAs, Roth IRAs, SIMPLE IRAs, or 403(b) plans. However, rollovers do not qualify for the credit.

Is the retirement savings credit refundable?
No, the retirement savings credit is non-refundable. This means the credit can reduce your total tax amount owed to zero, but it cannot provide you with a tax refund.

Source: https://www.thebalancemoney.com/retirement-saver-credit-4125920

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