Who Can Claim the Retirement Savings Contribution Credit?

One of the best things about saving money for retirement is that in many cases, you can claim a retirement savings contribution credit on your tax return.

At Addition Financial, we’ve found our members are sometimes uncertain whether they qualify for the retirement savings contribution credit. We never want any member to pay more than they need to in taxes. With that in mind, here is the information you need, including an explanation of who qualifies for the credit and how to calculate it.

What is the Retirement Savings Contribution Credit?

The Retirement Savings Contribution Credit is sometimes referred to as the Saver’s Credit. It’s designed to help low and middle-income people save for retirement by giving them a break on their taxes.

It’s important to understand the difference between a tax credit and a tax deduction. A tax credit is a dollar-for-dollar of your gross tax liability, which is the amount of tax you’re required to pay before any credits are taken.

To take the Retirement Savings Contribution Credit, you’ll need to be sure you qualify. While it can be difficult to figure out if you qualify for some tax credits, this one is straightforward.

Who Can Take the Retirement Savings Contribution Credit?

How can you tell if you’re eligible to take the Retirement Savings Contribution Credit? There are three basic requirements. You must be:

  • At least 18 years old
  • Not a full-time student
  • Not claimed as a dependent on anybody else’s tax return

In other words, you can’t qualify for the Retirement Savings Contribution Credit if your parents still claim you as a dependent – or your spouse does.

The Internal Revenue Service considers you a full-time student if during any part of five calendar months of the tax year you:

  • Were enrolled as a full-time student at any school; or,
  • Took a full-time, on-farm training course offered by a school, state, county or local government agency.

The IRS includes technical, trade and mechanical schools in its definition of schools. It does not include on-the-job training courses, online-only schools or correspondence schools in its definition.

You can take the credit if you or your spouse (if married filing jointly) made contributions to:

  • A traditional or Roth IRA
  • A 401(k), 403(b), 457(b), SEP or SIMPLE plan
  • A qualified retirement plan as defined in section 4974(c)
  • A 501(c)(18)(D) plan
  • An ABLE account (if you are the designated beneficiary)

Because the Retirement Savings Contribution Credit is designed to help low and middle-income people, there is an income cap as well. If the amount on your Form 1040, line 7, or Form 1040NR, line 36, is more than the following amounts, you will not be able to take the credit:

  • $31,500 if single
  • $47,250 if single head of household
  • $63,000 if married filing jointly

If you’re unsure whether you qualify based on income, the best way to find out is to complete your form 1040 up to the lines indicated and check your income against these limits.

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How to Calculate the Retirement Savings Contribution Credit

To calculate the amount of the Retirement Savings Contribution Credit, you’ll need to first calculate your adjusted gross income (AGI). That’s the amount on Line 6 of Form 1040 and Line 35 of Form 1040NR.

There are three income thresholds to worry about. Let’s start with the thresholds for single people. They are:

  • If your AGI is $19,000 or less, your credit is 50% of your total contributions.
  • If your AGI is between $19,001 and $20,500, your credit is 20% of your total contributions.
  • If your AGI is between $20,501 and $31,500, your credit is 10% of your total contributions.

For single heads of household, the thresholds are:

  • If your AGI is $28,500 or less, your credit is 50% of your total contributions.
  • If your AGI is between $28,501 and $30,750, your credit is 20% of your total contributions.
  • If your AGI is between $30,751 and $47,250, your credit is 10% of your total contributions.

For single people and married people filing separately, the maximum credit is $2,000.

If you are married and filing a joint tax return, here are the AGI limits:

  • If your AGI is $38,000 or less, your credit is 50% of your total contributions.
  • If your AGI is between $38,001 and $41,000, your credit is 20% of your total contributions.
  • If your AGI is between $41,001 and $63,000, your credit is 10% of your total contributions.

For married people filing jointly, the maximum credit is $4,000.

If your income is below the thresholds we’ve listed here and you contribute to a retirement savings plan, you may be eligible for the Retirement Savings Contribution Credit.

To learn more about Addition Financial’s retirement savings plans, please click here.