Did You Know the Government Might Pay You to Save Money?

The IRS knows that it's important for people to save money for retirement, and it also knows that saving can be a challenge -- especially for families with relatively low incomes. For that reason, the agency offers a tax credit for retirement savers who meet certain criteria.

What is the Saver's Credit?

Officially known as the Retirement Savings Contributions Credit, the Saver's Credit is a tax credit that you can claim on your federal income tax return. Tax credits are even more valuable than deductions, since you subtract a credit from your tax due (with deductions, you subtract the deduction from your income for the year, so they don't lower your tax bill as much as credits do).

In order to qualify for the credit, you have to meet the income requirements and also contribute to a retirement savings account (contributions to traditional IRAs, Roth IRAs, 401(k)s, 403(b)s, and other employer-based retirement plans all qualify).

The income limits for the Saver's Credit are based on your adjusted gross income (AGI) for the year and on your filing status. AGI is your taxable income for the year minus certain deductions, including the Health Savings Account (HSA) deduction, the Individual Retirement Account (IRA) deduction, and the student loan interest deduction. You'll find this number on line 38 of your Form 1040 or line 22 of your Form 1040A. You also have to be 18 or older, not a full-time student, and not claimed as a dependent by anyone else to get this credit.

The income requirements for 2017 are as follows (if you exceed these limits, you can't claim the credit):

If your status is Married Filing Jointly and your AGI is...

You can claim a credit of...

Up to $37,000

50% of your contribution, up to a maximum credit of $2,000

$37,001-$40,000

20% of your contribution, up to a maximum credit of $800

$40,001-$62,000

10% of your contribution, up to a maximum credit of $400

If your status is Head of Household and your AGI is...

You can claim a credit of...

Up to $27,750

50% of your contribution, up to a maximum credit of $1,000

$27,751-$30,000

20% of your contribution, up to a maximum credit of $400

$30,001-$46,500

10% of your contribution, up to a maximum credit of $200

If your status is anything else and your AGI is...

You can claim a credit of...

Up to $18,500

50% of your contribution, up to a maximum credit of $1,000

$18,501-$20,000

20% of your contribution, up to a maximum credit of $400

$20,001-$31,000

10% of your contribution, up to a maximum credit of $200

How to claim the credit

If you're eligible to claim the Saver's Credit, you'll need to fill out Form 8880 and turn it in along with the rest of your tax return. First, you'll write down the IRA and 401(k) (or other workplace-based retirement plan) contributions you made for the year in the appropriate fields and total them up in the following field. Next, you have to note any distributions you took from those retirement accounts and subtract them from the total contributions you made. Finally, you can only take the credit on $2,000 worth of contributions (or $4,000 if married filing jointly), so if your contributions totaled more than that you'll need to write $2,000 down on the form and use that as the basis for your credit (married filing jointly taxpayers write $2,000 in the "you" column and $2,000 in the "your spouse" column, then add them up).

The form will then walk you through the necessary calculations to determine the amount of your credit. Once you have a total for the credit, you'll need to transfer that number to your Form 1040 as instructed on Form 8880. That may sound like a lot of work, but it takes just a few minutes to complete the form -- and you could get a fat tax break for your trouble.

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