During Tax Season, Remind Modest Earners About the Saver’s Credit

Many eligible employees could benefit from the saver's credit—if they know about it

Stephen Miller, CEBS By Stephen Miller, CEBS February 15, 2019
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Many U.S. workers don't know that they're eligible for a tax credit by saving in an employer-sponsored retirement plan or an individual retirement account (IRA), and that could be costing them money.

The Retirement Savings Contributions Credit, also called the saver's credit, is available to low- and moderate-income workers who are saving for retirement. But 62 percent of workers don't know about the credit, according to the nonprofit Transamerica Center for Retirement Studies in Los Angeles, which last fall surveyed nearly 6,000 employees.

"Tax season is an ideal time to tell eligible workers how they can earn extra tax credits by saving through their employer's 401(k) or a similar retirement plan," said Catherine Collinson, president of the Transamerica Center. "The saver's credit might just be the motivator for those not yet saving for retirement to get started."

"Saving for retirement is a challenge for many households in America," said Scott Spann, a senior financial planner with Financial Finesse, a provider of workplace financial wellness programs in Charleston, S.C. "Special tax incentives help make the process of saving easier."

What Is the Saver's Credit?

Like other tax credits, the saver's credit can increase a taxpayer's refund or reduce the tax owed. Here's how it works:

The amount of the credit is a maximum of 50 percent of an employee's retirement plan contributions or up to $2,000 (or $4,000 for married couples filing jointly), depending on the filer's adjusted gross income (AGI) as reported on Form 1040. Consequently, the maximum saver's credit is $1,000 (or $2,000 for married couples filing jointly).

The saver's credit "is different than a tax deduction due to the fact that a tax credit is a dollar-for-dollar reduction of your gross tax liability, [which is] the total amount of taxes you're responsible for paying before any credits are applied," Spann explained.

The saver's credit is in addition to the tax benefit of contributing pretax dollars to a qualified retirement plan such as an employer-sponsored 401(k) or an IRA. "Many eligible retirement savers may be confusing these two incentives because the notion of a double tax benefit"—pretax contributions and an additional tax credit—"seems too good to be true," Collinson said.

Who Can Claim the Saver's Credit?

The credit is available to workers age 18 or older who have contributed to a company-sponsored retirement plan or an IRA in the past year and who meet the income requirements shown in the table below. The filer cannot be a full-time student and cannot be claimed as a dependent on another person's tax return.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Income Caps for Tax Years 2018 and 2019

The amount of the available tax credit diminishes as income rises, up to the AGI limit. To help preserve the credit's value, income thresholds are adjusted annually to keep pace with inflation. Below are the income caps for tax year 2018 (when claiming the credit on tax returns filed this year) and 2019 (for returns filed next year).

 

​2018 Saver's Credit
Tax Credit Rate Single Filers and Married, Filing Separately* Married, Filing Jointly Heads of Household
50% of contributionAGI not more than $19,000AGI not more than $38,000AGI not more than $28,500
20% of contribution$19,001 - $20,500$38,001 - $41,000$28,501 - $30,750
10% of contribution$20,501- $31,500$41,001 - $63,000$30,751 - $47,250
0 creditmore than $31,500more than $63,000more than $47,250
2019 Saver's Credit
Tax Credit Rate Single Filers and Married, Filing Separately* Married, Filing Jointly Heads of Household
50% of contributionAGI not more than $19,250AGI not more than $38,500AGI not more than $28,875
20% of contribution$19,251 - $20,750$38,501 - $41,500$28,876 - $31,125
10% of contribution$20,751- $32,000$41,501 - $64,000$31,126 - $48,000
0 creditmore than $32,000more than $64,000more than $48,000

*Includes qualifying widow(er)s.

Source: IRS.

Deadlines for Retirement Contributions

"You must make eligible contributions to your employer-sponsored retirement plan or IRA for the tax year for which you are claiming the income tax credit," Spann said.

While 401(k) contributions for a tax year can be made only up to Dec. 31, workers can contribute to an IRA up to the mid-April income tax filing deadline for the tax year.

"Those who are eligible but did not save last year can still contribute to an IRA until April 15, 2019, and may be able to claim the saver's credit for 2019," Collinson noted.

Filing for the Saver's Credit

Employers can advise eligible workers to take the following steps to claim the saver's credit, according to the Transamerica Center:

  • If using tax preparation software, including those programs offered through the IRS Free File program, use Form 1040 or Form 1040NR for nonresident aliens. Answer questions about the saver's credit, which may be referred to as the Retirement Savings Contributions Credit and/or Credit for Qualified Retirement Savings Contributions.
  • If preparing tax returns manually, complete Form 8880, Credit for Qualified Retirement Savings Contributions, to determine your exact credit rate and amount. Then transfer the amount to the designated line on Form 1040 (schedule 3) or Form 1040NR.
  • If using a professional tax preparer, ask about the saver's credit.
  • Consider having any refund received directly deposited into an IRA to further boost your retirement savings.

The Transamerica Center has additional information in English and Spanish on its Saver's Credit webpage, along with a downloadable fact sheet/poster.

IRS Free File Program

Another potentially overlooked opportunity for workers who are eligible to claim the saver's credit is the IRS Free File program, which offers federal income tax preparation software at no charge to tax filers with an AGI of $66,000 or less. Twelve tax preparation services make their software available to eligible tax filers through the program.

Related SHRM Articles:

At Tax Time, Urge Review of Paycheck Withholding and Retirement Savings, SHRM Online, January 2019

How to Promote Retirement Savings for America Saves Week 2019, SHRM Online, January 2019


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