Are you eligible for the Saver's Credit? IRS Form 8880 will help you determine if you are eligible this credit for retirement savings. Here are the details.
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To encourage people with lower incomes to contribute to their retirement savings accounts, the Internal Revenue Service offers a tax credit for contributions to them. A tax credit directly reduces the amount of tax you owe, unlike a deduction, which only decreases your taxable income. In order to claim the retirement savings credit, you must use IRS form 8880.
Eligible retirement plans
Contributions you make to any qualified retirement plan can be used to satisfy the credit’s eligibility requirements. Qualified retirement plans include traditional IRAs, Roth IRAs, 401(k) plans, 403(b) plans and 457 plans. In the 2020 tax year, the maximum credit available to a single taxpayer is $1,000 and for joint filers, it increases to $2,000.
Your Adjusted Gross Income (AGI) must fall below the income limits for your filing status. For 2020, single filers with an AGI of $32,500 or more, head of household filers with AGI of $48,750 or more and joint filers with an AGI of $65,000 or more are ineligible to claim the credit.
These limits can change each year for inflation. In addition to satisfying the AGI limitations, you must be at least 18 years old, not enrolled as a full-time student at any time during the tax year and you cannot be claimed as a dependent on another person's tax return.
Calculating your eligible credit
Your Form 8880 will guide you through a calculation to determine the maximum credit amount you are eligible to claim. The size of your tax credit is a percentage of your annual retirement account contributions, which can range from 10 to 50 percent.
However, the credit percentage decreases as your AGI increases. For example, for 2020, a single taxpayer with an AGI of $16,750 can claim a credit equal to 50 percent of her IRA contributions; whereas, a similar taxpayer with an AGI of $27,000 calculates the credit as only 10 percent of annual contributions. One thing to remember is that you can still claim the credit even if you claim a deduction for those same IRA contributions.
TurboTax will ask you simple questions to determine your eligibility and will do these calculations for you.
Preparing Form 8880
To claim the credit, you must complete IRS form 8880 and include it with your tax return. Two key pieces of information you need before preparing Form 8880 is the AGI you calculate on your income tax return and documentation that reports your total retirement account contributions for the year. The IRS allows you to file Form 8880 with Forms 1040 or 1040NR (1040NR not supported in TurboTax).
Remember, with TurboTax, we'll ask you simple questions about your life and help you fill out all the right tax forms. Whether you have a simple or complex tax situation, we've got you covered. Feel confident doing your own taxes.