Saver's Credit Cuts the Taxes You Owe

By: AARP.org | November 2008

Tax-preferred saving is one incentive to encourage you to save for retirement. Did you know that federal tax law provides another: the Saver's Credit? This little-known tax break applies to those earning up to $55,500 a year ($27,750 for single filers). In addition to any tax deductions or exclusions you get on your qualified plan contributions, you could be eligible for a tax credit of up to $1,000.



Here's How It Works:

You may be eligible for the Saver's Credit if:

• Your adjusted gross income for 2009 is no more than $55,500 for joint filers or $27,750 for single filers
• You contributed to a qualified retirement plan (that is, a 401(k), 403(b) annuity, 457, SIMPLE IRA, or certain other employer plans), or an IRA this tax year
• You are at least 18 years old and not a full-time student
• No one claims you as a dependent on his or her tax return

The credit amount depends on your adjusted gross income and filing status.

Forms You Need

If you use tax preparation software, use Form 1040A, Form 1040, or Form 1040NR. The credit isn't available on Form 1040EZ. If the software has an interview process, be sure to answer questions about the Saver's Credit. The software may also refer to it as the "Retirement Savings Contributions Credit" or the "Credit for Qualified Retirement Savings Contributions."



If you prepare a paper return, fill out Form 8880: "Credit for Qualified Retirement Savings Contributions." Complete the form to determine your credit rate and the amount. Then copy that amount on the line indicated on Form 1040A, 1040, or 1040NR.



If you use a paid tax preparer, tell them that you may be eligible for the Saver's Credit. They will surely be aware of the credit, but you should make note of it, too.

*The credit amount applies to the first $2,000 in contributions.

Some Examples

Kelly meets the eligibility criteria. She files her taxes jointly on adjusted gross income of $34,000. She is eligible for a credit on 20 percent of her retirement plan contribution.

Kelly's contribution for 2009: $2,000

Amount IRS considers for the credit: $2,000

Dollar value of 20-percent credit: $400

The Saver's Credit gives Kelly $400 to apply toward any federal tax she owes when she files her 2009 return.



John meets the eligibility criteria. His filing status is single on adjusted gross income of $22,000. He is eligible for a credit on 10 percent of his retirement plan contribution.

John's contribution for 2009: $2,000

Amount IRS considers for the credit: $2,000

Dollar value of the 10-percent credit: $200

The Saver's Credit gives John $200 to apply toward any federal tax he owes when he files his 2009 return.



Sarah meets the eligibility criteria. She files her taxes as head of household on an adjusted gross income of $24,000. She is eligible for a credit on 50 percent of her retirement plan contribution (see above chart).

Sarah's contribution for 2009: $1,000

Amount IRS considers for the credit: $1,000

Dollar value of 50-percent credit: $500

The Saver's Credit gives Sarah $500 to apply toward any federal tax she owes when she files her 2009 return.



Promotion of the Saver's Credit
AARP's effort to increase awareness of the Saver's Credit is part of our broader mission to improve retirement security for all. Building awareness of the Saver's Credit is one way to help bring much-needed resources to eligible populations. We work at both the individual level and through employers to reach those who would benefit most.