The savers tax credit explained

A little known tax credit can help you save for retirement, even if you feel you don't have the money to do so.

The formal name is the Retirement Savings Contributions Credit. Most people, however, know it simply as the Saver's Credit, a two-timing savings strategy that reduces taxes and increases retirement.

By the numbers, here is how the Saver's Credit works: Let's say you pay yourself $2,000 in a qualified retirement plan, such as an IRA or 401(k). If your adjusted gross income is within a certain range (see chart below), the IRS allows you to receive a tax credit up to 50 percent of that contribution or, in this example, $1,000.

Say it ain't so, Joe.

It's true. In essence, you get paid for paying yourself.

Savers Tax Credit Eligibility

In order to receive the tax credit, you do need to meet certain requirements.

• Age 18 or older
• Not being claimed as a dependent on another person's return
• Not a full-time student
• Adjusted gross income (AGI) does not exceed $61,500 if filing jointly; $46,125 if filing as head of household or $30,750 for all other filers

What is the AGI?

Your AGI is your total gross income minus specific deductions, which are subject to change each year. But some deductions have been allowed each year including: half of the self-employment taxes you may pay, alimony payments, tuition and fees and contributions to certain retirement accounts such as a traditional IRA. Consult with a tax professional to find out all the deductions allowed in 2016.

The 1040 form is the only one that allows you to deduct every possible adjustment. Using form 1040A significantly reduces the number of available adjustments you can take¹, according to TurboTax. If you file taxes using the1040EZ form, your AGI equals your total income.

2016 Saver's Credit2
Credit Rate	Married Filing Jointly	Head of Household	All Other Filers*
50% of your contribution	AGI not more than $37,000	AGI not more than $27,750	AGI not more than $18,500
20% of your contribution	$37,001 – $40,000	$27,751 – $30,000	$18,501 – $20,000
10% of your contribution	$40,001 – $61,500	$30,001 – $46,125	$20,001 – $30,750
0% of your contribution	more than $61,500	more than $46,125	more than $30,750

*Single, married filing separately, or qualifying widow(er)

An Example of How the Tax Credit Works

Bob has been unemployed throughout 2016 and will not have any earnings to report for the year. His wife Barbara earned $36,000 working at a retail store. Barbara contributed $1,000 to her IRA in 2016, which resulted in an adjusted gross income on their joint return as $35,000. Barbara is able to claim a 50 percent credit or $500 for her $1,000 IRA contribution.

The Saver's Credit can be taken for your contributions to the following:

• A traditional or Roth IRA
• Your 401(k), Simple IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan
• Your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans.

If you have further questions about eligibility for the Saver's credit, consult a tax professional. You may find that the IRS will pay you (with a credit) to pay yourself.

¹ TurboTax

² Internal Revenue Service