Saver’s Tax Credit 2023: Max $1,000 Credit for Retirement Savings Explained

Julia Kagan is a seasoned financial journalist and former senior editor at Investopedia, specializing in personal finance.

What Is the Saver’s Tax Credit?

The Saver’s Tax Credit is a valuable tax incentive designed to encourage moderate-income individuals to contribute to their retirement savings. It directly reduces the amount of income tax owed, dollar for dollar, based on contributions made to qualified retirement accounts.

This credit applies to eligible taxpayers who contribute to employer-sponsored plans such as 401(k), 403(b), SIMPLE, SEP, or government 457 plans, as well as traditional or Roth IRAs.

Key Highlights

• Available to moderate-income taxpayers making eligible contributions to retirement accounts.
• Acts as a subsidy for saving toward retirement.
• Nonrefundable credit ranging from 10% to 50% of contributions, capped at $2,000 per individual, with a maximum credit of $1,000.
• The credit amount cannot exceed the taxpayer’s total tax liability before applying the credit.

How the Saver’s Tax Credit Works

The credit percentage you qualify for depends on your adjusted gross income (AGI), ranging from 10% to 50% of your contributions up to $2,000. This means you can receive a tax credit as high as $1,000.

Since the credit is nonrefundable, it can reduce your tax liability to zero but will not result in a tax refund if your liability is less than the credit amount.

Eligibility requirements include being at least 18 years old at the end of the tax year, not being a full-time student, and not being claimed as a dependent on another person's tax return.

Income Limits and Credit Rates for 2023

The IRS updates income thresholds annually to adjust for inflation. For the 2023 tax year, the Saver’s Tax Credit rates are:

• 50% credit for joint filers with AGI up to $43,500 or single filers with AGI up to $21,750.
• 20% credit for joint filers with AGI between $43,501 and $47,500 or single filers with AGI between $21,751 and $23,750.
• 10% credit for joint filers with AGI between $47,501 and $73,000 or single filers with AGI between $23,751 and $36,500.

Important Note

Contributors must avoid exceeding annual contribution limits to qualified retirement accounts. Excess contributions must be withdrawn promptly to avoid penalties, a process known as a return of excess contribution.

Example Scenario

Consider a married couple filing jointly with a combined income of $47,900 in 2023. If they contribute $2,000 to a retirement plan, they qualify for a 10% Saver’s Tax Credit, amounting to $200. Contributions beyond this percentage are not eligible for additional credit.

Tax Benefits of IRAs and 401(k)s

IRAs and 401(k) plans are popular tax-advantaged retirement savings vehicles promoted by the federal government to encourage long-term savings.

401(k) plans are typically employer-sponsored benefits, while IRAs cater mainly to self-employed individuals. Various versions exist for public employees and small businesses.

Traditional accounts allow pre-tax contributions, deferring taxation until withdrawal during retirement. Roth accounts use post-tax dollars but offer tax-free withdrawals.

The Saver’s Tax Credit further incentivizes moderate-income earners to consistently save for retirement by providing a direct tax credit on contributions.

Who Qualifies for the Saver’s Tax Credit?

Taxpayers with moderate earned incomes, as defined by IRS income brackets, qualify for this credit. Depending on income, eligible contributors receive a credit of 10%, 20%, or 50% of their contributions, up to a maximum credit amount.

How to Claim the Saver’s Tax Credit

To claim the credit, eligible taxpayers must complete IRS Form 8880 and submit it alongside their Form 1040 when filing their tax return.

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