If you make contributions to an eligible retirement plan or IRA, you may qualify for an additional tax credit known as Qualified Retirement Savings Contributions or Saver's Credit. This needs to be claimed on the IRS form 8880 but is not given to all taxpayers. What is this credit and who is eligible?
What is the Qualified Retirement Savings Contributions/Saver's Credit?
In some cases, taxpayers that make contributions to certain types of retirement plans and IRAs can claim a tax credit based on their savings each year. This runs up to $1,000, or $2,000 for joint filers, but is paid proportionately based on factors such as adjusted gross income and filing status which are used to create the qualifying contribution amount.
In basic terms, this means that lowest income taxpayers are likely to receive the highest credits. According to the IRS, the credit given ranges from 10-50%. The Saver's Credit does not replace other tax benefits that come as standard with eligible retirement plans but is given in addition to them.
IRS Form 8880 Tax Instructions: Who is Eligible?
There are certain eligibility criteria that must be met to qualify for an 8880 tax credit. For example, you, or your spouse if you are filing jointly, must have made one or more of the following contributions to plans such as:
- A 401(k), 403(b), SEP, SIMPLE or governmental 457 plan.
- A traditional or Roth IRA (rollover contributions do not count).
- A 501(c) (18) (D) plan.
- A defined contribution plans that qualifies under section 4974(c).
Distributions Also Affect the Retirement Savings Contribution Credit
If you have taken any distributions from a retirement plan, then this could also affect the credit you are given. These will need to be inputted into form 8880 for the two years before the claim year, the claim year itself and any time thereafter until the filing date (and extensions) for the relevant return.
You can download form 8880 on the IRS website. This form is used to work out how much credit will be given so that you can fill out the relevant field in your individual income tax return. It can be submitted with a 1040 or a 1040A but not with a 1040EZ.
Older people looking for tax filing and preparation advice may find it useful to check out the AARP's free Tax-Aide program and the site's online 1040 calculator to estimate taxes and refunds owed. It is also worth making sure to claim all available exemptions to reduce overall taxable income.
Sources: IRS.gov. Accessed online 4th January 2011.