Saver's Tax Credit

The saver's tax credit is a non-refundable tax credit that can be claimed by taxpayers who make salary-deferral contributions to their employer-sponsored 401(k), 403(b), SIMPLE, SEP or governmental 457 plan and/or make contributions to their Traditional and/or Roth IRAs. The amount of the credit varies and depends on the adjusted gross income (AGI) of the taxpayer and the amount of the contribution or contributions.

The saver's tax credit was legislated into effect for tax years 2002-2006 by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and was made permanent by the Pension Protection Act of 2006 (PPA). The saver's tax credit is a non-refundable tax credit between 10 percent and 50 percent of the individual taxpayer's eligible contribution of up to a total of $2,000, which gives it a maximum value of $1,000. In addition, the maximum credit amount is the lesser of either $1,000 or the tax liability the taxpayer would have had without the credit. This means simply that the tax credit is non-refundable so the credit can only take the taxpayer down to zero tax liability, not into a refund.  The saver's tax credit can be used to offset income-tax liability but not as a refund. To determine the amount of the saver's tax credit, the taxpayer cannot take refundable credits or the adoption credit into consideration.

To be eligible to claim the saver's tax credit, the taxpayer must be 18 years old by the end of the tax year, not be a fulltime student and not be claimed as a dependent on another taxpayer's return. 

The saver's tax credit is based on several different levels of adjusted gross income (AGI) . The saver's tax credit rate is 50 percent for households with total AGI of $30,000 and under or individuals with an AGI of $22,500 or under. The saver's tax credit is 20 percent for households with a total AGI of $30,001-$32,500 or individuals with an AGI of $22,501-$24,375. The saver's tax credit is 10 percent for households with an AGI of $32,501-$50,000 or individuals with an AGI of $24,376-$37,500.

For example, a household earning $32,900 that contributes $2,000 to a retirement plan will receive a tax credit of $200, calculated by multiplying 10 percent by $2,000. Any amount contributed above that 10 percent is not eligible for the saver's tax credit. A taxpayer who contributes more than the allowable limit is required to correct the excess contribution by removing the amount from the fund in a certain time limit. Removing this excess amount is referred to as a return of excess contribution.