Don't Mess With Taxes

Don't miss out on any tax breaks as you put together your retirement plan. That includes claiming the Saver's Credit if you're eligible.

Some retirement savers got an early Christmas present. On Dec. 23, President Joe Biden signed into law the $1.7 trillion omnibus package that keeps the federal government running and more.

Among the more was a revision of retirement provisions known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act. And one of those changes is the eventual conversion of the Saver's Credit into a matching contribution tied to workplace plans and IRAs.

That's a good move, as I note in my post about the coming credit conversion, but that's not going to happen until 2027.

In the meantime, if you qualify for the Saver's Credit, which could be as much as a $1,000 dollar-for-dollar offset of your tax liability, you need to claim it.

Contributing required: To do that, you first need to contribute to a qualifying retirement account. That's either your 401(k) plan — or 403(b) plan for employees of public schools and certain tax-exempt organizations, a 457 plan if you're a state or local government employee, the Thrift Savings Plan (TSP) for federal employees, or a self-employed retirement account if you're your own boss — at work, or an individual retirement account, either a traditional or Roth IRA.

Certain designated beneficiaries of Achieving a Better Life Experience, or ABLE, accounts also are eligible for the Retirement Savings Contributions Credit, as it's also known.

I know, it's too late to change your workplace plan contributions that come out of your paychecks. The last day for such money to count this year is Saturday, Dec. 31. My bad and mea culpa.

But you still can contribute to either version of an IRA.

IRA timing: Yes, you have until next Tax Day, which falls on Tuesday, April 18 in 2023, to set up a new IRA or add money to an existing IRA for 2022.

Again, it's your choice as to whether the traditional, tax-deferred or tax-free Roth version works better for your tax and financial circumstances.

But if you plan on filing your 2022 tax return early, you need to consider making your IRA contribution (or opening an account) soon. That way, if you're eligible, you can claim the Saver's Credit, too, when you do your taxes.

How to get the maximum credit: As noted, the Saver's Credit could be as much as $1,000. To get that amount, you must contribute at least $2,000 to your qualifying retirement accounts. When both spouses each contribute at least $2,000 to their eligible retirement savings, the credit is double, as each can claim $1,000.

And yes, that's an aggregate contribution amount, not per account. So if you've already put 2 grand into your workplace plan this year and you're eligible for the Saver's Credit, you're set. Just claim it when you file.

But if you don't have a workplace plan, or didn't put that much money into it, opening an IRA or adding to an existing one can help you reach the Saver's Credit max.

And it must be a new contribution for the tax year. Rolling money from one retirement account to another, such as an old workplace 401(k) you transfer into an IRA, doesn't count for Saver's Credit claim purposes.

Who can claim it: Saver's Credit eligibility, like most tax breaks, depends on a taxpayer's income.

The relevant income limits are based on your adjusted gross income and filing status. For the 2022 tax year, you can claim the credit if you file as a —

• Single taxpayer, including a married spouse filing separately, with income up to $34,000;
• Head of household with income up to $51,000; or
• Married couples filing jointly with combined incomes up to $68,000.

Your income level also determines whether you qualify for 50 percent, 20 percent, or 10 percent of the maximum contribution amount. The nearer the top of the earnings limit you are, the smaller percentage of the credit you can claim.

If you're already making tax year 2023 plans, check out the Saver's Credit section in Part 3 of the ol' blog's inflation series, which looks at how increases in the cost of living affect retirement accounts. It has details on the credit's earnings caps next year.

Other restrictions apply: In addition to income, the Internal Revenue Service also takes other special Saver's Credit rules into account.

First, you must be at least 18 years old to claim the tax credit.

If you are claimed as a dependent on someone else's tax return, you cannot take the credit.

Students also are prohibited from claiming the credit. For Saver's Credit purposes, you are considered a student if you are enrolled as a full-time student during any part of five calendar months during the tax year.

Any distributions from a retirement plan or ABLE account reduce the contribution amount used to figure the credit. For 2022, this rule applies to distributions received after 2019 and before the due date, including extensions, of your 2022 tax return.

Not refundable, but still helpful: Note, too, that other tax deductions and credits you claim could reduce, or even zero out, the Saver's Credit.

And even if you get the full $1,000 credit, it's nonrefundable. This means it can reduce your tax bill to zilch, but if there's more Saver's Credit left after you use it to wipe out what you owe Uncle Sam, the excess credit is lost.

But some tax savings are better than none. And plenty of folks have benefited from it.

The IRS points to tax year 2020 data, the most recent year for which complete figures are available, that show Saver's Credits totaling more than $1.7 billion were claimed on about 9.4 million individual income tax returns. That's an average of about $186 per eligible return.

Your tax preparer or tax software will help with your claim and calculations. For a preview, you also can check out Form 8880, which you'll file to claim the Saver's Credit (an excerpt of which is shown below), and its instructions (which are on page 2 of the form).

See more tax forms and more about them at Talking Tax Forms.

And even if you don't get the full $1,000 Saver's Credit amount, your nest egg contributions will pay off for you when you do retire.

You also might find these items of interest:

• Three retirement plans that also offer tax savings
• Tax Turkey to Avoid #2: Not collecting your employer's maximum 401(k) match
• Saver's Credit already offers an added nest egg tax break & there's talk of enhancing it (May 2021)

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