How to Use IRS Form 8880 to Claim the Savers Credit

"The rich always get the big tax breaks." There may be some truth in this quote but the affluent can't take advantage of a great benefit in the tax code called the Savers Credit. Enacted in 2002 as a temporary provision, this credit was made a permanent part of the tax code in 2006.

A tax credit reduces taxes dollar making it much more valuable much more valuable than a deduction.

The savers credit is designed to encourage low to moderate income workers to save for retirement by offsetting up to 50% of the cost of the first $2,000 placed into a qualifying retirement plan. The amount of the credit is a sliding scale of 50 percent, 20 percent or 10 percent of the amount set aside for retirement. The highest rate applies to taxpayers with the least amount of income.

Essentially the savers credit offers many workers an added bonus Money placed into an IRA, a ROTH IRA, a 401(K) plan, a 403(B) annuity, a governmental 457 plan, a SEP, or a SIMPLE IRA plan are all eligible for the credit..

To claim the credit you must meet the following qualifications: 1) You must be 18 or older. 2) You cannot be a full time student. 3) You cannot be claimed as a dependent on someone else's tax return. 4) Your Adjusted Gross Income cannot exceed $26,500 ($53,000 if married filing jointly or $39,750 if head of household).

Many employers offer a matching contribution up to a percentage of salary placed in employer sponsored retirement plans such as a 401(K). Anyone who is eligible should be alert to these "deals" offered by their employer and take advantage of both a valuable employee benefit and the associated tax credit.

For example, Mary is a teacher and files a joint return with her husband Jack who is working on the great American novel but has no current income. Mary earns $30,000 a year and her school district provides a tax sheltered annuity (403 B) plan with an employer match of 100% of the first 4% of contributions made to the plan. Mary decides to take advantage of the employer match benefit and invests $2,000 into the plan throughout the year. Mary and Jack receive an immediate tax benefit in that they are taxed on only $28,000 of salary income because of the salary deferral. In addition to the $2,000 contribution to the retirement plan the employer is contributing $1,200 so there is $3,200 added to the tax sheltered annuity investment. The tax savings credit will give Mary and Jack a $1,000 additional tax refund ($2,000 contribution x 50% credit) after their tax return is filed.

A $3,200 retirement investment ends up costing less than $1,000.

It's important to note that the credit is not automatic. You have to be aware of it and claim it on IRS form 8880. This form is to be included with the regular annual 1040 filing. Income limits for the credit (listed on form 8880) are adjusted annually to keep pace with inflation so be sure to keep this in mind.