Tax credit for savers: Definition, eligible recipients, and claiming procedures
In the upcoming tax year 2025, the Saver's Tax Credit offers a valuable opportunity for individuals to put some money back in their pockets while also saving for the future. This tax incentive, aimed at encouraging lower-income and middle-income individuals to contribute to retirement accounts, can help boost savings significantly.
To qualify for the Saver's Tax Credit, there are a few eligibility criteria to consider. Firstly, you must be at least 18 years old, not listed as a dependent on another person's tax return, and not enrolled as a full-time student. Eligible retirement plans for the Saver's Tax Credit include 401(k), SIMPLE IRA, ABLE account, SEP IRA, 403(b) or 457(b), and traditional or Roth IRA.
The income limits for the Saver's Tax Credit vary depending on filing status. For married couples filing jointly, the income cap is $79,000, with a 10% credit for those earning up to $51,001, a 20% credit for those earning between $51,001 and $51,000, and a 50% credit for those earning up to $47,500. For heads of household, the income cap is $59,250, with a 10% credit for those earning up to $38,251, a 20% credit for those earning between $38,251 and $38,256, and a 50% credit for those earning up to $35,625. For single and other filers, the income cap is $39,500, with a 10% credit for those earning up to $25,000, a 20% credit for those earning between $25,001 and $32,500, and a 50% credit for those earning up to $19,500.
Let's consider the example of Laura, who is married filing jointly and earns $50,000 in tax year 2025. Laura can claim a Saver's Credit of 20% on her $1,800 total annual contribution to her 403(b) plan and traditional IRA, resulting in a $360 credit.
When it comes to claiming the Saver's Tax Credit, taxpayers can open a retirement account through some of the best online brokers or robo-advisors, make their deposit, and use IRS Form 8880 to claim the credit if they meet the income limits and other eligibility criteria. It's important to note that the credit is a dollar-for-dollar reduction in the amount owed, unlike a tax deduction which reduces the amount of income subject to income tax.
The taxpayer is responsible for submitting Form 8880 to claim the Saver’s Tax Credit for contributions made by April 15, 2026, on their 2025 tax return. If you use tax software, the program should tell you if you qualify for the Saver's Credit based on your AGI and filing status.
In summary, the Saver's Tax Credit is an excellent way for eligible taxpayers to boost their retirement savings and reduce their tax liability. By understanding the income limits and eligibility criteria, individuals can take advantage of this valuable tax incentive and secure a brighter financial future.
