BENEFITS

Retirement Savings Contributions Credit

The Retirement Savings Contributions Credit (Saver's Credit) rewards entrepreneurs who contribute to qualifying retirement plans by allowing them to take a credit of up to $2,000 ($4,000 if married filing jointly) on their individual tax return in 2018. The value of the Saver's Credit you may be eligible to claim is calculated based on a percentage of your total contributions and can be an easy tax break for entrepreneurs with 2018 AGI less than $31,500 / $63,000 (married) who still make contributions to certain retirement plans.

UBER DRIVER / RIDESHARE

Last year Bill drove for Lyft part time and worked at home finalizing the concept for his startup business. Bill's AGI last year was $26,000. He is single, has not yet taken any distributions from his retirement plan and is claiming no other tax credits. Despite only working part time during the year, Bill contributed $2,000 to his IRA. Given Bill's AGI and filing status, he would be able to claim a savers credit of $200, since his contribution is limited to the lesser of 10% of his AGI or $1,000.

COURIER

Michelle is newlywed who drives full time for instacart in Phoenix, Arizona. Michelle and her husband's total household income last year was $38,000 and they contributed $4,000 to their Roth IRA. Neither Michelle or her husband have taken any distributions from their retirement plan or are claiming any other tax credits. Based on their AGI and filing status, they would be allowed a savers credit of $800 ($4,000 x 20%) on line 51 of their Form 1040.

REAL ESTATE AGENT

Naya is a Louisville, Kentucky based real estate agent who brought in $150,000 of commission income during the year. She is married and had a household AGI of $225,000. Naya and her husband contributed a total of $25,000 to their 401(k)'s during the year. Since Naya and her husband have an AGI above $63,000, they are not eligible to claim any savers credit despite having contributed a substantial amount to their retirement plans.

PHOTOGRAPHY

Kellyanne is a college student who is pursuing a major in Photography. During the year she did some freelance work, earning $15,000. Kellyanne contributed $5,000 of her freelance income to her Roth IRA and used the rest as spending money. Even though Kellyanne contributed to a qualifying plan and would have an AGI below $18,000 (she had no other gross income during the year) she would not be eligible to claim the savers credit because she was a student.

PROFESSIONAL SERVICES

Mike is a freelance architect who started his own firm during the year. During his first year of business he had no income and took an early distribution of $35,000 from his retirement plan to help supplement his income while he got his business off the ground. The following year, Mike had an AGI of $30,000 and contributed $2,000 to his 401(k). Even though he would ordinarily qualify for a 10% Saver's Credit, since his total distributions exceeded his current year contribution amount, he would not be eligible to claim the credit.

WHAT YOU SHOULD KNOW ABOUT THE TAX CREDIT

  • If you meet the requirements to take the Retirement Savings Contributions Credit (Savers Credit), you can offset your tax liability by up to $2,000 if you are single or $4,000 if you are married and file a joint return. The allowable credit is calculated as a percentage of your total contributions.
  • In 2018 if you are single with an AGI of $19,000 or less you can take a credit of 50% of your qualifying contribution, up to $2,000. The credit percentage phases out completely once your AGI exceeds $31,500. If you are married with an AGI less than $38,000 you can take a credit of 50% of your qualifying contribution up to $4,000. The credit percentage phases out once your AGI exceeds $63,000.
  • To qualify for the credit you must be over 18 years old and you cannot be a student or be claimed as a dependent on someone else's tax return.
  • Qualifying amounts include the total of contributions to your traditional or Roth IRA (excluding rollover contributions), your 401(k) or 403(b), 457 plan, SARSEP, SIMPLE plan, 501(c)(18)(d) plan and voluntary after-tax contributions to a qualified retirement plan. Note however that contributions to any of the aforementioned plans must be offset by distributions received from any of these plans between January, 2012 and the due date of your return. You do not need to reduce your qualifying contributions by distribution amounts received if the distributions were the result of certain rollovers, related to an IRA conversion, excess contributions or deferrals, or a loan treated as a distribution from a qualifying plan, to name a few. Refer to Form 8880 instructions for a full list of distributions that can be excluded from your contribution reduction calculation.
  • If your AGI was reduced from the foreign earned income exclusion or foreign housing deduction, these reductions should be added back to your AGI for calculation of your retirement savings contributions credit.

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