Saving on your 2017 income tax bill while saving for retirement could be an even better deal than you thought. In addition to reducing your taxable income by funding an IRA or employer-provided salary-reduction arrangement, eligible taxpayers could also get a Saver’s Tax Credit.
A tax credit is a dollar-for-dollar reduction of your tax bill, as opposed to a tax deduction, which reduces your taxable income. A tax deduction reduces your tax bill based on your tax rate – the higher your tax rate, the higher your tax savings.
Figuring out whether you could receive a Saver’s Credit depends on the answers to three questions:
- Who is eligible for the credit?
To claim the Saver’s Credit for 2017, the taxpayer must be at least 18, cannot be a full-time student, and cannot be claimed as a dependent on another person’s return. Her or his adjusted gross income cannot be more than specified limits, based on filing status (i.e., $62,000 for married filing jointly, $46,500 for head of household, or $31,000 for single, married filing separately, or qualifying widow(er).
- What 2017 contributions are eligible for the credit?
Eligible contributions include funding a 2017 traditional or Roth IRA made by April 17, 2018. Salary reduction plan contributions, such as to an employer’s 401(k), SIMPLE IRA, SARSEP, 403(b), or 457(b) plan, are also eligible. Rollover contributions of any type are not eligible for the Saver’s Credit.
- How much is the Saver’s Credit?
The amount of the Saver’s Credit is based on a percentage of the contributions that were made for 2017. The credit rate is between 10 and 50 percent, depending on income and filing status. For example, a single taxpayer with earned income of $31,000 who makes a $1,000 IRA contribution for 2017 is eligible for a $500 Saver’s Credit.