Saver's credit

Q: My understanding is that if I contribute to an IRA, I may qualify for an additional tax credit along with a tax deduction.

For 2022, I plan to contribute to a Traditional IRA. How does this credit work?

A: In an effort to provide an incentive for low-income individuals to contribute to their retirement plans, Congress passed the Retirement Savings Contribution Credit (Form 8880), often referred to as the “Saver's Credit,” a nonrefundable tax credit for contributions made by an eligible taxpayer to a qualified plan. The credit offsets both regular tax and Alternative Minimum Tax and is in addition to any applicable deduction.

The maximum retirement plan contribution eligible for the credit is $2,000 and an eligible taxpayer must be age 18 or over, not a full-time student or claimed as a dependent on another's tax return. The maximum credit allowed is $1,000 and is calculated using an “applicable percentage” based upon your filing status and adjusted gross income (AGI).

The 2022 Adjusted Gross Income limit for the saver's credit is:

• $68,000 for married couples filing jointly

• $51,000 for heads of household

• $34,000 for married individuals filing separately and for singles

The credit is available for elective contributions to any of the following plans:

• 401(k) plan

• 403(b) plan

• 457(b) plan

• SIMPLE IRA

• SEP IRA

• Traditional and Roth IRA's (other than rollover contributions)

• ABLE accounts

• Voluntary after-tax contributions to a qualified retirement plan

With limited exceptions, the qualified contribution is reduced by distributions made:

• During the year the credit applies

• During the two preceding years

• Prior to the due date of the return for the year in which the credit applies

Barry Dolowich is a certified public accountant and owner of a full-service accounting and tax practice with Monterey. He can be reached at 831-372-7200. Please address any questions to Barry at PO Box 710 Monterey, CA 93942 or email: bdolowich@ gmail.com.