Tax credits and deductions are created and amended regularly to help Americans and businesses lower their tax burden each year. The government offers many credits to encourage taxpayers to take steps for the health of their finances and the economy at large, including initiatives promoting retirement savings accounts. Retirement savings should be a top priority when planning for taxes each year.
The IRS created a tax credit known as the Saver’s Credit to encourage lower-income taxpayers to continue contributing to their retirement savings. This credit applies to certain qualifying contributions and reduces the amount of tax owed by the eligible taxpayer. Anyone making retirement plan contributions should look into whether they can claim this helpful credit.
The credit can be pretty significant, ranging from 10% to 50% based on your contributions made and adjusted gross income for the year. The Saver’s Credit worth is up to $1,000 for individual filers and $2,000 if married filing jointly.
Form 8880, Credit for Qualified Retirement Savings Contributions, is how you determine your eligibility for the Saver’s Credit and claim the credit with the IRS. The one-page form is relatively straightforward, but there are details and requirements you need to know before you get started. Here is your guide to IRS Form 8880, information on who needs to file it, and six steps to complete it correctly.
Who Needs Form 8880?
Only fill out and submit Form 8880 if you meet every guideline for your income and your retirement savings plan. There are important eligibility requirements to know before claiming the Saver’s Credit. Outlined below are the IRS requirements for this tax break:
Eligible Taxpayers
Your adjusted gross income must be below the applicable income limits. The limits for 2020 are as follows:
- Individual filers – $32,500 or more
- Head of household filers – $48,750 or more
- Joint filers – $65,000 or more
Taxpayers that make more than these amounts are not eligible for the credit.
Qualified Retirement Plans
You can also determine if the way you’ve been saving applies to this credit. Here are the retirement plans that qualify:
- Traditional IRAs and Roth IRAs
- 401(k)s, 403(b)s, 457(b)s, SEPs, SIMPLEs, or federal thrift savings plans
- 501(c)(18)(D)
- ABLE accounts
You basically need to have made contributions to an IRA or an employer-sponsored retirement plan. Double-check that your plan qualifies.
Other Requirements
Qualifying taxpayers must also be at least 18 years old, not enrolled as a full-time student at any point in the applicable tax year, and not claimed by anyone else as a dependent.
These guidelines may change as tax law changes, so always talk through new IRS regulations with a tax professional. Meeting all of these eligibility requirements and contributing to the qualifying retirement plans means you are ready to move on to filing Form 8880.
6 Steps to File Form 8880
IRS Form 8880 is used specifically for the retirement saver’s credit. This is where you’ll report your income to determine eligibility and all of the contributions you made throughout the year to your retirement savings account. Follow these steps to complete the form:
1. Gather Your Information
Be prepared with all the right data. You will need your adjusted gross income amount from your tax return and the total retirement account contributions you made in the applicable tax year.
2. Identify Your Columns
You only fill out column (a) unless you are filing jointly, in which case you also complete column (b) with information about your spouse.
3. List All Qualifying Contributions
List all of your eligible retirement savings contributions in lines 1 and 2, and add them up on line 3.
4. List Any Distributions
Line 4 is where you outline all distributions you received after 2017 and before the current tax return deadline. Only include your spouse’s distributions if you filed a joint return the year the distribution was received. Follow the instructions for calculations in lines 5 through 7 to make sure you can take the credit.
5. Enter Income
Enter your income from Form 1040 on line 8. Lines 9 through 12 then provide detailed instructions for calculating your credit based on your income. There is a separate Credit Limit Worksheet in the form instructions that you use for line 11.
6. Include Form 8880 With Your Tax Return
Make sure to include your completed form with your tax return when you send it to the IRS by the deadline.
Always double-check that your income, retirement contributions, and calculations are correct before submitting your Form 8880. Any inaccurate data can cause delays from the IRS or other tax issues. Carefully review the eligibility requirements, so you are never trying to claim a credit you aren’t legally allowed to take.
Remember that a tax credit differs from a tax deduction. The former is better because it reduces your actual tax bill, while a deduction lowers your taxable income.
Tax law can change quickly, and so can the available credits and deductions. The retirement saver’s credit is a great way to get a generous tax break, but make sure you fully understand how to qualify regarding income limits and other factors, like your student status or whether you are a dependent on another person’s tax return.
Work With a Tax Expert on Form 8880
Tax guidelines are confusing for many taxpayers, so never hesitate to talk with a tax expert about your situation. The team at Silver Tax Group can review your tax status and income and help you figure out which credits or deductions you can take, including the retirement saver’s credit. We will handle Form 8880 preparation for you as well.
Our skilled team of tax attorneys also helps clients with additional concerns such as tax audits, emergency tax services, and tax debt. Contact our office today to speak with a tax expert about Form 8880 and the retirement savings credit.
