Qualifying for the Retirement Savers' Tax Credit

Question: I retired from my career a few years ago but still earn a little money working part-time at a golf course. I read your column about retirees who work part-time being able to contribute to a Roth IRA. Can I also qualify for the retirement savers tax credit?

AYou may qualify for this frequently overlooked tax credit. “A lot of people don’t know about the savers’ credit because it’s a fairly narrow credit and isn’t applicable to a lot of people,” says Greg Rosica, tax partner and contributing author to the EY Tax Guide.

However, the type of income used to determine eligibility for the savers’ credit is different from the income used to calculate whether you can contribute to an IRA. You may contribute to an IRA if you have earned income from a job or self-employment (up to the amount you earned for the year, with a $5,500 maximum for 2016, or $6,500 if 50 or older). But eligibility for the retirement savers’ tax credit is based on your adjusted gross income plus how much you contributed to a retirement savings plan.

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Even if you earned only a small amount from a job, your AGI could still be too high if you earned taxable income in other ways –- say, if you’ve taken withdrawals from tax-deferred retirement savings, have a taxable pension, or received taxable Social Security benefits or dividends or capital gains from investments. See the first page of Form 1040 for a list of items that are included and subtracted in the AGI calculations. (Your AGI is the number at the bottom of page 1 of Form 1040.)

The size of the savers’ credit depends not only on your adjusted gross income, but also the amount of money you contributed to a traditional or Roth IRA, or to a 401(k), 403(b), 457 or other retirement plan for the year. For 2016, if you’re married filing jointly, up to $4,000 in contributions can count toward the credit, or $2,000 if you’re filing as single or head of household. If your adjusted gross income is $40,001 to $61,500 if married filing jointly, $30,001 to $46,125 if filing as head of household, or $20,001 to $30,750 for single filers, the credit is worth 10% of your contribution. If your AGI is $37,001 to $40,000 if married filing jointly, $27,751 to $30,000 for heads of household, or $18,501 to $20,000 for single filers, the credit is worth 20% of your contribution. The credit is worth 50% of your contribution if your AGI falls below those levels.

Another wrinkle: Eligible contributions are reduced by recent distributions you received from an IRA or other retirement savings. For example, distributions made from 2014 until the due date of your 2016 tax return are subtracted from your eligible contributions for the 2016 credit. For more information and help calculating the size of the credit, see the worksheet on Form 8880, which you must submit when filing your taxes to claim the credit.

The income cut-offs are slightly higher for 2017 contributions. See the IRS’s Retirement Savings Contributions Credit factsheet for the 2016 and 2017 income limits.