Tax question-above the line

[Andrew321]

Hi all,
I have a tax question: AGI is ~23,000 and $5,500 was put in a Roth IRA. Can that contribution be a tax credit under the saver's credit? I wasn't sure how the tax situation worked with a Roth because it's supposed to be after-tax dollars. Does that mean that Uncle Sam will give a $2,750 (50 percent of $5,500) break? https://www.thebalance.com/retirement-s ... it-4125920 This is where I read this might be possible, and I want to fact-check my understanding.

Thanks!

[arcticpineapplecorp.]

Hi all,
I have a tax question: AGI is ~23,000 and $5,500 was put in a Roth IRA. Can that contribution be a tax credit under the saver's credit? I wasn't sure how the tax situation worked with a Roth because it's supposed to be after-tax dollars. Does that mean that Uncle Sam will give a $2,750 (50 percent of $5,500) break? https://www.thebalance.com/retirement-s ... it-4125920 This is where I read this might be possible, and I want to fact-check my understanding.

Thanks!

You don't say your marital status.

If you're filing single and agi is $23,000 then you can get a 10% saver's credit because AGI is between $20,501 and $31,500. A 10% saver's credit on $5500 is $550. That's the tax savings you'd get.*

If you're filing married filing jointly or head of household, then yes it would be 50% which would be $2,750 tax savings.*

Even though you don't get a tax deduction for the contribution because it's after tax with the Roth, you still get the retirement saver's credit.

*By the way, this credit is non-refundable, not refundable. That means the credit can reduce your tax to $0 but if your tax liability is already $0 you won't get additional money back because of this credit. Do you understand the difference? In short, if you're married the standard deduction is $24,000 so if your AGI is below that, your tax liability is $0 and you don't get anything extra from the retirement saver's credit.
https://www.nrsforu.com/iApp/tcm/ocfa45 ... Limits.jsp
https://www.google.com/search?client=fi ... BIh9q0Wano

You have to file form 8880 to get the credit. If you use tax software (use free file through IRS or go to a V.I.T.A. site, that's volunteer income tax assistance) they will make sure it gets done properly, but double check.

I volunteer for V.I.T.A. through the United Way. Find one near you:
https://www.irs.gov/individuals/free-ta ... volunteers

[Andrew321]

Hi arctic,
Thank you. Filing single, and when I re-read your response, I noticed a mistake. Gross is ~23,000; after the $5,500 contribution it's $17,500. Would that qualify for the 50% credit?

Sorry for the error.

[arcticpineapplecorp.]

Hi arctic,
Thank you. Filing single, and when I re-read your response, I noticed a mistake. Gross is ~23,000; after the $5,500 contribution it's $17,500. Would that qualify for the 50% credit?

Sorry for the error.

The credit is based on AGI. Since the Roth is non-deductible it doesn't change your AGI. A tax deferred IRA would reduce your AGI to $17,500. So your AGI is $23,000 (based on Roth contribution) and therefore the credit is 10%.

If you want to contribute to a traditional IRA instead, then yes you would get a 50% on the $5500 contributed to traditional (not Roth) IRA, which would save you $2750 in tax.

Does that answer it?

With your income, don't pay to have your taxes done. Either do it yourself through freefile with the IRS (it's good practice to learn about taxes so you understand what benefits/incentives there are in the tax code) or go to a V.I.T.A. site near you.

https://www.irs.gov/individuals/free-ta ... volunteers

By the way, good catch on your part...can't tell you how many people don't even know this credit exists. It's easier now because software picks it up as opposed to the old days when you had to know it existed. But still, you have to take advantage of it through saving, and as you can see, there is still thought into whether to contribute Roth or traditional depending on whether you want to capture the bigger credit or not.

[dodecahedron]

The credit is based on AGI. Since the Roth is non-deductible it doesn't change your AGI. A tax deferred IRA would reduce your AGI to $17,500. So your AGI is $23,000 (based on Roth contribution) and therefore the credit is 10%.

If you want to contribute to a traditional IRA instead, then yes you would get a 50% on the $5500 contributed to traditional (not Roth) IRA, which would save you $2750 in tax.

Potential tax savings is much less than $2,750 in tax.

1) The credit is based on up to $2,000 in contributions, not the full $5,500 contribution. So theoretically, the maximum tax credit is 50% of $2,000 or $1,000.

2) The credit is nonrefundable, which means it is limited to the amount of actual tax liability. E.g., in your example, if AGI is $17,500 and OP is taking standard deduction for a nondependent single person under 65, then his tax liability is ($17,500-12,000)*.10=$550.

[arcticpineapplecorp.]

The credit is based on AGI. Since the Roth is non-deductible it doesn't change your AGI. A tax deferred IRA would reduce your AGI to $17,500. So your AGI is $23,000 (based on Roth contribution) and therefore the credit is 10%.

If you want to contribute to a traditional IRA instead, then yes you would get a 50% on the $5500 contributed to traditional (not Roth) IRA, which would save you $2750 in tax.

Potential tax savings is much less than $2,750 in tax.

1) The credit is based on up to $2,000 in contributions, not the full $5,500 contribution. So theoretically, the maximum tax credit is 50% of $2,000 or $1,000.

2) The credit is nonrefundable, which means it is limited to the amount of actual tax liability. E.g., in your example, if AGI is $17,500 and OP is taking standard deduction for a nondependent single person under 65, then his tax liability is ($17,500-12,000)*.10=$550.

yep, you're right. i missed it and it was right here:
https://www.nrsforu.com/iApp/tcm/ocfa45 ... Limits.jsp

good catch.

[Andrew321]

Thank you all. I appreciate the help. I hope to receive some small tax benefit, and am now confused about the paperwork. What I've read is that the eligibility is based on AGI, but the saver's credit form itself requires line 7 from form 1040, which is the W2 wages line, not line 37, which is AGI.

https://www.creditkarma.com/tax/i/what- ... rs-credit/
Form 8880: https://www.irs.gov/pub/irs-pdf/f8880.pdf
Form 1040: https://www.irs.gov/pub/irs-pdf/f1040.pdf

Can someone put this in plain English?

Thanks again,
Andrew

[arcticpineapplecorp.]

this one's easy (I'm sure not to mess it up!):

If you look at the link you referenced for the retirement credit worksheet...that's for 2018
but if you look at the 1040 you referenced...that's for 2017!

If you look at a draft 1040 for 2018 instead...you get the AGI is on, sure enough, line 7 of the new (post card size) 1040 tax return:

https://www.irs.gov/pub/irs-dft/f1040--dft.pdf

does that answer it?

[Andrew321]

this one's easy (I'm sure not to mess it up!):

If you look at the link you referenced for the retirement credit worksheet...that's for 2018
but if you look at the 1040 you referenced...that's for 2017!

If you look at a draft 1040 for 2018 instead...you get the AGI is on, sure enough, line 7 of the new (post card size) 1040 tax return:

https://www.irs.gov/pub/irs-dft/f1040--dft.pdf

does that answer it?

+1, yes, and thank you very much! This discovery has been a comedy of errors, mostly because I forgot about some income. All said and done, I expect this to save me about $1,400, or my entire federal tax liability.

[FiveK]

+1, yes, and thank you very much! This discovery has been a comedy of errors, mostly because I forgot about some income. All said and done, I expect this to save me about $1,400, or my entire federal tax liability.

The most the saver's credit can be for a single filer is $1000, so I hope there's an extra $400 you expect to come from something else this journey has uncovered...?

[Andrew321]

+1, yes, and thank you very much! This discovery has been a comedy of errors, mostly because I forgot about some income. All said and done, I expect this to save me about $1,400, or my entire federal tax liability.

The most the saver's credit can be for a single filer is $1000, so I hope there's an extra $400 you expect to come from something else this journey has uncovered...?

Thanks for responding. I'm happy to say that the saver's credit maxes out at 2K, not 1K.
Source: https://www.irs.gov/retirement-plans/pl ... ers-credit

[FiveK]

+1, yes, and thank you very much! This discovery has been a comedy of errors, mostly because I forgot about some income. All said and done, I expect this to save me about $1,400, or my entire federal tax liability.

The most the saver's credit can be for a single filer is $1000, so I hope there's an extra $400 you expect to come from something else this journey has uncovered...?

Thanks for responding. I'm happy to say that the saver's credit maxes out at 2K, not 1K.
Source: https://www.irs.gov/retirement-plans/pl ... ers-credit

Unfortunately the descriptive text is not well worded. The most the saver's credit can be for a single filer is $1000. See https://www.irs.gov/pub/irs-pdf/f8880.pdf, with the following most advantageous entries:
Line 7: $2,000
Line 9: 0.5
Line 10: $1,000
Line 12: $1,000

[kaneohe]

..................................
The most the saver's credit can be for a single filer is $1000, so I hope there's an extra $400 you expect to come from something else this journey has uncovered...?

Thanks for responding. I'm happy to say that the saver's credit maxes out at 2K, not 1K.
Source: https://www.irs.gov/retirement-plans/pl ... ers-credit

I agree w/ FiveK. The statement in your link: "The maximum credit amount is $2,000" is unfortunately worded.
Perhaps it should have been more like: The maximum contribution used in the credit amount calculation is 2K".
The worksheet example from F8880 used by FiveK makes that clear.

[Andrew321]

Aha. Gotta hate legalese. In any event, it’s a grand I didn’t know about last week! Do you have advice for what I should do with it?

[arcticpineapplecorp.]

Aha. Gotta hate legalese. In any event, it’s a grand I didn’t know about last week! Do you have advice for what I should do with it?

invest it in your Roth IRA for 2019.

[Andrew321]

Aha. Gotta hate legalese. In any event, it’s a grand I didn’t know about last week! Do you have advice for what I should do with it?

invest it in your Roth IRA for 2019.

Good advice! Thanks.

[dodecahedron]

Aha. Gotta hate legalese. In any event, it’s a grand I didn’t know about last week! Do you have advice for what I should do with it?

It is a non-refundable credit so it is only a grand IF your pre-credit tax liability is at least a grand. With an AGI of $17,500 and standard deduction, your pre-credit tax liability is only $550, so that is the cap on your credit.

See line 11 here:

https://docs.google.com/viewer?url=http ... Ff8880.pdf

[teen persuasion]

I'm still not clear if OP did a Roth IRA contribution or deductible tIRA contribution. His $1400 tax obligation implies Roth, which means his Saver's credit is limited to 10%, or $200 max.

[Retired2013]

Aha. Gotta hate legalese. In any event, it’s a grand I didn’t know about last week! Do you have advice for what I should do with it?

It is a non-refundable credit so it is only a grand IF your pre-credit tax liability is at least a grand. With an AGI of $17,500 and standard deduction, your pre-credit tax liability is only $550, so that is the cap on your credit.

See line 11 here:

https://docs.google.com/viewer?url=http ... Ff8880.pdf

+1
I've been saying the "Savers Credit" is misleading for years. I can't figure out how anybody can receive the full amount ever, since the tax liability can't be enough to cover the credit.

If AGI for a single can't exceed $19,000 to receive 50% credit. You put $4,000 in a IRA or 401(k). 50% is $2k crdit.

The tax liability is:
AGI 19,000
Standard deduction $12,000
Taxable income $7,000
Tax liability @ 10% = $700.

Max benefit $700. non-refundable credit.

If AGI goes above $19k, the credit goes down.

Please, somebody show me how anybody could actually get the full $1k or $2k. Show me a hypothetical tax return.

[Edie]

Aha. Gotta hate legalese. In any event, it’s a grand I didn’t know about last week! Do you have advice for what I should do with it?

It is a non-refundable credit so it is only a grand IF your pre-credit tax liability is at least a grand. With an AGI of $17,500 and standard deduction, your pre-credit tax liability is only $550, so that is the cap on your credit.

See line 11 here:

https://docs.google.com/viewer?url=http ... Ff8880.pdf

+1
I've been saying the "Savers Credit" is misleading for years. I can't figure out how anybody can receive the full amount ever, since the tax liability can't be enough to cover the credit.

If AGI for a single can't exceed $19,000 to receive 50% credit. You put $4,000 in a IRA or 401(k). 50% is $2k crdit.

The tax liability is:
AGI 19,000
Standard deduction $12,000
Taxable income $7,000
Tax liability @ 10% = $700.

Max benefit $700. non-refundable credit.

If AGI goes above $19k, the credit goes down.

Please, somebody show me how anybody could actually get the full $1k or $2k. Show me a hypothetical tax return.

The maximum credit is $1k, as 50% of the $2k allowable (for the credit) contribution. Not $2k as 50% of $4k.
Head of household, income 30,500, contributing $2k to trad IRA

AGI 28,500
Standard deduction $18,000
Taxable income $10,500
Tax liability @ 10% = $1,050

Max benefit $1000, still has tax liability of $50.

[kaneohe]

.........................]

...................................
......................................... You put $4,000 in a IRA or 401(k). 50% is $2k crdit.

.........................................

I thought FiveK had shown above that the max contribution for which you get credit is 2K even if you contribute
4K. The credit for a 4K contribution would then be the same for 2K contribution = 1K. Might make your job a bit easier (but still tough) to get full full credit. https://www.irs.gov/pub/irs-pdf/f8880.pdf Use this form to do the calculation of credit.

[Retired2013]

Aha. Gotta hate legalese. In any event, it’s a grand I didn’t know about last week! Do you have advice for what I should do with it?

It is a non-refundable credit so it is only a grand IF your pre-credit tax liability is at least a grand. With an AGI of $17,500 and standard deduction, your pre-credit tax liability is only $550, so that is the cap on your credit.

See line 11 here:

https://docs.google.com/viewer?url=http ... Ff8880.pdf

+1
I've been saying the "Savers Credit" is misleading for years. I can't figure out how anybody can receive the full amount ever, since the tax liability can't be enough to cover the credit.

If AGI for a single can't exceed $19,000 to receive 50% credit. You put $4,000 in a IRA or 401(k). 50% is $2k crdit.

The tax liability is:
AGI 19,000
Standard deduction $12,000
Taxable income $7,000
Tax liability @ 10% = $700.

Max benefit $700. non-refundable credit.

If AGI goes above $19k, the credit goes down.

Please, somebody show me how anybody could actually get the full $1k or $2k. Show me a hypothetical tax return.

The maximum credit is $1k, as 50% of the $2k allowable (for the credit) contribution. Not $2k as 50% of $4k.
Head of household, income 30,500, contributing $2k to trad IRA

AGI 28,500
Standard deduction $18,000
Taxable income $10,500
Tax liability @ 10% = $1,050

Max benefit $1000, still has tax liability of $50.

Thank You. I never tried Head of Household. First time I've seen it work out for the full credit amount. Still don't see it working for Single or Married.

Note: Around 3 - 4 years-ago, I had my sister put $3k in a IRA thinking she would get back $1.5k but never read the instructions far enough to see that this was a non-refundable credit. Her tax liability was around $400 so that was all she received. When she told me that, I though she did her tax return wrong. That's when I learned it was a non-refundable credit. As DW would say, read all of the instructions!

I also see that the credit amount has changed since I last did it.

[FiveK]

Still don't see it working for Single or Married.

MFJ earning $38K. Each contributes $2K to Roth IRA. One dependent. Received $18K Advance Premium Tax Credit w/ SLCSP = $18K.

Taxable = $14,000. Tax = $1400. Excess APTC tax = $600. Saver's credit = $2000. Net $0.

Don't know how likely, but it's possible.

Might be a similar situation for filing single, but that's an exercise left to the reader.

[kaneohe]

Still don't see it working for Single or Married.

MFJ earning $38K. Each contributes $2K to Roth IRA. One dependent. Received $18K Advance Premium Tax Credit w/ SLCSP = $18K.

Taxable = $14,000. Tax = $1400. Excess APTC tax = $600. Saver's credit = $2000. Net $0.

Don't know how likely, but it's possible.

Might be a similar situation for filing single, but that's an exercise left to the reader.

Very clever, FiveK. Thought if there were SE income the tax would be higher than normal and could make more of the savers credit available. After I saw your post, I realized the only other supplemental " taxes" that go against the non-refundable credits were the excess APTC and the AMT. The SE taxes are in the later section of the old 1040 so don't get applied against the non-refundable credits.

[dodecahedron]

Aha. Gotta hate legalese. In any event, it’s a grand I didn’t know about last week! Do you have advice for what I should do with it?

It is a non-refundable credit so it is only a grand IF your pre-credit tax liability is at least a grand. With an AGI of $17,500 and standard deduction, your pre-credit tax liability is only $550, so that is the cap on your credit.

See line 11 here:

https://docs.google.com/viewer?url=http ... Ff8880.pdf

+1
I've been saying the "Savers Credit" is misleading for years. I can't figure out how anybody can receive the full amount ever, since the tax liability can't be enough to cover the credit.

If AGI for a single can't exceed $19,000 to receive 50% credit. You put $4,000 in a IRA or 401(k). 50% is $2k crdit.

The tax liability is:
AGI 19,000
Standard deduction $12,000
Taxable income $7,000
Tax liability @ 10% = $700.

Max benefit $700. non-refundable credit.

If AGI goes above $19k, the credit goes down.

Please, somebody show me how anybody could actually get the full $1k or $2k. Show me a hypothetical tax return.

How to get the full $1K: take your example of the person with AGI of $19K. Suppose he got $300 in excess Advance Premium Tax Credits on his ACA policy. That results in $300 of repayment on Schedule 2, which is included in his line 11 number on his Form 1040.

It takes a very precise (and unlikely) alignment of the stars, but it could theoretically happen. Given the figures involved, it would probably require some kind of ¨shared policy allocation¨ situation.

Edited to add: as noted above, only a MFJ return in which both spouses contributed to their respective retirement accounts qualifies for a $2K savers credit, but they could also get their full $2K savers credit in a similar manner.

[Andrew321]

I'm still not clear if OP did a Roth IRA contribution or deductible tIRA contribution. His $1400 tax obligation implies Roth, which means his Saver's credit is limited to 10%, or $200 max.

I did Roth. I'm unfamiliar with the 10% rule for Roth. I didn't see it here: https://www.irs.gov/retirement-plans/pl ... ers-credit or on the 8880 form. I've misunderstood it twice, so I'm hoping for clarification.

Thanks to the many people who commented about what I'd be able to claim: my original AGI estimate was off by a few thousand (forgot a check) so my tax is higher, therefore I can get a few more bucks from the credit.

Andrew

[Epsilon Delta]

The credit is based on AGI. Since the Roth is non-deductible it doesn't change your AGI. A tax deferred IRA would reduce your AGI to $17,500. So your AGI is $23,000 (based on Roth contribution) and therefore the credit is 10%.

If you want to contribute to a traditional IRA instead, then yes you would get a 50% on the $5500 contributed to traditional (not Roth) IRA, which would save you $2750 in tax.

There is threshhold at an AGI of $19,000 to get the maximum 50% credit ($1000). It can make sense to split the $5,500 contribution between a deductible IRA and a Roth. In the above case take a $4000 deduction to get AGI to $19,000 (to get the maximum credit) and put the remaining $1,500 into a Roth. Once the savers credit has reduced your taxes to zero a Roth is better than a deductible IRA. You may want to figure taxes several ways since sometimes other things are in play.

Also note that you can recharacterize contributions until the extended filing date. So you can figure the exact split next year when there will be far fewer unknowns. (And you also know how the market has done -- If it quadruple in January hang the credit and put the gains in the Roth. )

This may be micro-optiomizing, but when you're earning $23k, $100 in current or future tax savings may be worth it, and everyone needs a hobby.

[kaneohe]

..............................................

I did Roth. I'm unfamiliar with the 10% rule for Roth. I didn't see it here: https://www.irs.gov/retirement-plans/pl ... ers-credit or on the 8880 form. I've misunderstood it twice, so I'm hoping for clarification.

............................................................

from your link: It's not a Roth rule..........it's just the multiplying factor when your AGI is in a certain range.

2018 Saver's Credit
Credit Rate All Other Filers*

10% of your contribution $20,501 - $31,500

and from F8880
................... single
$20,500 $28,500 0.1
$28,500 $30,750 0.1
$30,750 $31,500 0.1

[teen persuasion]

I'm still not clear if OP did a Roth IRA contribution or deductible tIRA contribution. His $1400 tax obligation implies Roth, which means his Saver's credit is limited to 10%, or $200 max.

I did Roth. I'm unfamiliar with the 10% rule for Roth. I didn't see it here: https://www.irs.gov/retirement-plans/pl ... ers-credit or on the 8880 form. I've misunderstood it twice, so I'm hoping for clarification.

Thanks to the many people who commented about what I'd be able to claim: my original AGI estimate was off by a few thousand (forgot a check) so my tax is higher, therefore I can get a few more bucks from the credit.

Andrew

Roth contributions won't change your AGI - traditional contributions would reduce your AGI by the amount you contributed (if deductible, that is). So if you made Roth contributions, your AGI is high enough that you are only eligible for the 10% credit.

Working backward from your $1400 tax liability: for single, that's ~$13250 taxable income + $12k standard deduction = $25250 AGI. Max contribution considered for the credit is $2k, and your AGI means you receive 10% of that, or $200 as your nonrefundable credit.

I have to agree with the others who have opined on the limitations of reaping the full credit due to its nonrefundable nature. This year I will have many multiples more nonrefundable credits than we can use - Saver's credit, AOTC (partial) and the increased CTC (also partial). But increasing AGI to use the credits (say by doing Roth conversions) is counterproductive because of high phaseout rates for refundable credits like EITC (both federal and state). And, of course, the Saver's credit shrinks and goes poof as AGI goes up.

[Andrew321]

I'm still not clear if OP did a Roth IRA contribution or deductible tIRA contribution. His $1400 tax obligation implies Roth, which means his Saver's credit is limited to 10%, or $200 max.

I did Roth. I'm unfamiliar with the 10% rule for Roth. I didn't see it here: https://www.irs.gov/retirement-plans/pl ... ers-credit or on the 8880 form. I've misunderstood it twice, so I'm hoping for clarification.

Thanks to the many people who commented about what I'd be able to claim: my original AGI estimate was off by a few thousand (forgot a check) so my tax is higher, therefore I can get a few more bucks from the credit.

Andrew

Roth contributions won't change your AGI - traditional contributions would reduce your AGI by the amount you contributed (if deductible, that is). So if you made Roth contributions, your AGI is high enough that you are only eligible for the 10% credit.

Working backward from your $1400 tax liability: for single, that's ~$13250 taxable income + $12k standard deduction = $25250 AGI. Max contribution considered for the credit is $2k, and your AGI means you receive 10% of that, or $200 as your nonrefundable credit.

I have to agree with the others who have opined on the limitations of reaping the full credit due to its nonrefundable nature. This year I will have many multiples more nonrefundable credits than we can use - Saver's credit, AOTC (partial) and the increased CTC (also partial). But increasing AGI to use the credits (say by doing Roth conversions) is counterproductive because of high phaseout rates for refundable credits like EITC (both federal and state). And, of course, the Saver's credit shrinks and goes poof as AGI goes up.

Thanks very much! It's a bummer I won't get as much as I hoped for, but hey, $200 unexpected bucks is still a nice surprise.

[harvestbook]

I've been using this tax estimator to see how much savers' credit I can get. By bumping up my Roth conversions I get more credit (in other words, more free Roth conversions.) I was eligible last year but owed no taxes and didn't realize I'd thrown away some "free money." It seems to do the Roth/tIRA breakdown automatically, since we had some of each.

I could pay the accountant a few hundred bucks to figure it out but I'd rather put that money to more Roth conversions. Even if we go over a bit, Roth conversions in the 10 percent bracket isn't the worst thing in the world. But there's a point where the conversions start reducing the credit, so there are moving parts.

https://www.olt.com/main/home/taxestimator.asp

[kaneohe]

I've been using this tax estimator to see how much savers' credit I can get. By bumping up my Roth conversions I get more credit (in other words, more free Roth conversions.) I was eligible last year but owed no taxes and didn't realize I'd thrown away some "free money." It seems to do the Roth/tIRA breakdown automatically, since we had some of each.

I could pay the accountant a few hundred bucks to figure it out but I'd rather put that money to more Roth conversions. Even if we go over a bit, Roth conversions in the 10 percent bracket isn't the worst thing in the world. But there's a point where the conversions start reducing the credit, so there are moving parts.

https://www.olt.com/main/home/taxestimator.asp

looks like a nice calculator.......but I stuck in 4K Roth and it gave $400 credit..........the 10% factor looks correct but
it seems like it is not limiting the Roth contribution (for credit calculations( to 2K so perhaps an error?