What's the point of Saver's tax credit?

raenye

Lever 2 Membel
(calculations are done for 2015, single, no dependents, and standard deduction, but it seems results hold for married too)

Let's say your IRA/401(k) contributions got you to the very point where you can take advantage of Saver's credit, that is, AGI of $30,500.
Your $2,000+ retirement contribution gives you $200 in non-refundable tax credit.

Tax bracket for $30k is 15%, so you owe 10% of $9,225 and 15% of $14,975 (= 30,500-9,225-6,300) --- altogether $3,168.50.

But the personal exemption is $4,000, so not only you can't use your $200 saver's credit, you're still wasting over $800 of your other tax credit!

:confused::confused::confused:

Where did I go wrong in the analysis?
 
Last edited:

raenye

Lever 2 Membel
OK, I think I got personal exemption wrong, but it's still not possible to maximize this in the 50% band.

To get 50% (of a contribution up to $2,000) you need AGI of $18,250. After standard deduction and personal exemption you're at $7,950, so tax owed is just $795. Hence you're wasting $205 in tax credit.

I understand most people making $20,000 won't think of contributing $2,000 but still...
 

Matt

Administrator
Staff member
This is an AGI issue @raenye - the calculation for the savers credit comes from line 38 of the 1040. This figure already has deductions factored in. Here's how it works:

Guy earns 35K.
Contributes 18K to 401(k)
Line 38 AGI 17K (barring other additions/deductions)
Savers credit = Max $1K.

Savers credit worksheet http://www.irs.gov/pub/irs-pdf/f8880.pdf (step 8 shows the 1040 line 38)
 

raenye

Lever 2 Membel
This is an AGI issue @raenye - the calculation for the savers credit comes from line 38 of the 1040. This figure already has deductions factored in. Here's how it works:

Guy earns 35K.
Contributes 18K to 401(k)
Line 38 AGI 17K (barring other additions/deductions)
Savers credit = Max $1K.

Savers credit worksheet http://www.irs.gov/pub/irs-pdf/f8880.pdf (step 8 shows the 1040 line 38)
But see the calculations above in my second post: he'll never use the full tax credit because now he owes just $800.
 

Matt

Administrator
Staff member
But see the calculations above in my second post: he'll never use the full tax credit because now he owes just $800.
Yeah good point. I wonder if there is a way to create a full value situation from this.... I was wondering if you itemized and claimed less than the standard deduction then cleared the balance with the credit - but that doesn't make immediate sense to me..

Or maybe they just used the $1K for neatness of numbers that don't need to be adjusted every year when tax brackets or rates change...
 

raenye

Lever 2 Membel
Yeah good point. I wonder if there is a way to create a full value situation from this.... I was wondering if you itemized and claimed less than the standard deduction then cleared the balance with the credit - but that doesn't make immediate sense to me..

Or maybe they just used the $1K for neatness of numbers that don't need to be adjusted every year when tax brackets or rates change...
It seems that while the max allowed AGI grows each year, so do the standard deduction, personal exemption and 10% bracket.
So in 2014 the tax owed was 10% of ($18,000 - $3,950 - $6,200) = $785;
in 2013 it was 10% of ($17,750 - $3,900 - $6,100)=$770.

I guess that by 2025 it will be possible to use the full $1,000.
 

Sesq

Level 2 Member
Let's see, Married Joint, $36k income, $2k ROTH contribution.

AGI - $36k
Exemptions (2x) - (8k)
Stan Deduction (MJ) - (12.6k)
Taxable Income - 21.4k

10% Bracket (up to $18,450) - $1,845
15% Bracket (balance) - $442
Total Tax - 2,287
Savers credit -1000
Remaining tax $1,287

Single

18k income, $2k ROTH contribution

AGI 18k
Exemption (4k)
SD - (6.3k)
Taxable Income - 7.7
Tax due (10%) $770

Credit 1k ($230 disallowed).

Of course, for the all taxpayer the credit applies to higher incomes with lower redemption rates with total phaseouts at $60k (mj) and $30k (s). Also, one could substitute traditional contributions at higher income levels instead of Roth contributions, but unless it changed your allowable credit I would think in the 10% and 15% brackets roth is the better answer.
 

MickiSue

Level 2 Member
Supporter
Tax CREDITS are different from deductions. If you have credits that are greater than your taxes owed, you get them back. So, owe $800, tax credit of $1000, get a refund of $200.

It works the same for the Working Family credit, which I received a few times when my kids were young and I had just gone back to full-time after a divorce.
 

raenye

Lever 2 Membel
Let's see, Married Joint, $36k income, $2k ROTH contribution.

AGI - $36k
Exemptions (2x) - (8k)
Stan Deduction (MJ) - (12.6k)
Taxable Income - 21.4k

10% Bracket (up to $18,450) - $1,845
15% Bracket (balance) - $442
Total Tax - 2,287
Savers credit -1000
Remaining tax $1,287
Hmm, 36-20.6 = 15.4, so tax owed is just $1,540.
MJ can get $2k credit for $4k Roth, so you waste $460 tax credit.

Tax CREDITS are different from deductions. If you have credits that are greater than your taxes owed, you get them back. So, owe $800, tax credit of $1000, get a refund of $200.

It works the same for the Working Family credit, which I received a few times when my kids were young and I had just gone back to full-time after a divorce.
AFAIK Saver's credit is non-refundable, so you do lose it.
 

MickiSue

Level 2 Member
Supporter
Hmm, 36-20.6 = 15.4, so tax owed is just $1,540.
MJ can get $2k credit for $4k Roth, so you waste $460 tax credit.


AFAIK Saver's credit is non-refundable, so you do lose it.
Unless Intuit is wrong, you're right. What's the point, then? (Insert disparaging comment about opposite political party here.)
 

calwatch

Level 2 Member
There is one oddity in the 1040 which allows you to apply saver's credit to any health insurance subsidy repayment penalty (APTC repayment, Line 51). Therefore if you are in the odd situation of needing to purchase through the Obamacare exchange, it's best to estimate an income level as close to the amount necessary to not qualify for Medicaid in a Medicaid state, or 100% of federal poverty line in a non-Medicaid expansion state. Then use the saver's credit to wipe away the APTC.
 
Top