Today, I wanted to talk about an interesting tax credit that I recently discovered – the Saver’s Credit. It’s a tax credit that won’t matter to a lot of professionals – especially a dentist and lawyer household like me and my wife are – but because of our current situation, we’re actually in a unique position where we might be able to take advantage of it this year.
In order to encourage lower-income individuals and households to save in retirement accounts, the government actually gives low-earning folks a tax credit if they save into qualified retirement plans such as a 401k, 403b, 457, or IRA. In a way, it’s like a government match program. You save some money into a retirement plan, and the government gives you some money back by reducing your tax bill.
In normal circumstances, a power couple like me and my wife would never qualify for the Saver’s Credit. We both would earn way too much. This past year, however, I took a pay cut in order to switch to a non-traditional legal role that’s a better fit for me (something I could do because I live lean and hustled to pay off my student loans). Meanwhile, my wife is completing her last year of a three-year dental residency, for which she’s paid a grand total of about $4,000 per year. We’re not exactly balling out of control for 2017 and it is possible that, with a little bit of work, we end up with a household income for the year that’s under $62,000.
With an income this low, I thought it’d be worthwhile to take a look and see what this Saver’s Credit was all about. We’ll likely never have an income this low again.
What Is The Saver’s Credit?
The Saver’s Credit is pretty much exactly what it sounds like – it’s a credit that the government gives to certain people that save money into qualified retirement plans. You know how employers give you a match if you contribute to your 401k? It’s sort of the same thing, except, in this case, your “match” comes from the government.
The amount of the Saver’s Credit is limited to a percentage of your first $2,000 in contributions you make to your retirement plans if you’re single, and your first $4,000 in contributions if you’re married. Basically, if you qualify for the Saver’s Credit and are single, you only need to save $2,000 in a year in order to max out your Saver’s Credit. If you’re married and qualify for the credit, you only need to save $4,000 in a year.
The amount of the Saver’s Credit varies depending on your income. For 2017, the IRS has set the credit amount as follows:
So basically, if you’re single, have a low enough income, and are taking full advantage of the Saver’s Credit, you’re looking at getting a tax credit of $200, $400, or $1,000. If you’re married, you’re looking at a potential tax credit of $400, $800, or $2,000 depending on your income.
Remember, tax credits are way better than deductions because they reduce your income tax owed, dollar for dollar. In other words, if you owe $2,000 in taxes, but have a $2,000 tax credit, you now owe nothing in taxes. Some tax-credits are even refundable, which means that the government literally pays you money in the form of a tax-refund if your tax liability is less than your tax credit.
Unfortunately, the Saver’s Credit is a non-refundable tax credit, which means that it can only reduce your tax liability to zero, but it can’t result in you getting a refund from the government.
Eligibility For The Saver’s Credit
The hard part for most professionals is qualifying for the Saver’s Credit. In order to be eligible for it, you obviously have to have a low enough income. Your eligibility is calculated using your adjusted gross income, which means that it’s your income, minus specific deductions (typically things like contributions to tax-deferred retirement accounts or expenses you’ve incurred if you’re an independent contractor). If your AGI is more than $31,000 as a single person or $62,000 as a married couple, you’re not going to qualify for the Saver’s Credit.
Beyond having a low enough income, the other things you need in order to qualify for the Saver’s Credit are:
- Be 18 years old or over;
- Can’t be claimed as a dependent on another person’s tax return; and
- Can’t be a student.
The definition of a student is what makes it so that you probably won’t be able to claim the Saver’s Credit for your first year out of school. The IRS says that you’re a student if, during any part of five calendar months in 2017, you were enrolled as a full-time student at a school. So, if you graduate in May and then start working in September or October (like most first-year associates do), you’re not going to qualify for the credit since you’ll have been a full-time student for five calendar months.
I’m still not quite sure how the Saver’s Credit applies for someone like my wife, who’s a resident and sort of a quasi-student. My guess is that she technically wouldn’t qualify to make contributions in her own name, but for my purposes, it doesn’t matter really since I can still make contributions for myself.
Strategies To Qualify For The Saver’s Credit
Admittedly, for many of us, having an AGI under $62,000 won’t be easy. Still, it’s possible, depending on how money you can shelter in tax-deferred accounts and how much you need in order to live the life you want to live. My own thoughts:
Max Out Every Tax-Deferred Account You Have. This is a big one. For most professionals, the only way to get a household AGI under $62,000 will be to tax-defer as much of your income as possible. You’ll need to take advantage of everything in your arsenal – 401ks, 457s, IRAs (if you can qualify for a deductible IRA), HSAs, Pensions, and self-employed retirement plans. If you have access to both a 401k and a 457, you’re in an amazing position, since you can max out both of those accounts and drastically reduce your adjusted gross income.
Take Advantage Of Years Where Only One Spouse Is Working. If you’re a household, you might have years where one spouse works and the other doesn’t, or where one spouse is in school while the other is working. If you can afford it, these are great times to really try to go for the Saver’s Credit. It’s pretty much the situation that my wife and I are in right now. I don’t earn that much right now and she’s earning basically nothing as a resident.
Don’t Earn Money. The best way to qualify for the Saver’s Credit is to not earn money in the first place. If you’re in a position where you don’t need a lot of money to live – like most folks looking for financial independence and early retirement – you could probably try to qualify for the Saver’s Credit year-after-year.
Unfortunately, I’m not quite sure if I’ll be able to get my AGI low enough this year to qualify for the Saver’s Credit, so it’s possible that, for me, the Saver’s Credit is just a theoretical thing.
Still, it’s an interesting credit that I’d like to try to go for since it would help to reduce my tax liability on all of my side hustle income. At a minimum, the Saver’s Credit gives you an excuse to try to max out all of your tax-deferred investment vehicles in order to get your AGI to as low an amount as possible. Nothing wrong with that.
More Recommended Ebike/Scooters
Check out these other ebikes/scooters I've had the chance to do a review for:
- GEN3 Outcross Bike – The GEN3 Outcross is a solid, affordable fat tire ebike that does a good job of doing what I need it to do. It works great for city riding, giving me a smooth ride in all conditions. It’s works really well as a winter ebike since the fat tires give it good traction over snow and ice. Check out my GEN3 Outcross Review.
- Himiway Escape Bike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Bike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
More Recommended Investing App Bonuses
For additional investing app bonuses, be sure to check out the ones below:
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More Recommended Bank Account Bonuses
If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
- GO2Bank ($100) - GO2Bank is an easy bank bonus that I recommend people take advantage of if they have an easy way of meeting the direct deposit requirement. I like that it’s easy to open the account and that the bonus pays out quickly. Check out my step-by-step guide on how to earn your GO2Bank $100 referral bonus.
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- US Bank Business ($750) – This is a fairly easy bank bonus to earn, since there are no direct deposit requirements. In addition, you can open the Silver Business Checking account, which comes with no monthly fees. Check out how to earn this big bonus here.
- SoFi Money ($275) – SoFi Money is a free checking account from SoFi. They’re currently offering a $25 referral bonus if you open a SoFi account with a referral link and deposit $10. You can also make an additional $250 as well if you complete a direct deposit. This is a good bank that is also 100% free, so you won’t have to worry about managing this account. Here’s a post I wrote with instructions on how to earn your SoFi Money bonus: SoFi Money Referral Bonus: Step By Step Guide.
- Fifth Third Bank ($225) – This offer is limited to customers in the following states: Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Tennessee, West Virginia, and South Carolina. If you don’t live in one of those states, you won’t be able to open an account online but you can still open an account in-branch if you happen to be visiting a city that has a branch. This is a fairly easy bank bonus to earn, especially since there are plenty of data points showing what will trigger the direct deposit requirement. In addition, you can open the Fifth Third Momentum Checking bank account, which comes with no monthly fees or minimum balance requirements. Read my guide on this bonus here.
- Fairwinds Credit Union ($100) – Fairwinds Credit Union is offering a referral bonus for users that sign up using a referral link. Fairwinds has no fees or minimum balance, so this is a particularly easy bonus to earn. Since this is a smaller credit union, my gut instinct tells me this offer won’t be around long, so if you’re in a position to meet the bonus requirements, grab this bonus before it’s gone. Here is my step-by-step guide on how to earn your Fairwinds Credit Union bonus.
- Netspend ($40 + 5% Interest Savings Account) – Netspend is a company that provides 5% interest savings accounts. If you sign up using my referral link, you’ll get a $40 signup bonus once you make your first deposit into your Netspend account of $40 or more. That means you get a 5% interest savings account and a free $40 to start! Make sure to check out my in-depth guide on how to set up these accounts.
- Current ($50) – Current is a free fintech bank that’s offering new users a $50 referral bonus after signing up for an account using a referral link.Current is an easy bonus to earn and also gives you access to three savings accounts that pay you 4% interest on up to $2,000. That means you can put away up to $6,000 earning 4% interest. That’s very good and makes Current an account I recommend to everyone. Check out my step-by-step guide on how to earn your Current Bank bonus.
- Digital Federal Credit Union ($20) – Digital Federal Credit Union (DCU) is a free, nationwide credit union that I recommend to readers for two reasons. First, DCU has a $20 referral bonus if you open a free DCU checking account with a referral link. Second, DCU has a saving account that gives you 6.17% interest on your first $1,000. Check out my in-depth post on how to set this account up.
- Novo Bank ($40) - Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. In addition to being a good bank bonus, Novo is also a good business checking account. It has no monthly fees or minimum balance requirements and operates a good app and website. Indeed, it’s the business checking account I currently use for this blog. Check out my post on how to easily open a Novo account.
- Varo ($35) – Varo is a free fintech banking app similar to Chime or Current. It’s currently offering a $35 bonus to new users that open a new Varo account with a referral link. The bonus for this bank is very easy to meet, all you need to do is spend $20 within 30 days of opening your Varo account. Check out my step-by-step guide to learn how to earn this bonus.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $250 if you complete a direct deposit.
- US Bank Business. US Bank is currently offering new business customers a $750 signup bonus after opening a new account and meeting certain requirements.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account.
- DCU. Digital Federal Credit Union (DCU) is a free, nationwide credit union that I recommend to readers for two reasons. First, DCU has a $20 referral bonus if you open a free DCU checking account with a referral link. Second, DCU has a savings account that gives you 6.17% interest on your first $1,000.
- Personal Capital. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
I qualified for the credit last year, but I got a significant raise this year (5-figures!) and I’m worried that might cost me the $1k credit I would have received year-after-year. Fortunately, I funnelled 80%+ of my raise to my 457(b), so my AGI might still be low enough to claim partial credit.
Definitely a benefit of “saving until it hurts” as Financial Samurai would say.
Nice man! That’s real good if you can get a raise and still get the credit.
Really great post! Thanks. I had heard of this, but it has only recently popped back up on my radar, because we’ve become a one income household over the last year and a half. Also, personally, I’ve ceased funding any new retirement money during that time and have been focused on growing what I already have socked away. I’ll be revisiting this, this year. You’re final point of “Don’t earn money”, is one that might be lost on people who are striving, but I think it’s highly under rated point. Especially for middle age and up folks. When factoring in commute times, time away from home, personal stamina for doing other things you love, etc. the true value of making an extra $40K+ per year is greatly reduced. This specific credit can help make that choice a little easier. Thanks for taking the time to research and post this.
Thanks Jim! Glad it helped!
We maxed out everything this year and were about 500 shy of qualifying. In 2018, due to new tax brackets and higher TsP/401k limits, I believe we will just barely qualify…but that’s after maxing out everything folks–TSP/401k, pension plans(mandatory), FSA, and 2 TIRA’s!