Ability to claim the maximum Savers Credit

[Craig-o]

I have a question concerning the ability to obtain the maximum $1000 tax credit for a single person.

For the 2019 tax year, I will have put over $20,000 (I'm 62 BTW so I can use catch-up) in my 401K plan and will result in an AGI of $19,000. I am claiming the standard deduction of $12,000 and thus would only be paying taxes on $7,000. The resultant tax bill would be $700 which, of course, would be credited.

My point is, there is no way to get the full $1000 credit (at least for a single person).

Am I missing something? It;s hard to believe this was the intention of the IRS in generating the credit.

[rjs]

What I think you are missing is that the Saver's Credit is a "nonrefundable" credit. That means that the credit cannot reduce your tax to less than zero. It cannot produce a refund of more tax than what you had withheld.

It's Congress that made that decision, not the IRS. That's how the credit is defined in the tax law, and it absolutely was Congress's intention to structure the credit that way.

[dmertz]

Before the end of 2019, you may want to consider increasing your income for 2019 so that you can utilize the entire credit.  If your employer's 401(k) plan offers a designated Roth account you could potentially request an In-plan Roth Rollover which will add to your taxable income while removing some eventually taxable income from your 401(k) and moving it to the Roth account in which growth will eventually be tax free.  If your 401(k) plan does not provide a designated Roth account but does partial permit in-service rollovers, you could instead do a taxable direct rollover of some of the money from the 401(k) to a Roth IRA.  If your calculations assume additional 401(k) elective deferrals through the remainder of the year, you could also stop those elective deferrals and contribute the money to a Roth IRA instead (unless you are married filing separately, in which case your modified AGI for the purpose would prohibit you from making a Roth IRA contribution, in which case you could make a deductible or nondeductible contribution to a traditional IRA instead and convert some amount to a Roth IRA).

If none of the previously mentioned options is available, you could potentially sell and repurchase appreciated capital assets such as stocks or mutual funds held outside of a retirement account.  Doing so would increase your taxable income while at the same time increasing your cost basis in the asset.

Whatever you do to increase income, you need to do it before the end of 2019.

[Craig-o]

Unless I am missing something, adding income won't help to get more credit.  In order to be eligible for the full $1000 credit (50% of first $2000 saved in retirement account), AGI must be $19,250 or less.

With that income and using the standard deduction of $12,200 only leaves taxable in come of $$7,050 and a tax bill of $705.

So, as I stated in my original question, There is no way to obtain the full $1000 credit.  Again, unless I'm missing something.

[Critter]

As already stated ... the credit can only be take against the federal taxes ... so if the tax is $705 then the credit is maxed at that amount.  None of the remainder is refundable ... it is simply lost.  Read the form line 11 instructions : 

https://www.irs.gov/pub/irs-pdf/f8880.pdf

[dmertz]

Good point regarding the AGI level, I forgot about the $19,250 threshold.  Raising 2019 AGI above $19,250 would cut the credit to 20%,  $400, which doesn't make sense to do.  Beginning with an AGI of $19,000 you could not add more than $250 of income, and you don't want to cut it too close or risk the credit being cut if your AGI goes even $1 over $19,250 for 2019.

The usefulness of this credit was a bit greater before the standard deduction was doubled by the Tax Cuts and Jobs Act of 2017, but I think it still might not have been possible to utilize the entire $1,000 credit.