Why does TurboTax say I do not qualify for the Retirement Savings Contribution Credit?

[TDJM]

Married filing jointly. We should qualify for this credit.

-We are over 18

-We were not students this year

-No one else can claim either of us as a dependent

-Our AGI is less than 65,000

We contributed to a traditional IRA.

I fill out these details under the "Retirement Savings Contribution Credit" section of the Deductions tab, and at the end it says it turns out we don't qualify for this credit. Why not?

I keep getting referred to the same chunk of text about how to qualify.

[SweetieJean]

Did you have any retirement distributions in in 2018, 2019, 2020?  (IRA, 401(k), pension, etc.)? That can disqualify you. 

[TDJM]

Thank you for replying; no I did not

[dmertz]

This is a nonrefundable credit.  If your income tax liability is already zero without this credit, you don't get this credit; it cannot be used to reduce your income tax liability below zero.  It cannot be used to reduce other taxes such as self-employment tax.

[TDJM]

Ok, this would make sense since all our income is from self-employment. But why doesn't the incentive cover all types of situations? Don't they want self-employed people to save for retirement too?

[Critter-3]

Ok ... it only covers FEDERAL taxes for ALL taxpayers so everyone gets treated the same way.  The credit cannot cover SE taxes anymore than it can cover FICA taxes that regular employees have withheld on their wages.  

[DawnC]

Self-Employed taxpayers are eligible to take the credit.   However, you can't take the credit if you have no tax liability.  To verify you are eligible to take the credit, Look at your Form 1040, Line 18.    From that number, you have to subtract the amounts on Schedule 3, Lines 1-3.   If that amount is 0, you can't take the credit.   

Schedule 3, Lines 1-3 include:

The Foreign Tax Credit

The Dependent and Child Care Credit and

Education Credits

What Is the Savers Credit?

The Retirement Savings Contributions Credit (Saver’s Credit) helps low and middle-income taxpayers save for retirement. Sometimes this is called the Credit for Qualified Retirement Savings Contribution or Retirement Credit. It’s a non-refundable tax credit which means it can’t reduce the amount of tax owed to less than zero.

[TDJM]

I guess that makes sense. It's just a bummer.

[AmeliesUncle]

If you don't have any income tax for the Saver's Credit to offset, then a Traditional IRA was not a good idea (you should have done a Roth IRA).

You may want to consider "recharacterizing" your contribution with your IRA custodian.  That would retroactively treat it as a Roth IRA.  

In your situation, it seems likely that would still give you the same result on your tax return (the Saver's Credit would offset any additional income tax), but you would have the benefits of a Roth IRA over the Traditional IRA.  There are other potential factors involved (or example, if you have any different types of credits that are being carried forward), but at first glance, it seems like a no-brainer that you should "recharacterize" that IRA contribution.

[TDJM]

I'm not sure I see why it's a nobrainer. How would a Roth IRA help me get more tax deductions?

[AmeliesUncle]

If you are not paying any "income" tax on this tax return, a Traditional IRA is not saving you any money.  But whenever you withdraw the Traditional, the withdrawal will be taxable.

If you contribute to a Roth, as I mentioned before, the Saver's credit will offset any "income" tax, so you will have the same result on this tax return ($0 of "income" tax).  BUT whenever you withdraw the Roth, it will NOT be taxable (if you withdraw it before certain timeframes, the "earnings" could be taxable, but if it is a "qualified" distribution it will be completely tax free).

[SamS1]

Have you taken a distribution from your IRA or retirement account in recent years?   Your eligible contributions may be reduced by any recent distributions you received from a retirement plan or IRA.  Your contributions are reduced by distributions received by the taxpayer, and spouse if filing jointly, received after 2017.   Check to see if you took any early distributions after 2017.

[wondering3]

I did take a distribution this year (taking advantage of the CARES exception), but it was less than the contribution (made elsewhere into a different account). Turbotax seems to take this into account because it says "Don't include any of the $** you made as a regular elective contribution" when asking about extra contributions, and the $** is the amount of my contributions minus the amount I took as a distribution. So it is a positive amount. I made more contribution than I got in distribution. But it says I am not qualified for the credit. But everywhere I look about qualifying it just says if you take a distribution your contribution amount will be reduced by the amount you took as a distribution. Ok. But Turbotax is saying I'm not eligible for the credit at all. Is there a minimum amount you have to contribute in order to get the credit? My income is definitely below the threshold.

[Critter-3]

@wondering3 

Reviewing   the form 8880 may resolve your questions ... the distribution reduces the amount of contributions you can use for the saver's credit.  

[dmertz]

This is a nonrefundable credit.  If your income tax liability is already zero without this credit, you don't get this credit; it cannot be used to reduce your income tax liability below zero.  It cannot be used to reduce other taxes such as self-employment tax.