Tax deductions and tax credits both allow us to save money on our income taxes. However, the two are very different. A tax deduction reduces the amount of income that you will pay income tax on, whereas a tax credit is a dollar-for-dollar reduction of your taxes owed.

Let's say that Sonya, who files as the head of a household, has $30,000 in taxable income and $1,000 in tax deductions. Sonya will only pay income tax on $29,000. If Sonya is in the 15% marginal tax bracket, then her $1,000 in deductions will save her $150 in income taxes ($1,000 x 0.15 = $150). But if Sonya has a $1,000 tax credit, then she will save the full $1,000 in income taxes.

The Saver's Credit is one of these beautiful tax credits. To qualify, you must make contributions to a 401(k), 403(b), 457, or a federal government retirement plan by the end of the calendar year. You may also qualify if you contribute to an IRA by the April 15 tax filing deadline.

The IRS explains that in order to qualify for the Saver's Tax Credit you must be at least 18 years old, must not be a full-time student, and must not be claimed on anyone else's tax return as a dependent. If you qualify, the amount of your credit ranges from 10% to 50% of your retirement plan contribution, up to $2,000 per person depending upon your adjusted gross income. You enter the credit information in the section of your 1040 form called Tax and Credits.

Here are the income guidelines for this year and next:

2015 Saver's Credit

Credit Rate

Married Filing Jointly

Head of Household

All Other Filers*

50% of your contribution

AGI not more than $36,500

AGI not more than $27,375

AGI not more than $18,250

20% of your contribution

$36,501-$39,500

$27,376-$29,625

$18,251-$19,750

10% of your contribution

$39,501-$61,000

$29,626-$45,750

$19,751-$30,500

0% of your contribution

more than $61,000

more than $45,750

more than $30,500

2016 Saver's Credit

Credit Rate

Married Filing Jointly

Head of Household

All Other Filers*

50% of your contribution

AGI not more than $37,000

AGI not more than $27,750

AGI not more than $18,500

20% of your contribution

$37,001-$40,000

$27,751-$30,000

$18,501-$20,000

10% of your contribution

$40,001-$61,500

$30,001-$46,125

$20,001-$30,750

0% of your contribution

more than $61,500

more than $46,125

more than $30,750

*Single, married filing separately, or qualifying widow(er). Source: IRS.

The Saver's Credit is a great incentive for Americans who may think they can't afford to fund a retirement plan due to a year of low income. The truth of the matter is that if you qualify for this incentive, you can't afford not to take it, as the credit is like a 10-50% immediate return on the money you invest in your retirement plan! While this credit may not apply to you if you make over the amounts stated, think of your children or grandchildren that are just starting out or a friend is who heading into retirement and only working part time -- this credit is just too good a deal to pass up!

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