Benefit Strategies
A Tax Break for Retirement Saving
Participants may be eligible to receive a tax break from the government when they save for retirement. Making contributions to their retirement plan or IRA may earn them a saver’s credit. Participants are eligible if they are:
- at least age 18
- not a full-time student
- not claimed as a dependent on someone else’s federal income tax return
What kind of tax break does the Saver’s Credit provide?
The tax credit is nonrefundable and may reduce your federal income tax. For example, if you don’t owe federal income taxes or you owe less than the saver’s credit entitles, your saver’s credit is forfeited or reduced to the amount of tax you actually owe. To take advantage of the saver’s credit, simply claim this tax credit when you file your annual federal income tax return.
How is the Saver’s Credit calculated?
Your federal income tax credit is calculated using the maximum contribution of $2,000 for an individual which can earn a saver’s credit up to $1,000. Your adjusted gross income (AGI) determines the percentage of your contribution that is eligible for a tax credit. AGI is your gross income less certain adjustments such as alimony, moving expenses, deductible retirement plan contributions, and other deductions.
| Income limits for Saver’s Credit | |||
| 50% of employee contributions($1,000 maximum tax credit; $2,000 if filing jointly) | $16,500 or less | $24,750 or less | $33,000 or less |
| 20% of employee contributions($400 maximum tax credit; $800 if filing jointly) | $16,501 - $18,000 | $24,751 - $27,000 | $33,001 - $36,000 |
| 10% of employee contributions($200 maximum tax credit; $400 if filing jointly) | $18,001 - $27,750 | $27,001 - $41,625 | $36,001 - $55,500 |
| 0% of employee contributions(no tax credit is available) | $27,751 or more | $41,626 or more | $55,501 or more |
The income limitations used to determine the credit are indexed for inflation for tax years beginning after 2006. See the chart for details on the percentages that apply to different ranges of AGI. The amount of your saver’s credit also may be reduced if you or your spouse receives a taxable distribution from a retirement plan or IRA within certain time periods.
Example:Joe defers $2,000 to his retirement plan. He is single and his AGI is $17,000. According to the chart, Joe is entitled to a federal income tax credit of $400 ($2,000 x 20%). This tax credit will reduce his federal income tax liability at the end of the year. If Joe doesn’t owe federal income taxes that year, his tax credit is forfeited since the saver’s credit is nonrefundable.
The information contained in this Wire is not intended or written as specific legal or tax advice and may not be relied on for purposes of avoiding any federal tax penalties.