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Saver's Tax Credit : Workers Can Save for Retirement and Reduce Income Taxes

The Saver's Tax Credit can reward workers who make contributions to a retirement plan or Individual Retirement Account (IRA). Workers can receive a tax credit worth up to 50 percent of a maximum $2,000 contribution. Married workers may each make the maximum contribution. The Saver's Tax Credit, is referred to in IRS tax forms as the "Credit for Qualified Retirement Savings Contributions". This may be particularly valuable for workers in areas where matched-savings plans, such as Individual Development Accounts (IDAs), are not available or when saving for retirement is a higher priority for a family than the uses that may qualify for matched savings in an IDA.

The Saver's Tax Credit will reduce or eliminate a worker's income tax but, unlike the Earned Income Tax Credit, workers who owe no income tax will not benefit from the Saver's Tax Credit. However, some moderate-income workers with children may see increased benefits from the EITC when they make contributions to a retirement account through pre-tax salary deductions and take advantage of the Saver's Tax Credit. Here's why:

• Non-taxable earned income is no longer counted in figuring the EITC. Most EITC claimants who also make contributions for retirement through pre-tax salary deductions are in the "phase-down" range of the EITC, where EITC amounts decrease as taxable income increases. Since the salary deductions made for retirement reduce the worker's taxable income, the worker will qualify for a larger EITC.

Who Is Eligible to Claim the Saver's Tax Credit?

The credit may be claimed by taxpayers who:

• Are age 18 or older,
• Are not full-time students,
• Are not claimed as a dependent on someone else's return;

and have adjusted gross income in 2008 no higher than these amounts:

• $53,000 if married filing jointly
• $39,750 if filing as head of household
• $26,500 if filing single, or married filing separately

What Retirement Contributions Qualify for the Saver's Tax Credit?

Contributions workers elect to make through salary reduction to a variety of employer administered retirement plans are eligible for the credit, as are contributions to both traditional and Roth Individual Retirement Accounts (IRAs). Salary reduction contributions made to the following types of plans are eligible:

• a 401(k) plan, including a SIMPLE 401(k)
• a section 403(b) annuity
• an eligible deferred compensation plan of a state or local government (a "governmental 457 plan")
• a SIMPLE IRA plan
• a salary reduction SEP (simplified employee pension)

Individuals entitled to deduct IRA contributions may still do so and also claim the Saver's Tax Credit. Voluntary after-tax contributions to a qualified retirement plan or 403(b) annuity also qualify for the Saver's Tax Credit.

How Is the Amount of the Saver's Tax Credit Figured?

The credit can range from 10 percent to 50 percent of the worker's contribution to retirement, based upon the worker's adjusted gross income for the tax year.

How do Workers Claim the Saver's Tax Credit?

Workers must complete IRS Form 8880,"Credit for Qualified Retirement Savings Contributions," enter the amount of the credit on Form 1040 or 1040A, and attach Form 8880 to their tax return. Form 8880 may be downloaded from the IRS website at: www.irs.gov/formspubs. For additional information, see IRS Announcement 2001-106, pg. 416,"Saver's Tax Credit for Contributions by Individuals to Employer Retirement Plans and IRAs" at: www.irs.gov/pub/irs-irbs/irb01-44.pdf.