Plan Now to Get Full Benefit of Saver's Credit, Tax Break Helps Low- and Moderate-Income
Workers Save for Retirement
Low- and moderate-income workers can take steps now to save for retirement and earn
a special tax credit in 2007 and the years ahead, according to the Internal Revenue
Service.
The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute
to IRAs and to 401(k) plans and similar workplace retirement programs. Formally
known as the retirement savings contributions credit, the saver’s credit is available
in addition to any other tax savings that apply.
“We want low- and moderate-income workers to know about this valuable credit so
they can effectively plan ahead and take full advantage of it,” said Richard J.
Morgante, commissioner of the Wage and Investment Division of the IRS. “Now that
a growing number of employers are automatically enrolling their employees in 401(k)
plans, the saver’s credit offers many workers who save for retirement an added bonus.”
Eligible workers still have time to make qualifying retirement contributions and
get the saver’s credit on their 2007 tax return. People have until April 15, 2008,
to set up a new individual retirement arrangement or add money to an existing IRA
and still get credit for 2007. However, elective deferrals must be made by the end
of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan
for employees of public schools and certain tax-exempt organizations, a governmental
457 plan for state or local government employees, and the Thrift Savings Plan for
federal employees. Employees who are unable to set aside money for this year may
want to schedule their 2008 contributions soon so their employer can begin withholding
them in January.
The saver’s credit can be claimed by:
- Married couples filing jointly with incomes up to $52,000 in 2007 or $53,000 in
2008;
- Heads of Household with incomes up to $39,000 in 2007 or $39,750 in 2008; and
- Married individuals filing separately and singles with incomes up to $26,000 in
2007 or $26,500 in 2008.
Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce
the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples,
the IRS cautioned that it is often much less and, due in part to the impact of other
deductions and credits, may, in fact, be zero for some taxpayers.
A taxpayer’s credit amount is based on his or her filing status, adjusted gross
income, tax liability and amount contributed to qualifying retirement programs.
Form
8880 is used to claim the saver’s credit, and its instructions have
details on figuring the credit correctly.
In 2005, the most recent year for which complete figures are available, saver’s
credits totaling more than $900 million were claimed on nearly 5.3 million individual
income tax returns. Saver’s credits claimed on these returns averaged $216 for joint
filers, $149 for heads of household and $140 for single filers.
The saver’s credit supplements other tax benefits available to people who set money
aside for retirement. For example, most workers may deduct their contributions to
a traditional IRA. Though Roth IRA contributions are not deductible, qualifying
withdrawals, usually after retirement, are tax-free. Normally, contributions to
401(k) and similar workplace plans are not taxed until withdrawn.
Other special rules that apply to the saver’s credit include the following:
- Eligible taxpayers must be at least 18 years of age.
- Anyone claimed as a dependent on someone else’s return cannot take the credit.
- A student cannot take the credit. A person enrolled as a full-time student during
any part of 5 calendar months during the year is considered a student.
- Certain retirement plan distributions reduce the contribution amount used to figure
the credit. For 2007, this rule applies to distributions received after 2004 and
before the due date (including extensions) of the 2007 return. Form 8880 and its
instructions have details on making this computation.
Begun in 2002 as a temporary provision, the saver’s credit was made a permanent
part of the tax code in legislation enacted last year. To help preserve the value
of the credit, income limits are now adjusted annually to keep pace with inflation.
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