Already in its first year of existence (2002), the credit was claimed on 3.5 million income tax returns, according to a Brookings Institute report. And why not? After all, due to this EGTRRA provision, certain segments of this population are eligible for the “saver’s credit,” a federally funded match of up to $1,000.
This may not come as a surprise to many plan sponsors though; a survey conducted in 2002 by Diversified Investment Advisors found that nearly three-quarters of plan sponsors surveyed say plan participation is higher as a result of the credit – nearly one in five report it is significantly higher. On average, plan sponsor respondents said that 34% of their workforce was eligible for the tax credit.
Part of the reason for the broad application may by due to the kinds of contributions that are eligible, that encompasses salary reduction contributions to a 401(k) plan – including a SIMPLE 401(k); a section 403(b) annuity; a governmental 457 plan; a SIMPLE IRA plan; or a salary reduction SEP are all eligible for the credit, as are voluntary after-tax employee contributions to a tax-qualified retirement plan or section 403(b) annuity. Additionally, the credit is available for contributions to a traditional or Roth IRA.
Of course, eligibility requirements do apply. Generally, a participant is eligible if they:
- are 18 or older
- are not a full-time student
- are not claimed as a dependent on someone else’s tax return
- has adjusted gross income that does not exceed: $50,000 if married filing jointly; $37,500 if head of household; $25,000 if single or married filing separately.
Once eligibility is determined, the saver’s credit rate is based on the taxpayer’s adjusted gross income for the taxable year for which the credit is claimed. For example, a single taxpayer with adjusted gross income of $15,000 could receive a credit-a reduction of taxes owed-equal to half of his or her contributions (up to $2,000 of contributions). So, if he contributes $1,000 to his 401(k), he will be able to reduce his federal income tax bill by $500. That is in addition to the benefits of pre-tax savings and any employer match. Contributions by or for either or both spouses, up to $2,000 per year for each spouse, can give rise to the Saver’s Credit.
A copy of the full Brookings report can be found at http://www.brook.edu/es/urban/publications/eitc/20030829_gitterman.htm .