According to the IRS, the five-year-old credit helps offset part of the first $2,000 workers contribute to IRAs and to DC plans. Originally included in 2001’s EGTRRA, the provision was made permanent by the Pension Protection Act (PPA). I ncome limits are now adjusted annually to keep pace with inflation.
Though the maximum saver’s credit is $1,000 ($2,000 for married couples) the IRS cautioned in its latest reminder that it is often much less and, due in part to the impact of other deductions and credits, may not apply at all to some taxpayers. Tax agency officials said 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.
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.
In 2005, the most recent year for which complete figures are available, the IRS said 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.
“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, in the announcement. “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.”
The agency said taxpayers have until April 15, 2008, to set up a new IRA or add money to an existing IRA and still get credit for 2007. However, deferrals to a DC plan must be made by the end of the year.
According to the IRS document, other special rules that apply to the saver’s credit include:
- Eligible taxpayers must be at least 18 years old.
- Anyone claimed as a dependent on someone else’s return cannot take the credit.
- A student cannot take the credit.
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.