Little wonder, according to a recent survey commissioned by the TransamericaCenter for Retirement Studies. Just 9% of American’s who fall within the Retirement Savings Contributions Credit’s income eligibility limit are familiar with it (only 16% of the general population is).
One of the major reasons, according to Transamerica is that the Credit is not available on the 1040EZ form, which 29% of those who meet the income limits have either filed, or plan to file, their taxes on.
Adding to the confusion, according to a press release, the credit is most commonly known as the “Saver’s Credit,” but the IRS refers to it as the “Retirement Savings Contributions Credit” and the “Credit for Qualified Retirement Savings Contributions” in its forms and publications.
Who is Eligible
In 2007, the tax credit applies to individuals with adjusted gross income not exceeding:
- $52,000 (for those married filing jointly, a $2,000 increase from the 2006 level),
- $39,000 (for head of household, a $1,500 increase), or
- $26,000 (for all others, such as single or married filing separately, which will be a $1,000 increase).
Depending on filing status and income level, taxpayers may qualify for a credit of up to $1,000 annually (up to $2,000 if filing jointly) when making eligible contributions to a qualified retirement plan, such as a 401(k), 403(b) or 457 plan, or a traditional individual retirement account (IRA). After tax year 2006, the adjusted gross income limits are scheduled to increase annually in $500 increments to allow for inflation, according to Transamerica.
However, it is important to note that the Saver's Credit is nonrefundable and may only be applied towards the federal income taxes owed in a given year. If an individual or household has no tax liability, then the Saver's Credit would not be treated by the IRS as a refund.
In general, for every dollar contributed to a qualified retirement plan or traditional IRA, up to the lesser of the limits permitted by the plan or the Internal Revenue Code, taxpayers can defer their contribution amount from their current overall taxable income to lower their federal income taxes.
At the end of the year, when they prepare their federal tax returns, they may claim the Saver's Credit by subtracting the applicable tax credit from the federal income taxes owed. A taxpayer may be eligible for one of the following Saver's Credit rates: 50%, 20%, or 10%.