Saver’s Credit: 401k Contributions Tax Credit for Low Income & Middle Income Consumers

If you fall in the category of low income savers, you may be eligible for a tax credit of $1000 on contributions made to 401k retirement plans, 403b plans, 457 government plans, IRA (Individual Retirement Account) or Roth IRA. This new legislation called the “Saver’s Credit” went into effect in 2002 (thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001) and is a reduction to your Gross Income (so that you have a less taxable income). It cannot be used as a $1000 refund for extra cash flow.

The requirements to be eligible for Saver’s Tax Credit are:

– Applicant must be 18 years of age or older
– Not be a full time student at a college or university
– Cannot be claimed as a dependent on someone else’s tax return

In terms of taxable income, the adjusted gross income of the saver must not exceed:

– $25,000 if filing as a single
– $37,500 if head of household with qualifying dependents
– $50,000 joint with spouse

Adjusted Gross Income Table

Joint Married Head of Household All Other Filers Saver’s Tax Credit
$0 – $30,000 $0-$22,500 $0-$15,000 50% of contribution
$30,001-$32,500 $22,501-$24,375 $15,001-$16,250 20% of contribution
$32,501-$50,000 $24,376-$37,500 $16,251-$25,000 10% of contribution
Over $50,000 Over $37,500 Over $25,000 0% of contribution

A few examples to clarify the data in the above table would be helpful.

1) For example, a Single taxpayer with $15000 of adjusted Gross Income for the year would fall under the “All Other Filers $0 – $15000″ category” and would therefore be eligible for 50% tax credit. For example, if he contributes $1500 this year to a 401k retirement plan, his tax credit would be $1500 x 50% = $750.

2) If a married couple earn a combined adjusted gross wage of $45000 and contribute $5000 to a 401k retirement plan (pre-tax contribution), then their net wage would be $45000 – $5000 = $40,000. This $40,000 figure falls under the 3rd row in the “Joint Married” column of $32,510 – $50,000. Their tax credit would therefore be: 10% x $5000 = $500.

3) A single taxpayer who earns $17,000 Gross wage for the year is eligible for 10% tax credit of total contributions. Therefore, a $2500 contribution towards a 401k retirement plan would result in 10% x $2500 = $250 tax credit.

However, if the single taxpayer takes out a minimum required 401k distribution payment of $500, then his adjusted Gross Wage would be:

$17,000 Gross Wage
($2500) 401k Contribution
+$500 Minimum Required 401k Distribution
$15,000 Adjusted Gross Wage

With an adjusted Gross Wage of $15000, the single tax payer is now eligible for a 20% tax credit of contributions (instead of 10% in the first case). This means if he still makes a $2500 401k contribution payment, his tax credit would be 20% x $2500 = $500.

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