Saver’s Credit (Saver’s Tax Credit)

Definition

Nonrefundable tax credit available to eligible individuals who make contributions to their retirement account. The saver’s credit is capped at $1,000, and the percentage for which the individual is eligible depends on his/her  MAGI.

The types of contributions are eligible for the saver’s credit are :

• Salary reduction contributions to 401(k) plan (including a SIMPLE 401(k)), a section 403(b) annuity, an eligible deferred compensation plan of a state or local government (a “governmental 457 plan”), a SIMPLE IRA plan, or a salary reduction SEP.
• Voluntary after-tax employee contributions to a tax-qualified retirement plan or section 403(b) annuity. For purposes of the credit, an employee contribution will be “voluntary” as long as it is not required as a condition of employment.
• Contributions to a traditional IRA or Roth IRA.

The following table provides the percentage of tax credit available for individuals within the indicated MAGI ranges.

The  credit can be claimed for IRA contributions and salary deferral contributions to employer sponsored plans

Referring Cite

IRC §25B(b), IRC§25A ,Announcement 2001-106, IRS Form 8880

Additional Helpful Information

• Other requirements for receiving the credit apply. These include the following:

• The individual must be at least 18 years of age the year for which the credit is claimed
• The individual cannot be claimed as a dependent on someone else’s tax return
• The individual cannot be a fulltime student

• An amount contributed to an individual’s IRA is not a contribution eligible for the saver’s credit if
  1. the amount is distributed to the individual before the due date (including extensions) of the
     individual’s tax return for the year for which the contribution was made,
  2. no deduction is taken with respect to the contribution, and
  3. the distribution includes any income attributable to the contribution.

• Eligible individuals entitled to deduct IRA contributions or to exclude plan contributions
  from gross income will be able to deduct or exclude those amounts and also claim the saver’s
  credit.
• A taxpayer can use the saver’s credit to offset both an alternative minimum tax liability and a
  regular income tax liability

Research papers and analyses

• Improving Tax Incentives for Low-Income Savers: The Saver’s Credit: William G. Gale, J. Mark Iwry, Peter R. Orszag, June 2005
• Making the Tax System Work for Low-Income Savers: The Saver’s Credit: William G. Gale, J. Mark Iwry, and Peter R. Orszag , July 2005

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Deduction

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