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Remind Eligible Employees About Saver's Tax Credit
 

By Stephen Miller, CEBS  12/9/2013

As the end of the year approaches, employers have an opportunity to inform low- and moderate-income workers that there's a special tax credit that can help them save for retirement.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to 401(k) plans, similar workplace retirement programs or individual retirement accounts (IRAs). Also known as the retirement savings contributions credit, the saver’s credit is available along with any other tax savings that apply.

For tax year 2013 eligible workers have until April 15, 2014, to set up a new IRA or add money to an existing one. However, elective contributions must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees.

Workers who are unable to set aside money for 2013 may want to schedule their 2014 contributions so their employer can begin withholding them in January.

Eligibility Rules

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. The amount of the credit is up to 50 percent of retirement plan contributions of up to $2,000 (or $4,000 for married couples filing jointly), depending on the filer's adjusted gross income (AGI), as reported on their Form 1040 or 1040A. Although this means the maximum saver’s credit is $1,000 (or $2,000 for married couples filing jointly), the IRS cautioned that it is often less and, due to the impact of other deductions and credits, may not be available to some taxpayers.

Generally, the saver’s credit can be claimed by:

  • Married couples filing jointly with incomes of up to $59,000 in 2013 or $60,000 in 2014.

  • Heads of household with maximum incomes of $44,250 in 2013 or $45,000 in 2014.

  • Singles and married individuals filing separately with incomes of up to $29,500 in 2013 or $30,000 in 2014.

Form 8880, which is used to claim the saver’s credit, has instructions that outline how to correctly calculate the credit. 

2013 Saver's Credit

Tax Credit Rate

Married, Filing Jointly

Head of Household

Single/Other Filers*

50% of contribution

AGI not more than $35,500

AGI not more than $26,625

AGI not more than $17,750

20% of contribution

$35,501-$38,500

$26,626-$28,875

$17,751-$19,250

10% of contribution

$38,501-$59,000

$28,876-$44,250

$19,251- $29,500

0% of contribution

more than $59,000

more than $44,250

more than $29,500

2014 Saver's Credit

Tax Credit Rate

Married, Filing Jointly

Head of Household

Single/Other Filers*

50% of contribution

AGI not more than $36,000

AGI not more than $27,000

AGI not more than $18,000

20% of contribution

$36,001-$39,000

$27,001-$29,250

$18,001-$19,500

10% of contribution

$39,001-$60,000

$29,251-$45,000

$19,501-$30,000

0% of contribution

more than $60,000

more than $45,000

more than $30,000

*Married couples who are filing separately or qualifying widow(er)s.
Source: Internal Revenue Service.

A Savings Incentive

In 2011, the most recent tax year for which complete figures are available, saver’s credits totaling just over $1.1 billion were claimed on nearly 6.4 million individual income-tax returns. Saver’s credits claimed on these returns averaged $215 for joint filers, $166 for heads of household and $128 for single filers.

The saver’s credit supplements other tax benefits available to people who set aside money for retirement. For example, most contributions to 401(k) and similar workplace plans are not taxed until employees withdraw funds, while Roth 401(k) contributions are not deductible, but qualifying withdrawals, usually after retirement, are tax-free.

Other special rules that apply to the saver’s credit include the following:

  • Eligible taxpayers must be at least 18 years of age.

  • Anyone claimed as a dependent on someone else’s tax return cannot take the credit.

  • A student cannot take the credit (anyone enrolled as a full-time student during any part of five calendar months during the year is considered a student).

Certain retirement plan distributions reduce the contribution amount used to determine the credit. For 2013, this rule applies to distributions received after 2010 and before the due date, including extensions, of the 2013 return. Form 8880 and its instructions have details on making this computation./P>

Created in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the credit’s value, income limits are now adjusted annually to keep pace with inflation.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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