If you make contributions to your employer's plan or an IRA,* you may be eligible for a tax credit of up to $1,000. Known as the “Saver's Credit,” this could reduce the income tax you pay dollar for dollar.
How the Saver's Credit Works
The credit rate can be from 10–50 percent of your annual contribution, depending on your adjusted gross income. The lower your income, the higher the credit rate. The credit rate also depends on your filing status. See the table below to determine your credit rate.
The maximum contribution taken into account for an individual's credit is $2,000. If you are married filing jointly, the maximum contribution taken into account is $2,000 each for you and your spouse.
Who Is Eligible For the Tax Credit?
The credit is available to those who:
· are 18 or older
· are not a full-time student
· are not claimed as a dependent on someone else's return, and
· have an adjusted gross income (shown on your tax return for the year of the credit) that does not exceed the limits shown in the table below.
Distributions May Affect Credit Amount
The annual contribution eligible for the credit may be reduced by any taxable distributions from a retirement plan or IRA that you or your spouse may receive:
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· during the year you claim the credit,
· during the two preceding years, or
· during the period after the end of the year for which you claim the credit before your tax return filing due date.
A distribution from a Roth IRA that is not rolled over is taken into account for this reduction, even if the distribution is not taxable. After these reductions, the maximum annual contribution eligible for the credit per person is $2,000.
Other Tax Considerations
The amount of your Saver's Credit will not change the amount of your refundable tax credits. A refundable tax credit, such as the earned income credit or the refundable amount of your child tax credit, is an amount that you would receive as a refund even if you did not otherwise owe any taxes.
The amount of your Saver's Credit in any year cannot exceed the amount of tax that you would otherwise pay (not counting any refundable credits or the adoption credit) in any year. If your tax liability is reduced to zero because of other nonrefundable credits, such as the Hope Scholarship Credit, then you will not be entitled to the Saver's Credit.
* Includes employer-sponsored 401(k), 403(b), or governmental 457 plans; small business SEP and SIMPLE IRAs; and Traditional and Roth IRAs.
** The Adjusted Gross Income limits were indexed for inflation in 2007 pursuant to the Pension Protection Act of 2006.
The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.