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
| 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.
