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Beginning
in 2002, if you make contributions to any of the above plans or to
an IRA, you may be eligible for a tax credit, called the
"saver's credit." This credit could reduce the federal
income tax you pay.
You
already pay less federal and state tax if you save for retirement
because your contributions are not included as taxable income. In
2002, the new "saver's credit" could further reduce your
federal tax, if you qualify.
The
amount of the credit you get is based on the first $2,000 of
retirement contributions you make and your credit rate. The credit
rate can be as low as 10% or as high as 50%, 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 tables at the end of this notice to determine the amount
of your credit.
The
maximum contribution used to calculate the credit for an
individual is $2,000. If you are married filing jointly, the
maximum contribution used to calculate the credit is $2,000 each
for you and your spouse. All of your voluntary retirement
contributions (not just $2,000) will be used to lower your gross
taxable income.
The
credit is available to you if you:
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".
CREDIT
RATES
Remember,
the maximum retirement contribution a person can use to determine
the amount of the credit is $2,000. In preparing income tax
returns, employees calculate the saver's credit by multiplying the
retirement contributions by a percentage that depends on adjusted
gross income as shown in the following charts.
| If your income tax filing status is
"married filing jointly" and your adjusted
gross income is: |
Your Saver's Credit rate is: |
|
$0-$30,000
|
50% of contribution
|
|
$30,001-$32,500
|
20% of contribution
|
|
$32,501-$50,000
|
10% of contribution
|
|
Over $50,000
|
Credit not available
|
| If your income tax filing status is
"head of household" and your adjusted gross
income is: |
Your Saver's Credit rate is: |
|
$0-$22,500
|
50% of contribution
|
|
$22,501-$24,375
|
20% of contribution
|
|
$24,376-$37,500
|
10% of contribution
|
|
Over $37,500
|
Credit not available
|
| If your income tax filing status is
"single," "married filing
separately," or "qualifying widow(er)"
and your adjusted gross income is: |
Your Saver's Credit rate is: |
|
$0-$15,000
|
50% of contribution
|
|
$15,001-$16,250
|
20% of contribution
|
|
$16,251-$25,000
|
10% of contribution
|
|
Over $25,000
|
Credit not available
|
FREQUENTLY
ASKED QUESTIONS
Description
of Saver's Credit
1. What is the saver's credit?
The saver's credit is a nonrefundable income tax credit for
certain taxpayers with adjusted gross income that does not exceed
$50,000. It is equal to a specified percentage of certain employee
contributions made to an employer-sponsored retirement plan or of
certain individual or spousal contributions to an individual
retirement arrangement (IRA) for taxable years beginning after
December 31, 2001, and before January 1, 2007. The saver's credit
is contained in section 25B of the Internal Revenue Code, which
was added by section 618 of the Economic Growth and Tax Relief
Reconciliation Act of 2001.
2.
Who is eligible for the saver's credit?
Taxpayers who are age 18 or over before the end of their taxable
year, other than full-time students or persons claimed as
dependents on another taxpayer's return, are eligible for the
credit.
For
this purpose, students include individuals who, during some part
of each of five months during the year, are (a) enrolled at a
school that has a regular teaching staff, course of study, and
regularly enrolled body of students in attendance, or (b) taking
an on-farm training course given by such a school or a state,
county, orlocal government. A student is a full-time student if he
or she is enrolled for the number of hours or courses the school
considers to be full-time.
3.
What is the maximum annual contribution eligible for the saver's
credit?
$2,000
per year.
4.
Is the amount of the annual contribution eligible for the saver's
credit ever reduced?
Yes.
The amount of any contribution eligible for the saver's credit is
reduced by the amount of any taxable distribution received by the
taxpayer (or by the taxpayer's spouse if the taxpayer filed
jointly with that spouse both for the year during which a
distribution was made and the year for which the credit is taken)
from any plan described in Question 5 below during the testing
period. The testing period consists of the year for which the
credit is claimed, the period after the end of that year and
before the due date (with extensions) for filing the taxpayer's
return for that year, and the two taxable years that precede the
year for which the credit is claimed. In the case of a
distribution from a Roth IRA, this reduction applies to any such
distribution, whether or not taxable, that is not rolled over. An
amount does not count as a distribution for purposes of the
reduction rule if the distribution is a return of a contribution
to an IRA (including a Roth IRA) made for the tax year and (1) the
distribution is made before the due date (including extensions) of
the individual's tax return for that year, (2) no deduction is
taken with respect to the contribution, and (3) the distribution
includes any income attributable to the contribution.
For
example, if an individual contributes $3,000 to a tax deferred
investment plan during 2002, but had taken a $500 IRA withdrawal
during that year and a $900 IRA withdrawal during 2001 and neither
of these withdrawals was rolled over, the amount of that
individual's 2002 plan contribution eligible for the credit is
$1,600 ($3,000 - $500 - $900, instead of the $2,000 that would
have been eligible for the credit if no withdrawals had been
taken.
5. What types of contributions are eligible for the saver's
credit?
Salary
reduction contributions to the following arrangements are eligible
for the credit: a 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. The saver's credit
is also available for 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. Finally, the saver's credit is available for
contributions to a traditional or Roth IRA.
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.
6. What is the saver's credit rate?
The
saver's credit rate is based on the taxpayer's adjusted gross
income for the taxable year for which the credit is claimed,
as follows:
|
Married Filing Jointly
|
Head of Household
|
All Other Filers
|
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
|
Credit not available
|
For
example, a taxpayer whose filing status is single with adjusted
gross income of $15,000 may be entitled to a credit equal to 50%
of his or her contributions (up to $2,000 of contributions) to a
plan described in Question 5 above.
7. Does the saver's credit affect an eligible individual's
entitlement to any deduction or exclusion that would otherwise
apply to the contribution?
No.
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.
8. Can a taxpayer use the saver's credit to offset both an
alternative minimum tax liability and a regular income tax
liability?
Yes
9. For married taxpayers filing jointly, do contributions by or
for either or both spouses give rise to the saver's credit?
Yes.
Contributions by or for either or both spouses, up to $2,000 per
year for each spouse, can give rise to the saver's credit.
10. Are salary reduction and after-tax employee contributions
that are eligible for the saver's credit taken into account in the
ADP and ACP nondiscrimination tests of sections 401(k) and (m) of
the Internal Revenue Code?
Yes.
Salary reduction contributions to a 401(k) plan, whether or not
those contributions give rise to the saver's credit, are taken
into account in the nondiscrimination test for salary reduction
contributions (the ADP test) for plans subject to that test. Also,
voluntary after-tax employee contributions to a qualified plan,
whether or not those contributions give rise to the saver's
credit, are taken into account in the nondiscrimination test for
employee after-tax contributions (the ACP test) for plans subject
to that test.
11. Can an individual claim the saver's credit for an amount
contributed to a plan pursuant to automatic enrollment?
Yes.
Any amount that is treated as an elective contribution on behalf
of an eligible individual to an employer plan described in
Question 5 above can give rise to the saver's credit.
12. Can an individual take a projected saver's credit into
account in figuring the allowable number of withholding allowances
on Form W-4?
Yes.
For information on converting credits into withholding allowances,
see IRS Publication 919, "How Do I Adjust My
Withholding?"
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