CRS Updates Fact Sheet on Savers Credit
RS21795
- AuthorsPurcell, Patrick
- Institutional AuthorsCongressional Research Service
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2006-16149
- Tax Analysts Electronic Citation2006 TNT 165-7
CRS Report for Congress
Received through the CRS Web
Order Code RS21795
Updated August 7, 2006
Patrick Purcell
Specialist in Social Legislation
Domestic Social Policy Division
Summary
_________________________________________________________________
The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) authorized a tax credit to encourage low- and moderate-income families and individuals to save for retirement.1 Eligible taxpayers who contribute to an individual retirement account (IRA) or to an employer-sponsored plan that is qualified under § 401, § 403 or § 457 of the tax code can receive a non-refundable tax credit of up to $1,000. This credit is in addition to the tax deduction for contributing to a traditional IRA or to an employer-sponsored retirement plan. In determining the amount of the credit, neither the amount of any refundable tax credits for which the taxpayer is eligible nor the adoption credit are taken into consideration. The retirement savings credit was first available in 2002, and as enacted in 2001, it would have expired after the 2006 tax year. Section 812 of H.R. 4 of the 109th Congress, the Pension Protection Act, as passed by the House of Representatives on July 28, 2006, and by the Senate on August 3, 2006, would make the retirement savings tax credit permanent. Section 833 provides that for years after 2006, the eligible income brackets will be indexed to inflation in increments of $500.
Taxpayers claim the credit on their federal income tax returns. Taxpayers who contribute up to $2,000 (for all plans combined) to a traditional IRA, a Roth IRA, or an employer-sponsored retirement plan receive a credit that reduces the amount of income tax they owe. The maximum credit is the lesser of $1,000 or the amount of tax that would have been owed without the credit. The amount of the credit declines as income increases. For individuals with adjusted gross incomes (AGI) under $15,000 and families with incomes under $30,000, the credit is 50% of contributions up to $2,000 for a maximum credit of $1,000. (See Table 1.) Because the credit is based on AGI, it increases the net benefit of contributing to a retirement plan. For example, a married couple filing jointly with income of $32,000 who contribute $2,000 to a § 401(k) plan would reduce their taxable income to $30,000 and qualify for a $1,000 tax credit. The net effect is that the $2,000 contribution to the 401(k) plan costs them only $1,000.
Table 1. Credit Amounts for the Savers' Credit
Filing Status and Adjusted Gross Income
Single Head of Married, Amount of Credit
Household Filing Jointly
$1 to $15,000 $1 to $22,500 $1 to $30,000 50% of contribution up to $2,000
($1,000 maximum credit)
$15,001 to $22,501 to $30,001 to
$16,250 $24,375 $32,500 20% of contribution up to $2,000
($400 maximum credit)
$16,251 to $24,376 to $32,501 to
$25,000 $37,500 $50,000 10% of contribution up to $2,000
($200 maximum credit)
More than More than More than
$25,000 $37,500 $50,000 Zero
The credit is not available to taxpayers under age 18 or to full-time students. If a worker or spouse receives a pre-retirement distribution from a retirement plan (such as a hardship withdrawal), any credit taken in that same year and in the two subsequent years will be reduced by the amount of the distribution. For example, if an individual took a $1,000 hardship withdrawal in 2004 and qualified for a $500 credit for that year, $500 of the hardship withdrawal would offset the $500 credit in 2004. The remaining $500 of the hardship withdrawal would offset any credits (up to $500) in 2005 and 2006. Because it is non-refundable, some families may not benefit from the retirement savings tax credit because they have no net income tax liability. Also, the credit may not be large enough to provide a savings incentive for families with incomes near the upper limits. For families in the highest income bracket that qualifies for the credit, the maximum credit is $200 for a contribution of $2,000. On the other hand, families that increase their saving to claim the retirement savings credit and who are eligible for the earned income tax credit (EITC) may increase the amount of the EITC for which they qualify.
Data from the IRS indicate that the retirement savings tax credit was claimed on more than 5 million tax returns -- representing about 4% of all tax returns -- filed each year from 2002 through 2005. The average credit on tax returns filed for tax year 2002 was $200. The average retirement plan contribution on which the credit was claimed that year was $1,200. Thus, the average credit for tax year 2002 was equal to about 17% of the average amount contributed to retirement plans by taxpayers who claimed the retirement savings credit.
FOOTNOTE
1 The retirement savings tax credit is authorized in the Internal Revenue Code at 26 U.S.C., § 25B.
END OF FOOTNOTE
- AuthorsPurcell, Patrick
- Institutional AuthorsCongressional Research Service
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2006-16149
- Tax Analysts Electronic Citation2006 TNT 165-7