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Many eligible employees could benefit from the saver’s credit—if they know about it
During tax season, employers have an opportunity to inform low- and moderate-income workers—those who last year earned $30,750 or less if single, or $61,500 or less if married and filing jointly—that there's a special tax credit to help them save for retirement.
saver's credit, officially known as the Retirement Savings Contributions Credit, can offset up to half of the first $2,000 (for individual tax filers) or $4,000 (married, filing jointly) that workers contribute to a 401(k), 403(b) or similar employer-sponsored retirement plan or to an individual retirement account (IRA).
"The saver's credit is in addition to the tax benefits of contributing pretax dollars to retirement plans. Because this double benefit sounds too good to be true, many eligible savers may be confusing the two incentives," said Catherine Collinson, president of the Los Angeles-based Transamerica Center for Retirement Studies, a nonprofit research institute funded by Transamerica Life Insurance Co.
"Many eligible employees may be missing out on the saver's credit when filing their tax returns, including workers who have saved in a 401(k) or similar plan" last year, Collinson added. "Other workers might have saved had they known about it. But the good news is that it's not too late to contribute to an IRA and claim the saver's credit for 2016. They have until April 17, 2017, to do so," since April 15—the traditional tax filing deadline—falls on a Saturday this year.
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 a maximum of 50 percent of an employee's 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 Form 1040 or 1040A. Consequently, the maximum saver's credit is $1,000 (or $2,000 for married couples filing jointly).
Generally, the saver's credit can be claimed by workers age 18 years and older who have contributed to a company-sponsored retirement plan or IRA in the past year and who meet the income limits for 2016 or, looking ahead, for 2017. The filer cannot be a full-time student or be claimed as a dependent on another person's tax return.
Caps for Tax Years 2016 and 2017
To help preserve the credit's value, income limits are adjusted annually to keep pace with inflation. The
IRS webpage on the saver's credit shows the following income limit thresholds for tax years 2016 and 2017:
Source: IRS, Retirement Savings Contributions Credit (Saver's Credit).
"While employees are focused on their taxes, encourage them to set payroll-deferral retirement plan contributions for this year if they haven't done so already," Collinson advised. "That way, if they're eligible, they'll be able to claim the saver's credit on their 2017 taxes next April."
[SHRM members-only toolkit:
Designing and Administering Defined Contribution Retirement Plans]
Filing for the Saver's Credit
Most workers who are eligible to claim the credit are also eligible to take advantage of the IRS Free File program for taxpayers with an AGI of $64,000 or less, using no-cost tax preparation software available at
If using tax preparation software, including those programs offered through the Free File program, use
Form 1040A or
Form 1040NR, advised Collinson, since the credit is not available with Form 1040EZ. "Workers who are eligible to receive the saver's credit are at risk of missing it if they use the wrong tax form," she warned.
A saver's credit poster can be
downloaded and printed here. An IRS Free File poster can be
downloaded and printed here.
Related SHRM Online Article:
2017 Payroll Taxes Will Hit Higher Incomes, SHRM Online Compensation, October 2016
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