Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

GET THE IRS TO MATCH YOUR 401(K) CONTRIBUTION

November 12, 2007

If you participate in a 401(k) plan at work, you know that many employers will match part or all of the amount you contribute to the plan from your paycheck. Did you know that for many taxpayers, the IRS will also match your 401(k) contribution - or your IRA contribution.

They do this through the 'Savers Credit." The IRS last week issued a news release explaining the credit. From the release:

The saver’s credit can be claimed by:
* Married couples filing jointly with incomes up to $52,000 in 2007 or $53,000 in 2008;

* Heads of Household with incomes up to $39,000 in 2007 or $39,750 in 2008; and

* Married individuals filing separately and singles with incomes up to $26,000 in 2007 or $26,500 in 2008.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

The release also notes some limits on the credit:

Other special rules that apply to the saver’s credit include the following:
* Eligible taxpayers must be at least 18 years of age.

* Anyone claimed as a dependent on someone else’s return cannot take the credit.

* A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

* Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2007, this rule applies to distributions received after 2004 and before the due date (including extensions) of the 2007 return. Form 8880 and its instructions have details on making this computation.

While 5.3 million taxpayers claimed savers credits of over $900 million in 2005, I suspect many taxpayers who could claim this credit miss it. Many more taxpayers fail to make the IRA or 401(k) contributions that would shake loose this government cash. You claim the credit on Form 8880.

The moral: If the government and your employer want to pay you to save money for retirement, it's wise to take them up on it.

Tags: 401(k).IRA.Savers Credit.