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Kimberly Lankford

Who is eligible for the saver's tax credit?



Who is eligible for the saver's tax credit?

The saver's tax credit is one of the most frequently overlooked tax credits, and it's a great opportunity for people below a certain income level to get an extra bonus for contributing to a retirement plan. The credit was due to expire at the end of this year, but the new tax law just extended the credit beyond 2006.

Married couples with an adjusted gross income of $50,000 or less can get a tax credit of up to $2,000 for contributing to an IRA, 401(k) or other employer-sponsored retirement plan. Singles earning $25,000 or less can get a tax credit of up to $1,000. The specific amount of the write-off is calculated by multiplying your eligible contribution by the credit rate, which is based on your adjusted gross income. Married couples can count up to $4,000 in contributions to a traditional or Roth IRA, 401(k), simplified employee pension (SEP), SIMPLE IRA, 457 or 403(b); singles can count up to $2,000 in eligible contributions.

For example, a married couple earning $30,000 or less can receive a credit for 50% of their eligible contributions. Because they can count up to $4,000 in contributions in the equation, they'll get a tax credit of up to $2,000 -- which actually reduces their tax bill by $2,000. The credit rate falls to 20% for couples earning $30,000 to $32,500, then 10% for those earning $32,501 to $50,000. In that case, a couple contributing $4,000 or more to their retirement plans could get a tax credit of $400.

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This credit is not available to children under age 18 and full-time students, or anyone who is claimed as a dependent on someone else's tax return, even if they open their own retirement accounts. But it's a great incentive for people who are just starting out in their first jobs after college -- or anyone else who falls within the income range -- and didn't think they could afford to save.

For more tax-saving strategies, see the Kipligner.com Tax Page.

Got a question? Ask Kim at askkim@kiplinger.com.




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