PA Pension Planners

ASPPA

Saver’s Credit Notice

Notice to Employees Regarding Saver’s Credit:

This notice explains how you may be able to pay less tax by contributing to [insert name of employer’s plan] (the “Plan”) or to an individual retirement arrangement (“IRA”).
Beginning in 2002, if you make contributions to the Plan 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 dollar-for-dollar. The amount of the credit you can get is based on the 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 your credit rate.
The maximum contribution taken into account for the credit for an individual is $2,000. If you are married filing jointly, the maximum contribution taken into account for the credit is $2,000 each for you and your spouse.
The credit is available to you if you:

$50,000 if you are married filing jointly,
$37,500 if you are a head of household with a qualifying person, or
$25,000 if you are single or married filing separately.

Example: Susan and John are married and file their federal income tax return jointly. For 2002, their adjusted gross income would have been $34,000 if they had not made any retirement contributions. During 2002, Susan elected to have $2,000 contributed to her employer’s 401(k) plan. John made a deductible contribution of $2,000 to an IRA for 2002. As a result of these contributions, their 2002 adjusted gross income is $30,000. If their Federal income tax would have been $3,000 (after applying any other credits to which they are entitled) without having made any retirement contributions, then their federal income tax as a result of making the $4,000 retirement contributions will be only $400 after application of the saver’s credit and other tax benefits for the retirement contributions. Thus, by saving $4,000 for their retirement, Susan and John have also reduced their taxes by $2,600.
The annual contribution eligible for the credit may have to be reduced by any taxable distributions from a retirement plan or IRA that you or your spouse receive during the year you claim the credit, during the 2 preceding years, or during the period after the end of the year for which you claim the credit and before the due date for filing your return for that year. A distribution from a Roth IRA that is not rolled over is taken into account for this reduction, even if the distribution is not taxable. After these reductions, the maximum annual contribution eligible for the credit per person is $2,000.

Example: Mark’s adjusted gross income for 2002 is low enough for him to be eligible for the credit that year and he defers $3,000 of his pay to his employer’s 401(k) plan during 2002. During 2001, Mark took a $400 hardship withdrawal from his employer’s plan and during 2002 he takes an $800 IRA withdrawal. Mark’s 2002 saver’s credit will be based on contributions of $1,800 ($3,000 – $400 – $800).
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

If your income tax filing status is “married filing joint”
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 separate” 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