Tax Credits for Low-Income Savers - Tax Law Changes - Tax Deduction - 401k -403b - 457 Plan - IRA

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Tax Credits for Low-Income Savers

Eligible individuals can receive a non-refundable tax credit of up to 50 percent on up to $2,000 in contributions to an IRA, 401(k), 403(b), SIMPLE or 457 plan. This credit is in addition to the tax deduction already associated with these contributions. This provision is effective in 2002 and will expire in 2006.

Taxpayers are eligible for this credit if they meet the following criteria:

Joint Filers

Joint filers whose adjusted gross income is less than $31,000 are eligible for a 50 percent credit
Joint filers with adjusted gross income over $31,000 but less than $34,000 are eligible for a 20 percent credit
Joint filers with adjusted gross income over $34,000 but less than $52,000 are eligible for a 10 percent credit

Beginning in 2007, the income limits are adjusted for inflation.

Single Filers
The income threshold for single filers is one-half the threshold for joint filers.

Tax credits can serve as a powerful incentive for low-income employees to make contributions to the employer's plan. The use of a 401(k) plan or other deferral arrangement may, in fact, reduce the employee's adjusted gross income to make the credit available or increase the percentage of the credit. Participation by low-income employees can help significantly in meeting non-discrimination tests and increasing the amounts that can be contributed to plans by more highly paid employees.

Next: Tax Credits and Elimination of the IRS User Fee for Small Employers