The IRS has released Announcement 2001-106, Tax Saver's Credit for Contributions by Individuals to Employer Retirement Plans and IRAs, in which the new Tax Saver's credit is explained. The IRS is encouraging all employers to inform employees now of this new tax saving procedure which becomes effective January 1, 2002. Employees can begin planning now to take advantage of this tax break.
The IRS announcement includes the following language which it is recommended that employers use to inform their employees of this tax credit:
Beginning in 2002, if you make a contribution to [name of retirement plan offered by employer] 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.
The maximum contribution taken into account for an individual is $2,000. If you are married filing jointly, the maximum contribution taken into account is $2,000 each for you and your spouse.
The credit is available to you if you:
- are 18 or older,
- are not a full-time student,
- are not claimed as a dependent on someone else's tax return, and
- have adjusted gross income (shown on your tax return for the year of the credit) that does not exceed:
$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
The announcement also includes answers to frequently asked questions and descriptive scenarios which illustrate examples of how the credit works.